Annual Report 2023
unique.
innovative.
solutions.
Dear Fellow Shareholders,
Last year marked 100 years since our founding and the
culmination of our journey from Renton Savings and Loan
Association established in 1923 on the shores of Lake
Washington as a single branch thrift to today’s First Financial
Northwest, Inc.,
the holding company of a full-fledged
community bank.
In 2015 we embarked on a strategy to expand our presence
to bring our unique, innovative solutions to more communities
via 15 locations in the greater Puget Sound Region,
showcasing our award-winning branch model, with smaller
featuring
footprint
experienced bankers.
technology-forward
offices
and
Over the past two years the Federal Reserve has raised its
targeted interest rate from 0.25% to 5.50%. The impact of the
rising interest environment on our business has been
substantial. Moreover, 2023 turned out to be an especially
tumultuous year for the banking industry which experienced
the 2nd and 3rd largest bank failures in U.S. history, causing
significant volatility in the trading prices of securities of
financial
institutions and heightened concern among
depositors and investors.
One common catalyst of these failures was a high level of
uninsured deposits at both institutions and the resulting run-off
in deposits. While in many cases shifting into higher interest-
bearing retail certificates of deposits, our customers did not
waver, total deposits increased $24.1 million to $1.19 billion
during 2023. At the same time, we employed various
strategies to help our customers reduce their exposure to
uninsured deposit accounts for greater security and peace of
mind. Uninsured deposits represented a manageable 23% of
total deposits at year end.
loans
increased net
receivable $8.8 million
Despite a challenging interest rate and lending environment,
we
to
$1.18 billion in 2023. One-to-four family loans increased
$39.0 million and consumer loans increased $7.6 million,
offsetting the general decline in other loan categories during
the year. Our robust credit culture and pristine asset quality
remains a point of priority and pride. Nonaccrual loans
accounted for 0.01% of total assets at year end.
At the same time a reduction in loan prepayments contributed
to a reduction in our noninterest income during the year.
Additionally, the average cost of our interest-bearing liabilities
outpaced the average yield we earned on our interesting-
earning assets, putting pressure on our net interest margin
which declined to 2.82% in 2023 from 3.53% in 2022.
During the same timeframe, our return on assets decreased to
0.41% in 2023 from 0.91% in 2022, while our return on
equity declined to 3.93% from 8.34%, respectively. These key
measures of profitability are a testament to the challenges
posed by the current interest rate environment and the
economic headwinds experienced during the year.
Despite these challenges, we distributed $4.76 million in
quarterly cash dividends during the year, returning more
than 75 percent of net income to shareholders. Book value
per share increased to $17.61 from $17.57 and the Bank
remained “well-capitalized” in accordance with regulatory
standards in 2023, while maintaining asset quality well
above its peers.
We recognize that our accomplishments are entirely the
product of the efforts of our incredible team of talented
employees. These professionals are among the best in their
respective fields and their hard work and dedication to
providing unique, innovative solutions to our customers is key
to our success. We are also very proud that, consistent with
prior years, over 80 percent of our employees donated their
time and expertise to local nonprofit organizations in our
communities in 2023, contributing to our “outstanding” CRA
rating.
We have earned the trust of our customers and the
communities we serve for over 100 years by holding true to
our core values of building long-term relationships, offering
high-quality and exceptional customer service, all the while
demonstrating our strong commitment to our communities. Last
year, reflecting on our 16th year as a publicly traded
company, we reaffirmed our dedication to delivering value to
you, our shareholders.
On January 10, 2024, the Bank entered into a definitive
agreement in which Global Federal Credit Union will assume
substantially all assets and assume substantially all liabilities
of First Financial Northwest Bank for an all-cash consideration
of approximately $231 million, subject to certain adjustments.
The transaction requires approval by the shareholders of the
Company and regulatory approvals, as well as other
customary closing conditions. Shareholders should expect to
receive additional information regarding the proposed
transaction in the coming weeks and months.
As always, thank you for your investment and continued
loyalty.
Sincerely,
Ralph C. Sabin
Chair
Joseph W. Kiley III
President and CEO
unique. innovative. solutions.
2023 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2023
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-33652
FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
26-0610707
(I.R.S. Employer Identification Number)
201 Wells Avenue South, Renton, Washington
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
98057
(Zip Code)
(425) 255-4400
Common Stock, $0.01 par value per share
(Title of Each Class)
The Nasdaq Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No ☑
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No ☑
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☑ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company”
in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
☑
Smaller reporting company
☑
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. _____
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received
by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1 (b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐
The aggregate market value of the common stock outstanding held by nonaffiliates of the registrant based on the closing sales price of the registrant’s
common stock as quoted on The Nasdaq Stock Market LLC on June 30, 2023, was $91,090,732 (8,011,498 shares at $11.37 per share). For purposes of this
calculation, common stock held only by executive officers, the employee stock ownership plan and directors of the registrant is considered to be held by
affiliates. As of March 8, 2024, the registrant had 9,174,425 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held in May 2024 (the “Proxy Statement”), are incorporated
by reference into Part III of this Annual Report on Form 10-K where indicated. The Proxy Statement will be filed with the U.S. Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this report relates.
FIRST FINANCIAL NORTHWEST, INC.
2023 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
Internet Website
PART I.
Item 1.
Business
General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiaries and Other Activities
Competition
Human Capital
How We Are Regulated
Taxation
Information about our Executive Officers
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6.
Securities
[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Business Strategy
Critical Accounting Estimates
Comparison of Financial Condition at December 31, 2023, and December 31, 2022
Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022
Average Balances, Interest and Average Yields/Costs
Yields Earned and Rates Paid
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity and Capital Resources
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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ii
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of
operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact,
are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,”
“estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or
future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include
statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other
things, our pending transaction with Global Federal Credit Union (“Global”) whereby Global, pursuant to the definitive
purchase and assumption agreement (the “P&A Agreement”), will acquire substantially all of the assets and assume
substantially all of the liabilities of First Financial Northwest Bank, expectations of the business environment in which we
operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit
experience, and statements regarding our mission and vision. These forward-looking statements are based upon current
management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements
may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or
range of factors including, but not limited to:
•
the occurrence of any event, change or other circumstances that could give rise to the right of one or all of the
parties to terminate the P&A Agreement;
•
•
delays in completing the P&A Agreement;
the failure to obtain necessary regulatory approvals and shareholder approval or to satisfy any of the other
conditions to the Global transaction, including the P&A Agreement on a timely basis or at all;
•
delays or other circumstances arising from the dissolution of First Financial Northwest Bank and First
Financial Northwest Inc. following completion of the P&A Agreement;
•
diversion of management’s attention from ongoing business operations and opportunities during the pending
Global transaction;
•
potential adverse reactions or changes to business or employee relationships, including those resulting from
the announcement of the Global transaction;
•
potential adverse impacts to economic conditions in our local market areas, other markets where the
Company (defined below) has lending relationships; or other aspects of the Company’s business operations or
financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of
inflation or deflation, a potential recession or slowed economic growth;
•
changes in the interest rate environment, including the recent past increases in the Board of Governors of the
Federal Reserve System (“Federal Reserve Board” or “Federal Reserve”) benchmark rate and duration at which such
elevated interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of
assets and obligations, and the availability and cost of capital and liquidity;
•
the impact of continuing elevated inflation and the current and future monetary policies of the Federal
Reserve in response thereto;
•
•
the effects of any federal government shutdown;
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-
offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to
increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for credit losses not
being adequate to cover expected losses, and require us to materially increase our reserves;
•
changes in general economic conditions, either nationally or in our market areas; changes in the levels of
general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our
net interest margin and funding sources;
•
fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real
estate values in our market areas;
•
results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary
by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions,
Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority
may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for
loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or
increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our
liquidity and earnings;
•
•
•
our ability to pay dividends on our common stock;
our ability to attract and retain deposits;
our ability to control operating costs and expenses;
iii
•
the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation;
•
•
difficulties in reducing risk associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect
our work force and potential associated charges;
•
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our
information technology systems or on the third-party vendors who perform several of our critical processing functions;
•
•
•
our ability to retain key members of our senior management team
our ability to implement a branch expansion strategy;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we
have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames and any goodwill charges related thereto;
•
•
our ability to manage loan delinquency rates;
costs and effects of any litigation that may be instituted against the Company as a result of the P&A
Agreement or otherwise, including settlements and judgments;
•
•
•
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business including changes in regulatory policies
and principles, including the interpretation of regulatory capital or other rules;
•
actions;
•
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory
the quality and composition of our securities portfolio and the impact of any adverse changes in the securities
markets, including market liquidity;
•
•
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory
agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting
issues and details of the implementation of new accounting methods;
•
the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public
health crises, acts of war or terrorism, and other external events on our businesses; and
•
other economic, competitive, governmental, regulatory, and technological factors affecting our operations,
pricing, products and services, and other risks detailed in this Form 10-K and our other reports filed with or furnished
to the U.S. Securities and Exchange Commission (“SEC”).
Any of the forward-looking statements that we make in this Form 10-K and in the other public reports and statements
we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above
or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be
materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors
should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.
We undertake no responsibility to update or revise any forward-looking statements.
As used throughout this report, the terms “Company”, “we”, “our”, or “us” refer to First Financial Northwest, Inc. and
its consolidated subsidiaries, including First Financial Northwest Bank and First Financial Diversified Corporation.
iv
Internet Website
The information contained on our website, www.ffnwb.com, is not included as a part of, or incorporated by reference
into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge
through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports, proxy statements and other SEC filings on our investor relations page. All of our reports, proxy
statements, and other documents filed with or furnished to the SEC are posted as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC and are also available free of charge at the SEC’s website at www.sec.gov.
v
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Item 1. Business
General
PART I
First Financial Northwest, Inc. (“First Financial Northwest”), a Washington corporation, was formed on June 1, 2007,
for the purpose of becoming the holding company for First Financial Northwest Bank (the “Bank”) in connection with the
Bank’s conversion from a mutual holding company structure to a stock holding company structure which was completed on
October 9, 2007. At December 31, 2023, the Company had total assets of $1.51 billion, net loans of $1.18 billion, deposits of
$1.19 billion and stockholders’ equity of $161.7 million. First Financial Northwest’s business activities generally are limited to
passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report,
including consolidated financial statements and related data, relates primarily to the Bank.
The Bank was organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal
mutual savings and loan association in 1935 and to a Washington state-chartered mutual savings bank in 1992. In 2002, the
Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank, and the wholly-owned
subsidiary of First Financial of Renton, Inc. In connection with the 2002 conversion, the Bank changed its name to First
Savings Bank Northwest, and then in August 2015, the Bank changed its name to First Financial Northwest Bank to better
reflect the commercial banking services it provides beyond those typically provided by a traditional savings bank. In February
2016, the Bank officially changed its charter from a Washington chartered stock savings bank to a Washington chartered
commercial bank as a way of better serving its customers’ needs.
First Financial Northwest became a bank holding company, after converting from a savings and loan holding company
on March 31, 2015, and is subject to regulation by the Federal Reserve Board through the FRB. The change was consistent with
the Bank’s shift in focus from a traditional savings and loan association towards a full service, commercial bank. Additionally,
the Bank is examined and regulated by the DFI and by the FDIC. The Bank is required to maintain reserves at a level set by the
Federal Reserve Board. The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines, which is one of the
11 regional banks in the Federal Home Loan Bank System (“FHLB System”). For additional information, see “How We are
Regulated - Regulation and Supervision of First Financial Northwest Bank - Federal Home Loan Bank System.”
The Bank’s largest concentration of customers is in King County, with additional concentrations in Snohomish, Pierce,
and Kitsap counties, Washington. The Bank is headquartered in Renton, in King County, where it has a full-service branch as
well as a smaller branch located in a commercial development known as “The Landing”. The Bank has additional branches in
King County located in Bellevue, Woodinville, Bothell, Kent, Kirkland, and Issaquah. In Snohomish County, Washington, the
Bank has five branches located in Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In addition, the Bank has
two Pierce County, Washington branches, located in University Place and Gig Harbor. These Bank’s branches with the
exception of its headquarters, are generally smaller branches focused on efficiency through the extensive use of the latest
banking technology. The Bank’s business consists of attracting deposits from the public and utilizing these funds to originate
one-to-four family residential, multifamily, commercial real estate, construction/land, business and consumer loans.
Our principal executive offices are located at 201 Wells Avenue South, Renton, Washington, 98057; our telephone
number is (425) 255-4400.
On January 10, 2024, Global Federal Credit Union, First Financial Northwest and the Bank entered into a P&A
Agreement, pursuant to which Global will acquire substantially all of the assets and assume substantially all of the liabilities
(including deposit liabilities) of the Bank, which we refer to herein as the asset sale, in exchange for $231.2 million in cash,
subject to possible downward adjustments. The asset sale is the first integral step in the sale transaction contemplated by the
P&A Agreement, which consists of: (1) the asset sale, (2) the voluntary liquidation of the Bank and distribution of the Bank’s
remaining assets, which will include the cash consideration paid by Global to the Bank in the asset sale, to First Financial
Northwest, and (3) the winding up and voluntary dissolution of First Financial Northwest and the distribution of its remaining
assets, including the remaining net cash proceeds from the asset sale, to its shareholders.
Consummation of the asset sale and related transactions is subject to certain conditions, including, among others,
approval of the P&A Agreement and the related transactions by First Financial Northwest’s shareholders, the receipt of all
required regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties
of each party, the performance in all material respects by each party of its obligations under the P&A Agreement, and the
absence of any injunctions or other legal restraints. The P&A Agreement provides certain termination rights for both Global
and the Bank, and further provides that upon termination of the P&A Agreement under certain circumstances, the Bank will be
1
obligated to pay Global a termination fee of $9.4 million. Additional information regarding the asset sale, including the P&A
Agreement, can be found in the Current Report on Form 8-K filed by First Financial Northwest with the SEC on January 11,
2024.
Market Area
We consider our primary market area to be the Puget Sound Region that consists primarily of King, Snohomish, Pierce
and, to a lesser extent, Kitsap counties. During 2023, the region experienced a slight increase in home prices on smaller sales
volume. The increase in mortgage rates contributed to a slowdown in demand in 2023 which led to a decline in sales. The
number of homes listed for sale in King, Pierce, Snohomish and Kitsap counties at the end of 2023 decreased from the end of
2022 with the declines ranging from 15% in Kitsap County to 47% in Snohomish County. Available inventory ranges from
1.9 months in Pierce County to nine months in Snohomish County.
King County has the largest population of any county in the state of Washington and covers approximately 2,100
square miles. It has a population of approximately 2.27 million residents and a median household income of approximately
$116,000, according to U.S. Census estimates. King County has a diversified economic base with many nationally recognized
firms including Boeing, Microsoft, Amazon, Starbucks, Nordstrom, Costco and Paccar. According to the Washington State
Employment Security Department, the unemployment rate for King County was 3.5% at December 31, 2023, compared to 2.8%
at December 31, 2022, and the national average of 3.7% at December 31, 2023. The median sales price of a residential home in
King County for December of 2023 was $775,000, an increase of 5.4% from December of 2022, according to the Northwest
Multiple Listing Service ("NMLS"). Residential sales volumes decreased 24.1% in 2023 compared to 2022 and inventory levels
as of December 31, 2022 were at 1.4 months according to the NMLS.
Pierce County, covering approximately 1,700 square miles, has the second largest population of any county in the state
of Washington. It has approximately 927,000 residents and a median household income of approximately $91,500, according to
U.S. Census estimates. The Pierce County economy is diversified with the presence of military-related government employment
(Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace-related employment
(Boeing). According to the Washington State Employment Security Department, the unemployment rate for Pierce County was
5.5% in December 2023, compared to 5.3% at year-end 2022. The median sales price of a residential home in Pierce County
was $526,000 for December 2023, a 5.2% increase compared to 2022, according to the NMLS. Residential sales volumes
decreased by 27.4% in 2023 compared to 2022 and inventory levels as of December 31, 2023 were at 1.9 months according to
the MLS.
Snohomish County has the third largest population of any county in the state of Washington and covers approximately
2,090 square miles. It has approximately 840,000 residents and a median household income of approximately $104,000,
according to U.S. Census estimates. The economy of Snohomish County is diversified with the presence of military-related
government employment (Naval Station Everett), aerospace-related employment (Boeing), and retail trade. According to the
Washington State Employment Security Department, the unemployment rate for Snohomish County was 3.6% in December
2023 compared to 3.2% in December 2022. The median sales price of a residential home in Snohomish County was $675,000
for December of 2023, a 0.6% decrease compared to December of 2022, according to the NMLS. Residential sales volumes
declined by 25.6% in 2023 compared to 2022 and inventory levels as of December 31, 2023 were at nine months according to
the MLS.
Kitsap County has the seventh largest population of any county in the state of Washington and covers approximately
395 square miles. It has approximately 278,000 residents and a median household income of approximately $93,700, according
to U.S. Census estimates. The Kitsap County economy is diversified with the presence of military-related government
employment (Naval Base Kitsap, Puget Sound Naval Shipyard), health care, retail trade and education. According to the
Washington State Employment Security Department, the unemployment rate for Kitsap County was 4.7% in December 2023,
compared to 4.3% for December 2022. The median sales price of a residential home was $540,000 for December 2023 an
increase of 9% over December 2022, according to the NMLS. Residential sales volumes decreased by 22.3% in 2023 compared
to 2022 and inventory levels as of December 31, 2023 were at 1.8 months according to the MLS.
For a discussion regarding competition in our primary market area, see “- Competition” later in Item 1 of this report.
2
Lending Activities
General. We focus our lending activities primarily on loans secured by commercial real estate, construction/land, first
mortgages on one-to-four family residences, multifamily, and business lending. We offer a variety of secured consumer loans,
including savings account loans, auto loans and home equity loans that include lines of credit and second mortgage term loans.
As of December 31, 2023, our net loan portfolio totaled $1.18 billion and represented 78.1% of our total assets.
Our current loan policy generally limits the maximum amount of loans we can make to one borrower to 15% of the
Bank’s total capital and surplus, or $26.1 million at December 31, 2023. Exceptions to this policy are allowed only with the
approval of the Board of Directors and if the borrower exhibits financial strength or sufficient, measurable compensating factors
exist after consideration of the loan-to-value ratio, borrower’s financial condition, net worth, credit history, earnings capacity,
debt service coverage, installment obligations, and current payment history. The regulatory limit of loans we can make to one
borrower is 20% of total capital and surplus, or $34.8 million, at December 31, 2023. At this date, our single largest lending
relationship, totaled $25.2 million, consisting of one commercial loan ($13.7 million) and one multifamily loan ($11.5 million),
both of which were performing in accordance with their terms.
Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2023, regarding
the amount of total loans in our portfolio based on their contractual terms to maturity, not including prepayments.
Real estate:
One-to-four family residential
Multifamily
Commercial
Construction/land
Total real estate
Business
Consumer
Total loans
Within One
Year
After One Year
Through Five
Years
After Five
Years Through
Fifteen Years
Beyond
Fifteen Years
Total
(In thousands)
$
4,637 $
19,051 $
20,458 $
469,077 $
26,284
16,026
48,686
95,633
8,601
42,863
200,382
8,234
270,530
16,604
278
104,512 $
5,016
292,150 $
$
53,678
146,420
4,004
224,560
2,544
66,674
293,778 $
15,324
15,031
—
499,432
1,332
27
500,791 $
513,223
138,149
377,859
60,924
1,090,155
29,081
71,995
1,191,231
The following table sets forth the amount of total loans due one year or more after December 31, 2023, with fixed or
adjustable interest rates.
Real estate:
One-to-four family residential
$
157,489 $
351,097 $
Fixed-Rate
Adjustable-Rate
(In thousands)
Total
Multifamily
Commercial
Construction/land
Total real estate
Business
Consumer
Total loans
37,124
149,380
605
344,598
3,805
59,236
74,741
212,453
11,633
649,924
16,675
12,481
508,586
111,865
361,833
12,238
994,522
20,480
71,717
$
407,639 $
679,080 $
1,086,719
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W
One-to-Four Family Residential Lending. As of December 31, 2023, $513.2 million, or 43.1% of our total loan
portfolio consisted of loans secured by one-to-four family residences.
The Bank is a traditional portfolio lender when it comes to financing residential home loans. In 2023, we originated
$87.3 million and purchased $2.1 million in one-to-four family residential loans. The purchased loans were part of our efforts to
increase our portfolio of Community Reinvestment Act (“CRA”) qualified loans. At December 31, 2023, $284.5 million, or
55.4% of our one-to-four family residential portfolio consisted of owner occupied loans with the remaining $228.8 million, or
44.6% consisting of non-owner occupied loans. In addition, at December 31, 2023, $158.0 million, or 30.8% of our one-to-four
family residential loan portfolio consisted of fixed-rate loans. Substantially all of our one-to-four family residential loans
require monthly principal and interest payments.
Our fixed-rate, one-to-four family residential loans are generally originated with 15 to 30 year terms, although such
loans typically remain outstanding for substantially shorter periods. We also originate hybrid loans with initial fixed-rate terms
of five to ten years that convert to variable-rate which adjusts annually thereafter. In addition, substantially all of our one-to-
four family residential loans contain due-on-sale clauses that allow us to declare the unpaid amount due and payable upon the
sale of the property securing the loan. Typically, we enforce these due-on-sale clauses to the extent permitted by law and as a
standard course of business. The average period of time a loan is outstanding is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates, and the interest rates payable on outstanding loans.
Our lending policy generally limits the maximum loan-to-value ratio on mortgage loans secured by one-to-four family
residential properties to FDIC limits. Generally, our one-to-four family loans do not exceed 80% loan-to-value based on the
lower of the purchase price or appraised value at the time of loan origination. Properties securing our one-to-four family
residential loans are appraised by independent appraisers approved by us. We require the borrowers to obtain title insurance and
if necessary, flood insurance. We generally do not require earthquake insurance due to competitive market factors.
Loans secured by rental properties represent potentially higher risk and, as a result, we adhere to more stringent
underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of
the property. Payments on loans secured by rental properties depend primarily on the tenants’ continuing ability to pay rent to
the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s
ability to repay the loan without the benefit of a rental income stream. In addition, successful operation and management of
non-owner occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of
such loans may be subject to adverse conditions in the real estate market or the economy. We request that borrowers and loan
guarantors, if any, provide annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower
as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and
profitability, and the value of the underlying property. These loans are generally secured by a first mortgage on the underlying
collateral property along with an assignment of rents and leases. If the borrower has multiple rental property loans with us, the
loans are typically not cross-collateralized. As of December 31, 2023, there were no nonaccrual one-to-four family loans.
However, at that date, we did have two one-to-four family loans totaling $317,000, which were 90 days or more past due.
Despite their overdue status, both loans well collateralized and no loss was expected by the Bank on these loans.
Multifamily and Commercial Real Estate Lending. As of December 31, 2023, $138.1 million, or 11.6% of our total
loan portfolio was secured by multifamily properties and $377.9 million, or 31.6% of our loan portfolio was secured by
commercial real estate properties. Our commercial real estate loans are typically secured by retail shopping centers, office
buildings, hotels or motels, mini-storage facilities, mobile home parks, warehouses, and nursing homes. Commercial real estate
and multifamily loans are subject to similar underwriting standards and processes. These loans are viewed primarily as cash
flow loans and secondarily as loans secured by real estate.
Typically, multifamily and commercial real estate loans have higher balances, are more complex to evaluate and
monitor, and involve a greater degree of risk than one-to-four-family residential loans. In an attempt to compensate for and
mitigate this risk, these loans are generally priced at higher interest rates than one-to-four family residential loans and generally
have a maximum LTV of 80% of the lesser of the appraised value or purchase price. We generally require loan guarantees by
any parties with a property ownership interest of 20% or more. If the borrower is a corporation or partnership, we generally
require personal guarantees from the principals based upon a review of their personal financial statements and individual credit
reports.
5
The following table presents a breakdown of our multifamily and commercial real estate loan portfolio at
December 31, 2023, and 2022:
Multifamily real estate:
Total multifamily
Commercial real estate:
Retail
Office
Hotel / motel
Storage
Mobile home park
Warehouse
Nursing home
Other non-residential
Total non-residential
$
$
$
December 31, 2023
December 31, 2022
Amount
% of Total in
Portfolio
Amount
% of Total in
Portfolio
(Dollars in thousands)
138,149
100.0 % $
126,866
100.0 %
124,172
72,778
63,597
33,033
21,701
19,218
11,610
31,750
377,859
32.9 % $
132,917
19.3
16.8
8.7
5.7
5.1
3.1
8.4
100.0 % $
84,301
55,408
33,797
25,283
19,917
12,348
43,933
407,904
32.5 %
20.7
13.6
8.3
6.2
4.9
3.0
10.8
100.0 %
The average loan size in our multifamily and commercial real estate loan portfolios was $987,000 and $2.1 million,
respectively, as of December 31, 2023. At this date, $34.9 million, or 25.2% of our multifamily loans and $100.1 million, or
26.5% of our commercial real estate loans were located outside of the Puget Sound Region. We currently target individual
multifamily and commercial real estate loans between $1.0 million and $5.0 million. The largest multifamily loan as of
December 31, 2023, was a 79-unit apartment complex with a net outstanding principal balance of $15.9 million located in King
County, Washington, which was performing in accordance with its loan repayment terms at that date. As of December 31,
2023, the largest commercial real estate loan had a net outstanding balance of $15.1 million that was secured by a retail facility
located in King County, Washington, which was performing in accordance with its loan repayment terms at that date.
The credit risk related to multifamily and commercial real estate loans is considered to be greater than the risk related
to one-to-four family residential loans because the repayment of multifamily and commercial real estate loans typically is
dependent on the income stream from the real estate securing the loan as collateral and the successful operation of the
borrower’s business, that can be significantly affected by adverse conditions in the real estate markets or in the economy. For
example, if the cash flow from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s
ability to repay the loan may be impaired. In addition, many of our multifamily and commercial real estate loans are not fully
amortizing and contain large balloon payments upon maturity. These balloon payments generally require the borrower to either
refinance or occasionally sell the underlying property in order to make the balloon payment.
If we foreclose on a multifamily or commercial real estate loan, our holding period for the collateral typically is longer
than for one-to-four family residential mortgage loan foreclosures because there are fewer potential purchasers of the collateral.
Our multifamily and commercial real estate loans generally have relatively large balances to single borrowers or related groups
of borrowers. Accordingly, if we make any errors in judgment in the collectability of our multifamily or commercial real estate
loans, any resulting charge-offs may be larger on a per loan basis than those incurred in our one-to-four family residential or
consumer loan portfolios. There were no commercial real estate loans or multifamily loans on nonaccrual status at both
December 31, 2023 and 2022. In addition, there were no multifamily or commercial real estate loans charged-off during the
years ended December 31, 2023 and 2022.
Construction/Land Loans. We originate construction/land loans primarily to residential builders for the construction
of single-family residences, condominiums, townhouses, multifamily properties and residential developments located in our
market area. Land loans include land non-development loans for the purchase or refinance of unimproved land held for future
residential development, improved residential lots held for speculative investment purposes or lines of credit secured by land,
and land development loans. Construction/land loans to builders generally require the borrower to have an existing relationship
with the Company and a proven record of successful projects. At December 31, 2023, our total construction/land loans
decreased to $60.9 million or 5.1% of our total loan portfolio, from $77.6 million, or 6.6% of our total loans, at
6
December 31, 2022, as a result of $15.4 million of multifamily construction/land loans converting to permanent multifamily
loans. The Company’s lending policy sets forth the guideline that the balance of our net acquisition, development, and
construction loans and deferred fees and costs, not exceed 100% of the Bank’s total capital plus surplus. The Company was in
compliance with this policy at December 31, 2023, with a balance equal to 38.3% of the Bank’s total capital plus surplus.
Management intends to maintain levels near or below this guideline, however the uncertainty of the timing associated with
construction loan draws occasionally results in the actual concentration exceeding the guideline. There were no construction/
land loans classified as nonaccrual at December 31, 2023 and 2022. There were no construction/land loan charge-offs during
the years ended December 31, 2023 and 2022. At December 31, 2023, the loans in process (“LIP”) balance on construction/land
loans was $44.6 million.
Following is the composition of our total construction/land loan portfolio, that are net of LIP, at the dates indicated.
All of the loans represented were performing:
Construction speculative:
One-to-four family residential
Total construction speculative
Construction permanent: (1)
Multifamily
Total construction permanent
Land:
Land development
Land non-development
Total land
Total construction/land loans
December 31,
2023
2022
(In thousands)
$
47,149 $
47,149
4,004
4,004
4,774
4,997
9,771
$
60,924 $
52,492
52,492
15,393
15,393
3,980
5,779
9,759
77,644
_____________
(1) Includes loans where the builder does not intend to sell the property after the construction phase is completed.
The following table includes construction/land loans by county at December 31, 2023:
County
King
Snohomish
Other Washington counties
Total
Loan Balance
Percent of Construction/
Land Loan Balance
(Dollars in thousands)
$
$
59,438
534
952
60,924
97.5 %
0.9
1.6
100.0 %
Loans to finance the construction of single-family homes, subdivisions and land loans are generally offered to builders
in our primary market areas. Loans that are termed “speculative” are those where the builder does not have, at the time of loan
origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing with either us or
another lender. The buyer may be identified either during or after the construction period, with the risk that the builder may
have to fund the debt service on the speculative loan along with real estate taxes and other carrying costs for the project for a
significant period of time after completion of the project until a buyer is identified. The maximum LTV ratio applicable to these
loans is generally 100% of the actual cost of construction, provided that the LTV on the completed project does not exceed
80%, with approval required from the Chief Credit Officer (“CCO”) for LTV ratios over 80%. In addition, a minimum of 20%
verified equity is generally also required. Verified equity refers to cash equity invested in the project. Development plans are
required from builders prior to committing to the loan. We require that builders maintain adequate title insurance and other
appropriate insurance coverage, and, if applicable, appropriate environmental data report(s) that the land is free of hazardous or
toxic waste. While maturity dates for residential construction loans are largely a function of the estimated construction period of
the project and typically do not exceed one year, land loans generally are for 12 to 18 months. Substantially all of our
residential construction loans have adjustable-rates of interest based on The Wall Street Journal prime rate. During the term of
7
construction, the accumulated interest on the loan is either added to the principal of the loan through an interest reserve or billed
monthly. At December 31, 2023, there was no interest reserve included in the LIP balance on construction/land loans. At
December 31, 2022, the LIP balance on construction/land loans included $5.2 million set aside for interest reserves. When these
loans exhaust their original reserves set up at origination, no additional reserves are permitted unless the loan is re-analyzed and
it is determined that the additional reserves are appropriate, based on the updated analysis. Construction loan proceeds are
disbursed periodically as construction progresses and as inspections by our approved inspectors warrant. At December 31,
2023, our three largest construction/land loans consisted of multifamily, land development and one-to-four family residential
loans of $4.0 million, $4.8 million, and $4.8 million, respectively, all of which properties are located in King County. The
$4.0 million multifamily loan will rollover to a permanent loan upon completion of the construction period.
Certain of our residential construction loans to borrowers for one-to-four family, non-owner occupied residences are
structured to be converted to fixed-rate permanent loans at the end of the construction phase with one closing for both the
construction loan and the permanent financing. Prior to making a commitment to fund a construction loan, we require an
appraisal of the post-construction value of the project by an independent appraiser. During the construction phase, which may
last 12 to 24 months, an approved inspector or designated Bank employee makes periodic inspections of the construction site to
certify construction has reached the stated percentage of completion. Typically, disbursements are made in monthly draws and
interest-only payments are required. At December 31, 2023, there were no residential construction loans which will rollover to
permanent loans with the Bank at the completion of the construction phase.
We also make construction loans for commercial development projects. The projects include multifamily, retail, office,
warehouse, hotels and office buildings. These loans typically have an interest-only payment phase during construction and
generally convert to permanent financing when construction is complete. Disbursement of funds is at our sole discretion and is
based on the progress of construction. The Bank uses an independent third party or Bank employee to conduct monthly
inspections to certify that construction has reached the stated percentage of completion and that previous disbursements are
reflected in the degree of work performed to date. Generally, the maximum LTV ratio applicable to these loans is 90% of the
actual cost of construction or 80% of the prospective value at completion.
Land development loans are generally made to builders for preparation of a building site and do not include the
construction of buildings on the property. The maximum LTV for these loans is 75% based on the lower of the purchase price
or appraised value at the time of loan origination. Land non-development loans are generally for raw land where we do not
finance the cost of preparing the site for building and are subject to a maximum LTV ratio of 65% based on the lower of the
purchase price or appraised value at the time of loan origination.
Our construction/land loans are based upon estimates of costs in relation to values associated with the completed
project. Construction/land lending involves additional risks when compared with permanent residential lending because funds
are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion.
Because of the uncertainties inherent in estimating construction costs, time needed to complete the building phase, as well as
the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to
evaluate accurately the total funds required to complete a project and the completed project LTV ratio. Changes in the demand
for new housing, longer completion times due to supply chain issues, and higher than anticipated building costs may cause
actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher
loan principal amounts and is often concentrated with a small number of builders. These loans often involve the disbursement
of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or
lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal
and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for
the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans
require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more
difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans
by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall demand for the project. Properties
under construction are often difficult to sell and typically must be completed in order to be successfully sold, which also
complicates the process of working out problem construction loans. This may require us to advance additional funds and/or
contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is the
added risk associated with identifying an end-purchaser for the finished project. Land loans also pose additional risk because of
the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be
significantly influenced by supply and demand conditions.
Business Lending. Business loans totaled $29.1 million, or 2.5% of the loan portfolio at December 31, 2023. The
Company participated in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed
8
unsecured loan program enacted under the Coronavirus Aid, Relief, and Economic Security Act of 2020 to provide near-term
relief to help small businesses impacted by COVID-19 sustain operations. The PPP began in 2020 and ended on May 31, 2021.
Under this program we funded 723 applications totaling $77.7 million of loans in our market areas and began processing
applications for loan forgiveness in the fourth quarter of 2020. At December 31, 2023, there were five PPP loans outstanding
totaling $473,000, as compared to the same loans with an aggregate outstanding balance of $783,000 at December 31, 2022.
The Company also originates loans under other SBA lending programs, which are partially guaranteed by the SBA. At
December 31, 2023, the Bank’s portfolio included $1.8 million of these SBA loans, of which $1.3 million is guaranteed by the
SBA. At that date, these SBA loans were not held for sale, however, the Company may elect to sell off the guaranteed portion
of these loans in the future.
Conventional business loans (loans other than PPP loans) are generally secured by business equipment, accounts
receivable, inventory or other property. Loan terms typically vary from one to five years. The interest rates on such loans are
either fixed-rate or adjustable-rate. The interest rates for the adjustable-rate loans are indexed to the prime rate published in The
Wall Street Journal plus a margin. Our business lending policy includes credit file documentation and requires analysis of the
borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an
evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an
important aspect of our credit analysis. We generally obtain personal guarantees on our conventional business loans. The largest
conventional business loan had an outstanding balance of $14.4 million at December 31, 2023 and was performing according to
its repayment terms. At December 31, 2023, we did not have any business loans delinquent in excess of 90 days or in
nonaccrual status.
Aircraft loans are collateralized by new or used, single-engine piston aircraft to light jets for business or personal use.
These loans generally range in size from $250,000 to $3.0 million with the primary focus of our underwriting guidelines on the
asset value of the collateral rather than the ability of the borrower to repay the loan. At December 31, 2023, the Company’s
aircraft loan portfolio consisted of one loan with an outstanding balance of $1.9 million, representing 6.7% of total business
loans. See Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic and collectible car
financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these transactions
becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”
Repayments of conventional business loans are often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in value. Our business loans, other than aircraft and PPP
loans, are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Credit support provided by the borrower for most of these loans and the probability of repayment is
based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of
loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent
on the ability of the borrower to collect amounts due from its customers. The collateral securing business loans may depreciate
over time, may be difficult to appraise, or may fluctuate in value based on the success of the business.
Consumer Lending. We offer a limited variety of consumer loans to our customers, consisting primarily of home
equity loans and savings account loans. Generally, consumer loans have shorter terms to maturity and higher interest rates than
one-to-four family residential loans. Consumer loans are offered with both fixed and adjustable interest rates and with varying
terms. At December 31, 2023, consumer loans were $72.0 million or 6.1% of the total loan portfolio.
At December 31, 2023, the largest component of the consumer loan portfolio consisted of purchased indirect consumer
loans to finance classic and collectible cars with a balance of $58.6 million, or 81.4% of the total consumer loan portfolio. Due
to the unique nature of these cars, the estimated value often does not align with listed values, therefore, approval of the loan is
based on the borrower’s ability to repay. These fixed rate loans typically have maturity periods of three to fifteen years.
Included in these loans are classic cars, defined as a vehicle in excess of 25 years old, and collectible cars, with a retail price in
excess of $150,000. The current internal portfolio limit for these loans is $60.0 million, and as of December 31, 2023, the
portfolio balance was $58.6 million. At that date, our largest classic and collectible car loan was $761,000 and the average loan
size was $85,000. See Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic and collectible
car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these transactions
becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”
At December 31, 2023, home equity loans, primarily home equity lines of credit totaled $12.5 million, or 17.3% of the
total consumer loan portfolio. The home equity lines of credit include $3.3 million of equity lines of credit in first lien position
and $9.2 million of second liens on residential properties. At December 31, 2023, unfunded commitments on our home equity
lines of credit totaled $21.4 million. Home equity loans are made for purposes such as the improvement of residential
9
properties, debt consolidation and education expenses. At origination, the LTV ratio is generally 90% or less, when taking into
account both the balance of the home equity loans and the first mortgage loan. Home equity loans are originated on a fixed-rate
or adjustable-rate basis. The interest rate for the adjustable-rate second lien loans is indexed to the prime rate published in The
Wall Street Journal and may include a margin. Home equity loans generally have a 10 to 30 year term, with a 10 year draw
period, and either convert to principal and interest payments with no further draws or require a balloon payment due at maturity.
Consumer loans entail greater risk than one-to-four family residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the
borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans. Classic and collectible car loans have greater risk
than other consumer loans primarily due to their high value which may fluctuate significantly. Home equity lines of credit have
greater credit risk than one-to-four family residential mortgage loans because they are generally secured by mortgages
subordinated to the existing first mortgage on the property that we may or may not hold in our portfolio. We do not have private
mortgage insurance coverage on these loans. Adjustable-rate loans may experience a higher rate of default in a rising interest
rate environment due to the increase in payment amounts when interest rates reset higher. If current economic conditions
deteriorate for our borrowers and their home prices fall, we may also experience higher credit losses from this loan portfolio.
For our home equity loans that are in a second lien position, it is unlikely that we will be successful in recovering our entire
loan principal outstanding in the event of a default. At December 31, 2023, $220,000 of classic and collectible auto loans were
in nonaccrual status. During the year ended December 31, 2023, $22,000 of consumer loans were charged off.
Loan Solicitation and Processing. Our consumer and residential mortgage loan originations are generated through
the Bank and from time to time through outside brokers and correspondent relationships we have established with select
mortgage companies or other financial institutions. We originate multifamily, commercial real estate, construction/land and
business loans primarily using the Bank’s loan officers, with referrals coming from builders, brokers and existing customers.
Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify
specific information relating to the loan applicant’s employment, income, and credit standing. All real estate loans requiring an
appraisal are done by our internal appraisal department or an independent third-party appraiser. All appraisers are approved by
us, and their credentials are reviewed annually, as is the quality of their appraisals.
We use a multi-level underwriting matrix which establishes lending targets and tolerance levels depending on the loan
type being approved. The matrix also sets minimum credit standards and approval limits for each of the loan types.
Lending Authority. The Directors’ Loan Committee consists of at least three members of the Board of Directors. The
Directors’ Loan Committee recommends for approval by the Board of Directors exceptions to the aggregate loan limit to one
borrower of 15% of total capital plus surplus, or $26.1 million at December 31, 2023. The Board of Directors approves
exceptions to such aggregate loan limit to one borrower up to 20% of total capital plus surplus, or $34.8 million at
December 31, 2023.
Officer Lending Authority. Individual signing authority has been delegated to two lending officers. Our Senior Credit
Approval Officer (“SCAO”) has authority from the Board of Directors to approve loans and aggregate relationships up to and
including $8.0 million. The Board of Directors has given our CCO authority to approve credit to one borrower not to exceed the
legal lending limit of 20% of total capital plus surplus.
Loan Originations, Servicing, Purchases, Sales and Repayments. For the years ended December 31, 2023, 2022,
and 2021, our total loan originations and purchases were $203.2 million, $321.4 million and $363.0 million, respectively.
One-to-four family residential loans are generally originated in accordance with FDIC guidelines, with the exception
of our special community development loans originated to satisfy compliance with the Community Reinvestment Act. Our
loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our
Board-approved loan policy. We require title insurance on all loans and fire and casualty insurance on all secured loans and
home equity loans where real estate serves as collateral. Flood insurance is also required on all secured loans when the real
estate is located in a flood zone.
10
The following table shows total loans originated, purchased, repaid and other changes during the years indicated.
Year Ended December 31,
2023
2022
(In thousands)
2021
Loan originations:
Real estate:
One-to-four family residential
$
87,283 $
160,290 $
Multifamily
Commercial
Construction/land
Total real estate
Business (1)
Consumer
Total loans originated
Loan purchases and participations:
One-to-four family residential
Multifamily
Commercial
Business
Consumer
Total loan purchases and participations (2)
Principal repayments
Charge-offs
Change in LIP
Change in net deferred (costs) fees, and ACL/ALLL
Net increase (decrease) in loans
$
4,365
22,076
51,790
165,514
2,201
13,441
181,156
2,107
80
—
—
19,832
22,019
8,287
38,580
55,524
262,681
2,567
6,155
271,403
4,042
12
9,073
5,000
31,834
49,961
(191,201)
(22)
(3,189)
79
8,842 $
(258,706)
(37)
2,000
(999)
63,622 $
124,220
20,976
62,552
72,825
280,573
26,029
1,852
308,454
1,665
251
32,374
—
20,290
54,580
(342,945)
—
(16,457)
(753)
2,879
_______________
(1) Includes $25.6 million in PPP loans originated during 2021. PPP expired on May 31, 2021.
(2) Totals include $80,000, $9.4 million and $8.2 million in loan participations during 2023, 2022 and 2021, respectively.
Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate-related products.
Loan fees generally represent a percentage of the principal amount of the loan and are paid by the borrower. The amount of fees
charged to the borrower on one-to-four family residential loans and multifamily and commercial real estate loans typically
range from 0% to 2%. United States generally accepted accounting principles (“GAAP”) require that certain fees received, net
of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated
with loans that are prepaid or sold are recognized in income at the time of prepayment or sale. We had $262,000 of net deferred
loan costs at December 31, 2023, and net deferred loan fees of $151,000 at December 31, 2022.
Loan purchases generally include a premium, which is deferred and amortized into interest income with net deferred
fees over the contractual life of the loan. During 2023, total premiums of $876,000, or 4.0% of the purchased principal, were
paid on purchased loans. In comparison, premiums of $1.4 million, or 3.5% of the purchased principal, were paid on purchased
loans during 2022.
One-to-four family residential and consumer loans are generally originated without a prepayment penalty. However,
the majority of our one-to-four family residential loans held in the name of an entity, and multifamily and commercial real
estate loans have prepayment penalties associated with the loans. Most of the multifamily and commercial real estate loan
originations with interest rates fixed for the first five years will adjust thereafter and have a prepayment penalty of 2% to 3% of
the principal balance in year one, with decreasing penalties in subsequent years. Longer initial fixed rate terms generally have
correspondingly longer prepayment penalty periods.
11
Asset Quality
As of December 31, 2023, we had $1.4 million of loans past due 30 days or more. These loans represented 0.12% of
total loans receivable. We generally assess late fees or penalty charges on delinquent loans of up to 5.0% of the monthly
payment. The borrower is given up to a 15 day grace period from the due date to make the loan payment.
The Company actively manages delinquent loans and nonperforming assets by aggressively pursuing the collection of
debts and marketing saleable properties we foreclosed or repossessed, work-outs of classified assets and loan charge-offs. We
handle collection procedures internally or with the assistance of outside legal counsel. Late charges are incurred when the loan
exceeds 10 to 15 days past due depending upon the loan product. When a delinquent loan is identified, corrective action takes
place immediately. The first course of action is to determine the cause of the delinquency and seek cooperation from the
borrower in resolving the issue. Additional corrective action, if required, will vary depending on the borrower, the collateral, if
any, and whether the loan requires specific handling procedures as required by the Washington State Deed of Trust Act. If the
borrower is chronically delinquent and all reasonable means of obtaining payments have been exhausted, we will seek to
foreclose on the collateral securing the loan according to the terms of the security instrument and applicable law.
Construction/land, commercial real estate, and multifamily loans generally have larger individual loan amounts that
have a greater single impact on asset quality in the event of delinquency or default.
When a loan becomes 90 days past due, we generally place the loan on nonaccrual status unless the credit is well
secured and/or in the process of collection. Loans may be placed on nonaccrual status prior to being 90 days past due if there is
an identified problem such as an impending foreclosure or bankruptcy or if the borrower is unable to meet their scheduled
payment obligations. Nonaccrual loans were $220,000 and $193,000 at December 31, 2023 and 2022, respectively.
Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as OREO until it is sold. When the property is acquired, it is recorded at the lower of its cost or fair market value of
the property, less selling costs. The Bank had no OREO properties at both December 31, 2023 and 2022. In the future, we may
experience foreclosure, deed-in-lieu of foreclosure, and short sale activity while we work with our nonperforming loan
customers to minimize our loss exposure.
Because of our structure, we believe we are able to make decisions regarding offers on OREO and the real estate
underlying our nonperforming loans very quickly compared to larger institutions where decisions could take six to twelve
months. This distinction has historically worked to our benefit in reducing our nonperforming assets and disposing of OREO.
Modifications to Borrowers Experiencing Financial Difficulty. Modifications of loans are made in the ordinary
course of business and are completed on a case-by-case basis through negotiation with the borrower in connection with the loan
collection processes. Loan modifications are made to provide borrowers payment relief. Effective January 1, 2023, the
Company adopted ASU 2022-02, which eliminated accounting guidance for trouble debt restructurings while requiring
disclosures of borrowers experiencing financial difficulty for modifications related to principal reductions, interest rate
reductions, term extensions, and more than insignificant payment delay.
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases,
these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficult may be in the
form of principal forgiveness, an interest rate reduction, and other-than-insignificant payment delay, or a term extension or a
combination thereof, among other things. At December 31, 2023, we did not have any loans that were experiencing financial
difficulty and were also modified during the year.
Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets as
substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and
payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the
weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or
liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets
classified as loss are those considered uncollectible and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
12
When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an
amount we deem prudent. General allowances represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but unlike specific allowances, have not been specifically allocated to particular problem
assets. When an insured institution classifies problem assets as a loss, it is required to charge-off those assets in the period in
which they are deemed uncollectible. Our determinations as to the classification of our assets and the amount of our valuation
allowances are subject to review by the FDIC and the DFI that can order the establishment of additional loss allowances or the
charge-off of specific loans against established loss reserves. Assets that do not currently expose us to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses are designated as special mention. At
December 31, 2023, special mention loans decreased to $130,000, down from $5.9 million at December 31, 2022, due to the
upgrade of a $500,000 one-to-four family residential loan, the payoff of a $4.7 million commercial loan and a $200,000
consumer loan and the downgrade of a $293,000 one-to-four family loan from special mention to substandard. At December 31,
2023, all special mention loans were current on their payments and were in compliance with their original loan terms.
In connection with the filing of periodic reports with the FDIC and in accordance with our loan policy, we regularly
review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable
regulations. The decrease in our classified loans during the year ended December 31, 2023 was primarily due to principal
paydowns, partially offset by a downgrade of a $293,000 one-to-four family loan from special mention to substandard.
Substandard loans that were individually evaluated for credit losses at December 31, 2023, resulted in an $11,000 addition to
ACL for the expected loss related to consumer loans.
Classified loans consisting solely of substandard loans, were as follows at the dates indicated:
One-to-four family residential
Multifamily
Commercial real estate
Consumer
Total classified loans
December 31,
2023
2022
(In thousands)
$
293 $
1,590
44,020
220
46,123 $
$
—
1,630
45,411
201
47,242
Allowance for Credit Losses (“ACL”). Management recognizes the possibility of loan losses throughout a loan’s
lifespan and emphasizes the need to maintain the ACL at a level sufficient to absorb specific losses related to collateral-
dependent loans and expected losses within the loan portfolio. Our methodology for analyzing the ACL comprises two
components: the general allowance and the specific allowance. The general allowance establishes a reserve rate using historical
life-of-loan default rates, current loan portfolio information, economic forecasts, and business cycle data. Statistical analysis
determines life-of-loan default and loss rates for the quantitative component, while qualitative factors (“Q-Factors”) adjust
expected loss rates for current and forecasted conditions. The Q-Factor methodology involves a blend of quantitative analysis
and management judgment, reviewed quarterly.
Specific allowances arise when individual loans exhibit unique risk characteristics, leading to an impairment
analysis. If management believes that scheduled principal and interest payments will not be fully paid, and the recorded
investment is less than the market value of the collateral, a specific reserve is established in the ACL for the loan. The specific
reserve amount is calculated using current appraisals, listed sales prices, and other available information. This analysis is
subject to inherent subjectivity, relying on estimates that may be revised as more information becomes available. As of
December 31, 2023 and 2022, the individually evaluated loan balances were $45.9 million and $48.5 million, respectively.
The Board of Directors’ Internal Asset Review Committee reviews and recommends ACL approval or any provision/
recapture of provision for credit losses quarterly. The Board approves the provision or recapture based on the Committee’s
recommendation. The ACL increases with the provision for credit losses, impacting current period earnings. If the loan
portfolio analysis indicates a lower risk than the ACL balance, a recapture of provision for credit losses is added to current
period earnings.
For the year ended December 31, 2023, there was a $208,000 recapture of provision for credit losses, compared to a
$434,000 recapture for the year ended December 31, 2022. This was primarily due to credit upgrades, payoffs of higher credit
risk loans, updates to economic forecasts, changes in loan portfolio balances, composition, and characteristics. As of
13
December 31, 2023, the ACL was $15.3 million or 1.28% of total loans, compared to $15.2 million or 1.29% at December 31,
2022. The ACL’s level is based on estimates, and actual losses may vary. Management reviews ACL adequacy quarterly.
The following table summarizes the distribution of the ACL by loan category, at the dates indicated.
2023
Loan
Balance
Allowance
by Loan
Category
December 31,
2022
Percent
of
Loans
to Total
Loans
Loan
Balance
Allowance
by Loan
Category
Percent
of
Loans
to Total
Loans
(Dollars in thousands)
2021
Loan
Balance
Allowance
by Loan
Category
Percent
of
Loans
to Total
Loans
$ 513,223 $
138,149
5,747
1,509
43.1 % $ 474,180 $
11.6
126,866
4,043
1,210
40.1 % $ 383,721 $
10.7
130,150
3,214
1,279
34.3 %
11.6
377,859
3,895
31.6
407,904
5,397
34.5
419,708
6,615
37.6
60,924
1,090,155
29,081
71,995
1,856
13,007
387
1,912
$ 1,191,231 $ 15,306
5.1
91.4
2.5
6.1
1,717
77,644
12,367
1,086,594
948
31,363
1,912
64,353
100.0 % $ 1,182,310 $ 15,227
6.6
91.9
2.7
5.4
2,064
92,843
13,172
1,026,422
1,112
46,333
1,373
46,363
100.0 % $ 1,119,118 $ 15,657
8.3
91.8
4.1
4.1
100.0 %
Real estate:
One-to-four
family
residential
Multifamily
Commercial real
estate
Construction/
land
Total real estate
Business
Consumer
Total
Based on its comprehensive analysis, management believes that the ACL as of December 31, 2023 was adequate to
absorb the estimated lifetime credit losses in the loan portfolio. While we believe the estimates and assumptions used in our
determination of the adequacy of the ACL are reasonable, there can be no assurance that such estimates and assumptions will be
proven correct in the future, or that the actual amount of future provisions will not exceed the amount of past provisions, or that
any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future
additions to the ACL may become necessary based upon changing economic conditions, the level of problem loans, business
conditions, credit concentrations, increased loan balances or changes in the underlying collateral of the loan portfolio. In
addition, the determination of the amount of the ACL is subject to review by bank regulators as part of the routine examination
process that may result in the establishment of additional loss reserves or the charge-off of specific loans against established
loss reserves based upon their judgment of information available to them at the time of their examination. A weakening in the
national and local economic conditions or other factors, could result in a material increase in the ACL and may adversely affect
the Company’s financial condition and results of operations.
14
The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s
calculations. The Company adopted the CECL methodology as of January 1, 2023. All amounts prior to January 1, 2023 were
calculated using the previous incurred loss methodology to compute our allowance for loan losses, which is not directly
comparable to the new current expected credit losses methodology.
ACL/ALLL as a percent of total loans
ACL/ALLL at period end
Total loans outstanding
At or For the Year Ended December 31,
2023
2022
2021
(Dollars in thousands)
1.28 %
1.29 %
1.40 %
$ 15,306
$ 15,227
$ 15,657
1,191,231
1,182,310
1,119,118
Non-accrual loans as a percentage of total loans outstanding at period end
0.02 %
0.02 %
$
220
$
193
$
1,191,231
1,182,310
1,119,118
— %
—
Total non-accrual loans
Total loans outstanding
ACL/ALLL as a percent of non-accrual loans at period end
6,957.27 % 7,889.78%
n/a
ACL/ALLL at period end
Total non-accrual loans
Net recoveries (charge-offs) during period to average loans outstanding:
One-to-four family residential:
Net recoveries during period
Average loans receivable, net (1)
Multifamily:
Net charge-offs during period
Average loans receivable, net (1)
Commercial:
Net charge-offs during period
Average loans receivable, net (1)
Construction/land development:
Net charge-offs during period
Average loans receivable, net (1)
Business:
Net charge-offs during period
Average loans receivable, net (1)
Consumer:
Net charge-offs during period
Average loans receivable, net (1)
Total loans:
Net (charge-offs) recoveries during period
Average loans receivable, net (1)
$ 15,306
220
$ 15,227
193
$ 15,657
—
— %
— %
0.05%
$
1
483,344
$
7
427,455
$
183
374,796
— %
—
$
— %
—
$
— %
—
$
139,470
132,845
139,298
— %
—
$
— %
—
$
— %
—
$
393,382
408,688
382,341
— %
— %
$
—
$
—
$
— %
—
59,054
74,438
97,494
— %
— %
— %
—
28,302
—
$
32,539
—
$
63,263
(0.03) %
(22)
69,017
(0.07) %
(37)
$
52,870
— %
—
$
41,580
— %
(21)
$
— %
(30)
$
0.02 %
183
$
$
$
1,172,569
1,128,835
1,098,772
_______________
(1) The average loans receivable, net balances, include nonaccrual loans and deferred loan (costs) fees.
15
Investment Activities
General. Under Washington State law, commercial banks are permitted to invest in various types of liquid assets,
including, but not limited to, U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper,
investment grade corporate debt securities, and obligations of states and their political sub-divisions.
The Investment, Asset/Liability Committee (“ALCO”), comprised of the Chief Executive Officer, Chief Financial
Officer, and Controller of the Bank, along with other members of management and the Board of Directors, holds the authority
and responsibility to manage our investment policy. This includes monitoring portfolio strategies and recommending necessary
changes to the Board of Directors. Monthly, management provides the Board with a summary of investment holdings, along
with respective market values, and details of all purchases and sales of investment securities.
The Chief Financial Officer has the primary responsibility for managing the investment portfolio and considers various
factors when making decisions, such as marketability, maturity, liquidity, and tax consequences of proposed investments. The
maturity structure of investments is affected by various market conditions, including the current and anticipated slope of the
yield curve, interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and
loan originations and purchases.
The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in
maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing risk, including credit
risk, reinvestment risk, liquidity risk and interest rate risk.
At December 31, 2023, our investment portfolio consisted principally of mortgage-backed securities, municipal bonds,
U.S. government agency obligations, and corporate bonds. From time to time, investment levels may increase or decrease
depending upon yields available on investment opportunities and management’s projected demand for funds for loan
originations, net deposit flows, and other activities. The Bank held three annuity contracts, totaling $2.5 million and
$2.4 million, respectively, at December 31, 2023 and 2022, as held-to-maturity investments. These annuity contracts were
purchased to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements.
Mortgage-Backed Securities. The mortgage-backed securities in our portfolio were primarily comprised of Fannie
Mae, Freddie Mac, and Ginnie Mae issued mortgage-backed securities, all which were classified as available-for-sale. These
issuers guarantee the timely payment of principal and interest in the event of default. At December 31, 2023, our available-for-
sale mortgage-backed securities portfolio included other “private label” mortgage-backed securities with a fair value of
$29.2 million and an amortized cost of $30.6 million. The mortgage-backed securities portfolio had a weighted-average yield of
4.00% at December 31, 2023.
U.S. Government Agency Obligations. The agency securities in our portfolio were comprised of Fannie Mae,
Freddie Mac, Ginnie Mae, SBA and FHLB agency securities. These issuers guarantee the timely payment of principal and
interest in the event of default. At December 31, 2023, the portfolio of government agency securities had a weighted-average
yield of 3.94%.
The guarantees of the SBA, as a U.S. government agency and Ginnie Mae, as part of a U.S. government agency are
backed by the full faith and credit of the United States. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are U.S.
government-sponsored entities. Although their guarantees are not backed by the full faith and credit of the United States, they
may borrow from the U.S. Treasury, which has taken other steps to ensure these U.S. government-sponsored entities can fulfill
their financial obligations.
Corporate Bonds. The corporate bond portfolio is comprised of both fixed and variable rate securities, including sub-
debt securities, issued by various financial institutions. At December 31, 2023, the corporate bond portfolio had a weighted-
average yield of 4.77%.
Municipal Bonds. The municipal bond portfolio is comprised of taxable and tax-exempt municipal bonds. The pre-tax
weighted-average yield on the municipal bond portfolio was 2.10% at December 31, 2023.
Federal Home Loan Bank Stock. As a member of the FHLB, we are required to own FHLB capital stock. The
required amount of capital stock is based on a percentage of our previous year-end assets and our outstanding FHLB advances.
16
The redemption of any excess stock we hold is at the discretion of the FHLB. During 2023, our FHLB stock holdings decreased
by $1.0 million, primarily as a result of the $20.0 million decrease in our FHLB advances during the year. The carrying value of
our FHLB stock totaled $6.5 million at December 31, 2023. During the years ended December 31, 2023 and 2022, we received
dividends on our FHLB stock of $485,000 and $318,000, respectively.
For the year ended December 31, 2023, there were no calls or sales of investment securities and one maturity of a
small balance mortgage-backed security. During the year ended December 31, 2022, gross proceeds from the principal
reductions and maturities of investments were $11.1 million, with net realized gains of $27,000.
Available-for-sale (“AFS”) debt securities are considered impaired if the fair value is less than the amortized cost. On
a quarterly basis, management evaluates impaired debt securities to determine if an ACL is required. If it is determined that a
credit loss exists and an allowance is required, the credit loss on a debt security is measured as the difference between the
amortized cost and the present value of the cash flows expected to be collected, limited by the amount of the impairment. For
impaired debt securities that the Company does not intend to sell and it is not likely that it will be required to sell but does not
expect to recover the entire security’s amortized cost basis, only the portion of the impairment representing a credit loss would
be recognized in earnings. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell
the debt security before recovering its cost basis, the entire impairment would be recognized through earnings. The Company
considers many factors including the severity and duration of the impairment, economic circumstances, recent events specific to
the issuer or industry, and for debt securities, external credit ratings and recent rating updates. Projected cash flows are
discounted by the original or current effective interest rate depending on the nature of the debt security being measured for a
potential credit loss. The remaining impairment related to all other factors is recognized as a charge to other comprehensive
income (“OCI”).
The Company had 123 securities in an unrealized loss position at both December 31, 2023 and 2022, with 113 and 62
of these securities in an unrealized loss position for 12 months or more at December 31, 2023 and 2022, respectively.
Management does not believe that the unrealized losses at December 31, 2023 and 2022 were related to credit losses. The
declines in fair market value of these securities were mainly attributed to changes in market interest rates, credit spreads, market
volatility and liquidity conditions. Currently, the Company does not intend to sell, and it is not more likely than not that the
Company will be required to sell the positions before their recovery of the amortized cost basis, which may be at maturity. As
such, no ACL was recorded with respect to AFS securities for the years ended December 31, 2023 and 2022. For additional
information regarding our investments, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 8 of this
report.
17
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18
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and market conditions. Borrowings from the FHLB are used to supplement the
availability of funds from other sources and also as a source of term funds to assist in the management of interest rate risk.
Our deposit composition reflects a mixture of various deposit products. We rely on marketing activities, customer
service, and the availability of a broad range of products and services to attract and retain customer deposits.
Deposits. We offer a competitive range of deposit products within our market area, including noninterest bearing
accounts, interest-bearing demand accounts, money market accounts, savings accounts, and certificates of deposit. Deposit
account terms vary according to the minimum balance required, the time periods the funds must remain on account, and the
interest rate, among other factors. When determining the terms for deposit accounts, we consider the development of long-term
profitable customer relationships, current market interest rates, maturity structures, deposit mix, customer preferences, and the
profitability of acquiring customer deposits compared to alternative funding sources. To align our deposit mix with lower cost
funds, we consistently adjust our pricing to remain competitive with local market rates. As part of our strategy, we actively
manage our deposit mix, and to complement local deposits, we may generate funds as needed through the wholesale market,
which may involve brokered deposits. The Company had $130.8 million and $124.9 million of brokered deposits at December
31, 2023 and 2022, respectively. The Company may continue to utilize brokered deposits to supplement our retail deposits and
contribute to our interest rate risk management efforts.
The following table sets forth our total deposit activity for the years indicated.
2023
Year Ended December 31,
2022
(In thousands)
2021
Total deposits, beginning balance
(Decrease) increase in retail deposits
Increase (decrease) in brokered funds
Net increase in deposits
Total deposits, ending balance
$
$
1,170,040 $
1,157,474 $
1,093,633
18,163
5,904
24,067
1,194,107 $
(112,320)
124,886
12,566
1,170,040 $
63,841
—
63,841
1,157,474
At December 31, 2023, deposits totaled $1.19 billion. We had $513.3 million of deposit accounts greater than the
FDIC insurance amount of $250,000, representing 43.0% of our total deposits. Of this amount, $170.1 million were retail
certificates of deposit. At December 31, 2022, $568.7 million, or 48.6%, of deposit accounts were greater than $250,000. At
December 31, 2023, we held $85.8 million in public funds, of which $48.8 million exceeded $250,000. Under Washington
State law, in order to participate in the public funds program, we are required to pledge eligible securities of a minimum of 50%
of the public deposits in excess of $250,000.
19
The following
table sets forth
information regarding our certificates of deposit and other deposits at
December 31, 2023. Certificates of deposit are categorized by their original term.
Weighted-
Average
Interest Rate
Product Term
Category
Amount
(Dollars in thousands)
Percentage
of Total
Deposits
— % N/A
Noninterest bearing demand deposits
$ 100,899
8.4 %
0.32
0.03
3.43
4.20
5.15
3.90
3.93
3.94
5.30
5.17
4.73
5.43
5.12
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
N/A
N/A
N/A
Three months or less
Over three through six months
Over six through twelve months
Over twelve months
Total certificates of deposit, retail
Over six through twelve months Brokered certificates of deposit
Brokered certificates of deposit
Over twelve months
N/A
N/A
Interest-bearing demand, brokered
Money market, brokered
Total brokered deposits
56,968
18,886
529,411
917
3,370
30,096
322,770
357,153
20,000
75,260
25,096
10,434
130,790
4.8
1.6
44.3
0.1
0.3
2.5
27.0
29.9
1.7
6.3
2.1
0.9
11.0
Total deposits
$ 1,194,107
100.0 %
Certificates of Deposit. The following table sets forth the amount and remaining maturities of certificates of deposit at
December 31, 2023.
One Year
or Less
After One Year
Through
Two Years
After Two
Years Through
Three Years
After Three
Years Through
Four Years
Thereafter
Total
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
4.01 - 5.00%
5.01 - 6.00%
Total
$
$
10,095 $
14,663
45,026
9,518
110,202
140,623
330,127 $
3,691 $
960
14,171
28
28,953
38,153
85,956 $
(In thousands)
1,567 $
243
3,781
886
—
3,300
9,777 $
435 $
—
10,918
4,433
243
—
16,029 $
169 $
—
4,762
—
5,593
10,524 $
15,957
15,866
78,658
14,865
144,991
182,076
452,413
20
The following table provides the uninsured portion of our retail certificates of deposit at December 31, 2023, by their
remaining maturity period.
Maturity Period
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Certificates of Deposit
(In thousands)
$
$
63,701
4,959
59,231
42,241
170,132
Deposits by Type. The following table sets forth the deposit balances by the types of accounts we offered at the dates
indicated.
2023
December 31,
2022
2021
Amount
Percent of
Total
Amount
Percent of
Total
Amount
Percent of
Total
(Dollars in thousands)
Noninterest bearing
Interest-bearing demand
$
Savings
Money market
Certificates of deposit, retail:
0.00 - 1.00%
1.01 - 2.00%
2.01 - 3.00%
3.01 - 4.00%
4.01 - 5.00%
5.01 - 6.00%
Total certificates of deposit,
retail
Brokered deposits:
3.01 - 4.00%
4.01 - 5.00%
5.01 - 6.00%
Total certificates of deposit,
brokered
Interest-bearing demand,
brokered
Money market, brokered
Total brokered deposits
100,899
56,968
18,886
529,411
15,958
15,866
78,658
14,865
135,231
96,575
357,153
—
9,760
85,500
95,260
25,096
10,434
130,790
8.4 % $
4.8
1.6
44.3
1.4
1.3
6.6
1.2
11.3
8.1
29.9
—
0.8
7.2
8.0
2.1
0.9
11.0
119,944
96,632
23,636
542,388
79,978
51,486
92,335
37,793
962
10.3 % $
8.3
2.0
46.4
6.8
4.4
7.8
3.2
0.1
117,751
97,907
23,146
624,543
176,376
21,264
57,509
38,978
—
10.2 %
8.5
2.0
54.0
15.2
1.8
4.9
3.4
—
262,554
22.3
294,127
25.3
15,680
74,088
—
89,768
25,062
10,056
124,886
1.3
6.3
—
7.6
2.2
0.9
10.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total deposits
$ 1,194,107
100.0 % $ 1,170,040
100.0 % $ 1,157,474
100.0 %
Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We use
advances from the FHLB and to a lesser extent federal funds (“Fed Funds”) purchased to supplement our supply of lendable
funds, to meet short-term deposit withdrawal requirements and to provide longer term funding to assist in the management of
our interest rate risk by matching the duration of selected loan and investment maturities.
21
As a member of the FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances
on the security of that stock and certain of our mortgage loans, provided that certain creditworthiness standards have been met.
Advances are individually made under various terms pursuant to several different credit programs, each with its own interest
rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to secure the credit. We maintain a credit facility
with the FHLB that provides for immediately available advances, subject to acceptable collateral. At December 31, 2023, our
remaining FHLB credit capacity was $561.3 million and outstanding advances from the FHLB totaled $125.0 million. In
addition, at December 31, 2023, we had supplemental funding sources of $55.8 million available at the FRB and $75.0 million
available between two correspondent financial institutions.
Other than our utilization of interest rate swaps, we do not currently participate in other hedging programs, stand-alone
contracts for interest rate caps or floors or other activities involving the use of off-balance sheet derivative financial
instruments, however, these options are evaluated on occasion. As of December 31, 2023, we had eight interest rate swaps with
an aggregate notional amount of $115.0 million and a fair value gain of $7.6 million as compared to seven interest rate swaps
with an aggregate notional amount of $95.0 million and a fair value gain of $10.5 million at December 31, 2022. The
$115.0 million notional amount included two new agreements we entered into with qualified institutions on July 17, 2023. One
agreement had a $15.0 million notional amount, a two-year maturity and a fixed rate of 4.57%. The second agreement also had
a $15.0 million notional amount, a three-year maturity and a fixed rate of 4.15%. On November 20, 2023, a $10.0 million
notional swap with a four-year maturity and a fixed rate of 1.59% matured and was not replaced. For additional information,
see Item 1A. Risk Factors -“Risks Related to Market and Interest Rate Changes - If interest rate swaps we enter into prove
ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse
effect on our results of operations and cash flows,” Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management,” and Note 11 of the Notes to Consolidated Financial Statements
contained in Item 8 of this report.
Subsidiaries and Other Activities
First Financial Northwest has two wholly-owned subsidiaries, the Bank and First Financial Diversified Corporation.
The Bank is a community-based commercial bank which primarily serves the greater Puget Sound region of King and to a
lesser extent, Pierce, Snohomish and Kitsap Counties, Washington through our full-service banking office in Renton,
Washington and fourteen additional branches in King, Pierce and Snohomish Counties, Washington. We are in the business of
attracting deposits from the public and utilizing those deposits to originate loans. First Financial Diversified Corporation
previously held a small portfolio of loans. Subsequent to these loans paying off in 2019, the company has had minimal activity.
Competition
The Bank operates in the highly competitive Puget Sound region of Western Washington. We face competition in
originating loans and attracting deposits within our geographic market area. The competitive environment is impacted by
changes in the regulatory environment, technology and product delivery systems as well as consolidation in the industry
creating larger, more diversified competitors. We compete by consistently delivering high-quality personal service to our
customers that results in a high level of customer satisfaction.
The Bank attracts deposits primarily through its branch office system. The competition is primarily from commercial
banks, savings institutions and credit unions in the same geographic area. Based on the most current FDIC market share data
dated June 30, 2023, the top five banks in the Seattle-Tacoma-Bellevue metropolitan statistical area (comprised of Bank of
America, JP Morgan Chase, Wells Fargo, US Bancorp and KeyBank) controlled 72% of the deposit market. In addition to the
FDIC insured competitors, credit unions, insurance companies and brokerage firms also compete for consumer deposit
relationships. The Bank’s share of aggregate deposits in the market area is less than 1%.
Our competition for loans comes principally from commercial banks, mortgage brokers, thrift institutions, credit
unions and finance companies. Several other financial institutions compete with us for banking business in our market area.
These institutions have substantially more resources than the Bank and, as a result, are able to offer a broader range of services,
such as trust departments and enhanced retail services. Among the advantages of some of these institutions are their ability to
make larger loans, initiate extensive advertising campaigns, access lower cost funding sources, and allocate their investable
assets in regions of highest yield and demand. The challenges posed by such large competitors may impact our ability to
originate loans, secure low cost deposits, and establish product pricing levels that support our net interest margin goals that may
limit our future growth and earnings potential.
22
Human Capital
The Company continually strives to recruit the most talented, motivated employees in their respective fields. By
providing opportunities for personal and professional growth coupled with an environment that values teamwork and work-life
balance, we are able to attract and retain outstanding individuals. We pride ourselves on providing excellent benefits,
competitive salaries and the opportunity for participation in the company's long-term success.
Workforce. At December 31, 2023, we had 142 full-time employees. Our employees are not represented by any
collective bargaining group. The Company is committed to providing equality of opportunity in all aspects of employment
through a comprehensive affirmative action plan that is updated annually. As of December 31, 2023, our workforce was 58.5%
female and 41.5% male, and women held 52.5% of the Bank’s management roles. The average tenure of mid-level officers and
managers is 4.7 years and the average tenure of executive/senior level officers is 9.8 years. The ethnicity of our workforce was
61.3% White, 26.8% Asian, 4.2% Hispanic or Latino, 2.8% Black, 2.1% Two or More Races, 0.7% Native Hawaiian or Other
Pacific Islander, and 2.1% undisclosed at December 31, 2023.
The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31,
2023, by job classification as defined by the Equal Employment Opportunity Commission (“EEOC”):
Job Classification
Female
Minority (1)
Distribution by EEOC
Job Classification
Executive / Senior level officers
Mid-level officers and managers
Professionals
Sales workers
Technicians
Administrative support
Total
46.2 %
46.2 %
9.2 %
54.2
45.5
37.5
—
86.8
31.3
36.4
37.5
50.0
47.4
33.8
23.2
5.6
1.4
26.8
58.5 %
38.7 %
100.0 %
__________
(1) Includes employees self-disclosed as Asian, Black, Native Hawaiian or Other Pacific Islander, Hispanic or Latino, or Two or
More Races.
Benefits. The Company provides competitive comprehensive benefits to employees. The Company values the health
and well-being of its employees and strives to provide programs to support this. Benefit programs available to eligible
employees may include 401(k) savings plan, profit-sharing plan, ESOP, health and life insurance, employee assistance program,
paid holidays, paid time off, and other leave as applicable. Effective January 1, 2023, the Company made changes to its 401(k)
plan to qualify as a “Safe Harbor” plan. Under the revised plan, employee contributions up to 5% will be matched 100% by the
Company and said matching contributions will be immediately vested to the employee. Separately, in an effort to replace the
ESOP benefits that matured in 2022, the Company introduced a profit-sharing plan beginning in 2023, wherein a contribution
will be made to every employee’s retirement account in an amount ranging from 5% to 8% annually, based on the Company’s
profitability.
Board of Directors. The Company’s Board of Directors is comprised of the Company’s Chief Executive Officer and
Chief Financial Officer and five non-employee directors. The non-employee directors are represented by 60% female and 20%
minority.
Training and education. The Company recognizes that the skills and knowledge of its employees are critical to the
success of the organization, and promotes training and continuing education as an ongoing function for employees. The Bank’s
compliance training program provides annual training courses to assure that all employees and officers know the rules
applicable to their jobs.
How We Are Regulated
The following is a brief description of certain laws and regulations that are applicable to First Financial Northwest and
the Bank. On March 31, 2015, First Financial Northwest converted from a registered savings and loan holding company to a
bank holding company. As a bank holding company, First Financial Northwest is subject to examination and supervision by,
23
and is required to file certain reports with the FRB. First Financial Northwest also is subject to the rules and regulations of the
SEC under the federal securities laws. The Bank, which changed its charter from a Washington-chartered savings bank to a
Washington-chartered commercial bank effective on February 11, 2016, is subject to regulation and oversight by the DFI, the
applicable provisions of Washington law and by the regulations of the DFI adopted thereunder. The Bank also is subject to
regulation and examination by the FDIC, which insures its deposits to the maximum extent permitted by law.
The laws and regulations governing us may be amended from time to time by the relevant legislative bodies and
regulators. Any such legislative action or regulatory changes in the future could adversely affect us. We cannot predict whether
any such changes may occur.
Regulation and Supervision of First Financial Northwest Bank
General. As a state-chartered commercial bank, the Bank is subject to applicable provisions of Washington state law
and regulations of the DFI in addition to federal law and regulations of the FDIC applicable to state banks that are not members
of the Federal Reserve System. State law and regulations govern the Bank’s ability to take deposits and pay interest, to make
loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking
services to its customers and to establish branch offices. Under state law, commercial banks in Washington also generally have
all of the powers that federal commercial banks have under federal laws and regulations. The Bank is subject to periodic
examination by and reporting requirements of the DFI.
Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to $250,000 per separately
insured deposit ownership right or category by the Deposit Insurance Fund (“DIF”) of the FDIC. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions.
The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base,
which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its
federal deposit insurance assessment. Total base assessment rates currently range from 5 to 32 basis points subject to certain
adjustments.
Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to
decline below the statutory minimum of 1.35 percent. In September 2020, the FDIC Board of Directors adopted a Restoration
Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by
the Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and
required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least
semiannually. In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at
risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve
ratio. Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in
initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository
institutions. In October 2022, the FDIC Board adopted a final rule to increase initial base deposit insurance assessment rate
schedules uniformly by two basis points, with an effective date of January 1, 2023, applicable to the first quarterly assessment
period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF
reaches the statutory minimum level of 1.35 percent by September 30, 2028
Management cannot predict what FDIC assessment rates will be in the future. In a banking industry emergency, the
FDIC may also impose a special assessment. The Bank paid $683,000 in FDIC assessments for the year ending December 31,
2023.
As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.
The FDIC also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to
pose a serious risk to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings
associations. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit
insurance.
Standards for Safety and Soundness. Each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and internal audit systems; loan documentation; credit
underwriting; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. In general,
the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe
24
compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal shareholder. If the FDIC determines that an institution fails to meet any of
these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. Management of
the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a
plan of compliance.
Capital Requirements. Federally insured financial institutions, such as the Bank, and their holding companies, are
required to maintain a minimum level of regulatory capital.
The Bank is subject to capital regulations adopted by the FDIC, which establish minimum required ratios for a
common equity Tier 1 (“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to
risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the
following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of
8%; and (iv) a Tier 1 leverage ratio of 4%. Consolidated regulatory capital requirements identical to those applicable to
subsidiary banks generally apply to bank holding companies. However, the Federal Reserve has provided a “Small Bank
Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion
of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the
Federal Reserve.
The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018,
required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a
“community bank leverage ratio” or “CBLR” of between 8 to 10%. Institutions with capital meeting or exceeding the ratio and
otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and
trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with
the applicable regulatory capital requirements, including the risk-based requirements. The CBLR was established at 9% Tier 1
capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank
leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is
provided with a two-quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace
period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital
requirements. Although the Bank qualified to make this election, as of December 31, 2023, management has not elected to use
the CBLR as the Bank’s margin above the current minimum levels to be well-capitalized is greater than our margin would be
under the CBLR.
In addition to the minimum CET1, Tier 1, and total capital ratios, the capital regulations require a capital conservation
buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in
order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
To be considered “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8%,
a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5%, and not
be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to
maintain a specific capital level. As of December 31, 2023, First Financial Northwest Bank met the requirements to be “well
capitalized” and met the fully phased-in capital conservation buffer requirement.
25
The table below sets forth the Bank’s capital position at December 31, 2023 and 2022, based on FDIC thresholds to be
well-capitalized.
Bank equity capital under GAAP
Tier 1 leverage capital
Tier 1 leverage capital requirement
Excess
Common equity tier 1
Common equity tier 1 capital requirement
Excess
Tier 1 risk-based capital
Tier 1 risk-based capital requirement
Excess
Total risk-based capital
Total risk-based capital requirement
Excess
December 31,
2023
2022
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
$ 152,264
$ 150,370
$ 158,629
10.18 % $ 156,147
10.31 %
77,936
5.00
75,722
5.00
$ 80,693
5.18 % $ 80,425
5.31 %
$ 158,629
69,220
14.90 % $ 156,147
70,641
6.50
14.37 %
6.50
$ 89,409
8.40 % $ 85,506
7.87 %
$ 158,629
14.90 % $ 156,147
14.37 %
85,194
$ 73,435
86,942
8.00
6.90 % $ 69,205
8.00
6.37 %
$ 171,971
106,493
16.15 % $ 169,755
108,678
10.00
15.62 %
10.00
$ 65,478
6.15 % $ 61,077
5.62 %
The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances.
For a complete description of the Bank’s required and actual capital levels on December 31, 2023, see Note 14 of the
Notes to Consolidated Financial Statements contained in Item 8 of this report.
The Financial Accounting Standards Board (“FASB”) adopted Accounting Standards Update (“ASU”) No. 2016-13
that became effective for us for our first fiscal year beginning after December 15, 2022. This standard, referred to as Current
Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to
recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the current
method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, we
recorded a one-time adjustment of $395,000 to retained earnings, and a $500,000 increase to the allowance for credit losses in
the first quarter of 2023.
Prompt Corrective Action. Federal statutes establish a supervisory framework for FDIC-insured institutions based on
five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures.
The well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on
brokered deposits, including restrictions on the rates it can offer on its deposits, generally. To be considered adequately
capitalized, an institution must have the minimum capital ratios described above. Any institution which is neither well
capitalized nor adequately capitalized is considered undercapitalized. The previously referenced final rule establishing an
elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital
exceeds the community bank leverage ratio and opts to use that framework will be considered “well capitalized” for purposes of
prompt corrective action.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and
restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by the Bank to
26
comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its
activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the
maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking
regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital
requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with
capital requirements.
At December 31, 2023, the Bank was categorized as “well capitalized” under the prompt corrective action regulations
of the FDIC. For additional information, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of
this report.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Des Moines, one of 11 regional FHLBs
that administer the home financing credit function of savings institutions. The FHLBs are subject to the oversight of the Federal
Housing Finance Agency (“FHFA”) and each FHLB serves as a reserve or central bank for its members within its assigned
region. The FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System
and make loans or advances to members in accordance with policies and procedures established by the Board of Directors of
the FHLB, which are subject to the oversight of the FHFA. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential
home financing. See “Business – Deposit Activities and Other Sources of Funds – Borrowings.”
As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines based on the Bank's
asset size and level of borrowings from the FHLB. At December 31, 2023, the Bank held $6.5 million in FHLB stock that was
in compliance with the holding requirements. The FHLB pays dividends quarterly, and the Bank received $485,000 in
dividends during the year ended December 31, 2023.
The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could
also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank’s FHLB stock may result
in a decrease in net income and possibly capital.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk
management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial
real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to
conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or
as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide
banks in developing risk management practices and capital levels commensurate with the level and nature of real estate
concentrations. The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources
on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid
growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is
approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to
real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total
regulatory capital; or
• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory
capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more
during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such
concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2023,
the Bank’s aggregate recorded loan balances for construction, land development and land loans were 38.3% of regulatory
capital. In addition, at December 31, 2023, the Bank’s loans on commercial real estate, as defined by the FDIC, were 316.8% of
regulatory capital.
Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the
activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An
27
insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary,
(2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not
exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures
directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured
depository institutions and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-
insured institution if certain requirements are met.
Under the law of Washington State, Washington chartered savings banks may exercise any of the powers of
Washington-chartered commercial banks, national banks and federally-chartered savings banks, subject to the approval of the
Director of the DFI in certain situations. In addition, Washington state-chartered commercial and savings banks may charge the
maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to
Washington residents.
Environmental Issues Associated With Real Estate Lending. The Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) is a federal statute that generally imposes strict liability on all prior and present
“owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing
that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site.
Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations that have
left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a
loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by
properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for
cleanup costs that often are substantial and can exceed the value of the collateral property.
Federal Reserve System. The Federal Reserve requires all depository institutions to maintain reserves at specified
levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal
Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and
businesses. At December 31, 2023, the Bank was in compliance with the reserve requirements in place at that time.
Affiliate Transactions. First Financial Northwest and the Bank are separate and distinct legal entities. First Financial
Northwest (and any non-bank subsidiary of First Financial Northwest) is an affiliate of the Bank. Federal laws strictly limit the
ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under
Section 23A of the Federal Reserve Act and between a bank and an affiliate are limited to 10% of the bank’s capital plus
surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital plus surplus. Further, covered transactions
that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal
law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act
between a bank and its affiliates be on terms as favorable to the bank as transactions with nonaffiliates.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers,
directors and principal shareholders. Under Section 22(h), loans to a director, executive officer or greater than 10% shareholder
of a bank and certain affiliated interests, generally may not exceed, together with all other outstanding loans to such person and
affiliated interests, 15% of the institution’s unimpaired capital plus surplus. Section 22(h) also requires that loans to directors,
executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to
other persons unless the loans are made pursuant to a benefit or compensation program that (1) is widely available to employees
of the institution and (2) does not give preference to any director, executive officer or principal shareholder, or certain affiliated
interests, over other employees of the bank. Section 22(h) also requires prior Board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a bank to all insiders cannot exceed the bank’s unimpaired capital plus surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2023, the Bank was in
compliance with these restrictions.
Community Reinvestment Act. The Bank is subject to the provisions of the Community Reinvestment Act of 1977
(“CRA”), which require the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in
meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s CRA performance must
be considered in connection with a bank’s application, to among other things, establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution. An unsatisfactory rating may be the basis for denial of certain applications. The Bank received
an “outstanding” rating during its most recent CRA examination.
28
Dividends. The amount of dividends payable by the Bank to First Financial Northwest depends upon the Bank’s
earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law,
the Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the
amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. In
addition, dividends may not be declared or paid if the Bank is in default in payment of any assessments due to the FDIC.
Dividends on the Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of
the Bank, without the approval of the Director of the DFI. Dividends payable by the Bank can be limited or prohibited if the
Bank does not meet the capital conservation buffer requirement.
The amount of dividends actually paid during any one period is affected by the Bank’s policy of maintaining a strong
capital position. Federal law further restricts dividends payable by an institution that does not meet the capital conservation
buffer requirement and provides that no insured depository institution may pay a cash dividend if it would cause the institution
to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies
also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe
and unsound practice.
Privacy Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service providers. Federal banking agencies, including the
FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing
safeguards under the supervision of the Board of Directors. These guidelines, along with related regulatory materials,
increasingly focus on risk management and processes related to information technology and the use of third parties in the
provision of financial services. These regulations require the Bank to disclose its privacy policy, including informing consumers
of its information sharing practices and informing consumers of their rights to opt out of certain practices. In addition, other
federal and state cybersecurity and data privacy laws and regulations may expose the Bank to risk and result in certain risk
management costs. In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule
providing for new notification requirements for banking organizations and their service providers for significant cybersecurity
incidents. Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible,
and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a
“notification incident” has occurred. Notification is required for incidents that have materially affected or are reasonably likely
to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or
the stability of the financial sector. Service providers are required under the rule to notify affected banking organization
customers as soon as possible when the provider determines that it has experienced a computer-security incident that has
materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours.
Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory
imposed fines and penalties, damages from private causes of action and/or reputational harm.
In July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience
and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and
governance. The new rules require registrants to disclose on Form 8-K any cybersecurity incident they determine to be material
and to describe the material aspects of the incident’s nature, scope, and timing, as well as its material impact or reasonably
likely material impact on the registrant. For information regarding the Company’s cybersecurity risk management, strategy and
governance, see “Item 1C. Cybersecurity” contained in Part I of this Form 10-K.
Anti-Money Laundering and Customer Identification. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on
October 26, 2001. The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to
prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected,
financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes
Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the
identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank
regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank
Holding Company Act and Bank Merger Act applications.
Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the Consumer Financial
Protection Bureau (“CFPB”) and empowered it to exercise broad regulatory, supervisory and enforcement authority with
respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations
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issued by the CFPB, but as a financial institution with assets of less than $10 billion, The Bank is generally subject to
supervision and enforcement by the FDIC with respect to its compliance with federal consumer financial protection laws and
CFPB regulations.
The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost
every aspect of its business relationships with consumers. While not exhaustive, these laws and regulations include the Truth-
in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act,
the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership
and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check
Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the
sale of insurance, federal and state laws prohibiting unfair and deceptive business practices and various regulations that
implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the
manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and
providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including
but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of
certain contractual rights.
Regulation and Supervision of First Financial Northwest
General. First Financial Northwest, as sole shareholder of the Bank, is a bank holding company registered with the
Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank
Holding Company Act of 1956, as amended (“BHCA”), and the regulations of the FRB. Accordingly, First Financial Northwest
is required to file semi-annual reports with the Federal Reserve and provide additional information as the Federal Reserve may
require. The Federal Reserve may examine First Financial Northwest, and any of its subsidiaries, and charge First Financial
Northwest for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding
companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or unsound practices. First Financial Northwest is also
required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.
The Bank Holding Company Act. Under the BHCA, First Financial Northwest is supervised by the Federal
Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and
managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner. In addition, the
Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to
its subsidiary bank by having the ability to provide financial assistance to its subsidiary bank during periods of financial distress
to the bank. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary bank will
generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal
Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of
strength provisions required by the Dodd-Frank Act. First Financial Northwest and any subsidiaries that it may control are
considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between the Bank and affiliates are
subject to numerous restrictions. With some exceptions, First Financial Northwest and its subsidiaries are prohibited from tying
the provision of various services, such as extensions of credit, to other services offered by First Financial Northwest or by its
affiliates.
Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in
activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the
BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks
as to be a proper incident thereto. These activities include: operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance;
leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real
estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers. The Federal Reserve must approve the acquisition (or acquisition of
control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking
regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution.
30
Acquisition of Control of a Bank Holding Company. Under federal law, a notice or application must be submitted
to the appropriate federal banking regulator if any person (including a company), or group acting in concert, seeks to acquire
“control” of a bank holding company. An acquisition of control can occur upon the acquisition of 10% or more of the voting
stock of a bank holding company or as otherwise defined by federal regulations. In considering such a notice or application, the
Federal Reserve takes into consideration certain factors, including the financial and managerial resources of the acquirer and the
anti-trust effects of the acquisition. Any company that acquires control becomes subject to regulation as a bank holding
company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking
regulators and may be subject to their approval or non-objection.
Regulatory Capital Requirements. As discussed above, pursuant to the “Small Bank Holding Company” exception,
effective August 30, 2018, bank holding companies with less than $3 billion in consolidated assets were generally no longer
subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to First
Financial Northwest Bank. At the time of this change, First Financial Northwest was considered “well capitalized” (as defined
for a bank holding company), with a total risk-based capital ratio of 10.0% or more and a Tier 1 risk-based capital ratio of 8.0%
or more, and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to
maintain a specific capital level.
Restrictions on Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by
bank holding companies which expresses its view that a bank holding company must maintain an adequate capital position and
generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash
dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and
overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends. Under Washington corporate law, First Financial
Northwest generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in
the usual course of business, or its total assets would be less than its total liabilities. The capital conservation buffer requirement
discussed above can also limit dividends. For additional information, see Item 1.A. “Risk Factors – Risks Related to Regulatory
and Compliance Matters-Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could
result in fines or sanctions” in this report.
Stock Repurchases. A bank holding company, except for certain “well-capitalized” and highly rated bank holding
companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written
agreement with, the Federal Reserve. During the year ended December 31, 2023, First Financial Northwest did not repurchase
any of its outstanding common stock.
Federal Securities Laws. First Financial Northwest’s common stock is registered with the SEC under Section 12(b)
of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We are subject to information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
Taxation
Federal Taxation
General. The Company is subject to federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company. The tax years still
open for review by the Internal Revenue Service are 2020 through 2023.
First Financial Northwest files a consolidated federal income tax return with the Bank. Accordingly, any cash
distributions made by First Financial Northwest to its shareholders are considered to be taxable dividends and not as a non-
taxable return of capital to shareholders for federal and state tax purposes.
Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on
the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.
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Net Operating Loss Carryovers. A financial institution may carryforward net operating losses indefinitely. The
Company had no net operating loss carryforwards at December 31, 2023.
Corporate Dividends-Received Deduction. First Financial Northwest may eliminate from its income dividends
received from the Bank as a wholly-owned subsidiary of First Financial Northwest that files a consolidated return with the
Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with
which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the
dividend. Corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of
dividends received or accrued on their behalf.
For additional information regarding our federal income taxes, see Note 13 of the Notes to Consolidated Financial
Statements contained in Item 8 of this report.
State Taxation
The Company is subject to a business and occupation tax imposed under Washington state law at the rate of 1.75% of
gross receipts for the Bank, as gross receipts are greater than $1.0 million, and 1.50% for its other subsidiaries with gross
receipts less than $1.0 million. In addition, various municipalities also assess business and occupation taxes at differing rates.
Interest received on loans secured by first lien mortgages or deeds of trust on residential properties, rental income from
properties, and certain investment securities are exempt from this tax. An audit by the Washington State Department of
Revenue was completed for the years 2010 through 2013, resulting in no material tax revisions.
Information about our Executive Officers
The business experience for at least the past five years for the executive officers of the Company is set forth below.
Joseph W. Kiley III, age 68, has held the positions of President and Chief Executive Officer at First Financial
Northwest and First Financial Diversified Corporation since September 2013. Additionally, he has served as director of both
First Financial Northwest and First Financial Diversified Corporation since December 2012. Since September 2012, Mr. Kiley
has been the President, Chief Executive Officer and director of the Bank. His prior experience includes serving as President,
Chief Executive Officer, and a director of Frontier Bank, F.S.B., Palm Desert, California, and its holding company, Western
Community Bancshares, Inc. Mr. Kiley has over 30 years of executive experience at banks, thrifts and their holding companies
that includes, but is not limited to, serving as president, chief executive officer, chief financial officer, and director. Mr. Kiley
holds a Bachelor of Science degree in Business Administration (Accounting) from California State University, Chico, and is a
former California certified public accountant. Mr. Kiley is a member of the Renton Rotary Club, City of Renton Mayor’s
Business Executive Forum, City of Renton Mayor’s Blue Ribbon Panel, and past Chair of the Board of Directors of the Renton
Chamber of Commerce. He is a director and past Chairman of the Board of Directors of the Washington Bankers Association
and a member of the Community Bankers Council of the American Bankers Association. He previously served on the Board of
Directors of the California Bankers Association (former Western Bankers Association) and its Executive Committee.
Richard P. Jacobson, age 60, has served as Chief Operating Officer of the Bank since July 2013, and as Chief
Financial Officer of First Financial Northwest, First Financial Diversified Corporation and the Bank since August 2013. In
September 2013, he was appointed as a director for each of these entities. Mr. Jacobson served as a consultant to First Financial
Northwest from April 2010 to April 2012. Subsequently, he worked as a mortgage loan originator in Palm Desert, California
from July 2012 to July 2013. Previously, he had been employed by Horizon Financial Corp. and Horizon Bank, Bellingham,
Washington, for 23 years, and had served as President, Chief Executive Officer and a director of Horizon Financial Corp. and
Horizon Bank from January 2008 to January 2010. Mr. Jacobson also served as Chief Financial Officer of Horizon Financial
Corp. and Horizon Bank from March 2000 until October 2008. Between 1985 and 2008, Mr. Jacobson served in several other
positions at Horizon Financial Corp. and Horizon Bank and spent two years as a Washington state licensed real estate appraiser
from 1992 to 1994. Mr. Jacobson received his Bachelor’s degree in Business Administration (Finance) from the University of
Washington. In addition, Mr. Jacobson graduated with honors from the American Bankers Association’s National School of
Banking. Mr. Jacobson is a past president of the Whatcom County North Rotary Club and has served on the Boards of his
church, the United Way, Boys and Girls Club, and Junior Achievement.
Simon Soh, age 59, assumed the role of Senior Vice President and Chief Credit Officer of the Bank in
December 2019. Prior to his official appointment, he had been serving in this capacity on an interim basis since November
2019, as well as during the period from August 2017 to December 2018. Preceding this role, Mr. Soh held the position of
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Senior Vice President and Chief Lending Officer at the Bank from October 2012 to December 2019. His earlier roles included
Vice President and Loan Production Manager from August 2010 to October 2012. Before joining the Bank, Mr. Soh was First
Vice President and Commercial Lending Manager at East West Bank. In 1998, Mr. Soh was a founding member of Pacifica
Bank in Bellevue, Washington that merged with United Commercial Bank in 2005, later becoming East West Bank in 2009.
Mr. Soh has over 35 years of experience in commercial banking.
Ronnie J. Clariza, age 43, was appointed Senior Vice President and Chief Risk Officer of the Bank in November
2013. Before this, he served as Vice President and Risk Management Officer of the Bank since May 2008. His tenure with the
Bank began in 2003, initially holding the position of Assistant Vice President and Compliance Officer. Over the years, he has
served in various compliance and internal audit roles with the Bank. Mr. Clariza is a graduate of the University of Washington
where he received his Bachelor of Arts degree in Business Administration, Finance, and is a certified regulatory Compliance
Officer. Mr. Clariza is an active member of the Enterprise Risk Management and Government Relations Committees for the
California Bankers and Washington Bankers Associations, respectively. He has also participated in numerous working groups
for the American Bankers Association and previously served as a Volunteer Compliance Manager for the Seattle Children’s
Hospital Guild Association.
Dalen D. Harrison, age 64, has served as Chief Banking Officer of the Bank since December 2019, and was promoted
to Executive Vice President in November 2023. She previously served as Chief Deposit Officer of the Bank from March 2014
to December 2019, and was appointed Senior Vice President in July 2014. Before her tenure at the Bank, Ms. Harrison served
as Senior Vice President and Director of Retail Banking at Peoples Bank in Bellingham, Washington from 2010 until 2014 and
as Vice President of Rainier Pacific Bank, Tacoma, Washington, from 1994 until 2010. Ms. Harrison received a Bachelor of
Arts degree in Business Administration from Saint Mary’s College in Moraga, California. Ms. Harrison has served on the
boards of Rainier Pacific Foundation, First Place for Children, Gig Harbor Rotary Foundation, Renton Downtown Partnership,
and Renton Area Youth and Family Services.
Item 1A. Risk Factors.
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision,
you should carefully consider the risks and uncertainties described below together with all of the other information included in
this report and our other documents filed with and furnished to the SEC. In addition to the risks and uncertainties described
below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects.
The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those
discussed in these forward-looking statements. The market price of our common stock could decline significantly due to any of
these identified or other risks and you could lose some or all of your investment. This report is qualified in its entirety by these
risk factors.
Risks Related to Macroeconomic Conditions
Our business may be adversely affected by downturns in the national economy and in the economies in our market
areas.
Our loans are primarily to businesses and individuals in the state of Washington with 87.2% of loans to borrowers or
secured by properties located in Washington and 12.8% of loans to borrowers or secured by properties in other states. Through
our efforts to geographically diversify our loan portfolio, at December 31, 2023, our portfolio included $152.8 million, or
12.8% of loans to borrowers or secured by properties located in 46 other states and Washington, D.C., including $35.1 million,
or 2.9% of loans, secured by properties or to borrowers in California. A decline in the national economy or the economies of the
four counties which we consider to be our primary market area could have a material adverse effect on our business, financial
condition, results of operations, and prospects. Weakness in the global economy and global supply chain issues have adversely
affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or
relationships between the United States and other countries may also affect these businesses.
A deterioration in economic conditions in the market areas we serve as a result of inflation, a recession, or other
factors, could have a material adverse effect on our business, financial condition and results of operations including, but not
limited to:
•
Reduced demand for our products and services, potentially leading to a decline in our overall loans or assets.
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Elevated instances of loan delinquencies, problematic assets, and foreclosures.
•
• An increase in our allowance for credit looses on loans.
•
Depreciation in collateral values linked to our loans, thereby diminishing borrowing capacities and asset values tied to
existing loans.
Reduced net worth and liquidity of loan guarantors, possibly impairing their ability to meet commitments to us.
Reducing in our low-cost or noninterest-bearing deposits.
•
•
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our
portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could
negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are
affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies
and natural disasters such as earthquakes and tornadoes. If we are required to liquidate a significant amount of collateral during
a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans
and generally have a negative effect on our financial condition and results of operations.
External economic factors, such as changes in monetary policy and inflation, may have an adverse effect on our
business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the
Federal Reserve Board. Actions by monetary and fiscal authorities, including the Federal Reserve Board, could lead to inflation,
deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since
the end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures, while easing recently,
remained elevated throughout the first half of 2023. Small to medium-sized businesses may be impacted more during periods of
high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses.
Consequently, the ability of our business customers to repay their loans may deteriorate quickly, which would adversely impact
our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other
costs to the Company to increase, which could adversely affect our results of operations and financial condition. Virtually all of
our assets and liabilities are monetary in nature. As a result, interest rates tend to have a more significant impact on our
performance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the
same magnitude as the prices of goods and services.
Risks Related to Our Lending
Our construction/land loans are based upon estimates of costs and the value of the completed project.
We make construction/land loans to contractors and builders primarily to finance the construction of single and
multifamily homes, subdivisions, as well as commercial properties. We originate these loans regardless of whether the property
used as collateral is under a sales contract. At December 31, 2023, construction/land loans totaled $60.9 million, or 5.1% of our
total loan portfolio. At December 31, 2023, $47.1 million were one-to-four family construction loans and $4.0 million were
multifamily construction loans. We had no commercial construction loans at December 31, 2023. Land loans, which are loans
made with land as security, totaled $9.8 million, or 0.8% of our total loan portfolio at December 31, 2023. Land loans include
the purchase or refinance of unimproved land held for future residential development, improved residential lots held for
speculative investment purposes, lines of credit secured by land, and land development loans.
Construction lending involves inherent risks due to estimating costs in relation to project values. Uncertainties in
construction costs, market value, and regulatory impacts make accurately evaluating total project funds and loan-to-value ratios
challenging. Factors like shifts in housing demand and unexpected building costs can significantly deviate actual results from
estimates. Additionally, this type of lending often involves higher principal amounts and might be concentrated among a few
builders. A downturn in housing or real estate markets could escalate delinquencies, defaults, foreclosures, and compromise
collateral value.
Some builders have multiple outstanding loans with us, meaning problems with one loan pose a substantial risk to us.
Moreover, certain construction loans do not require borrower payments during the term, accumulating interest into the
principal. Thus, repayment depends heavily on project success and the borrower's ability to sell, lease, or secure permanent
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financing, rather than their ability to repay principal and interest directly. Misjudging a project's value could leave us with
inadequate security and potential losses upon completion. Actively monitoring construction loans, involving cost comparisons
and on-site inspections, adds complexity and cost. Market interest rate hikes also might significantly impact construction loans,
affecting end-purchaser borrowing costs, potentially reducing demand or the homeowner's ability to finance the completed
home. Further, properties under construction are hard to sell and often need completion for successful sales, complicating
problem loan resolution. This might require additional funds or engaging another builder, incurring additional costs and market
risks. Moreover, speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished
projects. At December 31, 2023, $47.1 million of our construction/land loans were for speculative construction loans.
We also offer land loans for land acquisition and development. However, loans for land development or future
construction carry additional risks due to longer development periods, vulnerability to real estate value declines, economic
fluctuations delaying projects, political changes affecting land use, and the collateral's illiquid nature. During this extended
financing-to-completion period, the collateral often generates no cash flow.
All of our construction loans have a take-out commitment for a permanent loan with us. At December 31, 2023, all of
our construction/land loans were classified as performing.
Our level of commercial and multifamily real estate loans may expose us to increased lending risks.
Our current business strategy includes an emphasis on commercial real estate lending. This type of lending activity,
while potentially more profitable than one-to-four family residential lending, is generally more sensitive to regional and local
economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these
types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. At December 31,
2023, we had $377.9 million of commercial real estate loans, representing 31.6% of our total loan portfolio and $138.1 million
of multifamily loans, representing 11.6% of our total loan portfolio.
Commercial and multifamily loans typically involve higher principal amounts than other types of loans, and repayment
is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to
cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market
conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained or
renewed, the borrower’s ability to repay the loan may be impaired. Commercial real estate loans also expose a lender to greater
credit risk than loans secured by residential real estate, because the collateral securing these loans typically cannot be sold as
easily as residential real estate. In addition, many of our commercial real estate loans are not fully amortizing and contain large
balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying
property in order to make the payment, which may increase the risk of default or non-payment.
A secondary market for most types of commercial and multifamily real estate loans is not readily available, so we have
less opportunity to mitigate credit risk by selling part or all our interest in these loans. As a result of these characteristics, if we
foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for
one-to-four family residential loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on
commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan
portfolios.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint
guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending.
Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a
risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if,
among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total
capital, or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land
development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to
commercial real estate related entities, represent 300% or more of total capital. Based on the FDIC criteria, the Bank had a
concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land
development and other land represented 316.8% of total capital at December 31, 2023. The particular focus of the guidance is
on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that
are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a
secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk
35
management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance
states that management should employ heightened risk management practices including Board and management oversight and
strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress
testing. While we believe we have implemented policies and procedures with respect to our commercial real estate lending
consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with
their interpretation of the guidance that may result in additional costs to us.
Expanding our commercial business portfolio may increase the Company’s exposure to risk.
The Company’s growth strategy includes increasing originations of business loans backed by non-real estate assets.
Our business loans are primarily made based on borrowers’ cash flow, with collateral as a secondary factor. However, the
unpredictability of borrowers' cash flow and the fluctuating value of collateral, often in the form of accounts receivable,
inventory, or equipment, present significant risks. Loans secured by accounts receivable are contingent on the borrower's ability
to collect from their customers, while other collateral may depreciate, be challenging to assess, lack liquidity, and vary in value
based on the success of the business. Additionally, economic fluctuations can significantly impact borrowers' repayment
abilities, more so than loans secured by real estate.
Our non-owner occupied real estate loans may expose us to increased credit risk.
At December 31, 2023, $228.8 million, representing 44.6% of our one-to-four family residential loan portfolio and
19.2% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by
non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner
occupied properties. The repayment of such loans relies predominantly on the tenant's consistent rental payments to the
borrower, who in turn is our client. In instances where the property owner fails to secure a tenant, repayment becomes
contingent on the owner's capacity to service the loan without rental income. In addition, the physical condition of non-owner
occupied properties is often below that of owner occupied properties due to lenient property maintenance standards that
negatively impact the value of the collateral properties, can negatively impact the collateral property values, heightening
potential losses for lenders. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan
outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss. At December 31, 2023, we had 128 non-owner occupied residential loan relationships with
an outstanding balance over $500,000 and an aggregate balance of $183.9 million.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2023, $513.2 million, or 43.1% of our total loan portfolio, was secured by first liens on one-to-four
family residential properties. In addition, at December 31, 2023, our home equity lines of credit totaled $12.5 million. A
significant portion of our one-to-four family residential real estate loan portfolio consists of jumbo loans that do not conform to
secondary market mortgage requirements, and therefore are not immediately salable to Fannie Mae or Freddie Mac because
such loans exceed the maximum balance allowable for sale (generally $647,000 to $891,000 for single-family homes in our
primary market areas in 2023). Jumbo one-to-four family residential loans may expose us to increased risk because of their
larger balances, and because they cannot be immediately sold to government sponsored enterprises.
In addition, one-to-four family residential loans are generally sensitive to regional and local economic conditions that
significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A
decline in residential real estate values resulting from a downturn in the housing market may reduce the value of the real estate
collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions
or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in
higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These
potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial
condition and business operations.
To meet our growth objectives we may originate or purchase loans outside of our market area which could affect the
level of our net interest margin and nonperforming loans.
To achieve our desired loan portfolio growth, we have actively pursued and may continue seeking opportunities to
originate or purchase loans outside of our market area, whether individually, through participations, or in bulk or “pools.” Prior
to purchase, we perform certain due diligence procedures and may re-underwrite these loans to our underwriting standards.
Although we anticipate acquiring loans with customary limited indemnities, this approach exposes us to heightened risks,
36
particularly when acquiring loans in unfamiliar geographic areas or of a type where our management lacks substantial prior
experience. Monitoring such loans also may pose greater challenges for us. Further, when determining the purchase price for
these loans, management will make certain assumptions, including, but not limited to, how borrowers will prepay their loans,
the real estate market, and our ability to successfully manage loan collections and, if necessary, dispose of acquired real estate
through foreclosure. To the extent that our underlying assumptions prove inaccurate or undergo unexpected changes, such as an
unanticipated decline in the real estate market, the purchase price paid could exceed the actual value, resulting in a lower yield
or a loss of some or all of the loan principal. For instance, purchasing loan "pools" at a premium and experiencing earlier-than-
expected loan prepayments would yield lower interest income than initially projected. Our success in increasing our loan
portfolio through loan purchases depends on our ability to price the loans properly and relies on the economic conditions in the
geographic areas where the underlying properties or collateral for the acquired loans are located. Inaccurate estimates or
declines in economic conditions or real estate values in the markets where we purchase loans could significantly adversely
affect the level of our nonperforming loans and our results of operations. At December 31, 2023, our loan portfolio included
$81.8 million, constituting 6.9% of total loans, in counties located within Washington State but outside of our primary market
area. In addition, our portfolio included $152.8 million, or 12.8% of total loans, of loans located outside of Washington State.
If the lead institutions on our loan participation agreements do not keep us informed about the changes in credit quality
on the underlying loans in a timely manner, we could be subject to misstatement in our ACL, or possibly losses on these
loans.
Under our participation agreements, the lead institution bears the responsibility of acquiring pertinent credit
information concerning the associated loans. Failure to promptly relay any credit deterioration in these loans to us could lead to
inaccuracies in grading these loans, consequently resulting in an understatement of our ACL. In scenarios where credit
deterioration occurs without timely information reaching us, our ACL might not accurately reflect the loan risks. Substantial
credit downgrades, if not adequately accounted for in our ACL, could potentially lead to losses on these loans. At December 31,
2023, we had $28.8 million in loan participations in which we were not the lead lender.
We engage in aircraft and classic and collectible car financing transactions, in which high-value collateral is susceptible
to potential catastrophic loss. Consequently, if any of these transactions becomes nonperforming, we could suffer a loss
on some or all of our value in the assets.
As our primary focus for aircraft loans is on the asset value of the collateral, the collectability of these loans ultimately
may be dependent on the value of the underlying collateral. Aircraft values have historically experienced significant
fluctuations due to a number of factors including, but not limited to, the availability of used aircraft, shifts in passenger and air
cargo demand, increases in fuel costs, government regulation and the comparative value of newly manufactured similar aircraft.
Similarly, classic and collectible car values are affected by availability and demand; however, due to the unique nature,
estimated values often differ from listed values. Therefore, loan approval for these assets is predominantly based on the
borrower’s ability to repay. An aircraft, classic or collectible car as collateral also presents unique risks because of its high-
value and susceptibility to rapid relocation, as well as the potential for significant loss. Although the loan documentation for
these transactions will include insurance covenants and other provisions to protect us against risk of loss, there can be no
assurance that the insurance proceeds would be sufficient to ensure our full recovery of the loan. Moreover, a limited number of
nonperforming loans could have a significant negative impact on the overall value of our loan portfolio. Liquidating a
significant number of aircraft or classic or collectible cars during periods of reduced values could adversely affect our financial
condition and profitability. At December 31, 2023, our loan portfolio included $58.6 million in classic and collectible car loans
and $1.9 million in aircraft loans.
Our ACL for loans may prove to be insufficient to absorb losses in our loan portfolio. Future additions to our ACL for
loans, as well as charge-offs in excess of reserves, will reduce our earnings.
Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an
ACL for loans to reserve for estimated potential losses on loans from defaults, and represents management's best estimate of
expected credit losses over the life of the loan portfolio. Determining the appropriate level of the ACL for loans involves
estimating future losses at the time a loan is originated or acquired, incorporating a broader range of information and future
economic scenarios. The determination of the appropriate level of the ACL for loans inherently involves a high degree of
subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including
the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of
many of our loans. In determining the amount of the ACL for loans, we review loans and our historical loss and delinquency
experience and evaluate economic conditions. Management also recognizes that significant new growth in loan portfolios, new
loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform
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in a historical or projected manner and will increase the risk that our ACL for loans may be insufficient to absorb credit losses
without significant additional provisions. If our assumptions are incorrect, our ACL for loans may not be sufficient to cover
actual losses, resulting in additional provisions for credit losses on loans to replenish the ACL for loans. Deterioration in
economic conditions, new information regarding existing loans, identification of additional problem loans or relationships, and
other factors, both within and outside of our control, may increase our loan charge-offs and/or otherwise require an increase in
our provision for credit losses on loans. In addition, bank regulatory agencies periodically review our ACL for loans. Based on
their assessment, they and may require increased provisions or loan charge-offs. Any increase in the provision for credit losses
on loans affects net income and could materially impact our financial condition, results of operations, and capital.
Risks Related to Market and Interest Rate Changes
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to
many factors that are beyond our control, including general economic conditions and policies of various governmental and
regulatory agencies and, in particular, the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market
Committee (“FOMC”) of the Federal Reserve has increased the target range for the federal funds rate by 525 basis, including
100 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 2023. If the FOMC further increases the
targeted federal funds rates, overall interest rates will likely rise, which will negatively impact our net interest income and may
negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.
We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities.
In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest
rate risk effectively, our business, financial condition and results of operations could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of
borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the
difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding.
Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income.
Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend
to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when
interest rates increase, the yield we earn on our assets may not rise as fast as our funding costs, causing our net interest margin
to contract. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could
also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-
term rates, however, at December 31, 2023, the yield curve was inverted with short-term rates above long-term rates. Because
our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience
pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest
rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to
reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such
repayment proceeds into lower yielding investments, which would likely hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. As is the case with many banks our
emphasis on increasing core deposits has resulted in an increasing percentage of our deposits being comprised of deposits
bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of
funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings
increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore
earnings, could be adversely affected.
In addition, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest
rate may not adjust. At December 31, 2023, 63.5% of our net loans were comprised of adjustable-rate loans. At that date,
$410.8 million, or 54.3%, of these loans with an average interest rate of 4.75% were at their floor interest rate. The inability of
our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is
subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at
their respective floor, which is above the fully-indexed rate, there is a further risk that our interest income may not increase as
rapidly as our cost of funds during periods of increasing interest rates and could have a material adverse effect on our results of
operations.
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Changes in interest rates also affect the value of securities portfolio. Generally, the fair value of fixed-rate securities
fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a
separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in
interest rates could have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in
market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also,
our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate
changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact
us, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk" for additional information about our
interest rate risk management.
If interest rate swaps we entered into prove ineffective, it could result in volatility in our operating results, including
potential losses, which could have a material adverse effect on our results of operations and cash flows.
We are exposed to the effects of interest rate changes as a result of the borrowings we use to maintain liquidity and
fund our expansion and operations. To limit the impact of interest rate changes on earnings, prepayment penalties and cash
flows and to lower overall borrowing costs while taking into account variable interest rate risk, we may borrow at fixed rates or
variable rates depending upon prevailing market conditions. We may also enter into derivative financial instruments such as
interest rate swaps in order to mitigate our interest rate risk on a related financial instrument.
Our interest rate contracts expose us several risks, including:
•
•
•
•
Potential loss due to variations in the spread between the interest rate contract and the hedged item.
Risks related to the counterparty’s inability to fulfill obligations.
Exposure to fluctuations and uncertainties in underlying asset prices due to interest rates and market volatility.
Liquidity risk associated with the ease of buying or selling these instruments.
If we suffer losses on our interest rate contracts, our business, financial condition and prospects may be negatively
affected, and our net income will decline.
We record the swaps at fair value and designate them as an effective cash flow hedge under Accounting Standards
Codification (“ASC”) 815, Derivatives and Hedging. Each quarter, we measure hedge effectiveness using the “hypothetical
derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our
swaps could prove to be ineffective for a number of reasons, including early retirement of the debt, as is allowed under the debt,
or in the event the counterparty to the interest rate swaps were determined to not be creditworthy. Any determination that the
hedge created by the swaps was ineffective could have a material adverse effect on our results of operations and cash flows and
result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swaps,
especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.
As of December 31, 2023, we had interest rate swaps outstanding with an aggregate notional amount of $115.0 million.
At December 31, 2023, the fair value of our interest rate swaps was a $7.6 million gain. For additional information, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management”.
We may incur losses on our securities portfolio.
The fair value of our investment securities is susceptible to significant shifts due to factors beyond our control,
potentially leading to adverse changes in their valuation. These factors include, but are not limited to, rating agency actions in
respect of the securities, defaults by the issuer or adverse events related to the underlying securities, capital market instability,
and, as previously mentioned, fluctuations in market interest rates. Any of these factors, among others, could cause the fair
value of these securities to be lower than the amortized cost basis resulting in a credit loss, which could have a material effect
on our business, financial condition and results of operations. We are required to maintain sufficient liquidity to ensure a safe
and sound operation, potentially requiring us to sell securities at a loss if our liquidity position falls below desirable level and all
alternative sources of liquidity are exhausted. In an environment where other market participants are also liquidating securities,
our loss could be materially higher than expected, significantly adversely impacting liquidity and capital levels.
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Events impacting the financial services industry could adversely affect our results of operations and financial condition.
In the first quarter of 2023, the financial services industry was negatively affected by the bank failures involving
Silicon Valley Bank and Signature Bank. Subsequently, First Republic Bank was acquired by JP Morgan Chase after the FDIC
was appointed receiver. The adverse events involving Silicon Valley Bank and Signature Bank caused significant volatility in
the trading prices of stock of publicly traded banks and holding companies and have decreased confidence in banks among
depositors and investors. Such ramifications could continue or worsen in light of the recent failure and acquisition of First
Republic Bank. Banking regulators’ actions in response to these events have included ensuring that depositors of Silicon Valley
Bank and Signature Bank would have access to their deposits, including uninsured deposit accounts, establishing the Bank
Term Funding Program as an additional source of liquidity for banks generally, and most recently facilitating the acquisition of
First Republic Bank by JP Morgan Chase. Continued concerns relating to these adverse events could result in a reduction in
demand for our products and services, including withdrawals of uninsured deposits, and could impact profitability and
stockholders’ equity. The premiums of the FDIC’s deposit insurance program are expected to increase, and banking regulators
have signaled further review of regulatory requirements and the potential for changes to laws or regulations governing banks
and bank holding companies. Changes resulting from these events could include increased regulatory oversight, higher capital
requirements or changes in the way regulatory capital is calculated, and the impositions of additional restrictions through
regulatory changes or supervisory or enforcement activities, each of which could have a material impact on our business.
Risks contained in our corporate bond portfolio from securities issued by other financial institutions could adversely
impact our financial condition and results of operations.
The majority of our corporate bond portfolio is comprised of subordinated debentures and bonds issued by other
financial institutions. If the market perception of any of these financial institutions or the financial institutions industry in
general deteriorates, we will see additional declines in the value of the securities issued by the financial institutions and it will
adversely impact our financial condition. Further, if any of these financial institutions fail, we will suffer losses that will
adversely impact our financial condition and results of operations.
Risks Related to our Business Strategy
Our branching strategy may cause our expenses to increase faster than revenues.
Our current business strategy includes branch expansion in strategic areas to enhance our market presence. These new
branches tend to be much smaller than traditional bank branch offices, utilizing the improved technology available with our
core data processor. This allows us to maintain management’s focus on efficiency, while working to expand our presence into
new markets. The success of our expansion strategy into new markets, however, is contingent upon numerous factors, such as
our ability to select suitable locations, assess each market’s competitive environment, secure managerial resources, hire and
retain qualified personnel and implement effective marketing strategies. The opening of new offices may not increase the
volume of our loans and deposits as quickly as or to the degree that we hope, and opening new offices will increase our
operating expenses. On average, de novo branches do not become profitable until three to four years after opening. We
currently expect to lease rather than own any additional branch properties. Further, the projected timeline and the estimated
dollar amounts involved in opening de novo branches could differ significantly from actual results. The success of our acquired
branches is dependent on retention of existing customers’ deposits as well as expanding our market presence in these locations.
We may not successfully manage the costs and implementation risks associated with our branching strategy. Accordingly, any
new branch may negatively impact our earnings for some period of time until the branch reaches certain economies of scale.
Finally, there is a risk that our new branches will not be successful even after they have been established or acquired.
Risks Related to Regulatory and Compliance Matters
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or
sanctions.
The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop
programs to prevent financial institutions from being used for money laundering and terrorist activities. Failure to comply with
these regulations could result in fines or sanctions. During the last few years, several banking institutions have received large
fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist
in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in
preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to
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liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of
regulatory approvals to proceed with certain aspects of our business plan, including acquisitions. Failure to maintain and
implement adequate programs to combat money laundering and terrorist financing could also have serious reputational
consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of
operations and growth prospects.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer
unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is
critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor,
report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk,
interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a
compliance program designed to identify, measure, assess, and report on our adherence to applicable laws, policies and
procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk
management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our
business. However, as with any risk management framework, there are inherent limitations to our risk management strategies as
there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management
framework proves ineffective, we could suffer unexpected losses and our business financial condition and results of operations
could be materially adversely affected.
We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change
the treatment and recognition of critical financial line items and affect our profitability.
Our business operations are significantly influenced by the extensive body of accounting regulations in the United
States. Regulatory bodies periodically issue new guidance, altering accounting rules and reporting requirements, which can
substantially affect the preparation and reporting of our financial statements. These changes might necessitate retrospective
application, potentially leading to restatements of prior period financial statements.
One such significant change in 2023 was the implementation of the CECL model, which we adopted on January 1,
2023. Under the CECL model, financial assets carried at amortized cost, such as loans and held-to-maturity debt securities, are
presented at the net amount expected to be collected. This forward-looking approach in estimating expected credit losses
contrasts starkly with the prior, "incurred loss" model, which delays recognition until a loss is probable. CECL mandates
considering historical experience, current conditions, and reasonable forecasts affecting collectability, leading to periodic
adjustments of financial asset values. However, this forward-looking methodology, reliant on macroeconomic variables,
introduces the potential for increased earnings volatility due to unexpected changes in these indicators between periods. An
additional consequence of CECL is an accounting asymmetry between loan-related income, recognized periodically based on
the effective interest method, and credit losses, recognized upfront at origination. This asymmetry might create the perception
of reduced profitability during loan expansion periods due to the immediate recognition of expected credit losses. Conversely,
periods with stable or declining loan levels might seem relatively more profitable as income accrues gradually for loans where
losses had been previously recognized.
As a result of the change in methodology from the incurred loss model to the CECL model, on January 1, 2023, the
Company recorded a one-time charge, net of tax, of $395,000 to retained earnings and a $500,000 increase to the ACL.
Risks Related to Cybersecurity, Data and Fraud
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information
systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general
ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of
confidential and other information in our computer systems and networks. Although we take protective measures and endeavor
to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to
breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or
other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could
jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our
computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our
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customers or counterparties. We may be required to expend significant additional resources to modify our protective measures
or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that
are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant
reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our
reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries,
vulnerabilities in third party technologies (including browsers and operating systems), or other developments could result in a
compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect
data about us, our customers and underlying transactions. Any compromise of our security also could deter customers from
using our internet banking services that involve the transmission of confidential information. We rely on standard internet
security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have
developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-
attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our
security measures, and could result in losses to us or our customers, our loss of business and/or customers, damage to our
reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other
businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of
which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established policies
and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events
will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data
processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do
not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns or other
disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction
volumes, cyber-attacks and security breaches, or if we otherwise have difficulty in communicating with them, our ability to
adequately process and account for transactions could be affected, and our ability to deliver products and services to our
customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could
also entail significant delay and expense. Threats to information security also exist in the processing of customer information
through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be
adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of
third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or
other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services,
and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar
functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence
of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject
us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse
effect on our financial condition and results of operations.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to
ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the
effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected
and processed. While we continuously update our policies, programs, processes and practices, many of our data management
and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to
aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to
manage changing business needs.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
The Bank is susceptible to fraudulent activity that may be committed against us or our customers which may result in
financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s
information, misappropriation of assets, privacy breaches against our customers, litigation, or damage to our reputation. Such
fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and
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other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also
experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent
such losses, there can be no assurance that such losses will not occur.
Risks Related to Our Business and Industry Generally
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the
contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the
contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial
condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our
operations, which in turn could have a material negative impact on our financial condition and results of operations. We also
could be adversely affected to the extent a service agreement is not renewed by the third-party vendor or is renewed on terms
less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of
their vendors’ performance, including aspects which they delegate to third parties.
Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential to our business. We require sufficient liquidity to meet customer loan
requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash
commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry
or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment
securities and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and at times,
borrowings from the FHLB of Des Moines and certain other wholesale funding sources to fund our operations. Deposit flows
and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of
interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes
to the FHLB of Des Moines's underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our liquidity.
Although we have historically been able to replace maturing deposits and borrowings if desired, we may not be able to
replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB or market
conditions change. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans and deposits are concentrated, negative operating
results, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to
us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services
industry or deterioration in credit markets. Any decline in available funding in amounts adequate to finance our activities or on
terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or
fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available
when it is needed, or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At
some point, we may need to raise additional capital to support our growth or replenish future losses. Our ability to raise
additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on
our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional
capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to
further expand our operations could be materially impaired and our financial condition and liquidity could be materially and
adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of
our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject
to adverse regulatory action.
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We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely
affect our prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the community banking industry where First Financial Northwest Bank
conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our
strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified
management, loan origination, finance, administrative, marketing, and technical personnel and upon the continued contributions
of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of
key executives, including our President, and certain other employees. In addition, our success has been and continues to be
highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to
identify and attract suitable candidates to replace such directors.
We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to
withdraw from this plan, or if Pentegra, the multiple employer defined benefit pension plan sponsor, requires us to
make additional contributions, we could incur a substantial expense in connection with the withdrawal or the request
for additional contributions.
We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension plan for the
benefit of our employees. Effective March 31, 2013, we did not allow additional employees to participate in this plan and froze
the future accrual of benefits under this plan with respect to those participating employees. In connection with our decision to
freeze our benefit accruals under the plan, and since then, we considered withdrawing from the plan. If we choose to withdraw
from the plan, we could incur a substantial expense in connection with the withdrawal. The actual expense that would be
incurred in connection with a withdrawal from the plan is primarily dependent upon the timing of the withdrawal, the total
value of the plan’s assets at the time of withdrawal, general market interest rates at that time, expenses imposed on withdrawal,
and other conditions imposed by Pentegra as set forth in the plan.
Even if we do not withdraw from the plan, Pentegra, as sponsor of the plan, may request that we make an additional
contribution to the plan, in addition to contributions that we are regularly required to make, or obtain a letter of credit in favor
of the plan, if our financial condition worsens to the point that it triggers certain criteria set out in the plan. If we fail to make
the contribution or obtain the requested letter of credit, then we may be forced to withdraw from the plan and establish a
separate, single employer defined benefit plan that we anticipate would be underfunded to a similar extent as under the multiple
employer plan.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
First Financial Northwest is an entity separate and distinct from our principal subsidiary, the Bank, and derives
substantially all of its revenue at the holding company level in the form of dividends from the Bank. Accordingly, First Federal
Northwest is, and will be, dependent upon dividends from the Bank to pay the principal of and interest on its indebtedness, to
satisfy its other cash needs and to pay dividends on its common stock. The Bank’s ability to pay dividends is subject to its
ability to earn net income and to meet certain regulatory requirements, including the capital conservation buffer requirement. In
the event the Bank is unable to pay dividends to First Financial Northwest, it may not be able to pay dividends on its common
stock or repurchase its stock.
If we fail to meet the expectations of our stakeholders with respect to our environmental, social and governance (“ESG”)
practices, including those relating to sustainability, it may have an adverse effect on our reputation and results of
operation.
Our reputation may also be negatively impacted by our diversity, equity and inclusion (“DEI”) efforts if they fall short
of expectations. In addition, various private third-party organizations have developed ratings processes for evaluating
companies on their approach to ESG and DEI matters. These ratings may be used by some investors to assist with their
investment and voting decisions. Any unfavorable ratings may lead to reputational damage and negative sentiment among our
investors and other stakeholders. Furthermore, increased ESG related compliance costs could result in increases to our overall
operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and
standards could negatively impact our reputation to do business with certain partners, and our stock price. New government
regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary
reporting, diligence, and disclosure.
44
Item 1B. Unresolved Staff Comments
First Financial Northwest has not received any written comments from the SEC regarding its periodic or current
reports under the Securities Exchange Act of 1934, as amended.
Item 1C. Cybersecurity
Risk Management and Strategy
Our cybersecurity risk management and strategy are integrated into our enterprise-wide risk management (ERM)
program, which leverages a "three lines of defense" model to manage risk within the organization. Such model incorporates
1) day-to-day/operational activities and controls that are managed at the business unit level; 2) identification, measurement and
mitigation of inherent security risks via the use of internal control and cybersecurity maturity frameworks, operating policies,
independent monitoring, risk management and compliance oversight; and 3) internal audit designed to provide objective and
independent validation of the design and operating effectiveness of cybersecurity and information security controls.
Technology risk (including cybersecurity and overall operational risk) is identified as a key risk area for the Company, and
utilizes a combination of manual and automated methods as well as internal and external resources to monitor, measure and
mitigate cybersecurity risks.
The ability to mitigate cybersecurity risks is dependent upon an effective risk assessment process that identifies,
measures, controls, and monitors material risks stemming from cybersecurity threats. These threats include any potential
unauthorized activities occurring through the Company's information systems that could adversely affect the confidentiality,
integrity, or availability of the Company's information systems or the data contained therein. The Company's Information
Security Program includes a comprehensive information security risk assessment process that incorporates the following
elements:
1.
Identification of reasonably foreseeable internal and external threats that could result in unauthorized disclosure,
misuse, alteration, or destruction of confidential information or information systems.
2. Assessment of the likelihood and potential damage of these threats, taking into consideration the sensitivity of
confidential information.
3. Assessment of the sufficiency of policies, procedures, information systems, and other arrangements in place to control
risks.
The risk assessment process is designed to identify assets requiring risk reduction strategies and includes an evaluation
of the key factors applicable to the operation. The Company conducts a variety of information security assessments throughout
the year, both internally and through third-party specialists.
In designing our Information Security Program, we refer to established industry frameworks - in particular, the Federal
Financial Institutions Examination Council (FFIEC) and guidance and best practices from the National Institute of Standards
and Technology (NIST). The FFIEC framework offers a set of guidelines to help financial institutions effectively manage and
mitigate cybersecurity risks. The framework focuses on ensuring the confidentiality, integrity, and availability of sensitive
information and systems. NIST is part of the U.S. Department of Commerce and among other initiatives, develops
cybersecurity standards, guidelines, and other resources to meet the needs of U.S. industry, federal agencies and the broader
public. Activities range from producing specific information that organizations can put into practice immediately to longer-term
research that anticipates advances in technologies and future challenges. The Company utilizes these frameworks to assist with
the design of our Information Security Program, including risk mitigation controls and processes. While we believe our
information security program is well-designed and appropriate for our organization, the sophistication of cyber threats
continues to increase and the Company's cybersecurity risk management and strategy may be insufficient and may not be
successful in protecting against all cyber incidents. Accordingly, no matter how well designed or implemented the Company's
controls are, it may not be able to anticipate all cyber security breaches, and it may not be able to implement effective
preventive measures against such security breaches in a timely manner. For more information on how cybersecurity risk may
affect the Company's business strategy, results of operations or financial condition, please refer to Item I A. Risk Factors -
Risks Related to Cybersecurity, Data and Fraud.
The Company uses a cross-functional approach to identify, prevent, and mitigate cybersecurity threats and incidents.
We have adopted controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that
decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner. We
have developed a formal cybersecurity incident response plan that summarizes the steps the Company will take to respond to a
45
cybersecurity incident. The plan includes an Incident Response Team (IRT), which is responsible for addressing and
coordinating all aspects of the Company's response to cybersecurity events. The IRT is supported by operating procedures and
guidelines designed to outline the expectations and processes to be followed when responding to incidents of unauthorized
access to confidential information maintained by the Company or its service providers. The IRT may consult legal counsel and
other external experts in connection with their respective activities. An escalation process has been established for engaging
other resources and appropriate reporting protocols at both the management and Board of Directors levels.
Governance
Our Board of Directors has adopted, and reviews annually, a Risk Appetite Statement that articulates the Company's
attitude towards risk. The Company's Risk Appetite Statement identifies key risk categories and establishes risk tolerances for
each. Associated risk metrics are monitored quarterly by Management and reported to the Audit/Compliance/Risk (ACR)
Committee of the Board and the Board of Directors. Management measures and reports inherent risk, mitigating controls,
residual risk and emerging risk for various key risk categories, inclusive of cybersecurity and information security risks.
The Company's governance and oversight of cybersecurity risks are facilitated through our Information Security
Program, which establishes administrative, technical, and physical safeguards designed to protect the confidential information
and records of all the Bank's clients in accordance with FDIC regulations. Our Information Security Program, along with its
associated policies and guidelines, takes into account FDIC and FFIEC regulations and guidance on sensitive information
protection as well as information system security. It is tailored to align with the Company's risk assessment results, and the size,
complexity, nature and scope of our activities.
We maintain relevant expertise within the Bank's management team to manage cybersecurity risks. In particular, the
Bank's Information Security Officer (“ISO”) reports directly to the Chief Risk Officer (“CRO”) and provides direction and
oversight for information and cyber-security related activities across the Company—including existing and emerging initiatives,
service provider arrangements, incident response, business continuity management, staff training, monitoring of key controls
and adjusting the information security program in response to changes in operations and internal/external threats and
vulnerabilities. The ISO has more than 20 years of information security experience at financial institutions as well as
information security consulting firms, and maintains various cybersecurity and IT audit professional certifications. The ISO
works in partnership with the Company’s Information Technology department and is supported by both internal and external
information technology and information security tools, resources and staff.
Both the CRO and ISO provide routine reports to various management committees and at the Board level—namely the
ACR Committee and the Board of Directors—regarding the overall status of the Information Security Program. Such reporting
encompasses various aspects, such as risk assessment, risk management and control decisions, service provider arrangements,
results of independent testing, cybersecurity incidents or violations and Management's responses, and recommendations for
changes to the Information Security Program. The Board of Directors plays a crucial role, annually reviewing and approving
our Information Security Program. The Board oversees efforts to develop, implement, and maintain an effective Information
Security Program, including reviewing Management's reporting on program effectiveness. Additionally, the Board of Directors'
Corporate Governance/Nominating Committee considers information technology and cybersecurity expertise when assessing
potential director candidates, to help ensure the Board of Directors has the capability to appropriately oversee Management's
activities in these areas.
Item 2. Properties
The corporate office for the Company is located at 201 Wells Avenue South, Renton, Washington and is owned by us.
The Bank’s full service retail operation is also at this location. In addition, the Bank owns a retail office located at 17424 SR 9,
Snohomish, Washington. At December 31, 2023, the Bank had 13 leased locations in Washington currently in operation: Mill
Creek, Edmonds, “The Landing” in Renton, Bellevue, Bothell, Woodinville, Smokey Point, Lake Stevens, Kent, Kirkland,
University Place, Gig Harbor, and Issaquah. The lending division operations of the Bank are at our owned location at 207 Wells
Avenue South, Renton, Washington. The lease terms for our properties are for an initial term of three to five years with the
option to extend for additional three to five year periods. In the opinion of management, all properties are adequately covered
by insurance, are in a good state of repair and are appropriately designed for their present and future use. For additional
information on our lease commitments, see Note 10- “Leases” of the Notes to Consolidated Financial Statements in Item 8 of
this report.
46
Item 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of
business. As of December 31, 2023, we were not involved in any significant litigation and do not anticipate incurring any
material liability as a result of any such litigation.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is traded on The Nasdaq Stock Market LLC’s Global Select Market (“NASDAQ”), under the
symbol “FFNW.” As of March 8, 2024, there were approximately 466 shareholders of record, excluding persons or entities that
hold stock in nominee or “street name” accounts with brokers.
As of December 31, 2023, our Board of Directors had declared 43 consecutive quarterly cash dividends on our
common stock. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. Any
dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial
condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions.
No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods.
Our future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal
regulations.
Stock Repurchases
The following table represents First Financial Northwest common shares repurchased during the fourth quarter ended
December 31, 2023.
Period
Total Number of
Shares Purchased
Average Price
Paid per Share
October 1 - October 31, 2023
November 1 - November 30, 2023
December 1 - December 31, 2023
— $
—
—
—
—
—
—
—
Total Number of
Shares
Repurchased as
Part of Publicly
Announced Plan
—
—
—
—
Maximum
Number of Shares
that May Yet Be
Repurchased
Under the Plan(1)
457,000
457,000
457,000
(1) On August 7, 2023, the Company announced that its Board of Directors authorized the repurchase of up 5% of the
Company’s outstanding common stock, or approximately 457,000 shares. The August 2023 stock repurchase program
commenced on August 10, 2023, and will expire no later than March 16, 2024. The extent to which the Company repurchases
its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. As a
result, there can be no assurance as to the exact number of shares, if any, that will be repurchased under the plan.
Equity Compensation Plan Information
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is
incorporated herein by reference.
Item 6. Reserved
47
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reviews our consolidated financial statements and other relevant statistical data for the
years ending December 31, 2023 and 2022, and is intended to enhance your understanding of our financial condition and results
of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes
thereto that appear in Item 8 of this Form 10-K. The information contained in this section should be read in conjunction with
these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K.
Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and
results of operations of First Financial Northwest and its subsidiaries.
Overview
First Financial Northwest Bank is a wholly-owned subsidiary of First Financial Northwest and, as such, comprises
substantially all of the activity for First Financial Northwest. The Bank was a community-based savings bank until February 4,
2016, when the Bank converted to a Washington state chartered commercial bank reflecting the commercial banking services it
now provides to its customers. The Bank primarily serves King, Snohomish, Pierce and Kitsap counties, Washington through
its full-service banking office and headquarters in Renton, Washington, as well as seven retail branches in King County,
Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington at
December 31, 2023. The Bank purchased four of these branches in 2017 and acquired $74.7 million in deposits (the “Branch
Acquisition”). The Branch Acquisition expanded our retail footprint and provided an opportunity to extend our unique brand of
community banking into those communities.
The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing
from the 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’s strategic initiatives seek to
diversify our loan portfolio and broaden growth opportunities with our current risk tolerance levels and asset/liability
objectives. Our business strategy emphasizes commercial real estate, construction, one-to-four family residential, and
multifamily lending. During 2023, loan originations, refinances and purchases outpaced repayments of loans, resulting in an
increase of $8.8 million in net loans receivable with a balance of $1.18 billion at December 31, 2023.
We continued to geographically expand our loan portfolio through purchases of consumer classic and collectible car
loans, that are outside of our primary market area. While the total volume of loan purchases and participations in 2023
decreased compared to 2022, our loan portfolio experienced a positive net change with an aggregate addition of $22.0 million
from these programs during 2023.
In our commitment to diversify beyond the State of Washington, our portfolio included $152.8 million in loans to
borrowers or secured by properties located in 46 other states, along with Washington, D.C. As of December 31, 2023, the
largest concentrations were in California, Florida, Texas, Oregon, and Alabama, totaling $35.1 million, $11.4 million,
$10.2 million, $10.0 million and $7.8 million of loans, respectively.
The Bank has affiliated with a SBA partner to process our SBA loans while the Bank retains the credit decisions. This
enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary
infrastructure. When volumes support our becoming a SBA preferred lender, we will apply for that status which would provide
the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to
make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may
include business lines of credit, business term loans or equipment financing. In conjunction with the growth of business loans,
the Bank seeks to service these customers with their business deposits as well.
Net income for the year ended December 31, 2023 was $6.3 million, or $0.69 per diluted share, compared to
$13.2 million, or $1.45 per diluted share, for the year ended December 31, 2022. The primary contributor to this decrease was a
$7.8 million decrease in net interest income as our increase in interest expense significantly outpaced our increase in interest
income. In addition, we recorded a recapture of the provision for credit losses of $208,000 in 2023, compared to a $434,000
recapture in 2022, primarily due to credit upgrades and payoffs of loans carrying higher credit risk ratings, updates to economic
forecasts used for loans and unfunded commitments, changes in the loan portfolio balances, mix and characteristics and other
factors. The decrease in net income was further impacted by a $474,000 reduction in noninterest income and a $41,000 increase
in noninterest expense.
48
Our primary source of revenue is interest income, which is the income that we earn on our loans and investments.
Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between
interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently
and, thus, impacts our net interest income. The Bank is currently liability sensitive, meaning our interest-bearing liabilities
reprice at a faster rate than our interest-earning assets. Our net interest margin decreased compared to the prior year. The
average yield on interest-earning assets increased, primarily due to an increase in market interest rates. For the same reason,
average cost of funds also increased, but at a faster pace than the average yield on interest earning assets.
As our loan portfolio increases, or due to an increase for expected losses in our loan portfolio, our ACL may increase,
resulting in a decrease to net interest income after the provision for credit losses. Improvements in loan risk ratings, increases in
property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to
ACL due to loan growth or an increase in expected loan losses. For the year ended December 31, 2023, the Company recorded
a recapture of provision in the amount of $208,000.
Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of bank owned
life insurance (“BOLI”), and revenue earned on our wealth management services and is also affected by any net gain or loss on
sales of investment securities. Our noninterest income decreased $474,000 during the year ended December 31, 2023,
compared to 2022, primarily attributable to a $495,000 decrease in loan prepayment penalties.
Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory
assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist
primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits.
Professional fees include legal services, auditing and accounting services, computer support services, and other professional
services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings
and equipment, consist primarily of lease expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities.
We have continued our effort to proactively control our expenses. As a result, our noninterest expense for the year ended
December 31, 2023 had little change from the year ended December 31, 2022. The slight increase of $41,000 in noninterest
expense was primarily due to a $360,000 increase in regulatory assessments resulting from FDIC’s increasing deposit insurance
assessment rate effective this year, a $304,000 increase in other general and administrative expense, due to a number of factors,
including increased state/local taxes, business development efforts and deposit related expenses reflecting implementation of
new deposit programs in the year, and a $179,000 increase in data processing. These increases were partially offset by a
$767,000 decrease in salaries and employee benefits due to several factors, including lower expenses from the replacement of
the ESOP by the new profit-sharing plan, lower commission and loan direct cost offset expense resulting due to lower loan
origination and a $51,000 decrease in consulting service expense which was part of professional services. Other changes in
professional service fees were a $268,000 increase in other professional service expense, primarily resulted from a $419,000
expense related to the unsuccessful negotiation of a potential business combination with another financial institution during the
second quarter of the year. This increase was offset by a $163,000 decrease in legal fees and a $106,000 decrease in audit/
accounting services/examination fees.
Business Strategy
Our long-term business strategy is to operate and grow the Bank as a well-capitalized and profitable community bank,
offering one-to-four family residential, commercial and multifamily, construction/land, consumer and business loans along with
a diversified array of deposit and other products and services to individuals and businesses in our market areas. We intend to
accomplish this strategy by leveraging our established name and franchise, capital strength, and loan production capability by:
•
•
•
Capitalizing on our intimate knowledge of our local communities to serve the convenience and needs of customers,
and delivering a consistent, high-quality level of professional service;
Offering competitive deposit rates and developing customer relationships to diversify our deposit mix, growing lower
cost deposits, attracting new customers, and expanding our footprint in the geographical area we serve;
Utilizing wholesale funding sources, including but not limited to FHLB advances and acquiring deposits in the
national brokered certificate of deposit market, to assist with funding needs and interest rate risk management efforts,
as needed;
• Managing our loan portfolio to minimize concentration risk and diversify the types of loans within the portfolio;
• Managing credit risk to minimize the risk of loss and interest rate risk to optimize our net interest margin; and
49
•
Improving profitability through disciplined pricing, expense control and balance sheet management, while continuing
to provide excellent customer service.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates
and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time
the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different
estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or
results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past
experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on
an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K
for a summary of significant accounting policies and the effect on our financial statements.
Allowance for Credit Losses. Management recognizes that credit losses may occur over the life of a loan and that the
ACL must be maintained at a level necessary to cover estimated credit losses over the life of an exposure. The ACL is an
estimate of the expected credit losses on financial assets measured at amortized cost using the relevant information about the
past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and
reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the
financial assets. Our methodology for analyzing the ACL comprises two components: the general allowance and the specific
allowance. The general allowance establishes a reserve rate using historical life-of-loan default rates, current loan portfolio
information, economic forecasts, and business cycle data. Statistical analysis determines life-of-loan default and loss rates for
the quantitative component, while qualitative factors ("Q-Factors") adjust expected loss rates for current and forecasted
conditions. The Q-Factor methodology involves a blend of quantitative analysis and management judgment, reviewed quarterly.
Specific allowances arise when individual loans exhibit unique risk characteristics, leading to an impairment analysis. If
management believes that scheduled principal and interest payments will not be fully paid, and the recorded investment is less
than the market value of the collateral, a specific reserve is established in the ACL for the loan. The specific reserve amount is
calculated using current appraisals, listed sales prices, and other available information. This analysis is subject to inherent
subjectivity, relying on estimates that may be revised as more information becomes available.
Our Board of Directors’ Internal Asset Review Committee reviews and recommends for approval the allowance for
credit losses on a quarterly basis, and any related provision or recapture of provision for credit losses, and the Board of
Directors approves the provision or recapture after considering the Committee’s recommendations. The allowance is increased
by the provision for credit losses which is charged against current period earnings. When analysis of the loan/AFS investment
portfolio warrants, the allowance is decreased and a recapture of provision of credit losses is included in current period
earnings.
We believe that the ACL is a critical accounting estimate because it is highly susceptible to change from
period-to-period requiring management to make assumptions about expected credit losses of the loan portfolio. The impact of a
large unexpected loss could deplete the allowance and potentially require increased provisions to replenish the allowance,
thereby reducing earnings. For additional information see Item 1A. “Risk Factors – Risks Related to Our Lending - Our
allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio,” in this Form 10-K.
50
Comparison of Financial Condition at December 31, 2023 and December 31, 2022
Assets. The following table details the changes in the composition of our assets at December 31, 2023 from
December 31, 2022.
Balance at
December 31,
2023
Balance at
December 31,
2022
$
Change
%
Change
(Dollars in thousands)
Cash on hand and in banks $
Interest-earning deposits with banks
8,391 $
22,138
7,722 $
16,598
Investments available-for-sale, at fair value
Investments held-to-maturity, at amortized cost
207,915
2,456
217,778
2,444
Loans receivable, net
1,175,925
1,167,083
FHLB stock, at cost
Accrued interest receivable
Deferred tax assets, net
Premises and equipment, net
BOLI
Prepaid expenses and other assets
Right of use asset (“ROU”), net
Goodwill
Core deposit intangible, net
Total assets
6,527
7,359
2,648
19,667
37,653
10,478
2,617
889
419
7,512
6,513
2,597
21,192
36,286
12,479
3,275
889
548
$
1,505,082 $
1,502,916 $
669
5,540
(9,863)
12
8,842
(985)
846
51
(1,525)
1,367
(2,001)
(658)
—
(129)
2,166
8.7 %
33.4
(4.5)
0.5
0.8
(13.1)
13.0
2.0
(7.2)
3.8
(16.0)
(20.1)
—
(23.5)
0.1 %
The $2.2 million increase in total assets during 2023 was primarily a result of growth in our loan portfolio of
$8.8 million, funded by growth in deposits, primarily retail certificates of deposit and principal repayments on our investment
securities. Additional factors in our asset growth are described below.
Interest-earning deposits with banks. Interest-earning deposits with banks, consisting primarily of funds held at the
FRB, increased by $5.5 million from December 31, 2022 to December 31, 2023, primarily due to management’s electing to
maintain additional on-balance sheet liquidity in light of the volatility in the banking industry. Excess funds were deposited to
our interest-earning accounts with banks and are readily available for our funding needs.
Investments available-for-sale. During 2023, investments available-for-sale decreased $9.9 million, primarily due to
regularly scheduled principal payments on mortgage-backed securities. No investments securities were purchased during 2023.
The effective duration of our securities portfolio decreased slightly to 3.43% at December 31, 2023, as compared to
3.65% at December 31, 2022. Effective duration measures the anticipated percentage change in the value of an investment (or
portfolio) in the event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with
embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management
believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities
portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow
assumptions as interest rates change.
Loans receivable. Net loans receivable increased by $8.8 million during 2023 to $1.18 billion. During the year ended
December 31, 2023, one-to-four family loans increased $39.0 million, multifamily loans increased $11.3 million and consumer
loans, consistent with management’s strategy to increase the Bank’s portfolio of classic and collectible car loans, increased
$7.6 million. Partially offsetting these increases were decreases in commercial real estate loans of $30.0 million, construction/
land loans of $16.7 million, and business loans of $2.3 million.
During 2023, we supplemented our loan originations and participations by purchasing $21.9 million in loans, including
$19.8 million of performing classic and collectible car loans, and $2.1 million of CRA qualified one-to-four family loans. These
51
out-of-state purchases reflect our efforts to geographically diversify our loan portfolio with loans meeting our investment and
credit quality objectives.
At December 31, 2023, the Bank had $220,000 of nonaccrual loans. Nonaccrual loans as a percentage of our total
loans was 0.02% at both December 31, 2023 and 2022. Adversely classified loans, defined as substandard or below, decreased
to $46.1 million at December 31, 2023, from $47.2 million at December 31, 2022 due primarily to principal paydowns, partially
offset by a downgrade of a $293,000 one-to-four family loan from special mention to substandard. All substandard loans at
December 31, 2023, were considered collateral dependent and individually evaluated for a specific allowance. The Bank is
monitoring these loans closely, all of which remain current on their payment obligations, and does not expect to incur any
material losses.
The following table presents a breakdown of our nonaccrual loans at the dates indicated.
Nonaccrual loans:
Consumer
Total nonaccrual loans
December 31,
2023
2022
$
Change
(Dollars in thousands)
$
$
220 $
220 $
193 $
193 $
27
27
The Bank did not foreclose on any properties during either 2023 or 2022. There was no LIP related to nonperforming
loans at December 31, 2023 or 2022. The level of our nonperforming assets reflects the modest risk profile of our loan
portfolio and our commitment to promptly identify any problem loans and take prompt actions to turn nonperforming assets
into performing assets.
Allowance for credit losses. We believe that we use the best information available to establish the ACL, and that the
ACL as of December 31, 2023 was adequate to cover the expected credit losses in the loan portfolio at that date. While we
believe the estimates and assumptions used in our determination of the adequacy of the ACL are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions, or that any increased provisions that may be required will not
adversely impact our financial condition and results of operations. Future additions to the ACL may become necessary based
upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan
balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ACL
is subject to review by bank regulators as part of the routine examination process that may result in the establishment of
additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of
information available to them at the time of their examination.
The ACL was $15.3 million, or 1.28% of total loans receivable at December 31, 2023 as compared to $15.2 million, or
1.29% of total loans receivable at December 31, 2022. The following table details activity and information related to the ACL
for the years ended December 31, 2023 and 2022.
52
ACL balance at beginning of year
Adjustment for adoption of Topic 326
Recapture of provision for credit losses - loans
Charge-offs
Recoveries
ACL balance at end of year
ACL as a percent of total loans
ACL as a percent of nonaccrual loans
Total nonaccrual loans
Nonaccrual loans as a percent of total loans
Total loans receivable
Total loans originated
At or For the Years Ended
December 31,
2023
2022
(Dollars in thousands)
$
15,227
$
15,657
500
(400)
(22)
1
—
(400)
(37)
7
$
$
$
15,306
$
15,227
1.28 %
6,957.27 %
220
0.02 %
1,191,231
181,156
$
$
1.29 %
7,889.78 %
193
0.02 %
1,182,310
271,403
Intangible assets. As a result of the Branch Acquisition in 2017, we recognized goodwill of $889,000 and a CDI of
$1.3 million. The Company performed an impairment analysis at December 31, 2023, and determined that no impairment of
goodwill and CDI existed. However, if adverse economic conditions or a decrease in the Company’s stock price and market
capitalization were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill.
The CDI was provided by a third-party valuation service and represents the fair value of the customer relationships
that provide a low-cost source of funding. The analysis was performed on the acquired noninterest-bearing checking, interest-
bearing checking, savings, and money market accounts. The initial ratio of CDI to the acquired balances of core deposits was
2.23%. This amount is amortized into noninterest expense on an accelerated basis over ten years and had a balance of $419,000
at December 31, 2023.
Deposits. During the year ended December 31, 2023, deposits increased $24.1 million from December 31, 2022.
Details of deposit balances and their concentrations are as follows:
Noninterest-bearing demand
deposits
$
Interest-bearing demand deposits
Savings
Money market
Certificates of deposit, retail
Brokered deposits (1)
Total deposits
December 31,
2023
2022
100,899
56,968
18,886
529,411
357,153
130,790
(Dollars in thousands)
8.4 % $
4.8
1.6
44.3
29.9
11.0
119,944
96,632
23,636
542,388
262,554
124,886
10.3 %
8.3
2.0
46.4
22.3
10.7
$
1,194,107
100.0 % $
1,170,040
100.0 %
____________
(1) Brokered deposits at December 31, 2023 and 2022, were comprised of $95.2 million and $89.8 million of certificates of
deposit, $25.1 million and $25.1 million of interest-bearing demand deposits, and $10.4 million and $10.0 million of money
market deposits, respectively.
The growth in deposits during 2023 was primarily attributed to a $94.6 million increase in retail certificates of deposit
due in large part to promotions of these products during the year. The Bank’s strategic initiatives seek to diversify our loan
portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. When retail
deposit balances do not meet our funding needs, we utilize brokered deposits, the national deposit marketplace and other
53
wholesale funding sources. These funds are used to fund loan origination and support other operation needs. During 2023, the
Company increased its usage of brokered deposits, in particular brokered certificates of deposit, due in large part to the stability
of such deposits. While the rates paid on brokered deposit are generally higher than retail deposits obtained through our branch
network, brokered deposit customers do not have the ability to withdraw these deposits, making such deposits very valuable in
times of volatility in the banking industry. With the turmoil in markets created by the failure of financial institutions in the first
quarter of 2023, the industry’s focus on liquidity and stability of deposits increased materially. This was the primary factor that
influenced the increase use of brokered deposits in 2023, with the average balance of brokered deposits increasing to
$162.2 million for the year ended December 31, 2023, from an average balance of $41.6 million during 2022. The increases in
retail and brokered certificates of deposit were partially offset by a $19.0 million decrease in noninterest-bearing deposits, a
$39.7 million decrease in interest-bearing demand deposits, a $4.8 million decrease in savings and a $13.0 million in money
market accounts.
At December 31, 2023 and December 31, 2022, we held $85.8 million and $61.0 million in public funds, of which
$39.4 million and $20.1 million were retail certificates of deposits, respectively. These funds were secured with the Washington
State Public Deposit Protection Commission by $26.5 million in pledged investment securities.
Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, to leverage
our balance sheet and to supplement our deposits. FHLB advances at December 31, 2023 were $125.0 million compared to
$145.0 million at December 31, 2022. At December 31, 2023, our FHLB advances consisted of $25.0 million of fixed-rate
three-month advances that renew quarterly, $90.0 million of fixed-rate one-month advances that renew monthly, all of which
are utilized in cash flow hedge agreements, as described below, and $10.0 million of overnight FHLB advances. The
availability of overnight FHLB advances provides us flexibility to adjust the level of our borrowings as our funding needs
change, consistent with our asset/liability objectives. Average borrowings during 2023 were $127.3 million. At December 31,
2023, all of our FHLB advances were due to mature in less than two months.
Cash Flow Hedge. To assist in managing interest rate risk, the Bank enters into interest rate swap agreements with
qualified institutions designated as cash flow hedge instruments. On July 17, 2023, the Bank entered into two new interest rate
swap agreements with qualified institutions. One agreement had a $15.0 million notional amount, a two-year maturity and a
fixed rate of 4.57%. The second agreement had a $15.0 million notional amount, a three-year maturity and a fixed rate of
4.15%. On November 20, 2023, a $10.0 million notional swap with a four-year maturity and a fixed rate of 1.59% matured and
was not replaced. As of December 31, 2023, the Bank had eight interest rate swap agreements. These agreements had an
aggregate notional amount of $115.0 million, with individual notional amounts ranging from $10.0 million to $15.0 million, a
weighted-average remaining term of 3.0 years and a weighted-average fixed rate of 1.87%. The remaining maturity of these
agreements is from eight months to 5.8 years.
Under the terms of the interest rate swap agreements, the Bank pays a fixed interest rate and in return receives an
interest payment based on the corresponding SOFR index, which resets quarterly or monthly, depending on the hedge term.
Concurrently, the Bank borrowed a fixed rate FHLB advance that will be renewed quarterly or monthly, as designated by the
hedge agreement, at the fixed interest rate at that time. Effectiveness of the interest rate swap is evaluated quarterly with any
ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair value of the
cash flow hedge created by the interest rate swap agreements is recognized as an other asset or other liability on the balance
sheet with the tax-effected portion of the change included in other comprehensive income. At December 31, 2023, we
recognized a $7.6 million fair value asset as a result of the increase in market value of the interest rate swap agreements.
Stockholders’ Equity. Total stockholders’ equity increased to $161.7 million at December 31, 2023, from
$160.4 million at December 31, 2022. Increases to stockholders’ equity for the year ended December 31, 2023, included
$6.3 million of net income and $605,000 in stock-based compensation recognized as additional paid-in-capital over the vesting
periods of the stock awards. In addition, the exercise of stock options resulted in the issuance of 95,019 shares of common stock
and a $1.0 million increase to additional paid-in capital.
These increases were partially offset by a $459,000 other comprehensive loss from the decrease in fair value of our
derivative portfolio, partially offset by increases in value of our available-for-sale investments. These increases were further
offset by a $395,000 net of tax adjustment to retained earnings resulting from the adoption of ASU 2016-13 and a $1.0 million
decrease to additional paid-in-capital from the cancellation of 83,722 shares of stock awards. In addition, shareholder cash
dividends of $0.52 per share were paid during 2023, reducing retained earnings by $4.8 million.
54
Comparison of Operating Results for the Years Ended December 31, 2023 and December 31, 2022
Net Interest Income. Net interest income in 2023 was $40.5 million, a $7.8 million or 16.2% decrease from
$48.4 million in 2022, due primarily to a $26.7 million increase in interest expense outpacing the $18.9 million increase in
interest income. The increase in interest income was primarily due to the increase in average yield on interest-earning assets to
5.44% for the year ended December 31, 2023 from 4.33% for the year ended December 31, 2022, a result of increases in
market interest rates during the year and our deployment of excess liquidity into higher yielding assets. Average interest-
earning assets increased $69.0 million, fully funded by a $83.5 million increase in interest-bearing liabilities. The average cost
of interest-bearing liabilities increased to 3.05% for the year ended December 31, 2023 from 0.95% for the year ended
December 31, 2022, as a result of the persistently elevated short-term interest rates and the change in the Company’s deposit
mix. In 2023, our average balance of interest-bearing demand, savings, money market and noninterest-bearing deposits
decreased $21.1 million, $3.2 million, $95.6 million and $15.4 million, respectively, contributing to the need to increase usage
of brokered deposits and other funding alternatives. As a result, average balance of brokered deposits increased to
$162.2 million at December 31, 2023 from an average balance of $41.6 million at December 31, 2022. The average balance of
the retail certificates of deposit increased $69.4 million during 2023 compared to 2022 due in large part to promotions of these
products this year. As a result of our utilizing higher costing brokered deposits to meet our funding needs in 2023, our net
interest margin decreased to 2.82% for the year ended December 31, 2023, from 3.53% for the year ended December 31, 2022.
For more information, see “Asset and Liability Management and Market Risk.”
The following table compares average interest-earning asset balances, associated yields, and resulting changes in
interest and dividend income for the years ended December 31, 2023 and 2022:
Year Ended December 31,
2023
2022
Average
Balance
Yield
Average
Balance
Yield
Change in
Interest and
Dividend Income
Loans receivable, net
Investments
Interest-earning deposits
FHLB stock
Total interest-earning assets
$
$
1,172,569
213,261
44,684
6,857
1,437,371
(Dollars in thousands)
1,128,835
203,148
30,176
6,256
1,368,415
5.71 % $
3.97
5.06
7.07
5.44 % $
4.69 % $
2.76
1.28
5.08
4.33 % $
14,003
2,871
1,875
167
18,916
During the year ended December 31, 2023, interest income on net loans receivable increased $14.0 million due to
increases in the average yield and, to a lesser extent, the average balance of loans. The average loan yield increased to 5.71%
from 4.69% and the average balance of loans receivable increased $43.7 million for the year ended December 31, 2023,
compared to the year ended December 31, 2022, primarily due to loans originated or refinanced at higher rates or adjusted
upward in this rising rate environment.
Interest income on investments available-for-sale increased $2.9 million during 2023, due to an increase in the average
yield to 3.97% from 2.76% for the prior year and, to a lesser extent, a $10.1 million increase in the average balance of
investments. Approximately 44% of our investment portfolio was comprised of variable rate securities which repriced during
the rising rate environment during 2023.
Interest income on interest-earning deposits increased $1.9 million during the year ended December 31, 2023
compared to the prior year, due to a 378 basis point increase in the average yield to 5.06% for the year ended December 31,
2023, from 1.28% for the year ended December 31, 2022 and, to a lesser extent, a $14.5 million increase in their average
balance.
55
The following table details average balances, cost of funds and the resulting changes in interest expense for the years
ended December 31, 2023 and 2022:
Year Ended December 31,
2023
2022
Average
Balance
Cost
Average
Balance
Cost
Change in
Interest
Expense
80,646
20,612
498,419
342,638
162,195
127,263
(Dollars in thousands)
1.26 % $
101,744
0.47 % $
0.03
2.91
3.13
5.02
2.52
23,823
593,984
273,197
41,603
113,890
0.03
0.63
1.33
2.62
1.70
535
(1)
10,759
7,106
7,053
1,274
Interest-bearing demand accounts
$
Savings accounts
Money market accounts
Certificates of deposit, retail
Brokered deposits
FHLB advances and other borrowings
Total interest-bearing liabilities
$ 1,231,773
3.05 % $ 1,148,241
0.95 % $
26,726
Interest expense increased $26.7 million to $37.6 million for the year ended December 31, 2023 from $10.9 million for
the year ended December 31, 2022. The increase was primarily a result of the increase in average cost of interest-bearing
deposits to 3.12% for the year ended December 31, 2023, compared to 0.87% for the year ended December 31, 2022, primarily
attributed to the rising rate environment in 2023.
Interest expense increased on all deposit categories other than savings during the year ended December 31, 2023
compared to the year ended December 31, 2022. Increases were $535,000, $10.8 million, $7.1 million and $7.1 million for
interest-bearing demand, money market, retail certificates of deposit and brokered deposits, respectively. Interest expense on
interest-bearing demand accounts increased, primarily due to average cost increasing to 1.26% in 2023 as compared to 0.47% in
2022, partially offset by a $21.1 million reduction in average balance. Interest expense on money market accounts increased,
primarily due a 228 basis point increase in average cost, partially offset by a $95.6 million decrease in average balance. To
compensate for the volume loss in interest-bearing demand and money market accounts, the Bank promoted their retail
certificate of deposits and increased the utilization of brokered deposits as an alternative funding source in 2023. As a result,
interest expense on both retail certificates of deposit and brokered deposits increased during 2023. Retail certificates of deposit
had an average balance of $342.6 million and an average cost of 3.13% in 2023, compared to average balance of $273.2 million
and average cost of 1.33% in 2022. The average balance of brokered deposits increased $120.6 million to $162.2 million for the
year ended December 31, 2023, compared to $41.6 million for the year ended December 31, 2022. The average cost of
brokered deposits increased 240 basis points to 5.02% in 2023 from 2.62% in 2022.
Interest expense on FHLB advances and other borrowings increased $1.3 million in 2023 compared to 2022 due to
combination of an 82 basis point increase in the average rate paid on advances and, to a lesser extent, a $13.4 million increase
in average balance. As a result of the interest rate hikes in 2023, the average cost of these advances increased to 2.52% for the
year ended December 31, 2023, compared to 1.70% for the year ended December 31, 2022.
Provision for Credit Losses. We recorded a recapture of the provision for credit losses for loans of $400,000 for the
year ended December 31, 2023. This recapture, combined with a $192,000 provision for credit losses on unfunded loan
commitments resulted in a net recapture of provision of $208,000 in 2023. We adopted ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326), effective January 1, 2023, which resulted in a net of tax charge of $395,000 to retained earnings and
a $500,000 increase in the ACL. This one-time adoption adjustment, combined with the $208,000 recapture of provision,
resulted in a $79,000 increase in the ACL. The percentage of the ACL to total loans was 1.28% at December 31, 2023,
compared to 1.29% at December 31, 2022. The recapture of provision for credit losses for loans in 2023 was due primarily to
credit upgrades and payoffs of loans carrying higher credit risk ratings, updates to economic forecasts used for loans and
unfunded commitments, changes in the loan portfolio balances, mix and characteristics and other factors.
In 2022, we recorded a recapture of the provision for loan and lease losses of $400,000. Combining with a $34,000
recapture of provision for loan and lease losses on unfunded commitments, a $434,000 net recapture of provision for loan and
lease losses was reflected in our financial statements. The recapture of provision in 2022 was primarily a result of $14.4 million
of loans downgraded to substandard, resulting in these loans being removed from the calculation of the general allowance for
56
loan and lease losses and instead being individually analyzed for required specific reserve, which indicated no additional
specific reserve was needed. Changes in the composition of our loan portfolio, with $90.7 million growth in lower risk one-to-
four family residential loans and a decline in higher risk construction/land loans with over $20.0 million of these loans
converting to permanent multifamily loans also contributed to the recapture of provision in 2022.
Noninterest Income. Noninterest income decreased $474,000 to $2.8 million for the year ended December 31, 2023
from $3.2 million for the year ended December 31, 2022. The following table provides a detailed analysis of the changes in the
components of noninterest income:
Year Ended
December 31, 2023
Year Ended
December 31, 2022
$
Change
%
Change
(Dollars in thousands)
Gain on sale of investments, net
$
— $
27 $
BOLI change in cash surrender value
Wealth management revenue
Deposit related fees
Loan related fees
Other
Total noninterest income
$
1,081
253
956
275
208
2,773 $
1,004
312
936
919
49
3,247 $
(27)
77
(59)
20
(644)
159
(474)
(100.0) %
7.7
(18.9)
2.1
(70.1)
324.5
(14.6) %
The largest change to our noninterest income was a $644,000 decrease in loan related fees for the year ended
December 31, 2023, primarily due to a $495,000 decrease in fees collected on loan prepayments during the year and a $94,000
decrease in annual fees earned on business lines of credit (“LOC”) due to the timing difference in the receipt of such fees in the
comparable periods.
Wealth management revenue decreased $59,000 in 2023. This decline was primarily attributed to challenges in
identifying and hiring a replacement for a wealth advisor in our primary location, a goal that was successfully achieved in late
2023 with onboarding of a tenured senior wealth advisor. Additionally, our existing investor base skews toward an older
demographic with a conservative, low-risk investing profile. The inclination of these clients toward cash and cash equivalents,
which provides attractive returns with nominal commission expenses, has resulted in a slightly reduced revenue impact.
BOLI income increased $77,000 for the year ended December 31, 2023, primarily due to net increases in cash
surrender value of certain policies during the year of 2023.
Other noninterest income increased $159,000 during 2023 compared to the prior year, primarily due to a $139,000
combined result of mark-to-market value adjustment and capital distributions from our fintech focused investment. In addition,
merchant service fees increased $17,000 for the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to an increase in business account referrals to our third-party card payment processing vendor.
Noninterest Expense. Noninterest expense increased $41,000, or 0.1% to $35.7 million for the year ended
December 31, 2023 from $35.6 million for the year ended December 31, 2022. The following table provides a detailed analysis
of the changes in the components of noninterest expense:
Year Ended
December 31, 2023
Year Ended
December 31, 2022
$
Change
%
Change
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
Regulatory assessments
Insurance and bond premiums
Marketing
Other general and administrative
Total noninterest expense
$
$
20,366 $
4,748
2,288
2,857
763
468
343
3,833
35,666 $
57
(Dollars in thousands)
21,133 $
4,776
2,339
2,678
403
464
303
3,529
35,625 $
(767)
(28)
(51)
179
360
4
40
304
41
(3.6) %
(0.6)
(2.2)
6.7
89.3
0.9
13.2
8.6
0.1 %
For the year ended December 31, 2023, regulatory assessments increased $360,000 as a result of the FDIC increasing
deposit insurance assessment rates by two basis points effective this year. Other general and administrative expense increased
$304,000 due to a number of factors, including increased state/local taxes, business development efforts and deposit related
expenses reflecting implementation of new deposit programs this year. Data processing expense increased $179,000 primarily
due to the reclassification of some expenses to data processing from “Other general and administrative”.
These increases were partially offset by a $767,000 decrease in salaries and employee benefits. The decrease in
salaries and employee benefits primarily was due to a $1.4 million decrease in ESOP expense resulting from the remaining
unallocated shares under the ESOP being fully allocated during 2022, $815,000 decrease in incentive pay, as well as a $59,000
decrease in health insurance costs and a $52,000 decrease in expense related to the Pentegra pension plan, partially offset by an
$804,000 increase in salaries and wages and $737,000 increase in expenses related to the profit-sharing program which replaced
the ESOP in 2023. Additional changes within salary and benefits include a $325,000 decrease in commissions which was
mostly offset by the $306,000 decrease in loan origination direct cost offset due to lower loan originations, and a $178,000
increase in 401(k) matching contributions which was offset by a $178,000 increase in compensation expense related to the grant
of equity awards.
The $51,000 decrease in professional fees for the year ended December 31, 2023 compared to the prior year, was
partially offset by the $40,000 increase in marketing expense, primarily attributed to our 100-year anniversary.
Federal Income Tax Expense. We recorded a $1.6 million federal income tax provision for 2023, compared to
$3.2 million for 2022. The decrease in federal income tax provision for 2023 was primarily the result of a $8.6 million decrease
in pretax net income.
58
Average Balances, Interest and Average Yields/Cost
The following table presents information regarding average balances of assets and liabilities as well as interest income
from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate
spreads, net interest margins and the ratio of average interest-earning assets to average interest-bearing liabilities. Average
balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a
tax equivalent basis.
Year Ended December 31,
2023
Interest
and
Dividends
Average
Balance (1)
Yield/
Cost
Average
Balance (1)
2022
Interest
and
Dividends
Yield/
Cost
Average
Balance (1)
2021
Interest
and
Dividends
Yield/
Cost
(Dollars in thousands)
Interest-earnings assets:
Loans receivable, net
Investments, taxable(2)
Investments, non-taxable(2)
Interest-earning deposits
FHLB stock
$ 1,172,569 $ 66,938
7,965
509
190,968
22,293
5.71 % $ 1,128,835 $ 52,935
5,105
180,085
4.17
498
23,063
2.28
4.69 % $ 1,098,772 $ 50,170
2,765
151,768
2.83
459
24,342
2.16
44,684
6,857
2,261
485
5.06
7.07
5.44
30,176
6,256
386
318
1,368,415
59,242
1.28
5.08
4.33
60,482
6,271
72
332
1,341,635
53,798
87,324
$ 1,455,739
79,841
$ 1,421,476
Total interest-earning assets
1,437,371
78,158
Noninterest earning assets
92,140
Total average assets
$ 1,529,511
Interest-bearing liabilities:
Interest-bearing demand accounts $
80,646 $ 1,013
1.26 % $ 101,744 $
478
0.47 % $ 106,684 $
Savings accounts
Money market accounts
20,612
6
498,419
14,503
Certificates of deposit, retail
342,638
10,741
Brokered deposits
Total deposits
162,195
8,144
1,104,510
34,407
Advances from the FHLB and
other borrowings
127,263
3,208
Total interest-bearing liabilities
1,231,773
37,615
0.03
2.91
3.13
5.02
3.12
2.52
3.05
23,823
593,984
273,197
41,603
1,034,351
7
3,744
3,635
1,091
8,955
113,890
1,934
1,148,241
10,889
0.03
0.63
1.33
2.62
0.87
1.70
0.95
Noninterest bearing liabilities
Average equity
137,310
160,428
Total average liabilities and equity
$ 1,529,511
148,813
158,685
$ 1,455,739
21,715
545,306
342,147
—
90
6
1,601
5,519
—
1,015,852
7,216
115,466
1,131,318
1,603
8,819
130,117
160,041
$ 1,421,476
4.57 %
1.82
1.89
0.12
5.29
4.01
0.08 %
0.03
0.29
1.61
—
0.71
1.39
0.78
Net interest income
$ 40,543
$ 48,353
$ 44,979
Net interest margin
Ratio of average interest-
earning assets to average
interest-bearing liabilities
2.82 %
3.53 %
3.35 %
116.69 %
119.17 %
118.59 %
________________
(1) The average loans receivable, net balances include nonaccrual loans and deferred fees (costs).
(2) Average balances of investments are based on fair value.
59
Yields Earned and Rates Paid
The following table presents the weighted-average yields earned on our assets and the weighted-average interest rates
paid on our liabilities, as well as our interest rate spread and net interest margin, at and for the periods indicated.
Yield on interest-earning assets:
Loans receivable, net
5.79 %
5.71 %
4.69 %
4.57 %
Weighted Average
Yield/Rate at
December 31, 2023
Net Yield/Rate at and for the
Year Ended December 31,
2023
2022
2021
Investments, taxable
Investments, non-taxable
Interest-earning deposits
FHLB stock
Total interest-earning assets
Rate paid on interest-bearing liabilities:
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit, retail
Brokered deposits
Total interest-bearing deposits
Advances from the FHLB and other borrowings
Total interest-bearing liabilities
Interest rate spread
Net interest margin
3.97
1.98
5.36
6.86
5.49
0.32
0.03
3.43
3.94
5.12
3.58
2.22
3.44
2.05
n/a
4.17
2.28
5.06
7.07
5.44
1.26
0.03
2.91
3.13
5.02
3.12
2.52
3.05
2.39
2.82
2.83
2.16
1.28
5.08
4.33
0.47
0.03
0.63
1.33
2.62
0.87
1.70
0.95
3.38
3.53
1.82
1.89
0.12
5.29
4.01
0.08
0.03
0.29
1.61
—
0.71
1.39
0.78
3.23
3.35
60
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income. Information is
provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by
prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume).
Changes in rate/volume are allocated proportionately to the changes in rate and volume.
Year Ended December 31, 2023
Compared to December 31, 2022
Change in Interest
Year Ended December 31, 2022
Compared to December 31, 2021
Change in Interest
2023
2022
Rate
Volume
Total
Rate
Volume
Total
(In thousands)
$
11,952 $
2,051 $
14,003 $
1,392 $
1,373 $
2,551
28
1,689
136
309
(17)
186
31
2,860
11
1,875
167
1,824
63
350
(13)
516
(24)
(36)
(1)
2,765
2,340
39
314
(14)
Interest-earning assets:
Loans receivable, net
Investments, taxable
Investments, non-taxable
Interest-earning deposits
FHLB stock
Net change in interest income
16,356
2,560
18,916
3,616
1,828
5,444
Interest-bearing liabilities:
Interest-bearing demand accounts
Savings accounts
Money market accounts
Certificates of deposit, retail
Brokered deposits
Advances from FHLB and other
borrowings
634
—
11,361
6,182
3,891
(99)
(1)
(602)
924
3,162
535
(1)
10,759
7,106
7,053
392
—
2,000
(772)
1,091
(4)
1
143
(1,112)
—
388
1
2,143
(1,884)
1,091
1,047
227
1,274
Net change in interest expense
Net change in net interest income
23,115
(6,759) $
3,611
(1,051) $
26,726
(7,810) $
$
Asset and Liability Management and Market Risk
353
3,064
552 $
(22)
(994)
2,822 $
331
2,070
3,374
General. Our Board of Directors has approved an asset/liability management policy to guide management in
maximizing interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing
liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate risk, credit risk, and profitability. It is
the responsibility of the ALCO to communicate, coordinate and manage our asset/liability position consistent with our business
plan and Board-approved policies. The ALCO meets quarterly to review various areas including:
•
•
•
•
•
•
•
•
economic conditions;
interest rate outlook;
asset/liability mix;
interest rate risk sensitivity;
current market opportunities to promote specific products;
historical financial results;
projected financial results; and
capital position.
61
The ALCO also reviews current and projected liquidity needs. As part of its procedures, the ALCO regularly reviews
interest rate risk by forecasting the impact that changes in interest rates may have on net interest income and the market value of
portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet
instruments and evaluating such impacts against the maximum potential change in the market value of portfolio equity that is
authorized by the Board of Directors.
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are
established contractually for a period of time. Market interest rates change over time. Our loans generally have longer
maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest
rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
To effectively manage interest rate risk, we have implemented the following strategies:
•
•
•
•
•
•
we prioritize originating loans with shorter terms and higher yields whenever feasible. This approach helps to
mitigate exposure to interest rate fluctuations.;
we aim to increase the balances of non-maturity deposits with less rate sensitivity. This strategy provides stability
and flexibility in managing interest rate risk.
our investment portfolio includes securities with relatively short average lives, typically less than eight years. This
ensures that the portfolio is responsive to changing interest rate conditions.
we added $20.3 million of adjustable-rate loans into our loan portfolio. This diversification helps in adapting to
changes in interest rates and managing overall risk.
as a funding source, we may employ brokered certificates of deposit with a call option. This strategy provides
flexibility in managing funding costs while incorporating an option to adjust based on market conditions; and
we have employed interest rate swaps to effectively fix the rate on $115.0 million of FHLB advances. This use of
swaps helps us secure favorable interest rates on specific funding sources, contributing to interest rate risk
management.
How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis
by measuring the impact of changes to net interest income in multiple rate environments. Management retains the services of a
third-party consultant with over 30 years of experience in asset-liability management to assist in its interest rate risk and asset-
liability management. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest
rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities
on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or
actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of
repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities
lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various
maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features
which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-
rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately 63.5% of our
loans were adjustable-rate loans at December 31, 2023. At that date, $410.8 million, or 54.3%, of these loans with a weighted-
average interest rate of 4.75% were at their floor interest rate. A portion of these loans are set to reprice at defined time
intervals. Adjustable rate loans that are based on prime rate plus a specified margin recalculate each time the prime rate
changes. When the floor rate is above a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an
increase in market rates until the prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At
December 31, 2023, the Bank’s net loans receivable included $128.9 million of prime based loans, all of which were priced
above their floors at that date.
The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates.
However, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of
funds during periods of increasing interest rates. Further, in the event of a significant change in interest rates, prepayment and
early withdrawal levels would likely deviate from those assumed. Finally, the ability of many borrowers to service their debt
may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.
The assumptions we use are based upon a combination of proprietary and market data that reflect historical results and
current market conditions. These assumptions relate to interest rates, prepayments, deposit decay rates and the market value of
certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans,
62
investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are
modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposits can be maintained
with rate adjustments not directly proportionate to the change in market interest rates, based upon our historical deposit decay
rates, which are substantially lower than market decay rates. We have observed in the past that our deposit accounts during
changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do
not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are
based upon our analysis of our customer base, competitive factors, and historical experience.
Our income simulation model examines changes in net interest income in scenarios where interest rates were assumed
to remain at their base level, and instantaneously increase and decrease by 100, 200, 300 and 400 basis points.
The following table illustrates the estimated change in our net interest income over the next 12 months from
December 31, 2023, that would occur in the event of an immediate change in interest rates equally across all maturities, with no
effect given to any steps that we might take to counter the effect of that interest rate movement. Net interest income would
decline in year one under all four rising rate scenarios, with the larger the increase in the interest rate, the larger decline in net
interest income.
Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2023
Net Interest
Income
Basis Point Change in Rates
% Change
(Dollars in thousands)
$
35,094
36,203
37,275
38,477
39,547
40,391
42,593
41,606
41,874
(11.26) %
(8.46)
(5.75)
(2.71)
—
2.13
7.70
5.21
5.88
+400
+300
+200
+100
Base
(100)
(200)
(300)
(400)
The net interest income table presented above is predicated upon a stable balance sheet with no growth or change in
asset or liability mix. The effects of changes in interest rates are based upon a cash flow simulation of our existing assets and
liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no
assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan
portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the
portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would
perform as assumed. Also, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause changes to the net interest income other than those indicated above.
Liquidity and Capital Resources
We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound
operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal
operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that
adequate liquidity is maintained.
Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest
payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used
to fund loans, acquire investments and other assets, and fund continuing operations. While maturities and the scheduled
amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the
level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted
operating results are sufficient to fund all of our existing commitments.
63
Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally
invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis,
we maintain a strategy of investing in various lending products as described in greater detail under Item 1. “Business – Lending
Activities.” At December 31, 2023, the undisbursed portion of construction LIP totaled $44.6 million and unused lines of credit
were $39.1 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of
deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investments.
Retail certificates of deposit and brokered certificates of deposit scheduled to mature in one year or less at December 31, 2023,
totaled $257.0 million and $73.2 million, respectively. Management’s policy is to maintain deposit rates at levels that are
competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of
maturing certificates of deposit will remain with the Bank. In addition, we had the ability at December 31, 2023 to borrow an
additional $326.3 million from the FHLB, based on our collateral capacity, $55.8 million from the FRB, and $75.0 million from
unused lines of credit with other financial institutions to meet commitments and for liquidity purposes. See the Consolidated
Statements of Cash Flows in Item 8 of this report for further details on our cash flow activities.
We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due.
Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices, or in a reasonable time frame, to meet our
normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage our liquidity
and funding requirements.
Our primary source of funds is our retail deposits. When retail deposits are not sufficient to provide the funds for our
assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources
include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and
dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets, including but not limited
to, selling investments at a loss, which could adversely impact our earnings and capital levels. During 2023, to supplement the
decline in retail deposits resulting from the rising rate environment, we increased the utilization of brokered deposits as a
funding source. We may continue to utilize this type of funding to manage our liquidity position if desirable growth in retail
deposits is not expected.
On a monthly basis, we estimate our liquidity sources and needs for the next twelve months. Also, we determine
funding concentrations and our need for sources of funds other than deposits. This information is used by our ALCO in
forecasting funding needs and investing opportunities.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and
modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our
markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as
forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on
investment. The amount of capital investment is influenced by, among other things, current and projected demand for our
services and products, cash flow generated by operating activities, cash required for other purposes and regulatory
considerations.
Based on our current capital allocation objectives, during fiscal 2024 we expect cash expenditures of $759,000 for
capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying
quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice
at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.13 per share, which
we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the
Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2024 at this rate
of $0.13 per share, our average total dividend paid each quarter would be approximately $1.2 million, based on the number of
our current outstanding shares at December 31, 2023.
For the fiscal year ending December 31, 2024, we project that our fixed commitments will include (i) $845,000 of
operating lease payments and (ii) other future obligations and accrued expenses of $21.5 million. At December 31, 2023, our
$125.0 million in FHLB borrowings are all short-term and $115.0 million of our advances are tied to interest rate swap
agreements and are expected to be renewed as they mature during 2024. We believe that our liquid assets combined with the
available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.
Our total stockholders’ equity was $161.7 million at December 31, 2023. Consistent with our goal to operate a sound
and profitable financial organization we will actively seek to maintain the Bank as a “well capitalized” institution in accordance
with regulatory standards. As of December 31, 2023, the Bank exceeded all regulatory capital requirements. Regulatory capital
64
ratios for the Bank were as follows as of December 31, 2023: Total capital to risk-weighted assets was 16.15%; Tier 1 capital
and Common equity tier 1 capital to risk-weighted assets was 14.90%; and Tier 1 capital to total assets was 10.18%. At
December 31, 2023, the Bank met the financial ratios to be considered well-capitalized under the regulatory guidelines. See
Item 1. “Business – How We Are Regulated – Regulation and Supervision of First Financial Northwest Bank – Capital
Requirements.”
The Accumulated Other Comprehensive Income (“AOCI”) component of capital includes a variety of items, including
the value of our available-for-sale investment portfolio and the value of our derivative instruments, net of tax. We model
various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to withstand
the estimated potential fluctuations in a variety of interest rate environments.
First Financial Northwest is a separate legal entity from the Bank and must provide for its own liquidity. In addition to
its own operating expenses, First Financial Northwest is responsible for paying for any stock repurchases, dividends declared to
its stockholders and other general corporate expenses. Since First Financial Northwest is a holding company and does not
conduct operations, its primary sources of liquidity are interest earned on interest-earning assets, principally interest-earning
deposits, dividends up streamed from the Bank and borrowings from outside sources. Banking regulations may limit the amount
of dividends that may be paid to First Financial Northwest by the Bank. See, Item 8. "Note 14: Regulatory Capital
Requirements" in the accompanying notes to consolidated financial statements and Item 1. “Business – How We Are Regulated
– Regulation and Supervision of First Financial Northwest Bank – Dividends” in this Form 10-K. At December 31, 2023, First
Financial Northwest, on an unconsolidated basis, had $8.8 million in cash, noninterest-bearing deposits and liquid investments
generally available for its cash needs.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Asset and Liability Management and Market Risk” of this Form 10-K is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB
ID: 659)
Consolidated Balance Sheets as of December 31, 2023, and 2022
Consolidated Income Statements for the Years Ended December 31, 2023, and 2022
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, and 2022
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, and 2023
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, and 2022
Notes to Consolidated Financial Statements
Page
66
69
70
71
72
73
75
65
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of
First Financial Northwest, Inc., and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Financial Northwest, Inc.,
and Subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2023 and 2022, and the
consolidated results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards
Codification Topic 326, Financial Instruments – Credit Losses (Topic 326). The Company adopted the
new credit loss standard using the modified retrospective approach such that prior period amounts
are not adjusted and continue to be reported in accordance with previously applicable generally
accepted accounting principles. The new credit loss standard is also communicated as a critical audit
matter below.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting in accordance with the standards of the PCAOB. As part of our audit we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting
in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.
66
Our audit included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audit also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audit provides a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the
audit committee and that (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to
which they relate.
Allowance for Credit Losses
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for
credit losses for loans was $15.3 million at December 31, 2023. The allowance for credit losses is an
estimate of the expected credit losses on financial assets measured at amortized cost using the
relevant information about the past events, including historical credit loss experience on loans with
similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect
the collectability of the remaining cash flows over the contractual term of the financial assets. It is
based upon the Company’s analysis of the factors underlying the quality of the loan portfolio. These
factors include, among others, current economic forecasts, projected payment estimates, changes in
the nature and volume of the loan portfolio, overall portfolio quality, and certain other factors that may
affect the borrowers’ ability to pay.
We identified management’s estimation and application of qualitative factors and current economic
forecasts, both of which are used in the calculation of the allowance for credit losses on loans, as a
critical audit matter. To estimate the allowance for credit losses, the Company determines the life of
loan loss rates and analyzes qualitative factors that assess the current loan portfolio conditions and
the economic environment. The qualitative factors adjust the expected loss rates for current and
forecasted conditions that may not be fully provided for in the historical loss information. The
Company has established a methodology for adjusting the previously determined expected loss rates
based on current economic forecasts. The qualitative factor methodology is based on a blend of
quantitative analysis and management judgement. Auditing management’s judgments regarding the
qualitative factors and current economic forecasts applied to the allowance for credit losses involved
a high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included:
Testing the appropriateness of the methodology used in the calculation of the allowance for credit
losses, as well as testing the completeness and accuracy of the data used in the calculation,
application of the qualitative factors and current economic forecasts determined by management
and used in the calculation, and verifying calculations in the allowance for credit losses.
Obtaining management’s analysis and supporting documentation related to the qualitative factors
and testing whether the qualitative factors used in the calculation of the allowance for credit
losses are supported by the documentation provided by management.
67
Obtaining management’s analysis and supporting documentation related to the current economic
forecasts, and testing whether the forecasts used in the calculation of the allowance for credit
losses are reasonable and supportable based on the analysis provided by management.
Everett, Washington
March 13, 2024
We have served as the Company’s auditor since 2009.
68
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
Assets
Cash on hand and in banks
Interest-earning deposits with banks
Investments available-for-sale, at fair value
Investments held-to-maturity, at amortized cost
Loans receivable, net of allowance of $15,306 and $15,227
Federal Home Loan Bank (“FHLB”) stock, at cost
Accrued interest receivable
Deferred tax assets, net
Premises and equipment, net
Bank owned life insurance (“BOLI”)
Prepaid expenses and other assets
Right of use asset (“ROU”), net
Goodwill
Core deposit intangible, net
Total assets
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
FHLB advances
Advance payments from borrowers for taxes and insurance
Lease liability, net
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ Equity
Commitments and contingencies (Note 15)
December 31,
2023
2022
$
8,391 $
22,138
207,915
2,456
7,722
16,598
217,778
2,444
1,175,925
1,167,083
6,527
7,359
2,648
19,667
37,653
10,478
2,617
889
419
7,512
6,513
2,597
21,192
36,286
12,479
3,275
889
548
$ 1,505,082 $ 1,502,916
$
100,899 $
119,944
1,093,208
1,050,096
1,194,107
125,000
1,170,040
145,000
2,952
2,806
2,739
3,051
3,454
328
15,818
1,343,422
20,683
1,342,556
Preferred stock, $0.01 par value; authorized 10,000,000 shares, no shares issued or outstanding
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding
9,179,510 shares at December 31, 2023, and 9,127,595 shares at December 31, 2022
Additional paid-in capital
Retained earnings, substantially restricted
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
69
—
—
92
73,035
96,206
(7,673)
161,660 $
$
91
72,424
95,059
(7,214)
160,360
$ 1,505,082 $ 1,502,916
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
Interest income
Loans, including fees
Investments
Interest-earning deposits
Dividends on FHLB stock
Total interest income
Interest expense
Deposits
FHLB advances and other borrowings
Total interest expense
Net interest income
Recapture of provision for credit losses
Net interest income after recapture of provision for credit losses
Noninterest income
Net gain on sale of investments
BOLI income
Wealth management revenue, net
Deposit related fees
Loan related fees
Other
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Professional fees
Data processing
Regulatory assessments
Insurance and bond premiums
Marketing
Other general and administrative
Total noninterest expense
Income before provision for federal income taxes
Federal income tax provision
Net income
Basic earnings per common share
Diluted earnings per common share
Year Ended December 31,
2023
2022
$
66,938 $
52,935
8,474
2,261
485
5,603
386
318
78,158
59,242
34,407
3,208
37,615 $
40,543
(208)
40,751
—
1,081
253
956
275
208
8,955
1,934
10889
48,353
(434)
48,787
27
1,004
312
936
919
49
2,773
3,247
20,366
21,133
4,748
2,288
2,857
763
468
343
3,833
35,666
7,858
1,553
$
$
$
6,305 $
0.69 $
0.69 $
4,776
2,339
2,678
403
464
303
3,529
35,625
16,409
3,169
13,240
1.47
1.45
Basic weighted average number of common shares outstanding
Diluted weighted average number of common shares outstanding
9,126,209
9,152,617
9,006,369
9,102,283
See accompanying Notes to Consolidated Financial Statements.
70
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive loss, net of tax:
Unrealized holding gains (losses) on available-for-sale securities
Tax effect
Reclassification adjustment for net gains realized in income
Tax effect
(Losses) gains on cash flow hedges
Tax effect
Other comprehensive loss, net of tax
Total comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Year Ended December 31,
2023
2022
$
6,305 $
13,240
2,340
(18,319)
(492)
3,847
—
—
(2,920)
613
(459)
$
5,846 $
(27)
6
8,994
(1,889)
(7,388)
5,852
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S
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Recapture of provision for credit losses
Net amortization of premiums and discounts on investments
Gain on sale of investments available-for-sale
Depreciation of premises and equipment
Loss on disposal of premises and equipment
Deferred federal income taxes
Allocation of ESOP shares
Stock compensation expense
BOLI income
Annuity income
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets
Decrease in lease ROU asset
(Decrease) increase in advance payments from borrowers for taxes and insurance
Increase in accrued interest receivable
Decrease in lease liability
Increase in accrued interest payable
(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sales and call of investments
Principal repayments on investments
Purchases of investments available-for-sale
Net increase in loans receivable
Purchases of premises and equipment
Sale (purchase) of FHLB stock
Purchase of BOLI
Net cash provided (used) by investing activities
Year Ended December 31,
2023
2022
$
6,305 $
13,240
(208)
534
—
2,028
4
175
—
605
(1,081)
(12)
(790)
766
(99)
(846)
(756)
2,411
(4,865)
4,171
—
11,669
—
(9,134)
(507)
985
(286)
2,727
(434)
720
(27)
2,153
1
217
1,372
770
(1,004)
(10)
279
739
142
(1,228)
(719)
216
11,565
27,992
11,089
16,729
(95,687)
(63,222)
(906)
(2,047)
(72)
(134,116)
73
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Continued)
Cash flows from financing activities:
Net increase in deposits
Advances from the FHLB
Repayments of advances from the FHLB
Proceeds from stock options exercises
Net share settlement of stock awards
Repurchase and retirement of common stock
Dividends paid
Net cash (used) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
Federal income taxes
Noncash transactions:
Year Ended December 31,
2023
2022
24,067
189,000
12,566
196,000
(209,000)
(146,000)
1,023
(1,016)
—
(4,763)
454
(226)
(1,398)
(4,343)
$
$
$
(689) $
57,053
6,209 $
24,320
30,529 $
(49,071)
73,391
24,320
$
35,204 $
1,900
10,673
2,485
Unrealized gain (loss) arising during the year on investments available-for-sale
2,340
(18,346)
Unrealized (loss) gain arising during the year on cash flow hedge
Initial recognition of ROU asset for new leases
Initial recognition of lease liability for new leases
Initial recognition of ACL
(2,920)
108
108
395
8,994
368
368
—
See accompanying Notes to Consolidated Financial Statements.
74
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
First Financial Northwest, Inc. (“First Financial Northwest”), a Washington corporation, was formed on June 1, 2007
for the purpose of becoming the holding company for First Financial Northwest Bank (the “Bank”) in connection with the
conversion from a mutual holding company structure to a stock holding company structure completed on October 9, 2007. First
Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in
the Bank. Accordingly, the information presented in the consolidated financial statements and related data, relates primarily to
the Bank. First Financial Northwest converted from a savings and loan holding company to a bank holding company in 2015
and is subject to regulation by the Board of Governors of the Federal Reserve of the Federal Reserve System ((the “Federal
Reserve Board” or “Federal Reserve”) through the Federal Reserve Bank of San Francisco (the “FRB”). The Bank is regulated
by the Federal Deposit Insurance Corporation (the “FDIC”) and the Washington State Department of Financial Institutions (the
“DFI”).
The Bank was organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal
mutual savings and loan association in 1935, and converted to a Washington state-chartered mutual savings bank in 1992. In
2002, the Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank and became the
wholly-owned subsidiary of First Financial of Renton, Inc. In connection with the mutual to stock conversion in 2007, the Bank
changed its name to First Savings Bank Northwest. In August 2015, the Bank changed its name to First Financial Northwest
Bank to support the expansion of focus to being more than a traditional “savings” bank. In February 2016, the Bank changed its
charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.
The Bank is a community-based commercial bank primarily serving King and Snohomish Counties, and to a lesser
extent, Pierce and Kitsap Counties, Washington. In King County, the headquarters and full-service banking office, as well as
one branch office, are located in Renton. Additional King County branch offices are located in Bellevue, Woodinville, Bothell,
Kent, Kirkland and Issaquah. In Snohomish County, five branch offices serve Mill Creek, Edmonds, Clearview, Smokey Point,
and Lake Stevens. In Pierce County, two branch offices serve Gig Harbor and University Place. The Bank’s business consists of
attracting deposits from the public and utilizing these deposits to originate one-to-four family residential, multifamily,
commercial real estate, construction/land, business and consumer loans.
The accompanying consolidated financial statements include the accounts of First Financial Northwest and its
wholly-owned subsidiaries First Financial Northwest Bank and First Financial Diversified Corporation (collectively, “the
Company”). All significant intercompany balances and transactions between First Financial Northwest and its subsidiaries have
been eliminated in consolidation.
Basis of Presentation and Use of Estimates
The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles
(“GAAP”). In preparing the consolidated financial statements, management makes estimates and assumptions based on
available information. These estimates and assumptions affect the amounts reported in the financial statements and the
disclosures provided. Actual results could differ from these estimates. Material estimates particularly subject to change include
the allowance for credit losses (“ACL”).
Subsequent Events
On January 10, 2024, the Bank entered into a definitive agreement in which Global Credit Union will acquire the
Bank. The transaction is structured as a purchase and assumption agreement with Global purchasing substantially all assets and
assuming substantially all liabilities of the Bank for the all-cash consideration of $231.2 million, subject to certain adjustments,
and subject to receiving all regulatory approvals, approval by the shareholders of the Company, and other customary closing
conditions.
On February 12, 2024, the Company declared a quarterly dividend to common shareholders of $0.13 per share, to be
paid on March 28, 2024, to shareholders of record as of March 15, 2024.
75
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks, interest-bearing
deposits and federal funds sold all with maturities of three months or less.
The Company is required to maintain an average reserve balance with the FRB or maintain such reserve balance in the
form of cash. Effective March 26, 2020 the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a
depository institution to zero percent. There was no required reserve balance at December 31, 2023 and 2022.
Investments
Investments in debt securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or
(3) trading. At December 31, 2023 and 2022, we had held-to-maturity and available-for-sale, but no trading securities.
Investments are categorized as held-to-maturity when we have the positive intent and ability to hold them to maturity.
Held-to-maturity investments are reported at amortized cost.
Investments are classified as available-for-sale if the Company intends to hold the securities for an indefinite period of
time, but not necessarily to maturity. Investments available-for-sale are reported at fair value. Unrealized holding gains and
losses on investments available-for-sale are excluded from earnings and are reported in other comprehensive income (loss), net
of applicable taxes. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method. Amortization or accretion of purchase premiums and discounts are included in investment income using the level-yield
method over the remaining period to contractual maturity. Dividend or interest income is recognized when it is earned.
The estimated fair value of investments is based on quoted market prices for investments traded in active markets or
dealer quotes. Mortgage-backed investments represent participation interest in pools of first mortgage loans originated and
serviced by the issuers of the investments.
Management makes an assessment to determine whether there have been any events or economic circumstances to
indicate that a security has incurred a credit-related loss. Management considers many factors including recent events specific
to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. For debt securities, if
management intends to sell the security or it is likely that management will be required to sell the security before recovering its
cost basis, the entire impairment loss would be recognized in earnings. If management does not intend to sell the security and it
is not likely that management will be required to sell the security but management does not expect to recover the entire
amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in
earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of
the cash flows expected to be collected, limited to the amount that the security’s fair value is less than its amortized cost basis.
The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be
collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all
other factors are presented as separate categories within OCI.
Loans Receivable
Loans are recorded at their outstanding principal balance adjusted for charge-offs, the ACL, net deferred fees or costs,
premium and discounts. Interest on loans is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well
secured and in the process of collection. Consumer and other loans are typically managed in the same manner. In all cases,
loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is doubtful.
All interest accrued but not collected on loans that are placed on nonaccrual is reversed against interest income. Loans
are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments
are reasonably assured. In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. We
evaluate the borrower’s financial condition to ensure that future loan payments are reasonably assured. We also take into
76
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consideration the borrower’s willingness and ability to make the loan payments and historical repayment performance. We
require the borrower to make the loan payments consistently for a period of at least six months as agreed to under the terms of
any modified loan agreement before we will consider reclassifying the loan to accrual status.
Individually Evaluated Loans
The Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326.
Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the
Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. These
loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated
with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified loans made
to borrowers experiencing financial difficulty, and/or are deemed collateral dependent, where the ultimate repayment of the
loan is expected to come from the operation of or eventual sale of the collateral.
Loans that are deemed by management to possess unique risk characteristics are evaluated individually for purposes of
determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective
interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent.
Collateral dependent loans are evaluated based on the estimated fair value of the underlying collateral, less estimated costs to
sell. The Company may increase or decrease the ACL for collateral dependent individually evaluated loans based on changes in
the estimated expected fair value of the collateral. In cases where the loan is well-secured and the estimated value of the
collateral exceeds the amortized cost of the loan, no ACL is recorded. Changes in the ACL for all other individually evaluated
loans is substantially on the Company’s evaluation of cash flows expected to be received from such loans.
Loan Modifications to Borrowers Experiencing Financial Difficulty
Loan modifications are made in the ordinary course of business and are completed on a case-by-case basis through
negotiation with the borrower in connection with the ongoing loan collection processes. Loan modifications are made to
provide borrowers payment relief and typically include adjustments such as changes to interest rate, advancement of maturity
date, and interest only payments for a period of time. Effective January 1, 2023, the Company adopted ASU 2022-02, which
eliminated accounting guidance for troubled-debt restructurings while requiring disclosure of borrowers experiencing financial
difficulty for modifications related to principal reductions, interest rate reductions, term extensions, and more than insignificant
payment delay.
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases,
these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the
form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension or a
combination thereof, among other things.
As of December 31, 2023, the Company had no loans that were both experiencing financial difficulty and modified
during the year.
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Credit Losses (AFS Investments)
For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more
likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the
security’s amortized cost basis is written down to fair value through income. For AFS securities where neither of the criteria are
met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this
assessment, management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of
the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this
assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are
compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited to the amount
that the fair value is less than the amortized cost basis. Any remaining discount that has not been recorded through an allowance
for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a
provision (or recaputure) for credit losses. Losses are charged against the allowance when management believes the
uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As
of December 31, 2023, the Company determined that the unrealized loss positions in AFS securities were not the result of credit
losses, and therefore, an allowance for credit losses was not recorded.
Allowance for Credit Losses (HTM Investments)
The three annuities we own and classify as held to maturity were purchased to support payments to two executive as
part of their Supplemental Employment Retirement Program (“SERP”). These annuities, along with an associated policy and
rider, provide for payments in retirement for the life of the executive. The rider that provides the long term guarantee for the
SERP has no cash value and is not transferable to another annuitant. The cash value of the annuity is representative of the
liquidation value of the contract. For this reason, no allowance for credit losses was recorded.
Allowance for Credit Losses (Loans and Unfunded Commitments)
The Company maintains an ACL for the expected credit losses of the loan portfolio as well as unfunded loan
commitments. The amount of ACL is based on ongoing, quarterly assessments by management. The CECL methodology
requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).
The ACL for the loan portfolio is a valuation account that is deducted from the loans amortized cost basis to present
the net amount expected to be collected on the loans. Loan balances are charged off against the ACL when management
believes the non-collectability of a loan balance is confirmed. Recoveries are recorded as an increase to the ACL for loans to
the extent they do not exceed the related charge-off amounts. The ACL for loans, as reported in our consolidated balance sheets,
is adjusted by a provision for credit losses and reduced by the charge-offs of loan amounts, net of recoveries.
The ACL consists of the allowance for loan losses and the reserve for unfunded commitments. The estimate of
expected credit losses under the CECL methodology is based on relevant information about past events, current conditions, and
reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is
generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should
be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period that
historical experience was based for each loan type. Finally, we consider forecasts about future economic conditions or changes
in collateral values that are reasonable and supportable.
Management estimates the ACL balance using relevant available information from internal and external sources
relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides
the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in
current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix or delinquency levels or
other relevant factors.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan
portfolio, disaggregating loans into pools, the level at which credit risk is monitored. Determining the appropriateness of the
ACL is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
periods, evaluations of the overall loan portfolio, based on the factors and forecasts then prevailing, may result in material
changes in the ACL and provision for credit losses.
The methodology for estimating the amount of expected credit losses has two basic components: first, a pooled
component for estimated expected credit losses for pools of loans that share similar risk characteristics and second an asset-
specific component involving individual loans that do not share risk characteristics with other loans and the measurement of
expected credit losses for such individual loans. The Company's ACL model methodology is to build a reserve rate using
historical life of loan default rates combined with assessments of current loan portfolio information and current and forecasted
economic environment and business cycle information. The model uses statistical analysis to determine the life of loan default
rates for the quantitative component and analyzes qualitative factors (Q-Factors) that assess the current loan portfolio conditions
and forecasted economic environment and collateral values.
Management maintains an ACL for unfunded commitments to absorb estimated expected credit losses associated with
our off-balance commitments to lend funds such as unused lines of credit and the undisbursed portion of construction loans.
The estimate considers the likelihood that funding will occur and estimated expected credit losses on commitments expected to
be funded over the estimated life. Loss rates are estimated by utilizing the same loss rates calculated for the allowance for credit
losses related to the respective loan portfolio pool. The ACL for unfunded commitments is based on estimates and ultimate
losses may vary from the current estimates. The ACL on unfunded commitments is evaluated on a regular basis an necessary
adjustments are recorded as a provision (recapture of provision) for credit losses. The ACL for unfunded commitments is
included in the other liabilities section of the consolidated balance sheets.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful
lives used to compute depreciation and amortization is 15 to 40 years for buildings and building improvements, and is three to
seven years for furniture, fixtures, and equipment. Leasehold improvements are amortized over the life of the lease.
Management reviews buildings, improvements and equipment for impairment on an annual basis or whenever events or
changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If
identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank System, the Company is required to maintain a minimum level of
investment in the Federal Home Loan Bank of Des Moines (“FHLB”) stock, based on specified percentages of total assets and
the Bank’s outstanding FHLB advances. Ownership of FHLB stock is restricted to the FHLB and member institutions. The
Company’s investment in FHLB stock is carried at par value ($100 per share), which reasonably approximates its fair value.
Transfer of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial
asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned
OREO consists principally of properties acquired through foreclosure and is originally stated at estimated market value
less selling costs. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the ACL.
Subsequent to the transfer of foreclosed assets held for sale, the assets are recorded at the lower of cost or fair value
(less estimated costs to sell), based on periodic evaluations. Subsequent write-downs in value are charged to noninterest
expense. Generally, legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve
property prior to sale are capitalized; however, in no event are recorded costs allowed to exceed estimated fair value.
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent gains, losses, or expenses recognized on the sale of these properties are included in noninterest expense. The
amounts that will ultimately be recovered from foreclosed assets may differ substantially from the carrying value of the assets
because of future market factors beyond management’s control.
Bank-Owned Life Insurance
The Company has purchased life insurance on certain key executives and officers. Bank-owned life insurance
(“BOLI”) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement. Increases to the cash surrender
value are recorded as noninterest income and partially offset expenses for employee benefits. Certain BOLI contracts contain
endorsement split-dollar life agreements. In these circumstances, the Bank accrues a reserve liability and related compensation
expense for the expected future benefit payout.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as unused lines of credit and commercial
letters of credit issued to meet customer financing needs. The face amount of these items represents the exposure to loss before
considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards, based on the fair value of these awards
at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the
Company’s common stock at the grant date is used for restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is
recognized on a straight-line basis over the requisite service period for the entire award.
Federal Income Taxes
The Company files a consolidated Federal income tax return and records its provision for income taxes under the asset
and liability method. Deferred taxes result from temporary differences in the recognition of certain income and expense
amounts between the Company’s financial statements and its tax return. The principal items giving rise to these differences
include net operating losses, valuation adjustments on foreclosed properties, and allowance for credit losses. Deferred tax assets
and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. Valuation allowances are established to reduce the net carrying amount of
deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will
not be realized. The Company’s policy is to recognize interest and penalties associated with income tax matters in income tax
expense.
Employee Stock Ownership Plan
The cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet allocated to participants, is
shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest. As of December 31, 2022, all shares under the ESOP were allocated.
Earnings Per Share
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and are included in the computation of earnings per share (“EPS”) pursuant to the two-class method. The
two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating
security according to dividends declared or accumulated and participation rights in undistributed earnings. Certain shares of the
Company’s nonvested restricted stock awards qualify as participating securities.
80
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income is allocated between the common stock and participating securities pursuant to the two-class method,
based on their rights to receive dividends, participate in earnings or absorb losses. Basic earnings per common share is
computed by dividing net earnings available to common shareholders by the weighted average number of common shares
outstanding during the period, excluding participating nonvested restricted shares. As ESOP shares are committed to be
released, they are included in the outstanding shares used in the basic EPS calculation.
Diluted earnings per share is computed in a similar manner, except that first the denominator is increased to include
the number of additional shares that would have been outstanding if potentially dilutive shares, excluding the participating
securities, were issued using the treasury stock method. For all periods presented, stock options and certain restricted stock
awards are potentially dilutive non-participating instruments issued by the Company.
Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under
the two-class method as the holders are not contractually obligated to share in the losses of the Company.
Comprehensive Income
Comprehensive income consists of net income and unrealized gains and losses on investments available-for-sale and
derivatives, which are also recognized as separate components of equity, net of tax.
Advertising Expenses
Advertising costs are generally expensed as incurred and are not material.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Information
The Company’s activities are considered to be a single industry segment for financial reporting purposes. The
Company is engaged in the business of attracting deposits from the general public and providing lending services. Substantially
all income is derived from a diverse base of investments and commercial, construction, mortgage, and consumer lending
activities.
Reclassification
Certain amounts in the consolidated financial statements have been reclassified to conform to the current consolidated
financial statement presentation. The results of the reclassifications are not considered material and have no effect on previously
reported net income or stockholders’ equity.
Derivatives
The Company designates certain interest rate swap agreements as a cash flow hedge, and as such, reports the net fair
value as an asset or liability. The hedge is utilized to mitigate the risk of variability in future interest payments. The fair value of
the cash flow hedge is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for
which the determination of fair value may require significant management judgment or estimation. The derivative is marked to
its fair value, with the change in fair value recorded as other comprehensive income or loss. Each derivative is tested for
effectiveness quarterly and all of our derivatives continue to be deemed effective. The gain or loss on the derivative is
reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item.
81
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill
Goodwill is recorded from a business combination as the difference in purchase price and fair value of the assets
acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not amortized. The Company performs a
goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs an impairment
analysis as needed when circumstances indicate impairment potentially exists. Any impairment will be recorded as a noninterest
expense and corresponding reduction in intangible asset on the consolidated financial statements.
Core Deposit Intangible
A core deposit intangible (“CDI”) asset was recognized from the assumption of core deposit liabilities in connection
with the acquisition of four banking branches from a third party in 2017 (the “Branch Acquisition”). The asset was valued by a
third party and is amortized into noninterest expense over ten years. The CDI is evaluated for impairment annually with any
additional decline recorded as a noninterest expense on the Consolidated Income Statement.
Recently Issued Accounting Pronouncements
Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) as amended
by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued by the Financial Accounting Standards Board
(“FASB”) in June 2016. This ASU replaces the incurred loss methodology which delays recognition until it is probable a loss
has been incurred with an expected loss methodology referred to as the current expected credit loss (“CECL”) methodology.
The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount
expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized
financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The
measurement of expected credit losses under CECL will be based on historical information, current conditions, and reasonable
and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the
fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark.
The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in
ACL recognized as a result of the adoption of CECL will occur through a cumulative-effect adjustment to retained earnings as
of the beginning of the first reporting period in which the ASU is adopted. This ASU was effective for smaller reporting
companies, such as the Company, on January 1, 2023. ASU 2019-05 issued in April 2019 further provides that entities that have
certain financial instruments measured at amortized cost that have credit losses, to irrevocably elect the fair value option in
Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. This ASU was
effective upon adoption of ASU 2016-13, and should be applied on a modified-retrospective basis as a cumulative-effect
adjustment to the opening balance of retained earnings in the statement of financial condition as of the adoption date. On
January 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $395,000 to retained earnings, and a
$500,000 increase to ACL for the cumulative effect of adopting this guidance. The impact that the transition to CECL had on
the expected credit losses on unfunded commitments was deemed to be immaterial.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU applies to
contracts, hedging relationships and other transactions that reference London Interbank Offering Rate (“LIBOR”) or other rate
references expected to be discontinued because of reference rate reform. The amendments in this ASU are elective and apply to
all entities that have derivative instruments that use an interest rate that will be modified by reference rate reform. This ASU
provides implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to
derivative instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12,
2020, or on a prospective basis to new modifications from any date subsequent to the date of issuance. Effective January 25,
2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol (“Protocol”) as published by the International
Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally,
effective January 1, 2022, the Company was no longer initiating or renewing loans using LIBOR as an index. As of December
31, 2023, all of the Company’s contracts using LIBOR have been converted to be based on Secured Overnight Financing Rate
(“SOFR”).
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructured loans
82
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors
when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-
period gross charge-offs by year of origination for financing receivables and net investments in leases. This ASU is effective
upon adoption of ASU 2016-13. On January 1, 2023, the Company adopted this ASU at the same time ASU 2016-13 was
adopted. The Company had no loans modified for borrowers experiencing financial difficulty during the year ended
December 31, 2023. The Company had $22,000 gross charge-offs in consumer loans since the adoption of this ASU.
Note 2 - Investments
The following tables summarize the amortized cost and fair value of investments available-for-sale at
December 31, 2023 and 2022, and the corresponding amounts of gross unrealized gains and losses.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Amortized
Cost
December 31, 2023
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
11,562 $
— $
(1,684) $
12,934
28,096
30,559
36,571
71,003
33,000
—
—
—
42
5
—
(1,755)
(1,516)
(1,366)
(4,764)
(1,051)
(3,721)
9,878
11,179
26,580
29,193
31,849
69,957
29,279
$
223,725 $
47 $
(15,857) $
207,915
Amortized
Cost
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Fair Value
$
11,800 $
— $
(1,860) $
13,720
29,426
34,295
36,968
76,718
—
18
—
17
6
(1,831)
(1,601)
(1,906)
(6,102)
(2,370)
9,940
11,889
27,843
32,389
30,883
74,354
33,000
235,927 $
$
—
41 $
(2,520)
(18,190) $
30,480
217,778
There were $2.5 million and $2.4 million of investments classified as held-to-maturity at December 31, 2023, and
2022, respectively. In January 2020, the Company purchased three annuity contracts to be held long-term to satisfy the benefit
obligation associated with certain supplemental executive retirement plan (“SERP”) agreements. These annuities, along with an
associated insurance policy and rider, provide for payments in retirement for the life of the executive. The rider that provides
the long term guarantee for the SERP has no cash value and is not transferrable to another annuitant. The cash value of the
annuity is representative of the liquidation value of the contract. Hence, the amortized cost of each of these HTM investments is
considered to be its fair value.
83
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of investments available-for-sale at December 31, 2023, by expected
maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily
mortgage-backed investments, are shown separately.
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed investments
December 31, 2023
Amortized
Cost
Fair Value
(In thousands)
$
39,883 $
11,054
33,762
55,875
140,574
83,151
39,603
10,770
29,683
51,029
131,085
76,830
$
223,725 $
207,915
Maturities of the investments held-to-maturity (annuities) were established at the time the initial contract was signed.
They were set up as end of life of the executives or until the annuities are depleted.
Under Washington State law, in order to participate in the public funds program the Company is required to pledge
eligible securities as collateral in an amount equal to 50% of the public deposits held. Investments with a carrying value of
$26.5 million and $21.0 million were pledged as collateral for public deposits at December 31, 2023 and 2022, respectively,
both of which exceeded the minimum collateral requirements established by the Washington Public Deposit Protection
Commission. At both December 31, 2023 and 2022, there were no investments pledged as collateral for FHLB advances.
84
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and other redemptions of available-for-sale investments were as follows:
Proceeds
Gross gains
Gross losses
Year Ended December 31,
2023
2022
(In thousands)
$
— $
11,088
—
—
27
—
The following tables summarize the aggregate fair value and gross unrealized loss by length of time those investments
have been continuously in an unrealized loss position at December 31, 2023 and 2022.
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Less Than 12 Months
December 31, 2023
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
$
— $
671
11,601
—
2,477
—
5,966
20,715 $
— $
(57)
(70)
—
(16)
—
(34)
(177) $ 181,364 $
9,878 $
10,508
14,979
28,330
26,916
67,440
23,313
(1,684) $
(1,698)
(1,446)
(1,366)
(4,748)
(1,051)
(3,687)
(15,680) $ 202,079 $
9,878 $
11,179
26,580
28,330
29,393
67,440
29,279
(1,684)
(1,755)
(1,516)
(1,366)
(4,764)
(1,051)
(3,721)
(15,857)
Less Than 12 Months
December 31, 2022
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
(In thousands)
$
6,710 $
(1,073) $
3,226 $
(787) $
9,936 $
4,677
7,645
27,430
7,892
43,664
(272)
(310)
(1,614)
(680)
(1,184)
6,476
13,714
4,959
20,901
30,224
(1,559)
(1,291)
(292)
(5,422)
(1,186)
11,153
21,359
32,389
28,793
73,888
(1,860)
(1,831)
(1,601)
(1,906)
(6,102)
(2,370)
17,241
$ 115,259 $
(1,259)
(6,392) $
13,239
92,739 $
(1,261)
(11,798) $ 207,998 $
30,480
(2,520)
(18,190)
At both December 31, 2023 and 2022, the Company had 123 securities with a gross unrealized loss position.
Management reviewed the financial condition of the entities underlying the securities at both December 31, 2023 and 2022, and
determined that no ACL was required. Management does not believe that the unrealized losses at December 31, 2023 and 2022,
were related to credit quality. The declines in fair market values of these securities were mainly attributed to changes in market
interest rates, credit spreads, market volatility and liquidity conditions. Currently, the Company does not intend to sell, and it is
not more likely than not that the Company will be required to sell the positions before their recovery of the amortized cost
basis, which may be at maturity. As such, no allowance for credit losses was recorded with respect to AFS securities for the
years ended December 31, 2023 and 2022.
85
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable
Loans receivable net of loans in process (“LIP”), at December 31, 2023, and 2022 are summarized as follows:
One-to-four family residential:
Permanent owner occupied
Permanent non-owner occupied
Multifamily
Commercial real estate
Construction/land: (1)
One-to-four family residential
Multifamily
Land
Business
Consumer
Total loans
Less:
ACL for loans
Loans receivable, net
December 31,
2023
2022
(In thousands)
$
284,471 $
228,752
513,223
232,869
241,311
474,180
138,149
126,866
377,859
407,904
47,149
4,004
9,771
60,924
29,081
71,995
1,191,231
15,306
1,175,925 $
$
52,492
15,393
9,759
77,644
31,363
64,353
1,182,310
15,227
1,167,083
____________
(1) Included in the construction/land category are “rollover” loans, which are loans that will convert upon completion of the
construction period to permanent loans and be reclassified according to the underlying collateral. In addition, raw land or
buildable lots where the Company does not intend to finance the construction are included in the construction/land category.
At December 31, 2023 and 2022, all of the multifamily and land loans included in the construction/land loan portfolio will be
converted to permanent loans upon completion of the construction period.
Concentrations of credit. Most of the Company’s lending activity occurs within the state of Washington. The primary
market areas include King, and to a lesser extent, Pierce, Snohomish and Kitsap counties. At December 31, 2023, the
Company’s loan portfolio was comprised of one-to-four family residential loans representing 43.1% of the total loan portfolio,
commercial real estate and multifamily loans representing 31.6% and 11.6%, respectively, and construction/land loans
representing 5.1% of the total loan portfolio. Consumer and business loans accounted for the remaining 8.6% of the total loan
portfolio. During the years ended December 31, 2021 and 2020, the Company participated in the U.S. Small Business
Administration (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed unsecured loan program enacted under the
Coronavirus Aid Relief and Economic Security Act of 2020 to provide near-term relief to help small businesses impacted by
COVID-19 sustain operations. Forgiveness payments received from the SBA reduced the balance of PPP loans included in
business loans to $473,000 at December 31, 2023, all of which is fully guaranteed by the SBA. The Company’s five largest
borrowing relationships had an aggregate total of $99.1 million at December 31, 2023, representing 8.3% of total loans
receivable.
86
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at
December 31, 2023 and 2022, was as follows:
Fixed Rate
Adjustable Rate
Term to Maturity
Principal
Balance
Term to Rate Adjustment
Principal
Balance
December 31, 2023
Due within one year
$
After one year through three years
After three years through five years
After five years through ten years
Thereafter
(In thousands)
27,714 Due within one year (1)
55,326 After one year through three years
74,404 After three years through five years
71,210 After five years through ten years
206,698 Thereafter
$
435,352
$
310,260
169,981
173,914
101,724
—
$
755,879
____________
(1) Includes $128.9 million of prime based loans and $108.2 million in loans that adjust based on SOFR.
Fixed Rate
Adjustable Rate
Term to Maturity
Principal
Balance
Term to Rate Adjustment
Principal
Balance
December 31, 2022
Due within one year
After one year through three years
After three years through five years
After five years through ten years
Thereafter
(In thousands)
4,654 Due within one year (1)
56,336 After one year through three years
68,739 After three years through five years
105,847 After five years through ten years
212,764 Thereafter
448,340
$
$
$
$
328,934
72,292
224,527
108,217
—
733,970
____________
(1) Includes $158.2 million of prime based loans and $110.7 million in loans that adjust based on LIBOR.
Our adjustable-rate loans are tied to various indices, including SOFR, the prime rate as published in The Wall Street
Journal, and the FHLB. Certain adjustable-rate loans have interest rate adjustment limitations and are generally indexed to the
FHLB Long-Term Bullet advance rates published by the FHLB. Future market factors may affect the correlation of the interest
rate adjustment with the rates paid on short-term deposits that have been primarily utilized to fund these loans.
Credit Quality Indicators. The Company assigns a risk rating to all credit exposures based on the risk rating system
designed to define the basic characteristics and identified risk elements of each credit extension. The Company utilizes a
nine-point risk rating system. A description of the general characteristics of the risk grades is as follows:
•
•
Grades 1 through 5: These grades are considered to be “pass” credits. These include assets where there is virtually no
credit risk, such as cash secured loans with funds on deposit with the Company. Pass credits also include credits that
are on the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not
checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt
obligations in the future.
Grade 6: These credits, classified as ”special mention”, possess weaknesses that deserve management’s close attention.
Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the
87
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
substandard, doubtful or loss categories. If left uncorrected, these potential weaknesses may result in deterioration in
the Company’s credit position at a future date.
Grade 7: These credits, classified as “substandard”, present a distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. These credits have well defined weaknesses which jeopardize the orderly
liquidation of the debt and are inadequately protected by the current net worth and payment capacity of the borrower or
of any collateral pledged.
Grade 8: These credits are classified as “doubtful” have well defined weaknesses which make the full collection or
liquidation of the loan highly questionable and improbable. This classification is used where significant risk exposures
are perceived but the exact amount of the loss cannot yet be determined due to pending events.
Grade 9: Assets classified as “loss” are considered uncollectible and cannot be justified as a viable asset for the
Company. There is little or no prospect of near term recovery and no realistic strengthening action of significance is
pending.
As of both December 31, 2023, and 2022, the Company had no loans rated as doubtful or loss. The following tables
present a summary of loans by type, risk category, year of origination and current period gross charge-offs as of December 31,
2023, and by type and risk category as of December 31, 2022:
December 31, 2023
Term Loans by Year of Origination
2023
2022
2021
2020
2019
Prior
Total
Loans
(In thousands)
One-to-four family residential
Pass
Watch
Special mention
Substandard
Total one-to-four family residential
Current year-to-date (“YTD”) gross
charge-offs
Multifamily
Pass
Watch
Special mention
Substandard
Total multifamily
Current YTD gross charge-offs
Commercial real estate
Pass
Watch
Special mention
Substandard
Total commercial real estate
Current YTD gross charge-offs
$ 86,208 $ 142,563 $ 94,582 $ 61,946 $ 31,806 $ 95,012 $ 512,117
683
683
—
—
—
—
—
—
—
—
—
—
130
130
—
293
$ 86,208 $ 142,563 $ 94,582 $ 61,946 $ 31,806 $ 96,118 $ 513,223
293
—
—
—
—
$
— $
— $
— $
— $
— $
— $
—
$ 3,329 $ 8,332 $ 22,787 $ 43,259 $ 25,988 $ 30,561 $ 134,256
—
—
—
—
—
—
—
—
—
—
2,303
—
2,303
—
—
—
1,590
$ 3,329 $ 8,332 $ 22,787 $ 43,259 $ 25,988 $ 34,454 $ 138,149
—
$
— $
— $
— $
— $
— $
— $
1,590
—
—
—
$ 20,026 $ 35,054 $ 73,727 $ 78,204 $ 8,337 $ 98,316 $ 313,664
—
—
—
—
—
—
4,108
—
—
—
—
526
12,745
—
1,295
3,322
—
42,199
20,175
—
44,020
$ 20,026 $ 35,054 $ 77,835 $ 78,730 $ 22,377 $ 143,837 $ 377,859
—
$
— $
— $
— $
— $
— $
— $
88
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2023
Term Loans by Year of Origination
2023
2022
2021
2020
2019
Prior
Total
Loans
(In thousands)
$ 14,797 $ 26,286 $ 19,841 $
— $
— $
— $
60,924
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Construction/land
Pass
Watch
Special mention
Substandard
Total construction/land
$ 14,797 $ 26,286 $ 19,841 $
Current YTD gross charge-offs
Business
$
— $
— $
— $
— $
— $
— $
— $
— $
60,924
— $
—
Pass
Watch
Special mention
Substandard
Total business
$ 1,480 $ 6,358 $
388 $ 1,272 $ 1,486 $ 18,097 $
29,081
—
—
—
—
—
—
$ 1,480 $ 6,358 $
—
—
—
—
—
—
—
—
—
388 $ 1,272 $ 1,486 $ 18,097 $
—
—
—
—
—
—
29,081
Current YTD gross charge-offs
$
— $
— $
— $
— $
— $
— $
—
Consumer
Pass
Watch
Special mention
Substandard
Total consumer
Current YTD gross charge-offs
Total loans receivable, gross
Pass
Watch
Special mention
Substandard
Total loans
$ 23,937 $ 23,921 $ 10,190 $ 5,523 $ 5,260 $ 2,917 $
71,748
—
—
—
27
—
19
—
—
201
—
—
—
—
—
—
—
—
—
$ 23,937 $ 23,967 $ 10,391 $ 5,523 $ 5,260 $ 2,917 $
— $
$
— $
22 $
— $
— $
— $
27
—
220
71,995
22
$ 149,777 $ 242,514 $ 221,515 $ 190,204 $ 72,877 $ 244,903 $ 1,121,790
—
—
27
—
4,108
—
—
—
12,745
—
6,308
130
23,188
130
—
46,123
$ 149,777 $ 242,560 $ 225,824 $ 190,730 $ 86,917 $ 295,423 $ 1,191,231
44,082
1,295
201
526
19
Current YTD gross charge-offs
$
— $
— $
— $
— $
22 $
— $
22
89
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One-to-
Four
Family
Residential Multifamily
December 31, 2022
Commercial
Real Estate
Construction /
Land
(In thousands)
Business
Consumer
Total
Risk Rating:
Pass
Watch
Special mention
Substandard
$ 472,049 $
1,109
1,022
—
122,952 $
2,284
342,995 $
14,831
77,644 $
—
31,363 $
—
63,914 $ 1,110,917
18,252
28
—
1,630
4,667
45,411
—
—
—
—
210
201
5,899
47,242
Total
$ 474,180 $
126,866 $
407,904 $
77,644 $
31,363 $
64,353 $ 1,182,310
The following tables summarize changes in the ACL for loans or the allowance for loan and lease losses (“ALLL”), by
type of loans, for the period indicated. As a result of adopting ASC 326 on January 1, 2023, the methodology to compute the
ACL for 2023 was based on the CECL methodology, rather than the previously applied incurred loss methodology which was
used during 2022. The analysis of pooled loans excluded PPP loans as these loans are fully guaranteed by the SBA.
At or For the Year Ended December 31, 2023
ACL:
Beginning balance
Adjustment for
adoption of Topic 326
$
Charge-offs
Recoveries
Provision (recapture
of provision)
Ending balance
One-to-
Four
Family
Commercial
Residential Multifamily
Real Estate
Construction/
Land
(In thousands)
Business Consumer
Total
4,043 $
1,210 $
5,397 $
1,717 $
948 $
1,912 $ 15,227
1,520
—
1
83
—
—
(970)
—
—
408
—
—
(510)
—
—
(31)
(22)
—
500
(22)
1
183
5,747 $
216
1,509 $
(532)
3,895 $
$
(269)
1,856 $
(51)
387 $
53
(400)
1,912 $ 15,306
90
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One-to-
Four
Family
At or For the Year Ended December 31, 2022
Commercial
Residential Multifamily
Real Estate
Construction/
Land
(In thousands)
Business Consumer
Total
$
$
$
3,214 $
—
7
1,279 $
—
—
6,615 $
—
—
2,064 $
—
—
1,112 $
—
—
1,373 $ 15,657
(37)
7
(37)
—
822
4,043 $
(69)
1,210 $
(1,218)
5,397 $
(347)
1,717 $
(164)
948 $
576
(400)
1,912 $ 15,227
4,030 $
13
1,210 $
—
5,397 $
—
1,717 $
—
948 $
—
1,912 $ 15,214
13
—
$ 474,180 $
126,866 $
407,904 $
77,644 $ 31,363 $ 64,353 $ 1,182,310
ALLL:
Beginning balance
Charge-offs
Recoveries
(Recapture)
provision
Ending balance
General reserve
Specific reserve
Loans:
Total loans
472,820
125,236
Loans collectively
evaluated for
impairment (1) (3)
Loans individually
evaluated for
impairment (2)
_____________
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
(3) PPP loans totaling $785,000 were excluded from the collectively evaluated pool when calculating the ALLL as payment on
these loans is guaranteed by the SBA.
1,133,909
362,493
48,401
77,644
31,363
45,411
64,353
1,630
1,360
—
—
—
91
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past Due Loans. At December 31, 2023, total past due loans comprised 0.12% of total loans as compared to 0.02% at
December 31, 2022.
The following tables represent a summary at December 31, 2023, and 2022, of the aging of loans by type:
Loans Past Due as of December 31, 2023
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
$
— $
—
—
—
—
—
—
453
453 $
378 $
—
—
—
—
378
—
9
387 $
293 $
24
—
—
—
317
—
220
537 $
671 $ 283,800 $ 284,471
228,752
24
228,728
138,149
—
138,149
377,859
—
377,859
—
60,924
60,924
1,090,155
695
1,089,460
29,081
—
29,081
71,995
682
71,313
1,377 $ 1,189,854 $ 1,191,231
Total real estate
Business
Consumer
Total
_________________________
(1) There were two one-to-four family residential loans 90 days and greater past due and still accruing interest, attributed to
their well collateralization.
$
Loans Past Due as of December 31, 2022
30-59 Days
60-89 Days
90 Days
and
Greater
Total
Current
Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Construction/land
$
— $
27
—
—
—
27
—
—
27 $
— $
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
193
193 $
— $ 232,869 $ 232,869
241,311
27
126,866
—
407,904
—
—
77,644
1,086,594
27
31,363
—
193
64,353
220 $ 1,182,090 $ 1,182,310
241,284
126,866
407,904
77,644
1,086,567
31,363
64,160
Total real estate
Business
Consumer
Total
________________________
(1) There were no loans 90 days and greater past due and still accruing interest at December 31, 2022.
$
92
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual Loans. At December 31, 2023 and 2022, nonaccrual loans totaled $220,000 and $193,000 respectively,
representing 0.01% of total assets at both dates.
The following tables present a summary of loans individually evaluated for credit losses at December 31, 2023, by the
type of loan:
Recorded
Investment (1)
At December 31, 2023
Unpaid Principal
Balance (2)
(In thousands)
Related Allowance
$
293 $
295 $
1,590
44,021
19
45,923
—
—
1,591
44,121
18
46,025
—
—
293
1,590
44,021
19
45,923 $
295
1,591
44,121
18
46,025 $
$
—
—
—
—
—
11
11
—
—
—
11
11
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Multifamily
Commercial real estate
Consumer
Total
Loans with an allowance:
Consumer
Total
Total individually evaluated loans:
One-to-four family residential:
Owner occupied
Multifamily
Commercial real estate
Consumer
Total
_________________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
93
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present a summary of loans individually evaluated for ALLL at December 31, 2022, by the type
of loan:
Recorded
Investment (1)
At December 31, 2022
Unpaid Principal
Balance (2)
(In thousands)
Related
Allowance
$
174 $
175 $
188
1,632
45,542
47,536
486
512
998
660
700
1,632
45,542
188
1,632
45,542
47,537
533
512
1,045
708
700
1,632
45,542
$
48,534 $
48,582 $
—
—
—
—
—
12
1
13
12
1
—
—
13
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Total
Total impaired loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Total
_____________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
94
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the average recorded investment in impaired loans, and interest income
recognized on impaired loans for the year ended December 31, 2022, by the type of loan:
Loans with no related allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Loans with an allowance:
One-to-four family residential:
Owner occupied
Non-owner occupied
Total
Total individually evaluated loans:
One-to-four family residential:
Owner occupied
Non-owner occupied
Multifamily
Commercial real estate
Consumer
Total
Year Ended December 31, 2022
Average Recorded
Investment
Interest Income
Recognized
(In thousands)
$
184 $
712
1,317
41,102
—
43,315
490
516
1,006
674
1,228
1,317
41,102
—
44,321 $
$
11
23
69
2,054
—
2,157
28
36
64
39
59
69
2,054
—
2,221
The following is a summary of information pertaining to TDRs at December 31, 2022 :
Performing TDRs
Nonaccrual TDRs
Total TDRs
December 31, 2022
(In thousands)
$
$
1,360
—
1,360
95
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At both December 31, 2023 and 2022, the Company had no loans outstanding with executive officers or directors.
Note 4 - Other Real Estate Owned
At both December 31, 2023 and 2022, there were no mortgage loans secured by residential real estate in the process of
foreclosure.
Note 5 - Premises and Equipment
Premises and equipment consisted of the following at December 31, 2023 and 2022:
Land
Buildings and improvements
Leasehold improvements
Furniture and fixtures
Equipment
Computer hardware and software
Less accumulated depreciation and amortization
Construction in process
Total premises and equipment, net
December 31,
2023
2022
(In thousands)
$
2,226 $
21,917
6,123
3,776
2,353
3,860
40,255
(20,841)
253
2,226
21,873
6,088
3,777
2,342
3,767
40,073
(19,277)
396
$
19,667 $
21,192
Depreciation and amortization expense was $2.0 million and $2.2 million for the years ended December 31, 2023 and
2022, respectively.
Note 6 - Fair Value of Financial Instruments
The Company measures the fair value of financial instruments for reporting in accordance with ASC Topic 820, Fair
Value Measurements. Fair values of assets or liabilities are based on estimates of the exit price, which is the price that would be
received to sell an asset or paid to transfer a liability. When available, observable market transactions or market information is
used. The fair value estimate of loans receivable was based on similar techniques, with the addition of current origination
spreads, liquidity premiums, or credit adjustments. The fair value of nonperforming loans is based on the underlying value of
the collateral.
The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for
market assumptions.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one
of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that
market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained
from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of
assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most
current information available on the measurement date.
All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:
•
Level 1 - Quoted prices for identical instruments in active markets.
96
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•
•
•
•
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and model-derived valuations whose inputs are observable.
Level 3 - Instruments whose significant value drivers are unobservable.
The Company used the following methods to measure fair value on a recurring or nonrecurring basis.
Investments available-for-sale: The fair value of all investments, excluding FHLB stock, was based upon quoted
market prices for similar investments in active markets, identical or similar investments in markets that are not
active, and model-derived valuations whose inputs are observable.
Collateral dependent loans: The fair value of collateral dependent loans is measured using the present value of
expected future cash flows discounted at the loan’s effective interest rate. When the sole source of repayment of the
loan is the operation or liquidation of the collateral, the fair value is determined using the observable market price
less certain completion costs.
• Derivatives: The fair value of derivatives is based on pricing models utilizing observable market data and discounted
cash flow methodologies for which the determination of fair value may require significant management judgment or
estimation.
97
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no
transfers between Level 1, Level 2 and Level 3 recurring measurements during the periods presented):
December 31, 2023
Fair Value
Measurements
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In thousands)
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Total available-for-sale investments
Derivative fair value asset
Total
Available-for-sale investments:
Mortgage-backed investments:
Fannie Mae
Freddie Mac
Ginnie Mae
Other
Municipal bonds
U.S. Government agencies
Corporate bonds
Total available-for-sale investments
Derivative fair value asset
$
$
$
9,878 $
— $
9,878 $
11,179
26,580
29,193
31,849
69,957
29,279
207,915
7,565
215,480 $
—
—
—
—
39,603
—
39,603
—
39,603 $
11,179
26,580
29,193
31,849
30,354
29,279
168,312
7,565
175,877 $
December 31, 2022
Fair Value
Measurements
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In thousands)
9,940 $
11,889
27,843
32,389
30,883
74,354
30,480
217,778
10,485
— $
9,940 $
736
—
—
—
38,450
—
39,186
—
11,153
27,843
32,389
30,883
35,904
30,480
178,592
10,485
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
$
228,263 $
39,186 $
189,077 $
The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets,
identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.
98
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at
December 31, 2023, and 2022.
December 31, 2023
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Fair Value
Measurements
Collateral dependent loans (included in loans
receivable)
Total
$
$
45,912 $
45,912 $
— $
— $
— $
— $
45,912
45,912
December 31, 2022
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Impaired loans (included in loans receivable, net)(1)
Total
$
$
48,521 $
48,521 $
(In thousands)
— $
— $
— $
— $
48,521
48,521
________________
(1) Total value of impaired loans is net of $13,000 of specific reserves on performing TDRs.
The following tables present quantitative information about Level 3 fair value measurements for financial assets
measured at fair value on a nonrecurring basis at December 31, 2023 and 2022.
Fair
Value
Valuation
Technique(s)
December 31, 2023
Unobservable Input(s)
(Dollars in thousands)
Range
(Weighted Average
Change in Fair
Value)
Collateral
dependent loans
$ 45,912 Market approach
Appraised value of collateral discounted by
expected selling costs
0.0% - 14.26%
(0.04%)
99
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value
Valuation
Technique(s)
December 31, 2022
Unobservable Input(s)
(Dollars in thousands)
Impaired loans (1)
________________
(1) Total value of impaired loans is net of $13,000 of specific reserves on performing TDRs.
$ 48,521 Market approach
Appraised value of collateral discounted by
expected selling costs
Range
(Weighted Average
Change in Fair
Value)
0.0% - 6.91%
(0.06%)
The fair value calculation of the Company’s financial instruments attempts to incorporate market conditions at a
specific point in time. The underlying assumptions are generally subjective and involve uncertainties. Therefore, these fair
value estimates are not intended to represent the underlying value of the Company as a whole.
The carrying amounts and estimated fair values of financial instruments at December 31, 2023 and 2022, were as
follows:
December 31, 2023
Fair Value Measurements Using:
Carrying Value
Estimated
Fair Value
Level 1
(In thousands)
Level 2
Level 3
$
8,391 $
22,138
207,915
2,456
8,391 $
22,138
207,915
2,456
8,391 $
22,138
39,603
—
— $
—
168,312
2,456
—
—
—
—
1,175,925
1,113,642
6,527
7,359
7,565
706,162
357,154
130,791
125,000
2,739
6,527
7,359
7,565
706,162
353,881
130,977
124,976
2,739
—
—
—
—
706,162
—
—
—
—
—
1,113,642
6,527
7,359
7,565
—
353,881
130,977
124,976
2,739
—
—
—
—
—
—
—
—
Financial Assets:
Cash on hand and in banks
Interest-earning deposits
Investments available-for-sale
Investments held-to-maturity
Loans receivable, net
FHLB stock
Accrued interest receivable
Derivative fair value asset
Financial Liabilities:
Deposits
Certificates of deposit, retail
Brokered deposits
Advances from the FHLB
Accrued interest payable
100
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Fair Value Measurements Using:
Carrying Value
Estimated
Fair Value
Level 1
(In thousands)
Level 2
Level 3
Financial Assets:
Cash on hand and in banks
$
7,722 $
7,722 $
7,722 $
Interest-earning deposits
Investments available-for-sale
Investments held-to-maturity
Loans receivable, net
FHLB stock
Accrued interest receivable
Derivative fair value asset
Financial Liabilities:
Deposits
Certificates of deposit, retail
Brokered deposits
Advances from the FHLB
Accrued interest payable
16,598
217,778
2,444
16,598
217,778
2,444
1,167,083
1,120,403
7,512
6,513
10,485
782,600
262,554
124,886
145,000
328
7,512
6,513
10,485
782,600
254,004
124,843
144,999
328
16,598
39,186
—
—
—
—
—
782,600
—
—
—
—
— $
—
178,592
2,444
—
—
—
—
—
1,120,403
7,512
6,513
10,485
—
254,004
124,843
144,999
328
—
—
—
—
—
—
—
—
Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value
of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial
instruments.
Note 7 - Accrued Interest Receivable
Accrued interest receivable consisted of the following at December 31, 2023 and 2022:
Loans receivable
Investments
Interest-earning deposits
December 31,
2023
2022
(In thousands)
$
$
6,093 $
1,260
6
7,359 $
5,290
1,222
1
6,513
101
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Deposits
Deposit accounts consisted of the following at December 31, 2023 and 2022:
Noninterest-bearing
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
Brokered deposits
December 31,
2023
2022
(In thousands)
$
$
100,899 $
56,968
18,886
529,411
357,153
130,790
1,194,107 $
119,944
96,632
23,636
542,388
262,554
124,886
1,170,040
_______________
(1) Includes $25.1 million and $25.1 million of brokered interest-bearing demand accounts, $10.4 million and $10.0 million of
brokered money market accounts, and $95.3 million and $89.8 million of brokered certificates of deposit at December 31, 2023
and 2022, respectively.
At December 31, 2023, scheduled maturities of certificates of deposit were as follows:
December 31,
2024
2025
2026
2027
2028
Total: (1)
Amount
(In thousands)
330,127
85,956
9,777
16,029
10,524
452,413
$
$
_______________
(1) Includes $95.3 million of brokered certificates of deposit.
Deposits included public funds of $85.8 million and $61.0 million at December 31, 2023 and 2022, respectively.
Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at
December 31, 2023, and 2022, were $171.4 million and $89.6 million, respectively. Interest expense on certificates of deposit
equal to or exceeding $250,000 totaled $4.7 million and $1.2 million for the years ended December 31, 2023 and 2022,
respectively.
Included in total deposits are accounts of $2.3 million and $2.7 million at December 31, 2023 and 2022, respectively,
which are controlled by related parties.
102
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits for the periods indicated was as follows:
Interest-bearing demand
Savings
Money market
Certificates of deposit, retail
Brokered deposits
Note 9 - Other Borrowings
Year Ended December 31,
2023
2022
$
(In thousands)
1,013 $
6
14,503
10,741
8,144
$
34,407 $
478
7
3,744
3,635
1,091
8,955
The Company maintained credit facilities with the FHLB at December 31, 2023 and 2022, totaling $686.3 million and
$667.9 million, respectively. At December 31, 2023, the credit facility was collateralized by $224.7 million of one-to-four
family residential mortgages, $168.7 million of commercial real estate loans, and $57.9 million of multifamily loans under a
blanket lien arrangement. At December 31, 2022, the credit facility was collateralized by $235.9 million of one-to-four family
residential mortgages, $163.8 million of commercial real estate loans, and $62.5 million of multifamily loans under a blanket
lien arrangement. The Company also had unused line-of-credit facilities of $55.8 million with the FRB and $75.0 million with
other financial institutions at December 31, 2023, with interest payable at the then stated rate.
Summary information related to FHLB advances and other borrowings during the years ended December 31, 2023 and
2022, consisted of the following:
Maximum borrowing outstanding at any month end
Average borrowing outstanding during year
Balance outstanding at end of year
Average rate paid during the year
Weighted-average rate paid at end of year
$
Year ended December 31,
2023
2022
(Dollars in thousands)
$
160,000
127,263
125,000
2.52 %
2.22
159,000
113,890
145,000
1.70 %
2.37
Scheduled maturities of FHLB advances outstanding at December 31, 2023, were as follows:
Balance Due
(Dollars in thousands)
Weighted Average Interest Rate at
December 31, 2023
FHLB overnight Fed Funds
Fixed rate, maturing within two months
$
$
10,000
115,000
125,000
5.50 %
1.94
Note 10 - Leases
The Company follows ASC Topic 842, Leases, recognizing ROU assets and lease liabilities on the Company’s
consolidated balance sheets. At December 31, 2023, the Company had 13 operating leases for retail branch locations. The
remaining initial lease terms range from five months to 7.1 years, with most leases carrying optional extensions of three to five
years. The Company will include optional lease term extensions in the lease ROU assets and lease liabilities when management
103
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
believes it is reasonably certain that the term extension will be exercised, which will be determined based on indicators that the
Company would have an economic incentive to extend the lease. Short term leases, having a term of one year or less, are
expensed in the period of the lease. To calculate the present value of future lease payments, the Company uses an incremental
borrowing rate equal to the FHLB advance rate at the time of the lease inception, or at January 1, 2019, for leases in place at
that date.
The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating
minimum rent over the lease term. At December 31, 2023, the Company was committed to paying $74,000 per month in
minimum monthly lease payments. The minimum monthly lease payment over the initial lease term, including any free rent
period, was used to calculate the lease ROU asset and lease liability. The Company’s current leases do not include any non-
lease components.
Total lease expense included in the Company’s consolidated income statement includes the amortized lease expense
under ASC Topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the
individual lease agreements. The Company’s consolidated balance sheet includes the lease ROU asset and lease liability. The
following table includes details on these items at and for the years ended December 31, 2023, and 2022:
December 31, 2023
December 31, 2022
(Dollars in thousands)
Lease expense, year-to-date
$
1,143
$
Lease ROU asset
Lease liability
Weighted average remaining term (in years)
Weighted average discount rate
2,617
2,806
4.81
2.27 %
1,107
3,275
3,454
5.16
2.10 %
The following table provides a reconciliation between the undiscounted minimum lease payments at December 31,
2023 and the discounted lease liability at that date:
Due through one year
Due after one year through two years
Due after two years through three years
Due after three years through four years
Due after four years through five years
Due after five years
Total minimum lease payments
Less: present value discount
Lease liability
$
$
December 31, 2023
(In thousands)
845
691
371
304
310
432
2,953
147
2,806
Note 11 - Derivatives
The Company uses derivative financial instruments in the form of interest rate swap agreements, which are designated
as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At December 31, 2023,
the hedged items have a total notional amount of $115.0 million, and consist of rolling one-month or three-month FHLB
advances that are renewed at the fixed interest rate at each renewal date. The hedging instruments have two to eight year terms,
with remaining terms ranging from eight months to 5.8 years, and stipulate that the counterparty will pay the Company interest
at one-month or three-month SOFR and the Company will pay a weighted-average fixed interest of 1.87% on the notional
amount of $10.0 million to $15.0 million. The Company pays or receives the net interest amount monthly or quarterly based on
104
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the respective hedge agreement and includes this amount as part of interest expense on borrowings on the Consolidated Income
Statement.
Quarterly, the effectiveness evaluation is based upon the fluctuation of the interest the Company pays to the FHLB for
the debt as compared to the one-month or three-month SOFR interest received from the counterparty. At December 31, 2023,
the $7.6 million net fair value gain of the cash flow hedges was reported with other assets. The tax effected amount of
$6.0 million was included in Accumulated Other Comprehensive Income. There were no amounts recorded in the Consolidated
Income Statements for the years ended December 31, 2023 or 2022, related to ineffectiveness.
Fair value for these derivative instruments, which generally changes as a result of changes in the level of market
interest rates, is estimated based on dealer quotes and secondary market sources.
The following table presents the fair value of derivative instruments as of December 31, 2023 and 2022:
Balance Sheet
Location
Fair Value at
December 31, 2023
Fair Value at
December 31, 2022
(In thousands)
Interest rate swaps on FHLB debt designated as cash
flow hedges
Other assets
$
7,565 $
10,485
The following table presents the net unrealized gains (losses) on derivative instruments, net of tax, included on the
Consolidated Statements of Comprehensive Income for the years ended December 31, 2023 and 2022:
Location
Other
Comprehensive
Income
2023 Amount of
Loss Recognized In
OCI, net of tax
2022 Amount of
Gain Recognized In
OCI, net of tax
(In thousands)
$
2,307 $
7,105
Interest rate swaps on FHLB debt designated as cash
flow hedge
Note 12 - Benefit Plans
Multi-employer Pension Plans
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra DB Plan”), a
tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment.
Pension benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is
13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and
as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets
stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer
may be used to provide benefits to participants of other participating employers.
As of March 31, 2013, the Pentegra DB Plan was frozen, eliminating all future benefit accruals for employees. Each
employee’s accrued benefit was determined as of March 31, 2013.
The funding target is the present value of all benefits that have accrued as of the first day of the current plan year
(July 1). Because interest rates used to calculate the present value of all benefits (5.22% for 2023 and 5.39% for 2022) is
significantly higher than current market value investment rates, the funding target does not represent the Company’s actual
liability upon withdrawal from participation in the Pentegra DB Plan, which is significantly larger than the funding target. The
table below presents the funded status (market value of plan assets divided by funding target) of the plan as of July 1:
105
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2023
2022
Source
First Financial Northwest’s Plan(1)
_________________
(1) Market value of plan assets reflects any contributions received through June 30, 2023 and 2022, respectively.
Valuation Report
95.2 %
Valuation Report
101.9 %
Total contributions made to the Pentegra DB Plan, as reported on Pentegra’s Form 5500, were $142.4 million and
$248.6 million for the plan years ended June 30, 2022 and June 30, 2021, respectively. The Company’s contributions to the
Pentegra DB Plan for the year ended December 31, 2023 were not more than 5% of the total contributions to the Pentegra DB
Plan for the plan year ended June 30, 2022. The Company’s policy is to fund pension costs as accrued.
Total contributions to the Pentegra DB Plan by the Company during the years ended December 31, 2023 and 2022
were:
2023
2022
Date Paid
Amount
Date Paid
Amount
10/16/2023
Total
$
$
Supplemental Executive Retirement Plan
(In thousands)
310
310
11/28/2022
Total
$
$
92
92
The Company has entered into post-employment agreements with certain key officers to provide supplemental
retirement benefits. The Company recorded $276,000 and $177,000 of compensation expense for the years ended December 31,
2023, and 2022, respectively. At December 31, 2023, a $1.2 million liability was included in other liabilities on the Company’s
consolidated balance sheet in support of the expected current and future benefit payments on these agreements. In addition, in
January 2020, the Company purchased three annuity contracts, totaling $2.4 million, to satisfy the benefit obligation associated
with certain supplemental executive retirement plan agreements. As of December 31, 2023, these annuities were reported as
investments held-to-maturity with a fair value of $2.5 million on the Consolidated Balance Sheets.
401(k) Plan
The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all
employees after 60 days of continuous employment. Under this Safe Harbor plan, employee contributions up to 5% of
compensation are matched 100% by the Company and said matching contributions are immediately vested to the employee.
Employees may make investments in various stock, money market, or fixed income plans. The Company contributed $543,000
and $365,000 to the plan for the years ended December 31, 2023 and 2022, respectively. In an effort to replace the ESOP
benefits that matured in 2022, as outlined below, the Company introduced a profit-sharing plan beginning in 2023, wherein a
contribution will be made to every employee’s retirement account in an amount ranging from 5% to 8% annually, based on the
Company’s profitability. For the year ended December 31, 2023, the Company recorded an accrued expense of $737,000 for
the plan to be contributed to employees’ retirement accounts in early 2024.
Employee Stock Ownership Plan
The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $16.9 million
from First Financial Northwest and used those funds to acquire 1,692,800 shares of First Financial Northwest’s stock at the
time of the initial public offering at a price of $10.00 per share. The loan which had a fixed interest rate of 4.88% matured on
October 8, 2022.
Shares purchased by the ESOP with the loan proceeds were held in a suspense account and were allocated to ESOP
participants on a pro rata basis as principal and interest payments were made by the ESOP to First Financial Northwest. The
loan was secured by First Financial Northwest’s common stock purchased with the loan proceeds and was repaid by the ESOP
with funds from the Bank’s discretionary contributions to the ESOP and earnings on the ESOP assets. No payments were made
106
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
on ESOP loan in 2023 due to the loan’s maturity in October 2022. Principal and interest payments totaled $1.2 million during
2022.
As shares were committed to be released from collateral, the Company reported compensation expense equal to the
daily average market prices of the shares and the shares became outstanding for EPS computations. Compensation expense was
accrued throughout the year.
A summary of key transactions for the ESOP for the years ended December 31, follows:
ESOP contribution expense
Dividends on unallocated ESOP shares used to reduce ESOP contribution
Shares held by the ESOP at December 31, 2023 and 2022, are as follows:
Allocated shares
Unallocated shares
Total ESOP shares
Fair value of unallocated shares
Stock-Based Compensation
2023
2022
(In thousands)
— $
—
1,372
30
$
December 31,
2023
2022
(Dollars in thousands, except share data)
1,692,800
—
1,692,800
—
1,692,800
—
1,692,800
—
In June 2016, First Financial Northwest’s shareholders approved the First Financial Northwest, Inc. 2016 Equity
Incentive Plan (“2016 Plan”). This plan provides for the granting of incentive stock options (“ISO”), non-qualified stock
options (“NQSO”), restricted stock and restricted stock units. The 2016 Plan expires in June 2026. The 2016 Plan established
1,400,000 shares available to grant with a maximum of 400,000 of these shares available to grant as restricted stock awards.
Each share issued as a restricted stock award counts as two shares towards the total shares available to be awarded.
As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008
Plan”) was frozen with no additional awards being made under the 2008 plan. Restricted stock awards and stock options that
were granted under the 2008 Plan are fully vested and unexercised options remain exercisable, subject to the provision of the
2008 Plan and the respective award agreements. At December 31, 2023, there were 848,598 total shares available for future
grant under the 2016 Plan, including 144,299 shares available to be granted as restricted stock.
Under the 2016 Plan, the vesting date for each option award or restricted stock award is determined by an award
committee and specified in the award agreement. In the case of restricted stock awards granted in lieu of cash payments of
directors’ fees, the grant date is used as the vesting date.
Total compensation expense for the 2016 Plan was $605,000 and $770,000 for the years ended December 31, 2023
and 2022, respectively. The related income tax benefit was $127,000 and $162,000 for the years ended December 31, 2023 and
2022, respectively.
Stock Options
Under the 2008 Plan, stock option awards were granted with an exercise price equal to the market price of First
Financial Northwest's common stock at the grant date. At December 31, 2023, options granted under the 2008 Plan to purchase
122,500 shares were outstanding and fully vested and exercisable. Stock options have a contractual period of ten years. Any
107
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unexercised stock options will expire ten years after the grant date, or sooner in the event of the award recipient’s death,
disability or termination of service with the Company.
Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee
and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the
grant date. Any unexercised stock options will expire 10 years after the award date or sooner in the event of the award
recipient’s death, disability, retirement, or termination of service. On August 4, 2023, 40,000 shares were granted as stock
options under the 2016 Plan.
A cashless exercise of vested stock options may occur by the option holder surrendering the number of options valued
at the current stock price at the time of exercise to cover the total cost to exercise. The surrendered options are canceled and are
unavailable for reissue.
The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the
assumptions noted in the table below. The dividend yield is based on the current quarterly dividend in effect at the time of the
grant. Historical employment data is used to estimate the forfeiture rate. The historical volatility of the Company’s stock price
over a specified period of time is used for the expected volatility assumption. First Financial Northwest bases the risk-free
interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. First Financial Northwest elected
to use the “simplified” method permitted by the U.S. Securities and Exchange Commission to calculate the expected term. This
method uses the vesting term of an option along with the contractual term, setting the expected life at the midpoint.
The fair value of options granted was determined using the following weighted-average assumptions as of the grant
date for the periods indicated. No stock options were granted in 2022.
Annual Dividend Yield
Expected volatility
Risk-free interest rate
Expected term
Weighted-average grant date fair value per option granted
$
Year Ended December 31,
2023
2022
4.31 %
34.04 %
4.08 %
6.25 years
2.98
N/A
N/A
N/A
N/A
N/A
A summary of the Company’s stock option plan awards activity for the year ended December 31, 2023 follows:
Outstanding at January 1, 2023
Granted
Exercised
Outstanding at December 31, 2023
Vested and expected to vest assuming a 3% forfeiture
rate over the vesting term
Exercisable at December 31, 2023
Weighted-
Average
Exercise Price
11.20
Shares
217,519 $
Weighted-
Average
Remaining
Contractual
Term in Years
Aggregate
Intrinsic
Value
$
823,028
40,000
(95,019)
162,500
161,300
122,500
12.06
10.78
11.65
11.65
11.52
3.15
3.10
1.05
114,438
296,725
295,021
239,925
As of December 31, 2023, unrecognized compensation cost related to nonvested stock options totaled $104,000.
108
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Awards
A summary of changes in nonvested restricted stock awards for the year ended December 31, 2023, is as follows:
Nonvested Shares
Shares
Weighted Average
Grant Date
Fair Value
Nonvested at January 1, 2023
Granted
Vested
Nonvested at December 31, 2023
31,272 $
40,618
(44,272)
27,618
Expected to vest assuming a 3% forfeiture rate over the vesting term
26,789
16.93
14.21
15.68
14.92
14.92
As of December 31, 2023, there was $176,000 of total unrecognized compensation costs related to nonvested shares
granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of
two months. The total fair value of shares vested during the years ended December 31, 2023 and 2022 were $694,000 and
$790,000, respectively.
Note 13 - Federal Income Taxes
The components of income tax expense for the years indicated are as follows:
Current
Deferred
Total income tax expense
Year Ended December 31,
2023
2022
$
$
(In thousands)
1,378 $
175
1,553 $
2,952
217
3,169
A reconciliation of the tax provision based on the statutory corporate rate of 21% for the year ended
December 31, 2023, and 2022, on pretax income is as follows:
Income tax expense at statutory rate
Income tax effect of:
Tax exempt interest, net
BOLI income, net
Other, net
Total income tax expense
Year Ended December 31,
2023
2022
(In thousands)
1,650 $
75
(223)
51
1,553 $
3,441
(50)
(207)
(15)
3,169
$
$
109
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets and liabilities, included in the accompanying consolidated balance sheets, consisted of the
following at the dates indicated:
Deferred tax assets:
ACL for loans
ACL for unfunded commitments
Deferred compensation
Net unrealized loss on investments available-for-sale
Employee benefit plans
Accrued expenses
Core deposit intangible
Expenses to facilitate branch acquisition
Split dollar life insurance
Lease liability
Total deferred tax assets
Deferred tax liabilities:
FHLB stock dividends
Loan origination fees and costs
Net unrealized gain on derivative cash flow hedge
Fixed assets
Goodwill
Right of use asset
Other, net
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2023
2022
(In thousands)
$
3,214 $
92
261
3,319
182
106
72
17
117
589
7,969
—
1,368
1,588
1,664
79
550
72
$
$
5,321 $
2,648 $
3,198
52
218
3,811
273
104
63
18
101
725
8,563
1
1,246
2,201
1,699
67
688
64
5,966
2,597
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex
factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and
a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could
differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and
liabilities.
At December 31, 2023 and 2022, the Company had no net operating loss carryforward.
As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of
approximately $4.5 million, on which federal income taxes have not been provided. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal
income taxes may be imposed at the then-prevailing corporate tax rates. The Company does not contemplate that such amounts
will be used for any purpose that would create a federal income tax liability; therefore no provision has been made.
Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the
deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management
110
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
evaluates both positive and negative evidence under the “more likely than not” standard. The weight given to the potential
effect of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be
objectively verified. As of December 31, 2023, it was determined the full deferred tax asset would be realized in future periods
and a valuation allowance would not be necessary.
The Company had no unrecognized tax benefits at December 31, 2023 or 2022, and recognized no interest or tax
penalties. The Company has filed U.S. federal income tax returns. Income tax returns filed are subject to examination by the
U.S. federal, state, and local income tax authorities. While no income tax returns are currently being examined, the Company is
no longer subject to tax examination by tax authorities for years prior to 2020.
Note 14 - Regulatory Capital Requirements
Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion
depositors.
First Financial Northwest is a bank holding company under the supervision of the FRB. Bank holding companies are
subject to capital adequacy requirements of the Federal Reserve Board under the Bank Holding Company Act of 1956, as
amended, and the regulations of the Federal Reserve Board, except that, pursuant to the Economic Growth, Regulatory Relief
and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than
$3 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations.
The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. Failure to
meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that
involve quantitative measures of their assets, liabilities, and certain off balance sheet items as calculated under regulatory
accounting practices. First Financial Northwest was not subject to regulatory requirements for bank holding companies at
December 31, 2023 and 2022, as its assets were less than the $3.0 billion threshold.
The capital amounts and classifications are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the table that follows) of total and Tier 1 capital to risk-weighted assets (as defined in the
regulations) and of Tier 1 capital to average assets.
As of December 31, 2023, according to the most recent notification from the FDIC, the Bank was categorized as
well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the
notification that management believes have changed the Bank’s category.
111
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank’s actual capital amounts and ratios at December 31, 2023 and 2022, are presented in the following table.
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
Ratio
(Dollars in thousands)
To be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2023:
Total risk-based capital
$
171,971
16.15 % $
85,194
8.00 % $
106,493
10.00 %
Tier 1 risk-based capital
158,629
14.90
63,896
6.00
85,194
8.00
Common equity tier 1
capital (“CET1”)
158,629
14.90
47,922
4.50
69,220
6.50
Tier 1 leverage capital
158,629
10.18
62,349
4.00
77,936
5.00
December 31, 2022:
Total risk-based capital
$
169,755
15.62 % $
86,942
8.00 % $
108,678
10.00 %
Tier 1 risk-based capital
156,147
14.37
65,207
6.00
86,942
8.00
Common equity tier 1
capital (“CET1”)
156,147
14.37
48,905
4.50
70,641
6.50
Tier 1 leverage capital
156,147
10.31
60,578
4.00
75,722
5.00
In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary
bonuses based on percentages of eligible retained income that could be utilized for such actions. As of December 31, 2023, the
Bank’s capital conservation buffer was 8.15%.
Note 15 - Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Company makes loan
commitments, typically unfunded loans and unused lines of credit, to accommodate the financial needs of its customers. These
arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the
Company’s normal credit policies, including collateral requirements, where appropriate. Commitments to extend credit are
agreements to lend to customers in accordance with predetermined contractual provisions. These commitments are for specific
periods or, may contain termination clauses and may require the payment of a fee. The total amounts of unused commitments
do not necessarily represent future credit exposure or cash requirements, in that commitments can expire without being drawn
upon. Unfunded commitments to originate loans or extend credit totaled $83.6 million at December 31, 2023, and $74.0 million
at December 31, 2022.
Lease Commitments. The Company has entered into lease commitments for its branches located in Mill Creek,
Edmonds, Renton, Bellevue, Woodinville, Smokey Point, Lake Stevens, Bothell, Kent, Kirkland, University Place, Gig Harbor,
and Issaquah, all in Washington. For more information on the Company’s lease commitments, see Note 10 - Leases.
Legal Proceedings. The Company and its subsidiaries are from time to time defendants in and are threatened with
various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of
112
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a
material effect on the consolidated financial statements of the Company.
Employment Contracts and Severance Agreements. The Company has change in control severance agreements with
key officers that offer specified terms of salary coverage. In addition, the Company has employment contracts with certain
executives that include specified terms of salary coverage as a result of involuntary termination due to change in control or
other circumstances.
Note 16 - Parent Company Only Financial Statements
Presented below are the condensed balance sheets, income statements and statements of cash flows for First Financial
Northwest.
FIRST FINANCIAL NORTHWEST, INC.
Condensed Balance Sheets
December 31,
2023
2022
(In thousands)
Assets
Cash and cash equivalents
Interest-bearing deposits
Investment in subsidiaries
Receivable from subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Payable to subsidiaries
Deferred tax liability, net
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
$
301 $
8,464
152,408
8
686
161,867 $
223
9,612
150,522
3
236
160,596
60 $
9
138
64
6
166
207
161,660
161,867 $
236
160,360
160,596
$
$
$
113
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements
Operating income:
Interest income:
Interest-bearing deposits with banks
Total interest income
Noninterest income:
Other income
Total noninterest income
Total operating income
Operating expenses:
Other expenses
Total operating expenses
Loss before benefit for federal income taxes and equity in undistributed
earnings of subsidiaries
Federal income tax benefit
Loss before equity in undistributed loss of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Year Ended December 31,
2023
2022
(In thousands)
$
97 $
97
164
164
261
1,790
1,790
(1,529)
(316)
(1,213)
7,518
6,305 $
$
13
13
25
25
38
1,942
1,942
(1,904)
(411)
(1,493)
14,733
13,240
114
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Statements of Cash Flows
Year Ended December 31,
2023
2022
(In thousands)
$
6,305 $
13,240
(7,518)
(14,733)
4,806
8,198
25
3
(5)
(4)
(450)
(28)
3,134
—
—
1,023
553
(1,017)
—
(4,763)
(4,204)
(1,070)
9,835
8,765 $
6
8
33
(106)
(211)
42
6,477
1,173
1,173
454
737
(226)
(1,398)
(4,343)
(4,776)
2,874
6,961
9,835
$
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating
activities:
Equity in undistributed earnings of subsidiaries
Dividends received from subsidiary
Restricted stock compensation
Change in deferred tax liability, net
Change in receivables from subsidiaries
Change in payables to subsidiaries
Change in other assets
Changes in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
ESOP loan repayment
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Proceeds for vested awards
Net share settlement of stock awards
Repurchase and retirement of common stock
Dividends paid
Net cash used in financing activities
Net (decrease) increase in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
115
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Earnings Per Share
The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods
indicated.
Net income
Earnings allocated to participating securities
Earnings allocated to common shareholders
Basic weighted-average common shares outstanding
Dilutive effect of stock options
Dilutive effect of restricted stock grants
Diluted weighted-average common shares outstanding
Basic earnings per share
Diluted earnings per share
Year Ended December 31,
2022
2023
(Dollars in thousands, except share data)
$
$
$
$
6,305 $
(18)
6,287 $
13,240
(44)
13,196
9,126,209
9,006,369
18,680
7,728
81,480
14,434
9,152,617
9,102,283
0.69 $
0.69 $
1.47
1.45
For the year ended December 31, 2023, there were 80,000 options to purchase shares of common stock that were
omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. No options to purchase
shares of common stock were omitted because their effect would be anti-dilutive for the year ended December 31, 2022.
Note 18 - Revenue Recognition
In accordance with Topic 606, revenues are recognized when goods or services are transferred to the customer in
exchange for the consideration the Company expects to be entitled to receive. To determine the appropriate recognition of
revenue for transactions within the scope of Topic 606, the Company performs the following five steps: (i) identify the
contract(s) with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction
price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when
the entity satisfies a performance obligation. A contract may not exist if there are doubts as to collectability of the amounts the
Company is entitled to in exchange for the goods or services transferred. If a contract is determined to be within the scope of
Topic 606, the Company recognizes revenue as it satisfies a performance obligation. The largest portion of the Company’s
revenue is from net interest income which is not within the scope of Topic 606.
116
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregation of Revenue
The following table includes the Company’s noninterest income disaggregated by type of service for the years ended
December 31, 2023 and 2022:
Gain on sales of investment securities (1)
BOLI income (1)
Wealth management revenue
Deposit related fees
Debit card and ATM fees
Loan related fees
Other
Total noninterest income
____________
(1) Not in scope of Topic 606
Year Ended December 31,
2023
2022
(In thousands)
— $
1,081
253
331
625
275
208
2,773 $
27
1,004
312
311
625
919
49
3,247
$
$
For the year ended December 31, 2023, substantially all of the Company’s revenues under the scope of Topic 606 are
for performance obligations satisfied at a specified date.
Revenues recognized within scope of Topic 606
Wealth management revenue: Our wealth management revenue consists of commissions received on the investment portfolio
managed by Bank personnel but held by a third party. Commissions are earned on brokerage services and advisory services
based on contract terms at the onset of a new customer’s investment agreement or quarterly for ongoing services. Commissions
are paid by the third party to the Bank when the performance obligation has been completed by both entities.
Deposit related fees: Fees are earned on our deposit accounts for various products or services performed for our customers.
Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box, and others.
These fees are recognized on a daily, monthly or annual basis, depending on the type of service.
Debit card and ATM fees: Fees are earned when a debit card issued by the Bank is used or when other bank’s customers use our
ATM services. Revenue is recognized at the time the fees are collected from the customer’s account or remitted by the VISA
interchange network.
Loan related fees: Noninterest fee income is earned on our loans for servicing or annual fees on certain loan types. Fees are also
earned on the prepayment of certain loans, and are recognized at the time the loan is paid off.
Other: Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the
time of the event or the applicable billing cycle.
Contract Balances
At December 31, 2023, the Company had no contract liabilities where the Company had an obligation to transfer
goods or services for which the Company had already received consideration. In addition, the Company had no material
performance obligations as of this date.
117
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(i) Disclosure Controls and Procedures.
An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”) was carried out as of December 31, 2023, under the supervision and with the
participation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and several other members of our
senior management. The CEO (Principal Executive Officer) and CFO (Principal Financial Officer) concluded that, as of
December 31, 2023, The Company’s disclosure controls and procedures were effective in ensuring that information we are
required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to First
Financial Northwest management, including its CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure, specified in the SEC’s rules and forms.
(a) Management’s report on internal control over financial reporting.
First Financial Northwest’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control system
is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair
presentation of published financial statements for external purposes in accordance with generally accepted accounting
principles.
This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors
of First Financial Northwest; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. A control
procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating
the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and
procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any
evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or procedures may deteriorate.
First Financial Northwest’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2023. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based
on that assessment, First Financial Northwest’s management believes that, as of December 31, 2023, the Company’s internal
control over financial reporting was effective based on those criteria.
Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s consolidated
financial statements as of December 31, 2023, which is included in Item 8. Financial Statements and Supplementary Data.
(b) Attestation report of the registered public accounting firm.
Not applicable.
118
(c) Changes in internal control over financial reporting.
As required by Rule 13a-15(d), our management, including our CEO and CFO, also conducted an evaluation of the
Company’s internal control over financial reporting to determine whether any changes occurred during quarter ended
December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2023, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
(a) There was no information to be disclosed by us in a report on Form 8-K during the fourth quarter of fiscal
2023 that was not so disclosed.
(b) During the quarter ended December 31, 2023, no director or officer (as defined in Rule 16a-1(f) under the
Exchange Act) of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading
arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information contained under the section captioned “Proposal 1 - Election of Directors” in First Financial
Northwest’s definitive proxy statement for the Annual Meeting of Shareholders to be held on May 23, 2024 (the “Proxy
Statement”) is incorporated herein by reference.
For information regarding the executive officers of the Company, see the information contained under “Item 1.
Business - Information about our Executive Officers”, which is incorporated herein by reference.
Nominating Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of
Directors since last disclosed to stockholders.
Audit Committee Financial Expert
The Company has a separately-designated standing Audit Committee established in accordance with Section
3(a)(58)(A) of the Exchange Act. At December 31, 2023, our Audit Committee was composed of Directors Joann E. Lee
(Chair), Cindy L. Runger and Ralph C. Sabin. Each member of the Audit Committee is “independent”, as independence is
defined for audit committee members in the listing standards of The Nasdaq Stock Market LLC. Our Board of Directors has
designated Directors Joann E. Lee, Cindy L. Runger and Ralph C. Sabin as the Audit Committee financial experts, as defined in
the SEC’s Regulation S-K.
Code of Business Conduct and Ethics
A copy of the Code of Business Conduct and Ethics is available on our website at www.ffnwb.com under Investor
Relations – Corporate Overview – Governance Documents. Additionally, any material amendments to, or waiver from a
provision of the Code of Business Conduct and Ethics will be posted to the same website.
119
Item 11. Executive Compensation
The information contained under the sections captioned “Executive Compensation” and “Directors’ Compensation” in
the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management.
The information contained under the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference.
(b) Security Ownership of Management.
The information contained under the section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by reference.
(c) Change In Control
On January 10, 2024, First Financial Northwest and the Bank entered into a definitive agreement in which Global Federal
Credit Union will acquire the Bank. The transaction is structured as a purchase and assumption agreement with Global
purchasing substantially all assets and assuming substantially all liabilities of the Bank for $231.2 million in cash, subject to
certain adjustments. Except for the foregoing, First Financial Northwest is not aware of any arrangements, including any pledge
by any person of securities of First Financial Northwest, the operation of which may at a subsequent date result in a change in
control of the Company.
(d) Equity Compensation Plan Information
The following table summarizes share and exercise price information about First Financial Northwest’s equity
compensation plans as of December 31, 2023.
Plan category
Equity compensation plans approved by
security holders:
2008 Equity Incentive Plan
2016 Equity Incentive Plan (1)
Equity compensation plans not approved by
security holders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
(c)
122,500 $
40,000
N/A
162,500 $
11.52
12.06
N/A
11.65
—
848,598
N/A
848,598
___________________
(1) The shares available for future grant under the 2016 Equity Incentive Plan include 144,299 shares which may be granted as
stock awards. Each share granted as stock award reduces the total available shares for grant by two shares.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information contained under the sections captioned “Meetings and Committees of the Board of Directors and
120
Corporate Governance Matters - Corporate Governance - Transactions with Related Persons,” and “Meetings and Committees
of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence” in the Proxy
Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item under the section captioned "Proposal 3 - Ratification of Appointment of
Independent Registered Public Accounting Firm in the Proxy Statement is incorporated herein by reference.
121
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)
Exhibits
+10.12
+10.13 Offer letter for Randy T. Riffle (14)
+10.14
2.1
3.1
3.2
4.1
4.2
+10.1
+10.2
+10.3
+10.4
+10.5
+10.6
+10.7
+10.8
+10.9
+10.10
+10.11
+10.15
+10.16
+10.17
+10.18
14
21
23
31.1
31.2
32.1
32.2
97
101
104
Purchase and Assumption Agreement by and among Global Federal Credit Union, First Financial Northwest Bank
and First Financial Northwest, Inc, dated January 10, 2024(1)
Articles of Incorporation of First Financial Northwest (2)
Amended and Restated Bylaws of First Financial Northwest (3)
Form of stock certificate of First Financial Northwest (2)
Description of Capital Stock of First Financial Northwest (4)
Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (5)
Form of Change in Control Severance Agreement for Executive Officers (6)
Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (7)
2008 Equity Incentive Plan (8)
2016 Equity Incentive Plan (9)
Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan(10)
Form of restricted stock award agreement under the 2008 Equity Incentive Plan (10)
Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (5)
Form of restricted stock award agreement under the 2016 Equity Incentive Plan (11)
Form of incentive stock option award agreement under the 2016 Equity Incentive Plan (12)
Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan (12)
Form of restricted stock award agreement under the 2016 Equity Incentive Plan (13)
Form of Involuntary Termination Agreement with Randy T. Riffle (15)
Form of Change in Control Severance Agreement with Randy T. Riffle (15)
Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III (16)
Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson (17)
Form of Change in Control Severance Agreement (Amended and Restated) by and between First Financial
Northwest Bank and Simon Soh, Dalen D. Harrison, and Ronnie J. Clariza (18)
Code of Business Conduct and Ethics (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code
of Ethics on the Company’s website at www.ffnwb.com pursuant to Regulation S-K section 229.406(c))
Subsidiaries*
Consent of Independent Registered Public Accounting Firm- Moss Adams LLP*
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act*
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
Policy relating to Recovery of Erroneously Awarded Compensation*
The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended
December 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance
Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4)
Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to
Consolidated Financial Statements.
Cover Page Interactive Date File
122
______________
* Copies of these exhibits are available upon written request to Investor Relations, First Financial Northwest, In., 201
Wells Avenue South Renton Washington 98057
(1) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 11, 2024.
(2) Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-1 on June, 6, 2007 (SEC File No.
333-143539).
(3) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated April 6, 2023.
(4) Filed as an exhibit to First Financial Northwest’s Annual Report on Form 10-K for December 31, 2020 filed on March
12, 2021.
(5) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 5, 2013.
(6) Filed as an exhibit to First Financial Northwest's Current Report on Form 8-K dated December 21, 2020.
(7) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(8) Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.
(9) Filed as Appendix A to First Financial Northwest's definitive proxy statement dated April 28, 2016.
(10) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.
(11) Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for March 31, 2018 filed on May 8,
2018.
(12) Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-8 on June 15, 2016 (SEC File No.
333-212029).
(13) Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for September 30, 2018 filed
November 7, 2018.
(14) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 20, 2018.
(15) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 3, 2019.
(16) Filed as an exhibit to First Financial Northwest's Current Report on Form 8-K dated May 16, 2023.
(17) Filed as an exhibit to First Financial Northwest's Current Report on Form 8-K dated May 16, 2023.
(18) Filed as an exhibit to First Financial Northwest's Current Report on Form 8-K dated May 16, 2023.
“+” indicates management contract, compensatory plan, or arrangement.
Item 16. Form 10-K Summary.
None.
123
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 13, 2024
FIRST FINANCIAL NORTHWEST, INC.
By:
/s/ Joseph W. Kiley III
Joseph W. Kiley III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ralph C. Sabin
Ralph C. Sabin
/s/ Joseph W. Kiley III
Joseph W. Kiley III
/s/ Richard P. Jacobson
Richard P. Jacobson
/s/ Eva Q. Ngu
Eva Q. Ngu
/s/ Diane C. Davis
Diane C. Davis
/s/ Joann E. Lee
Joann E. Lee
/s/ Roger H. Molvar
Roger H. Molvar
/s/ Cindy L. Runger
Cindy L. Runger
Chair of the Board and Director
March 13, 2024
President, Chief Executive Officer and Director
March 13, 2024
(Principal Executive Officer)
Chief Financial Officer and Director
March 13, 2024
(Principal Financial Officer)
March 13, 2024
March 13, 2024
March 13, 2024
March 13, 2024
March 13, 2024
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
124
Corporate and
Shareholder Information
Directors and
Executive Management
CORPORATE HEADQUARTERS
FIRST FINANCIAL NORTHWEST, INC.
201 Wells Avenue South
Renton, WA 98057
Phone: (425) 255-4400
Fax: (425) 228-7227
www.ffnwb.com
SUBSIDIARIES
First Financial Northwest Bank
First Financial Diversified Corporation
TRANSFER AGENT
Computershare
150 Royall Street, Suite 101
Canton, MA 02021
Phone: (781) 575-4223
Toll Free: (800) 368-5948
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Moss Adams, LLP
2707 Colby Avenue, Suite 801
Everett, WA 98201
SEC COUNSEL
Breyer & Associates
8180 Greensboro Drive, Suite 785
McLean, VA 22102
STOCK EXCHANGE
First Financial Northwest, Inc. common stock
trades on the NASDAQ Global Select Market
under the symbol FFNW.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be
a virtual meeting on Thursday, May 23, 2024
at 1:00 p.m. Pacific Time.
Directors
Ralph C. Sabin, Chair
Diane C. Davis
Richard P. Jacobson
Joseph W. Kiley III
Joann E. Lee
Roger H. Molvar
Cindy L. Runger
FIRST FINANCIAL NORTHWEST BANK
Executive Management
Joseph W. Kiley III, President and
Chief Executive Officer
Richard P. Jacobson, Executive Vice President,
Chief Financial Officer and Chief Operating
Officer
Dalen D. Harrison, Executive Vice President,
Chief Banking Officer
Ronnie J. Clariza, Senior Vice President,
Chief Risk Officer
Simon Soh, Senior Vice President,
Chief Credit Officer
INVESTOR AND SHAREHOLDER INFORMATION
Requests for company information or to receive a copy
of this Annual Report to Shareholders without charge
may be sent to:
First Financial Northwest, Inc.
Investor Relations
201 Wells Avenue South
PO Box 360
Renton, WA 98057