EDGAR 10-K Filing

Company CIK: 1401564
Filing Year: 2025
Filename: 1401564_10-K_2025_0000939057-25-000075.json

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ITEM 1. BUSINESS
Item 1. Business
General
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, 2024, the Company had total assets of $1.42 billion, net loans of $1.14 billion, deposits of $1.13 billion and stockholders’ equity of $161.6 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. The Bank’s branches, except for 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, but not limited to, the accuracy of specified representations and warranties by each party, the performance of each party’s obligations under the P&A Agreement in all material respects, and the absence of any injunctions or other legal restrictions. The P&A Agreement also grants termination rights to both Global and the Bank. Under certain circumstances, if the agreement is terminated, the Bank will be required 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.
We, along with Global, continue to work towards closing. We have previously received the required regulatory approvals from our banking regulators, as well as approval from our shareholders. At this time, Global has also received the regulatory approvals from its primary regulator, the National Credit Union Administration (“NCUA”). Currently, we expect the asset sale to close in the second quarter of 2025.
Market Area
We consider our primary market area to be the Puget Sound Region, which includes King, Snohomish, Pierce and, to a lesser extent, Kitsap counties. During 2024, the region experienced a slight increase in home prices, as a result of higher sales volume. Stability in mortgage rates and strong demand contributed to the increase in sales. The number of homes listed for sale in King, Pierce, Snohomish and Kitsap counties at the end of 2024 increased from the end of 2023, with growth ranging from 3.0% in Kitsap County to 46.0% in Snohomish County. Available inventory in these counties ranged from 1.1 months in Snohomish County to 1.8 months in Pierce 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 $122,000, 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 3.0% at December 31, 2024, compared to 3.5% at December 31, 2023, and the national average of 4.1% at December 31, 2024. The median sales price of a residential home in King County for December of 2024 was $800,000, an increase of 3.2% from December of 2023, according to the Northwest Multiple Listing Service ("NMLS"). Residential sales volumes increased 8.2% in 2024 compared to 2023 and inventory levels as of December 31, 2024, were at 1.6 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 928,000 residents and a median household income of approximately $96,600, 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 5.4% in December 2024, compared to 5.5% at year-end 2023. The median sales price of a residential home in Pierce County was $550,000 for December of 2024, a 4.6% increase compared to 2023, according to the NMLS. Residential sales volumes increased by 4.3% in 2024 compared to 2023 and inventory levels as of December 31, 2024, were at 1.8 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 844,000 residents and a median household income of approximately $108,000, 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 3.2% in December 2024 compared to 3.6% in December 2023. The median sales price of a residential home in Snohomish County was $745,000 for December of 2024, a 10.4% increase compared to December of 2023, according to the NMLS. Residential sales volumes increased by 7.7% in 2024 compared to 2023 and inventory levels as of December 31, 2024 were at 1.1 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 $98,500, 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 4.4% in December 2024, compared to 4.7% for December of 2023. The median sales price of a residential home was $539,000 for December of 2024, a decrease of 0.2% over December of 2023, according to the NMLS. Residential sales volumes increased by 8.6% in 2024 compared to 2023 and inventory levels as of December 31, 2024, were at 1.5 months according to the MLS.
For a discussion regarding competition in our primary market area, see “- Competition” in Item 1 of this report.
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, 2024, our net loan portfolio totaled $1.14 billion and represented 80.0% 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 $26.4 million at December 31, 2024. 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 $35.1 million, at December 31, 2024. At this date, our single largest lending relationship totaled $24.6 million, consisting of one commercial loan ($13.3 million) and one multifamily loan ($11.3 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, 2024, regarding the amount of total loans in our portfolio based on their contractual terms to maturity, not including prepayments.
Within One Year After One Year Through Five Years After Five Years Through Fifteen Years Beyond Fifteen Years Total
(In thousands)
Real estate:
One-to-four family residential $ 2,251 $ 26,207 $ 151,047 $ 322,565 $ 502,070
Multifamily 5,115 74,247 36,249 10,692 126,303
Commercial 41,885 185,192 140,745 6,576 374,398
Construction/land 44,304 14,952 7,884 - 67,140
Total real estate 93,555 300,598 335,925 339,833 1,069,911
Business 7,664 2,550 601 1,320 12,135
Consumer 902 6,287 65,093 924 73,206
Total loans $ 102,121 $ 309,435 $ 401,619 $ 342,077 $ 1,155,252
The following table sets forth the amount of total loans due one year or more after December 31, 2024, with fixed or adjustable interest rates.
Fixed-Rate Adjustable-Rate Total
(In thousands)
Real estate:
One-to-four family residential $ 155,131 $ 344,688 $ 499,819
Multifamily 52,756 68,432 121,188
Commercial 157,992 174,521 332,513
Construction/land - 22,836 22,836
Total real estate 365,879 610,477 976,356
Business 2,662 1,809 4,471
Consumer 59,580 12,724 72,304
Total loans $ 428,121 $ 625,010 $ 1,053,131
Geographic Distribution of our Loans. The following table shows the geographic distribution of our loan portfolio in dollar amounts and percentages at December 31, 2024.
Puget Sound Region (1)
Other Washington Counties Total in Washington State All Other States (2)
Total
Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category
Real estate: (Dollars in thousands)
One-to-four family
residential $ 465,935 92.8 % $ 27,050 5.4 % $ 492,985 98.2 % $ 9,085 1.8 % $ 502,070 100.0 %
Multifamily 93,249 73.8 25,334 20.1 118,583 93.9 7,720 6.1 126,303 100.0 %
Commercial 288,170 77.0 28,957 7.7 317,127 84.7 57,271 15.3 374,398 100.0 %
Construction/land 66,552 99.1 588 0.9 67,140 100.0 - - 67,140 100.0 %
Total real estate 913,906 85.4 81,929 7.7 995,835 93.1 74,076 6.9 1,069,911 100.0 %
Business 11,896 98.1 221 1.8 12,117 99.9 18 0.1 12,135 100.0 %
Consumer 14,552 19.8 1,217 1.7 15,769 21.5 57,437 78.5 73,206 100.0 %
Total Loans $ 940,354 81.4 % $ 83,367 7.2 % $ 1,023,721 88.6 % $ 131,531 11.4 % $ 1,155,252 100.0 %
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(1) Includes King, Snohomish, Pierce and Kitsap counties.
(2) Includes loans in California ($29.6 million), Florida ($10.8 million), Oregon ($10.6 million), Texas ($10.4 million), Alabama ($7.6 million), 42 other states and Washington, D.C. ($62.6 million).
One-to-Four Family Residential Lending. As of December 31, 2024, $502.1 million, or 43.5% 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 2024, we originated $44.4 million in one-to-four family residential loans and did not purchase any of such loans. At December 31, 2024, $284.7 million, or 56.7%, of our one-to-four family residential portfolio consisted of owner occupied loans with the remaining $217.4 million, or 43.3%, consisting of non-owner occupied loans. In addition, at December 31, 2024, $155.1 million, or 30.9%, 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, 2024, we had two nonaccrual one-to-four family loans totaling $299,000, which were 90 days or more past due. Despite their overdue status, both loans are well collateralized, and no loss was expected by the Bank on these loans.
Multifamily and Commercial Real Estate Lending. As of December 31, 2024, $126.3 million, or 10.9%, of our total loan portfolio was secured by multifamily properties and $374.4 million, or 32.3%, 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.
The following table presents a breakdown of our multifamily and commercial real estate loan portfolio at December 31, 2024 and 2023:
December 31, 2024 December 31, 2023
Amount % of Total in Portfolio Amount % of Total in Portfolio
(Dollars in thousands)
Multifamily real estate:
Total multifamily $ 126,303 100.0 % $ 138,149 100.0 %
Commercial real estate:
Retail $ 110,787 29.6 % $ 124,172 32.9 %
Office 73,306 19.6 72,778 19.3
Hotel / motel 72,434 19.3 63,597 16.8
Storage 32,229 8.6 33,033 8.7
Mobile home park 22,701 6.1 21,701 5.7
Warehouse 23,363 6.2 19,218 5.1
Nursing home 9,713 2.6 11,610 3.1
Other non-residential 29,865 8.0 31,750 8.4
Total commercial real estate $ 374,398 100.0 % $ 377,859 100.0 %
The average loan size in our multifamily and commercial real estate loan portfolios was $936,000 and $2.1 million, respectively, as of December 31, 2024. At that date, $33.1 million or 26.2% of our multifamily loans and $86.2 million or 23.0% 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, 2024, was a 79-unit apartment complex with a net outstanding principal balance of $14.9 million located in King County, Washington, which was performing in accordance with its loan repayment terms at that date. As of December 31, 2024, the largest commercial real estate loan was secured by a hotel facility with a net outstanding balance of $18.0 million 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, 2024 and 2023. In addition, there were no multifamily or commercial real estate loans charged off during the years ended December 31, 2024 and 2023.
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, 2024, our total construction/land loans increased to $67.1 million or 5.8% of total loans, from $60.9 million, or 5.1% of total loans, at December 31, 2023. 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, 2024, with a balance equal to 40.5% 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, 2024 and 2023. There were no construction/land loan charge-offs during the years ended December 31, 2024 and 2023. At December 31, 2024, the loans in process (“LIP”) balance on construction/land loans was $58.0 million.
Following is the composition of our total construction/land loan portfolio, that are net of LIP, at the dates indicated.
December 31,
2024 2023
(In thousands)
Construction speculative:
One-to-four family residential $ 49,674 $ 47,149
Total construction speculative 49,674 47,149
Construction permanent: (1)
Multifamily 7,884 4,004
Total construction permanent 7,884 4,004
Land:
Land development 7,019 4,774
Land non-development 2,563 4,997
Total land 9,582 9,771
Total construction/land loans $ 67,140 $ 60,924
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(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, 2024:
County Loan Balance Percent of Construction/Land Loan Balance
(Dollars in thousands)
King $ 64,876 96.6 %
Snohomish 856 1.3
Other Washington counties 1,408 2.1
Total $ 67,140 100.0 %
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 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, 2024, the LIP balance on construction/land loans included $11.7 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, 2024, our three largest construction/land loans consisted of multifamily, one-to-four family residential, and land development loans of $7.9 million, $5.0 million, and $4.9 million, respectively, all of which properties are located in King County and were performing in accordance with their repayment terms.
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, 2024, there were no residential construction loans which will roll over 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 $12.1 million, or 1.1% of total loans, at December 31, 2024. The Company originates loans under other SBA lending programs, which are partially guaranteed by the SBA. At December 31, 2024, the Bank’s portfolio included $1.7 million of these SBA loans, of which $1.3 million was 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 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 $6.4 million at December 31, 2024, and was performing according to its repayment terms. At December 31, 2024, we did not have any business loans delinquent in excess of 90 days or in nonaccrual status.
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 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, 2024, consumer loans were $73.2 million or 6.4% of the total loan portfolio.
At December 31, 2024, the largest component of the consumer loan portfolio consisted of purchased indirect consumer loans to finance classic and collectible cars with a balance of $59.6 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, 2024, the portfolio balance was $59.6 million. At that date, our largest classic and collectible car loan was $720,000 and the average loan size was $91,000. See Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in 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, 2024, home equity loans, primarily home equity lines of credit totaled $12.6 million, or 17.3% of the total consumer loan portfolio. The home equity lines of credit include $3.1 million of equity lines of credit in first lien position and $9.5 million of second liens on residential properties. At December 31, 2024, unfunded commitments on our home equity lines of credit totaled $25.3 million. Home equity loans are made for purposes such as the improvement of residential 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, 2024, $543,000 of classic and collectible auto loans were in nonaccrual status. During the year ended December 31, 2024, $41,000 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 credit to one obligor limit of 15% of total capital plus surplus, or $26.4 million at December 31, 2024. The Board of Directors may approve exceptions to such credit to loan limit to one obligor up to 20% of total capital plus surplus, or $35.1 million at December 31, 2024.
Credit Officer Lending Authority. Individual signing authority has been delegated to three lending officers. Our Senior Credit Officer (“SCO”) has authority from the Board of Directors to approve loans up to $5.0 million and aggregate relationships up to and including $8.0 million. Our Residential Credit Officer (“RCO”) has authority from the Board of Directors to approve residential loans up to $5.0 million, home equity lines of credit up to $1.0 million and aggregate relationships up to and including $8.0 million. The Board of Directors has given our CCO authority to approve loan requests and aggregate relationships up to the legal lending limit, 20% of capital plus surplus.
Loan Originations, Servicing, Purchases, Sales and Repayments. For the years ended December 31, 2024, 2023, and 2022, our total loan originations and purchases were $212.8 million, $203.2 million and $321.4 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 improved real estate serves as collateral. Flood insurance is also required on all secured loans when the real estate is located in a flood zone.
The following table shows total loans originated, purchased, repaid and other changes during the years indicated.
Year Ended December 31,
2024 2023 2022
(In thousands)
Loan originations:
Real estate:
One-to-four family residential $ 44,406 $ 87,283 $ 160,290
Multifamily 15,323 4,365 8,287
Commercial 37,293 22,076 38,580
Construction/land 90,329 51,790 55,524
Total real estate 187,351 165,514 262,681
Business
667 2,201 2,567
Consumer 7,440 13,441 6,155
Total loans originated 195,458 181,156 271,403
Loan purchases and participations:
One-to-four family residential - 2,107 4,042
Multifamily 74 80 12
Commercial 304 - 9,073
Business - - 5,000
Consumer 16,937 19,832 31,834
Total loan purchases and participations (1)
17,315 22,019 49,961
Principal repayments (234,817) (191,201) (258,706)
Charge-offs (41) (22) (37)
Change in LIP (13,414) (3,189) 2,000
Change in net deferred (costs) fees, and ACL/ALLL (240) 79 (999)
Net increase (decrease) in loans $ (35,739) $ 8,842 $ 63,622
_______________
(1) Totals include $378,000, $80,000 and $9.4 million in loan participations during 2024, 2023 and 2022, 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 $1.1 million and $262,000 of net deferred loan costs at December 31, 2024, and December 31, 2023, respectively.
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 2024, total premiums of $618,000, or 3.7% of the purchased principal, were paid on purchased loans. In comparison, premiums of 876,000 or 4.0% of the purchased principal, were paid on purchased loans during 2023.
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.
Asset Quality
As of December 31, 2024, we had $2.1 million of loans past due 30 days or more. These loans represented 0.18% 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.
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 $842,000 and $220,000 at December 31, 2024 and 2023, respectively.
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.
Modifications to Borrowers Experiencing Financial Difficulty. Loan modifications are made in the ordinary course of business on a case-by-case basis through negotiations with borrowers as part of the loan collection process. These modifications are intended to provide payment relief to borrowers. Occasionally, we may modify loans for borrowers facing financial difficulty, and in some cases, these modifications may result in new loans. Under Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures, we are required to disclose modification details, including principal reductions, interest rate reductions, term extensions, and significant payment delays for borrowers experiencing financial difficulty. At December 31, 2024, 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.
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, 2024, special mention loans decreased to $68,000 from $130,000 at December 31, 2023. At December 31, 2024, all special mention loans were current on their payments and 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, 2024, was primarily due to principal paydowns, a $1.0 million commercial real estate loan payoff and upgrades of two commercial real estate loans totaling $9.2
million from substandard to pass. Substandard loans individually evaluated for credit losses at December 31, 2024, resulted in no addition to ACL as these loans were well collateralized.
Classified loans consisting solely of substandard loans, were as follows at the dates indicated:
December 31,
2024 2023
(In thousands)
One-to-four family residential $ 299 $ 293
Multifamily 1,549 1,590
Commercial real estate 30,568 44,020
Consumer 543 220
Total classified loans $ 32,959 $ 46,123
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, 2024 and 2023, the individually evaluated loan balances were $32.4 million and $45.9 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, 2024, there was a $50,000 recapture of provision for credit losses, compared to a $208,000 recapture for the year ended December 31, 2023. This was primarily due to updates to economic forecasts, declines in loan portfolio balances, and changes in loan portfolio composition and characteristics. As of December 31, 2024, the ACL was $15.1 million, or 1.30% of total loans, compared to $15.3 million, or 1.28% of total loans at December 31, 2023. 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.
December 31,
2024 2023 2022
Loan
Balance Allowance
by Loan Category Percent of Loans
to Total Loans Loan
Balance Allowance
by Loan Category Percent of Loans
to Total Loans Loan
Balance Allowance
by Loan Category Percent of Loans
to Total Loans
Real estate: (Dollars in thousands)
One-to-four
family residential
$ 502,070 $ 5,416 43.5 % $ 513,223 $ 5,747 43.1 % $ 474,180 $ 4,043 40.1 %
Multifamily 126,303 1,809 10.9 138,149 1,509 11.6 126,866 1,210 10.7
Commercial real
estate 374,398 3,485 32.3 377,859 3,895 31.6 407,904 5,397 34.5
Construction/land 67,140 2,275 5.8 60,924 1,856 5.1 77,644 1,717 6.6
Total real estate 1,069,911 12,985 92.5 1,090,155 13,007 91.4 1,086,594 12,367 91.9
Business 12,135 164 1.1 29,081 387 2.5 31,363 948 2.7
73,206 1,917 6.4 71,995 1,912 6.1 64,353 1,912 5.4
Consumer $ 1,155,252 $ 15,066 100.0 % $ 1,191,231 $ 15,306 100.0 % $ 1,182,310 $ 15,227 100.0 %
Based on its comprehensive analysis, management believes that the ACL as of December 31, 2024 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.
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 Current Expected Credit Loss (“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 CECL methodology.
At or For the Year Ended December 31,
2024 2023 2022
(Dollars in thousands)
ACL/ALLL as a percent of total loans 1.30 % 1.28 % 1.29 %
ACL/ALLL at period end $ 15,066 $ 15,306 $ 15,227
Total loans outstanding 1,155,252 1,191,231 1,182,310
Nonaccrual loans as a percentage of total loans outstanding at period end 0.07 % 0.02 % 0.02 %
Total nonaccrual loans $ 842 $ 220 $ 193
Total loans outstanding 1,155,252 1,191,231 1,182,310
ACL/ALLL as a percent of nonaccrual loans at period end 1,789.31 % 6,957.27% 7,889.78%
ACL/ALLL at period end $ 15,066 $ 15,306 $ 15,227
Total nonaccrual loans 842 220 193
Net recoveries (charge-offs) during period to average loans outstanding:
One-to-four family residential: - % - % - %
Net recoveries during period $ 1 $ 1 $ 7
Average loans receivable, net (1)
500,633 483,344 427,455
Multifamily: - % - % - %
Net charge-offs during period $ - $ - $ -
Average loans receivable, net (1)
131,656 139,470 132,845
Commercial: - % - % - %
Net charge-offs during period $ - $ - $ -
Average loans receivable, net (1)
363,108 393,382 408,688
Construction/land development: - % - % - %
Net charge-offs during period $ - $ - $ -
Average loans receivable, net (1)
57,189 59,054 74,438
Business: - % - % - %
Net charge-offs during period $ - $ - $ -
Average loans receivable, net (1)
17,747 28,302 32,539
Consumer: (0.06) % (0.03) % (0.07) %
Net charge-offs during period $ (41) $ (22) $ (37)
Average loans receivable, net (1)
69,531 69,017 52,870
Total loans: - % - % - %
Net charge-offs during period $ (40) $ (21) $ (30)
Average loans receivable, net (1)
1,139,864 1,172,569 1,128,835
_______________
(1) The average loans receivable, net balances, include nonaccrual loans and deferred loan (costs) fees.
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, 2024, 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 at both December 31, 2024 and 2023, as held-to-maturity (“HTM”) 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 (“AFS”). These issuers guarantee the timely payment of principal and interest in the event of default. At December 31, 2024, our AFS mortgage-backed securities portfolio included other “private label” mortgage-backed securities with a fair value of $21.0 million and an amortized cost of $21.9 million. The mortgage-backed securities portfolio had a weighted-average yield of 3.65% at December 31, 2024.
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, 2024, the portfolio of government agency securities had a weighted-average yield of 6.12%.
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, 2024, the corporate bond portfolio had a weighted-average yield of 4.72%.
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, 2024.
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.
The redemption of any excess stock we hold is at the discretion of the FHLB. During 2024, our FHLB stock holdings decreased by $674,000, primarily as a result of the $15.0 million decrease in our FHLB advances during the year. The carrying value of our FHLB stock totaled $5.9 million at December 31, 2024. During the years ended December 31, 2024 and 2023, we received dividends on our FHLB stock of $597,000 and $485,000, respectively.
For the year ended December 31, 2024, there were no calls or sales of investment securities and gross proceeds from the maturities of investments were $40.0 million, with no gains or losses recognized. During 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.
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 107 and 123 securities in an unrealized loss position, with 100 and 113 of these securities in an unrealized loss position for 12 months or more at December 31, 2024 and 2023, respectively. Management does not believe that the unrealized losses at December 31, 2024 and 2023 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 the recovery of their 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, 2024 and 2023. For additional information regarding our investments, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
The table below sets forth information regarding the carrying value and weighted-average yield by contractual maturity of our investment portfolio at December 31, 2024. Mortgage-backed securities are presented in the totals column as a result of the variable nature of their principal reductions. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.
December 31, 2024
One Year or Less After One Year
Through Five Years After Five
Through Ten Years Thereafter Totals
Carrying
Value Weighted-
Average
Yield Carrying
Value Weighted-
Average
Yield Carrying
Value Weighted-
Average
Yield Carrying
Value Weighted-
Average
Yield Carrying
Value Weighted-
Average
Yield
(Dollars in thousands)
Available-for-sale:
Mortgage-backed securities $ - - % $ - - % $ - - % $ - - % $ 65,826 3.65 %
Municipal bonds - - 1,194 2.39 8,112 2.60 21,816 1.91 31,122 2.10
U.S. government agencies - - 20 5.77 1,843 5.98 21,813 5.59 23,676 6.12
Corporate bonds 2,476 4.16 7,341 7.51 21,201 3.87 - - 31,018 4.72
Total AFS $ 2,476 4.16 % $ 8,555 6.82 % $ 31,156 3.65 % $ 43,629 3.65 % $ 151,642 3.90 %
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 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 $47.9 million and $130.8 million of brokered deposits at December 31, 2024 and 2023, 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.
Year Ended December 31,
2024 2023 2022
(In thousands)
Total deposits, beginning balance $ 1,194,107 $ 1,170,040 $ 1,157,474
Increase (decrease) in retail deposits 20,183 18,163 (112,320)
(Decrease) increase in brokered funds (82,890) 5,904 124,886
Net (decrease) increase in deposits (62,707) 24,067 12,566
Total deposits, ending balance $ 1,131,400 $ 1,194,107 $ 1,170,040
At December 31, 2024, deposits totaled $1.13 billion. We had $588.9 million of deposit accounts greater than the FDIC insurance amount of $250,000, representing 52.0% of our total deposits. Of this amount, $214.8 million were retail certificates of deposit. At December 31, 2023, $513.3 million, or 43.0%, of deposit accounts were greater than $250,000. At December 31, 2024, we held $78.9 million in public funds, of which $53.0 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.
The following table sets forth information regarding our certificates of deposit and other deposits at December 31, 2024. Certificates of deposit are categorized by their original term.
Weighted-Average Interest Rate Product Term Category Amount Percentage
of Total
Deposits
(Dollars in thousands)
- % N/A Noninterest bearing demand deposits $ 80,772 7.1 %
0.14 N/A Interest-bearing demand 56,957 5.1
0.03 N/A Savings 16,277 1.4
3.51 N/A Money market 480,520 42.5
Certificates of deposit, retail
5.07 Three months or less 14,329 1.3
4.82 Over three through six months 18,006 1.6
4.34 Over six through twelve months 66,622 5.9
4.38 Over twelve months 350,017 30.9
4.41 Total certificates of deposit, retail 448,974 39.7
4.33 Over six through twelve months Brokered certificates of deposit 26,000 2.3
5.23 Over twelve months Brokered certificates of deposit 21,900 1.9
- N/A Interest-bearing demand, brokered - -
- N/A Money market, brokered - -
4.74 Total brokered deposits 47,900 4.2
Total deposits $ 1,131,400 100.0 %
Certificates of Deposit. The following table sets forth the amount and remaining maturities of certificates of deposit at December 31, 2024.
One Year or Less After One Year Through Two Years After Two Years Through Three Years After Three Years Through Four Years Thereafter Total
(In thousands)
0.00 - 1.00% $ 3,805 $ 1,531 $ 422 $ 346 $ 237 $ 6,341
1.01 - 2.00% 4,249 267 - - - 4,516
2.01 - 3.00% 21,335 7,293 10,219 6,101 2,003 46,951
3.01 - 4.00% 3,838 14,127 3,753 136 - 21,854
4.01 - 5.00% 248,718 62,686 6,302 5,845 11,152 334,703
5.01 - 6.00% 77,713 4,796 - - 82,509
Total $ 359,658 $ 90,700 $ 20,696 $ 12,428 $ 13,392 $ 496,874
The following table provides the uninsured portion of our certificates of deposit at December 31, 2024, by their remaining maturity period.
Maturity Period Certificates of Deposit
(In thousands)
Three months or less $ 59,025
Over three months through six months 22,184
Over six months through twelve months 64,598
Over twelve months 68,972
Total $ 214,779
Deposits by Type. The following table sets forth the deposit balances by the types of accounts we offered at the dates indicated.
December 31,
2024 2023 2022
Amount Percent of Total Amount Percent of Total Amount Percent of Total
(Dollars in thousands)
Noninterest bearing $ 80,772 7.1 % $ 100,899 8.4 % $ 119,944 10.3 %
Interest-bearing demand 56,957 5.1 56,968 4.8 96,632 8.3
Savings 16,277 1.4 18,886 1.6 23,636 2.0
Money market 480,520 42.5 529,411 44.3 542,388 46.4
Certificates of deposit, retail:
0.00 - 1.00% 6,341 0.6 15,958 1.4 79,978 6.8
1.01 - 2.00% 4,516 0.4 15,866 1.3 51,486 4.4
2.01 - 3.00% 46,951 4.1 78,658 6.6 92,335 7.8
3.01 - 4.00% 21,854 1.9 14,865 1.2 37,793 3.2
4.01 - 5.00% 308,703 27.3 135,231 11.3 962 0.1
5.01 - 6.00% 60,609 5.4 96,575 8.1
Total certificates of deposit, retail 448,974 39.7 357,153 29.9 262,554 22.3
Brokered deposits:
3.01 - 4.00% - - - - 15,680 1.3
4.01 - 5.00% 26,000 2.3 9,760 0.8 74,088 6.3
5.01 - 6.00% 21,900 1.9 85,500 7.2 - -
Total certificates of deposit, brokered 47,900 4.2 95,260 8.0 89,768 7.6
Interest-bearing demand, brokered - - 25,096 2.1 25,062 2.2
Money market, brokered - - 10,434 0.9 10,056 0.9
Total brokered deposits 47,900 4.2 130,790 11.0 124,886 10.7
Total deposits $ 1,131,400 100.0 % $ 1,194,107 100.0 % $ 1,170,040 100.0 %
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.
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, 2024, our remaining FHLB credit capacity, based on total assets, was $397.6 million. However, based on the amount of collateral pledged to secure credit at the FHLB, our remaining collateral based capacity was $281.2 million and outstanding advances from the FHLB totaled $110.0 million. In addition, at December 31, 2024, we had supplemental funding sources of $69.7 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, 2024, we had seven interest rate swaps with an aggregate notional amount of $100.0 million and a fair value gain of $6.3 million, as compared to eight interest rate swaps with an aggregate notional amount of $115.0 million and a fair value gain of $7.6 million at December 31, 2023. During the third quarter of 2024, a $15.0 million notional swap with a five-year maturity and a fixed rate of 1.44% 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 10 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, 2024, 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 71% 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.
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, 2024, we had 135 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, 2024, our workforce was 63.0% female and 37.0% male, and women held 51.9% of the Bank’s management roles. The average tenure of mid-level officers and managers is 5.2 years, and the average tenure of executive/senior level officers is 10.8 years. The ethnicity of our workforce was 62.3% White, 26.1% Asian, 3.6% Hispanic or Latino, 3.6% Black, 2.2% Two or More Races, 0.7% Native Hawaiian or Other Pacific Islander, and 1.4% undisclosed at December 31, 2024.
The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31, 2024, 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 41.7 % 50.0 % 8.7 %
Mid-level officers and managers 54.8 31.0 30.4
Professionals 44.4 37.0 19.6
Sales workers 80.0 40.0 3.6
Administrative support 82.7 40.4 37.7
Total 51.9 % 37.7 % 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 offers competitive and comprehensive benefits to employees, emphasizing their health and well-being through various support programs. Eligible employees may have access to benefits such as health and life insurance, an employee assistance program, paid holidays, paid time off, and other applicable leave. Previously, the Company also provided a 401(k) savings plan and a profit-sharing plan; however, these programs were terminated at the end of the third quarter of 2024 in anticipation of the Global transaction. While the transaction was initially expected to be completed by the end of 2024, it is now anticipated to close in the second quarter of 2025.
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 ensure 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. As a bank holding company, First Financial Northwest is subject to examination and supervision by, 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, a Washington-chartered commercial bank, 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.
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.
In October 2022, the FDIC Board adopted a final rule to increase initial base deposit insurance assessment rate schedules uniformly by two basis points, beginning in the first quarterly assessment period of 2023. Further, in November 2023, the FDIC Board adopted a final rule to implement a special assessment to banking organizations with total assets of $5.0 billion or more, to recover the estimated loss to the DIF associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The special assessment was determined at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly assessment periods, beginning with the first quarterly assessment period of 2024. No banking organizations with total assets of under $5 billion were required to pay a special assessment.
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 $692,000 in FDIC assessments for the year ending December 31, 2024.
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 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. The Bank did not elect to opt into the CBLR as of December 31, 2024.
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, 2024, First Financial Northwest Bank met the requirements to be “well capitalized” and met the fully phased-in capital conservation buffer requirement.
The table below sets forth the Bank’s capital position at December 31, 2024 and 2023, based on FDIC thresholds to be well-capitalized.
December 31,
2024 2023
Amount Ratio Amount Ratio
(Dollars in thousands)
Bank equity capital under GAAP $ 155,602 $ 152,264
Tier 1 leverage capital $ 160,671 11.16 % $ 158,629 10.18 %
Tier 1 leverage capital requirement 72,011 5.00 77,936 5.00
Excess $ 88,660 6.16 % $ 80,693 5.18 %
Common equity tier 1 $ 160,671 15.40 % $ 158,629 14.90 %
Common equity tier 1 capital requirement 67,831 6.50 69,220 6.50
Excess $ 92,840 8.90 % $ 89,409 8.40 %
Tier 1 risk-based capital $ 160,671 15.40 % $ 158,629 14.90 %
Tier 1 risk-based capital requirement 83,485 8.00 85,194 8.00
Excess $ 77,186 7.40 % $ 73,435 6.90 %
Total risk-based capital $ 173,748 16.65 % $ 171,971 16.15 %
Total risk-based capital requirement 104,356 10.00 106,493 10.00
Excess $ 69,392 6.65 % $ 65,478 6.15 %
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 at December 31, 2024, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
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 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, 2024, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC. For additional information, see Note 13 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, 2024, the Bank held $5.9 million in FHLB stock that was in compliance with the holding requirements. The FHLB pays dividends quarterly, and the Bank received $597,000 in dividends during the year ended December 31, 2024.
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 the 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, 2024, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 40.5% of regulatory capital. In addition, at December 31, 2024, the Bank’s loans on commercial real estate, as defined by the FDIC, were 300.8% 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 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 potentially 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, 2024, 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, 2024, 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.
On October 24, 2023, the federal banking agencies, including the FDIC issued a final rule designed to strengthen and modernize regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type. The applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027.
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 (“GLBA”) established a framework allowing affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. Federal banking agencies, including the FDIC, have implemented guidelines mandating that financial institutions develop, implement, and maintain administrative, technical, and physical safeguards to protect customer information. These guidelines emphasize risk management, particularly concerning information technology and third-party service providers. Additionally, the GLBA requires financial institutions to disclose their privacy policies to consumers, detailing information-sharing practices and providing options to opt out of certain disclosures.
In 2022, federal banking agencies adopted a rule introducing new notification requirements for banking organizations and their service providers concerning significant cybersecurity incidents. Banks must notify their primary federal regulator as soon as possible, and no later than 36 hours after identifying a computer-security incident that materially affects, or is reasonably likely to materially affect, the bank's operations, its ability to deliver services, or the stability of the financial sector. Service providers are required to inform affected banks promptly if they experience an incident that has materially disrupted, or is likely to disrupt, services for four or more hours.
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, Bank Secrecy 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 require 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 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. As of now, the CFPB’s future remains uncertain, with ongoing discussions about potential restructuring or replacement by other regulatory framework.
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.
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, 2024, 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 2021 through 2024.
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.
Net Operating Loss Carryovers. A financial institution may carry forward net operating losses indefinitely. The Company had no net operating loss carryforwards at December 31, 2024.
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 12 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 69, 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 61, 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 60, 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 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 44, 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 65, 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.

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ITEM 1A. RISK FACTORS
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 88.6% of loans to borrowers or secured by properties located in Washington and 11.4% of loans to borrowers or secured by properties in other states. Through our efforts to geographically diversify our loan portfolio, at December 31, 2024, our portfolio included $131.5 million, or 11.4% of loans to borrowers or secured by properties located in 42 other states and Washington, D.C., including $29.6 million, or 2.6% 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. Furthermore, trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.
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.
•Elevated instances of loan delinquencies, problematic assets, and foreclosures.
•An increase in our allowance for credit losses 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.
•Reduction in our low-cost or noninterest-bearing deposits.
A decline in local economic conditions could disproportionately affect our earnings and capital compared to larger financial institutions with more geographically diverse real estate loan portfolios. Because our loan portfolio is predominantly secured by real estate, deterioration in real estate markets could impair borrowers’ ability to repay loans and reduce the value of the underlying collateral. Real estate values are influenced by a range of factors, including economic conditions, government policies, natural disasters (e.g., fires, earthquakes, flooding and tornadoes), and trade-related pressures affecting construction costs or material availability. Liquidating significant collateral during a period of depressed real estate values could negatively impact our financial condition and profitability.
Adverse changes in the regional and general economy could reduce our growth rate, impair loan collections, and generally harm our financial condition and results of operations.
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our financial performance and operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Higher U.S. tariffs on imported goods could exacerbate inflationary pressures by increasing the cost of goods and materials for businesses and consumers. This may particularly affect small to medium-sized businesses, as they are less able to leverage economies of scale to mitigate cost pressures compared to larger businesses. Consequently, our business clients may experience increased financial strain, reducing their ability to repay loans and adversely impacting our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to us to increase, which could adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature, and as a result, interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. However, interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services, creating additional uncertainty in the economic environment.
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, 2024, construction/land loans totaled $67.1 million, or 5.8% of our total loan portfolio. At December 31, 2024, $49.7 million were one-to-four family construction loans and $7.9 million were multifamily construction loans. We had no commercial construction loans at December 31, 2024. Land loans, which are loans made with land as security, totaled $9.6 million, or 0.8% of our total loan portfolio at December 31, 2024. 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 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, 2024, $49.7 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, 2024, 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, 2024, we had $374.4 million of commercial real estate loans, representing 32.3% of our total loan portfolio and $126.3 million of multifamily loans, representing 10.9% 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 300.8% of total capital at December 31, 2024. 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 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, 2024, $217.4 million, representing 43.3% of our one-to-four family residential loan portfolio and 18.8% 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, 2024, we had 123 non-owner occupied residential loan relationships with an outstanding balance over $500,000 and an aggregate balance of $175.6 million.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2024, $502.0 million, or 43.5% of our total loan portfolio, was secured by first liens on one-to-four family residential properties. In addition, at December 31, 2024, our home equity lines of credit totaled $12.6 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 2024). 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, 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, 2024, our loan portfolio included $83.4 million, constituting 7.2% of total loans, in counties located within Washington State but outside of our primary market area. In addition, our portfolio included $131.6 million, or 11.4% 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 to us any credit deterioration in these loans 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, 2024, we had $18.0 million in loan participations in which we were not the lead lender.
We engage in 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.
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. A 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 classic or collectible cars during periods of reduced values could adversely affect our financial condition and profitability. At December 31, 2024, our loan portfolio included $59.6 million in classic and collectible car 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 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 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, which is significantly affected by interest rates. Interest rates are highly sensitive to factors beyond our control, such as general economic conditions and policies set by governmental and regulatory bodies, particularly the Federal Reserve. Increases in interest rates could reduce our net interest income, weaken the housing market by curbing refinancing activity and home purchases, and negatively affect the broader U.S. economy, potentially leading to slower economic growth or recessionary conditions.
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 this risk effectively, our business, financial condition and results of operations could be materially affected.
Our net interest margin, the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, can be adversely affected by interest rate changes. While yields on assets and costs of liabilities tend to move in the same direction, they may do so at different speeds, causing the margin to expand or contract. As our interest-bearing liabilities often have shorter durations than our interest-earning assets, a rise in interest rates may lead to funding costs increasing faster than asset yields, compressing our net interest margin. Additionally, changes in the slope of the yield curve, such as flattening or inversion, can further pressure our margins as funding costs rise relative to asset yields. Conversely, falling rates can increase loan prepayments, leading to reinvestment in lower-yielding assets, reducing 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 include interest rate floors that prevent the loan’s contractual interest rate from falling below a specified level. At December 31, 2024, 61.5% of our net loans were comprised of adjustable-rate loans. At that date, $398.2 million, or 56.0%, of these loans with an average interest rate of 5.02% were at their floor interest
rate. The presence of interest rate floors can increase income during periods of declining interest rates, as the rates on these loans cannot adjust downward below the floor. However, this benefit is subject to the risk that borrowers may refinance these loans to take advantage of lower rates. Furthermore, when loans are at their floor interest rates, our interest income may not increase as quickly as our cost of funds during periods of increasing interest rates, which could materially and adversely affect our results of operations.
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.
While we employ asset and liability management strategies to mitigate interest rate risk, unexpected, substantial, or prolonged rate changes could materially affect our financial condition, liquidity and results of operations. Also, our interest rate risk models and assumptions may not fully 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, 2024, we had interest rate swaps outstanding with an aggregate notional amount of $100.0 million. At December 31, 2024, the fair value of our interest rate swaps was $6.3 million. 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.
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 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. Additionally, any perceived or actual failure to prevent money laundering or terrorist financing activities could significantly damage our reputation. These outcomes 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 risks we face. These risks include liquidity, credit, market, interest rate, operational, legal and compliance, and reputational risks, among others. We also maintain a compliance program designed to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. Although we continuously assess and improve these programs, 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 was the implementation of the CECL model. Under the CECL model, financial assets carried at amortized cost, such as loans and HTM 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.
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 customers or counterparties. Even though we have no knowledge of any of these events affecting the system we operate and control, our risk and exposure to these matters remains heightened and 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. As of the date of this filing, we have not had any material breaches.
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. Even though we had no major system failures in 2024, 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.
Our current and future uses of Artificial Intelligence (AI) and other emerging technologies may create additional risks.
The increasing adoption of AI in financial services presents significant opportunities but also introduces a range of risks that could impact our operations, regulatory compliance, and customer trust. AI introduces model risk, where flawed algorithms or biased data could result in inaccurate credit decisions, compliance violations, or discriminatory outcomes in lending or customer service. Cybersecurity threats, such as data breaches, adversarial attacks, and data poisoning, pose significant challenges, particularly as these systems handle large volumes of sensitive customer information. Additionally, the opaque nature of some AI models, often referred to as "black-box" systems, raises regulatory compliance concerns, as regulators increasingly require transparency and explainability in AI-driven decision-making.
Operational risks also arise from potential system failures, over-reliance on AI, and integration challenges with existing infrastructure. Disruptions in AI systems could impact critical functions such as fraud detection, transaction monitoring, and customer support. Ethical and reputational risks, including unintended consequences or perceived unfairness in AI-driven decisions, may erode customer trust and expose us to regulatory scrutiny.
Mitigate these risks requires a robust governance framework, regularly testing and auditing of AI models, and strong human oversight. Investments in cybersecurity, data privacy protections, and employee training are critical to managing these risks.
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
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 products and services necessary for our day-to-day operations. Accordingly, our operations are exposed to risks associated with vendor performance under service level agreements. If a vendor fails to meet its contractual obligations due to changes in its organizational structure, financial condition, support for existing products and services, strategic focus, or any other reason, our operations could be disrupted, potentially causing a material adverse impact on our financial condition and results of operations. Furthermore, we could be adversely affected if a vendor agreement is not renewed or is renewed on terms less favorable to us. Regulatory agencies also require financial institutions to remain accountable for all aspects of vendor performance, including activities delegated to third parties. Additionally, disruptions or failures in the physical infrastructure or operating systems supporting our business and customers, or cyber-attacks or security breaches involving networks, systems, or devices used by our customers to access our services, could lead to client attrition, regulatory fines or penalties, reputational damage, reimbursement or compensation costs, and increased compliance expenses. Any of these outcomes could materially and adversely affect our financial condition and results of operations.
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, deposit maturities and withdrawals, payments on debt obligations, and other cash commitments under both normal operating conditions and unpredictable circumstances, including events causing industry or financial market stress. An inability to raise funds through deposits, borrowings, loan and investment security sales, or other sources could severely impact our liquidity. We rely on customer deposits and, at times, borrowings from the FHLB of Des Moines and other wholesale funding sources to fund operations. Deposit flows and loan and mortgage-related security prepayments are strongly influenced by external factors, such as interest rate trends (both actual and perceived) and market competition. Changes to the FHLB of Des Moines’s lending policies or underwriting guidelines may limit our ability to borrow and adversely affect our liquidity. Although we have historically been able to replace maturing deposits and borrowings, future replacements may be challenging due to changes in our financial condition, the FHLB of Des Moines’s condition, or broader market disruptions. Our access to adequate funding could also be impaired by factors affecting us specifically or the financial industry generally, such as financial market disruptions, negative perceptions of the financial services sector, or deteriorating credit markets. Additional challenges to liquidity could arise from reduced business activity in our core markets, adverse regulatory actions, or negative operating results. Any significant decline in funding availability could impede our ability to originate loans, invest in securities, meet expenses, or fulfill obligations such as repaying borrowings and meeting withdrawal demands, potentially resulting in a material adverse impact 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.
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 in the banking industry is intense, with a limited pool of candidates experienced in community banking. Our success relies on attracting and retaining skilled management, loan origination, finance, administrative, marketing, and technical personnel, as well as on the continued contributions of key executives, including our President, and other critical employees. Losing any of these individuals could result in a challenging transition period and negatively impact our operations. Additionally, 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. The loss of these key personnel or directors nearing retirement without suitable replacements could adversely affect our business.
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 Financial 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.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from clients, regulators, investors, and other stakeholders regarding their environmental, social, and governance (“ESG”) practices and disclosures. Investor advocacy groups, investment funds, and influential investors are particularly focused on issues related to the environment, health and safety, diversity, labor conditions, human rights, and corporate governance. While current trends suggest rising ESG-related compliance costs, a potential shift in government policy under a new administration could lead to a rollback of certain ESG-related regulations, potentially easing compliance burdens and reducing operational costs. However, failure to adapt to evolving regulatory requirements, or to meet the expectations of investors and other stakeholders, could still negatively impact our reputation, hinder our ability to do business with key partners, and affect our stock price. Furthermore, even with a potential reduction in government oversight, private-sector entities, including advocacy groups and institutional investors, may continue to demand greater transparency, requiring companies to navigate a more fragmented and potentially inconsistent landscape of voluntary reporting, due diligence, and disclosure obligations.
Risks Related to the Pending Global Transaction
Failure to complete the Global transaction could negatively impact the Company.
If the Global transaction is not completed for any reason, there may be various adverse consequences and the Company may experience negative reactions from the financial markets and from its customers and employees. For example, the Company’s business may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Global transaction, without realizing any of the anticipated benefits of completing the Global transaction. Additionally, if the Global P&A Agreement is terminated, the market price of the Company common stock could decline to the extent that current market prices reflect a market assumption that the Global transaction will be beneficial and will be completed. The Company could also be subject to litigation related to any failure to complete the Global transaction or to proceedings commenced against the Company to perform its obligations under the P&A Agreement. If the P&A Agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $9.4 million to Global. Additionally, the Company has incurred substantial expenses in connection with the negotiation and completion of the transactions contemplated by the P&A Agreement, as well as the costs and expenses of preparing, filing, printing, and mailing the proxy statement, and all filing and other fees paid in connection with the Global transaction. If the Global transaction is not completed, the Company would have to pay these expenses without realizing the expected benefits of the Global transaction.
The Company will be subject to business uncertainties and contractual restrictions while the Global transaction is pending.
Uncertainty about the effect of the Global transaction on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Global transaction is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. In addition, due to certain restrictions in the P&A Agreement on the conduct of business prior
to completing the Global transaction, we may be unable, during the pendency of the Global transaction to pursue certain actions, even if such actions would prove beneficial, and we may have to forgo certain opportunities we might otherwise pursue.
The P&A Agreement may be terminated in accordance with its terms and the Global transaction may not be completed.
The P&A Agreement is subject to a number of conditions which must be fulfilled in order to complete the Global transaction. These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the Global transaction may not be completed. In addition, the parties can mutually decide to terminate the P&A Agreement at any time or Global or the Company may elect to terminate the P&A Agreement in certain other circumstances.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
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.

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ITEM 2. PROPERTIES
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, 2024, 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 branch 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 9 - “Leases” of the Notes to Consolidated Financial Statements in Item 8 of this report.

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ITEM 3. LEGAL PROCEEDINGS
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, 2024, we were not involved in any significant litigation and do not anticipate incurring any material liability as a result of any such litigation.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 18, 2025, there were approximately 439 shareholders of record, excluding persons or entities that hold stock in nominee or “street name” accounts with brokers.
As of December 31, 2024, our Board of Directors had declared 45 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. The Company’s Board of Directors decided after the June 2024 dividend payment to suspend any further quarterly cash dividends due to the pending asset sale to Global. If the Global transaction does not close and future payments of dividends are declared, these payments 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, 2024.
Period Total Number of Shares Purchased(1)
Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Repurchased Under the Plan(2)
October 1 - October 31, 2024 33,959 $ 23.00 - -
November 1 - November 30, 2024 - - - -
December 1 - December 31, 2024 - - - -
33,959 23.00 -
(1) All shares reported in this column represents shares withheld by the Company to satisfy the exercise costs and tax withholding requirements due upon exercise of vested non-qualified stock options, which were not deemed to be repurchased pursuant to the publicly announced stock repurchase program.
(2) As of the three months ended December 31, 2024, the Company did not have any publicly announced stock repurchase program in place.
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.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 2024 and 2023, 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, 2024. 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 2024, loan repayments outpaced loan originations, refinances and purchases, resulting in a decrease of $35.7 million in net loans receivable with a balance of $1.14 billion at December 31, 2024.
We continued to geographically expand our loan portfolio through purchases of consumer classic and collectible car loans outside of our primary market area. During 2024, we added $17.3 million to our loan portfolio from loan purchases.
At December 31, 2024, our portfolio included $131.5 million in loans to borrowers, with $57.4 million of consumer classic and collectible car loan purchased and $74.1 million secured by real estate and other collateral located in 47 other states, along with Washington, D.C. As of December 31, 2024, the largest concentrations were in California, Florida, Oregon, Texas, and Alabama, totaling $29.6 million, $10.8 million, $10.6 million, $10.4 million and $7.6 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, 2024 was $1.1 million, or $0.12 per diluted share, compared to $6.3 million, or $0.69 per diluted share, for the year ended December 31, 2023. The primary contributor to this decrease was a $5.8 million decline in net interest income, which resulted from a $5.0 million increase in interest expense and a $788,000 decrease in interest income. In addition, we recorded a recapture of the provision for credit losses of $50,000 in 2024, compared to a $208,000 recapture in 2023, primarily due to updates to economic forecasts used for loans and unfunded commitments, a decline in loan portfolio balances, changes in loan portfolio composition and characteristics. The decrease in net income was further impacted by a $1.0 million increase in noninterest expense, partially offset by a $23,000 increase in noninterest income.
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, 2024, the Company recorded a recapture of provision in the amount of $50,000.
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 increased $23,000 during the year ended December 31, 2024, compared to 2023, primarily attributable to increases in BOLI income, wealth management revenue and loan related fees, partially offset by decreases in deposit account related fees and other miscellaneous income.
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, including transaction expenses related to the pending Global transaction. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of leas expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities.
Our noninterest expense for the year ended December 31, 2024 totaled $36.7 million, compared to $35.7 million for the year ended December 31, 2023. The year-over-year increase was primarily due to an increase in professional fees, data processing and salaries and employee benefits, partially offset by lower marketing and other general and administrative expenses and regulatory assessments.
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
•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 an asset 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.
Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Assets. The following table details the changes in the composition of our assets at December 31, 2024 from December 31, 2023.
Balance at
December 31, 2024 Balance at
December 31, 2023 $ Change %
Change
(Dollars in thousands)
Cash on hand and in banks $ 9,535 $ 8,391 $ 1,144 13.6 %
Interest-earning deposits with banks 36,182 22,138 14,044 63.4
Investments AFS, at fair value 151,642 207,915 (56,273) (27.1)
Investments HTM, at amortized cost 2,468 2,456 12 0.5
Loans receivable, net 1,140,186 1,175,925 (35,739) (3.0)
FHLB stock, at cost 5,853 6,527 (674) (10.3)
Accrued interest receivable 6,108 7,359 (1,251) (17.0)
Deferred tax assets, net 2,582 2,648 (66) (2.5)
Premises and equipment, net 18,166 19,667 (1,501) (7.6)
BOLI 38,950 37,653 1,297 3.4
Prepaid expenses and other assets 9,676 10,478 (802) (7.7)
Right of use asset (“ROU”), net 2,357 2,617 (260) (9.9)
Goodwill 889 889 - -
Core deposit intangible, net 295 419 (124) (29.6)
Total assets $ 1,424,889 $ 1,505,082 $ (80,193) (5.3) %
The $80.2 million decrease in total assets during 2024 was primarily a result of declines in our investments AFS and loan portfolio of $56.3 million and $35.7 million, respectively. Additional factors contributing to the change in our assets are described below.
Interest-earning deposits with banks. Interest-earning deposits with banks, consisting primarily of funds held at the FRB, increased by $14.0 million from December 31, 2023 to December 31, 2024. This increase was a result of a decline in loan demand and the decision not to reinvest proceeds from investment maturities, leading to excess funds being deposited into our interest-earning overnight accounts. These funds are readily available for use in meeting our financial obligations.
Investments available-for-sale. During 2024, investments AFS decreased $56.3 million, primarily due to the maturity of $40.0 million of investments and principal payments on mortgage-backed securities. No investments securities were purchased during 2024. Proceeds from investment maturities were used to supplement our funding needs, including paying off brokered deposits as they matured.
The effective duration of our securities portfolio increased to 3.84% at December 31, 2024, as compared to 3.43% at December 31, 2023. 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 decreased by $35.7 million during 2024 to $1.14 billion. During the year ended December 31, 2024, business loans decreased $16.9 million, multifamily loans decreased $11.8 million, one-to-four family loans decreased $11.2 million, and commercial real estate loans decreased $3.5 million. Partially offsetting these decreases were increases in construction/land loans of $6.2 million and consumer loans of $1.2 million, of which $962,000 were classic and collectible car loans.
During 2024, we supplemented our loan originations by purchasing $16.9 million of performing classic and collectible car loans. These purchases reflect our efforts to diversify our loan portfolio with loans meeting our investment and credit quality objectives.
At December 31, 2024, the Bank had $842,000 of nonaccrual loans. Nonaccrual loans as a percentage of total loans increased to 0.07% at December 31, 2024, from 0.02% at December 31, 2023. Adversely classified loans, defined as substandard or below, decreased to $33.0 million at December 31, 2024, from $46.1 million at December 31, 2023. This decrease was primarily due to $4.3 million in principal paydowns and loan payoffs, as well as upgrades of two commercial real estate loans with an aggregate balance of $9.2 million from substandard to pass, following improvements in these loans’ collateral values. The Bank is monitoring these loans closely and does not expect to incur any loss.
The following table presents a breakdown of our nonaccrual loans at the dates indicated.
December 31, $
Change
2024 2023
(Dollars in thousands)
Nonaccrual loans:
Real estate:
One-to-four family residential $ 299 $ - $ 299
Consumer 543 220 323
Total nonaccrual loans $ 842 $ 220 $ 622
The Bank did not foreclose on any properties during 2024 or 2023. There was no LIP related to nonperforming loans at December 31, 2024 and 2023. The level of our nonperforming assets reflects the modest risk profile of our loan portfolio and our commitment to promptly identifying any problem loans and taking 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, 2024 was adequate to cover the expected credit losses 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 $15.1 million at December 31, 2024, compared to $15.3 million at December 31, 2023, with both balances attributable solely to the loan portfolio. The ACL represented 1.30% of total loans receivable at December 31, 2024 as compared to 1.28% of total loans receivable at December 31, 2023. There was no ACL recorded for securities as of December 31, 2024 and 2023. The following table details activity and information related to the ACL for the years ended December 31, 2024 and 2023.
At or For the Years Ended
December 31,
2024 2023
(Dollars in thousands)
ACL balance at beginning of year $ 15,306 $ 15,227
Adjustment for adoption of Topic 326 - 500
Recapture of provision for credit losses - loans (200) (400)
Charge-offs (41) (22)
Recoveries 1 1
ACL balance at end of year $ 15,066 $ 15,306
ACL as a percent of total loans 1.30 % 1.28 %
ACL as a percent of nonaccrual loans 1,789.31 % 6,957.27 %
Total nonaccrual loans $ 842 $ 220
Nonaccrual loans as a percent of total loans 0.07 % 0.02 %
Total loans receivable $ 1,155,252 $ 1,191,231
Total loans originated 195,458 181,156
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, 2024, 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 $295,000 at December 31, 2024.
Deposits. During the year ended December 31, 2024, deposits decreased $62.7 million from December 31, 2023. Details of deposit balances and their concentrations are as follows:
December 31,
2024 2023
(Dollars in thousands)
Noninterest-bearing demand deposits $ 80,772 7.1 % $ 100,899 8.4 %
Interest-bearing demand deposits 56,957 5.1 56,968 4.8
Savings 16,277 1.4 18,886 1.6
Money market 480,520 42.5 529,411 44.3
Certificates of deposit, retail 448,974 39.7 357,153 29.9
Brokered deposits (1)
47,900 4.2 130,790 11.0
Total deposits $ 1,131,400 100.0 % $ 1,194,107 100.0 %
____________
(1) Brokered deposits at December 31, 2024 were all certificates of deposit. Brokered deposits at December 31, 2023, were comprised of $95.2 million of certificates of deposit, $25.1 million of interest-bearing demand deposits, and $10.4 million of money market deposits.
The decline in deposits during 2024 was primarily the result of a $154.5 million decrease in the aggregate of brokered deposits, money market accounts, savings accounts, interest-bearing demand and noninterest-bearing demand accounts, partially offset by a $91.2 million increase in retail certificates of deposit due in large part to promotions of these products. During 2024, management chose to reduce reliance on funds from the wholesale markets due to decreases in the loan portfolio
and overall loan demand. If loan demand increases and retail deposits are not sufficient to meet our financial obligations, we may reconsider the use of brokered deposits as an alternative funding source. While the rates paid on brokered deposits 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.
At December 31, 2024 and December 31, 2023, we held $78.9 million and $85.8 million in public funds, of which $42.8 million and $39.4 million were retail certificates of deposits, respectively. These funds were secured with the Washington State Public Deposit Protection Commission by $28.8 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, 2024 were $110.0 million compared to $125.0 million at December 31, 2023. At December 31, 2024, our FHLB advances consisted of $25.0 million of fixed-rate three-month advances that renew quarterly, $75.0 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 with flexibility to adjust the level of our borrowings as our funding needs change, consistent with our asset/liability objectives. Average borrowings during 2024 were $126.9 million. At December 31, 2024, all of our FHLB advances were due to mature within one month.
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. At December 31, 2024, the Bank had seven interest rate swap agreements as compared to eight interest rate swap agreements at December 31, 2023. During the third quarter of 2024, a $15.0 million notional swap with a five-year maturity and a fixed rate of 1.44% matured and was not replaced. As of December 31, 2024, our interest rate swap agreements had an aggregate notional amount of $100.0 million, with individual notional amounts ranging from $10.0 million to $15.0 million, a weighted-average remaining term of 2.3 years and a weighted-average fixed rate of 1.93%. The remaining maturity of these agreements is from six months to 4.8 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 Secured Overnight Financing Rate (“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, 2024, we recognized a $6.3 million fair value asset as a result of the increase in market value of the interest rate swap agreements.
Stockholders’ Equity. Total stockholders’ equity was $161.6 million at December 31, 2024, a slight decrease from $161.7 million at December 31, 2023. Decreases to stockholders’ equity were due to the payment of shareholder cash dividends of $0.26 per share, reducing retained earnings by $2.4 million, and a $2.0 million decrease in additional paid-in-capital from the cancellation of stock awards. These decreases were partially offset by $1.1 million of net income, $241,000 in stock-based compensation recognized as additional paid-in-capital over the vesting periods of the stock awards, a $1.4 million decrease in accumulated other comprehensive loss, net of tax, resulting from increases in the fair value of AFS investments (partially offset by decreases in the value of our derivative portfolio), and a $1.5 million increase in additional paid-in capital due to the exercise of stock options.
Comparison of Operating Results for the Years Ended December 31, 2024 and December 31, 2023
Net Interest Income. Net interest income in 2024 was $34.8 million, a $5.8 million or 14.3% decrease from $40.5 million in 2023, resulting from a $788,000 decrease in interest income and a $5.0 million increase in interest expense. The decrease in interest income was primarily due to the $70.0 million decrease in the average balance of interest-earning assets, partially offset by the increase in average yield on interest-earning assets to 5.66% for the year ended December 31, 2024, from 5.44% for the year ended December 31, 2023, a result of increases in market interest rates during the year. The average cost of interest-bearing liabilities increased to 3.63% for the year ended December 31, 2024, from 3.05% for the year ended December 31, 2023, as a result of the persistently elevated short-term interest rates and the change in the Company’s deposit mix. In 2024, due to a decline in loan demand, we decreased the usage of brokered deposits to meet our funding needs, resulting in a $91.0 million decrease in the average balance of these deposits. Also, our average balance of lower-costing interest-bearing demand deposits and savings deposits decreased $23.6 million and $2.9 million, respectively. These decreases were partially offset by an increase in higher-costing money market accounts and retail certificates of deposit of $8.6 million and $50.3 million, respectively, due in large part to promotions of these accounts in 2024. As a result of this shift in our deposit mix, our net interest margin decreased to 2.54% for the year ended December 31, 2024, from 2.82% for the year ended December 31, 2023. 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, 2024 and 2023:
Year Ended December 31,
2024 2023 Change in Interest and Dividend Income
Average
Balance Yield Average
Balance Yield
(Dollars in thousands)
Loans receivable, net $ 1,139,864 5.87 % $ 1,172,569 5.71 % $ 3
Investments 173,276 4.26 213,261 3.97 (1,086)
Interest-earning deposits 47,723 5.12 44,684 5.06 183
FHLB stock 6,614 9.03 6,857 7.07 112
Total interest-earning assets $ 1,367,477 5.66 % $ 1,437,371 5.44 % $ (788)
During the year ended December 31, 2024, interest income on net loans receivable remained unchanged from the prior year. The average loan yield increased to 5.87% from 5.71%, while the average balance of loans receivable decreased $32.7 million, primarily due to loans originated or refinanced at higher rates or adjusted upward in this rising rate environment.
Interest income on investments AFS decreased $1.1 million during 2024, due to a $40.0 million decrease in the average balance of investments, as proceeds from maturing investments were not reinvested. This decrease was partially offset by a 29 basis point increase in yield on investments AFS to 4.26% from 3.97% in the prior year. More than half of our investment portfolio was comprised of variable rate securities that repriced during the elevated interest rate environment of 2024.
Interest income on interest-earning deposits increased $183,000 during the year ended December 31, 2024, compared to the prior year, due to a $3.0 million increase in their average balance and, to a lesser extent, a six basis point increase in the average yield to 5.12% in 2024, from 5.06% in 2023.
The following table details average balances, cost of funds and the resulting changes in interest expense for the years ended December 31, 2024 and 2023:
Year Ended December 31,
2024 2023 Change in
Interest
Expense
Average
Balance Cost Average
Balance Cost
(Dollars in thousands)
Interest-bearing demand accounts $ 57,078 0.19 % $ 80,646 1.26 % $ (902)
Savings accounts 17,734 0.05 20,612 0.03 2
Money market accounts 507,018 3.63 498,419 2.91 3,904
Certificates of deposit, retail 392,888 4.27 342,638 3.13 6,043
Brokered deposits 71,232 5.34 162,195 5.02 (4,337)
FHLB advances and other borrowings 126,931 2.75 127,263 2.52 282
Total interest-bearing liabilities $ 1,172,881 3.63 % $ 1,231,773 3.05 % $ 4,992
Interest expense increased $5.0 million to $42.6 million for the year ended December 31, 2024, from $37.6 million for the year ended December 31, 2023. The increase was primarily a result of the increase in average cost of interest-bearing deposits, which increased to 3.74% in 2024 from 3.12% in 2023, reflecting a shift towards higher-costing deposits.
Interest expense on money market accounts and retail certificates of deposit increased $3.9 million and $6.0 million, respectively, during the year ended December 31, 2024, compared to the year ended December 31, 2023. The increase in interest expense on money market accounts was driven by an increase in the average cost of these accounts to 3.63% in 2024, from 2.91% in 2023 and, to a lesser extent, an $8.6 million increase in the average balance. The increase in interest expense on retail certificates of deposit resulted from a $50.3 million increase in the average balance and a 114 basis points increase in average cost , which rose to 4.27% in 2024 from 3.13% in 2023.
Partially offsetting these increases were decreases in interest expense on interest-bearing demand accounts and brokered deposits, which decreased by $902,000 and $4.3 million, respectively. The decrease in interest expense on interest-bearing demand accounts was primarily due to a reduction in the average cost to 0.19% in 2024 from 1.26% in 2023, along with a $23.6 million decline in the average balance. Interest expense on brokered deposit decreased primarily due a $91.0 million decline in the average balance, as we reduced reliance on brokered deposits in response to lower loan demand and repaid some brokered deposits using proceeds from investment maturities. This decrease was partially offset by a 32 basis point increase in the average cost to 5.34% in 2024 from 5.02% in 2023.
Interest expense on FHLB advances and other borrowings increased $282,000 in 2024 compared to 2023 due to a 23 basis point increase in the average rate paid on advances, partially offset by a $332,000 decrease in average balance. The average cost of these advances increased to 2.75% in 2024, compared to 2.52% in 2023.
Provision for Credit Losses. We recorded a recapture of the provision for credit losses for loans of $200,000 for the year ended December 31, 2024. This, combined with a $150,000 provision for credit losses on unfunded loan commitments, resulted in a net recapture of $50,000. The recapture of provision for credit losses on loans was primarily driven by updates to economic forecasts used for loans and unfunded commitments, a decline in the loan portfolio balances, and changes in portfolio mix, characteristics, and other factors.
In 2023, we recorded a $400,000 recapture of the provision for credit losses for loans. Combined with a $192,000 provision for credit losses on unfunded commitments, this resulted in a net recapture of $208,000. The recapture 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, and changes in the loan portfolio balances, mix and characteristics, among other factors. Additionally, 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 net $79,000 increase in the ACL.
Noninterest Income. Noninterest income was $2.8 million for the years ended December 31, 2024 and 2023. The following table provides a detailed analysis of the changes in the components of noninterest income:
Year Ended
December 31, 2024 Year Ended
December 31, 2023 $ Change %
Change
(Dollars in thousands)
BOLI change in cash surrender value $ 1,245 $ 1,081 $ 164 15.2 %
Wealth management revenue 279 253 26 10.3
Deposit related fees 923 956 (33) (3.5)
Loan related fees 296 275 21 7.6
Other 53 208 (155) (74.5)
Total noninterest income $ 2,796 $ 2,773 $ 23 0.8 %
The largest year-over-year change in noninterest income was a $164,000 increase in BOLI income, primarily due to net increases in cash surrender value of certain policies and a $21,000 cash dividend received during the year of 2024. The increase was partially offset was a $155,000 decrease in other noninterest income during 2024, compared to the prior year, primarily due to a $157,000 market-to-market value adjustment made for our fintech focused investment in 2023 with no similar adjustment in 2024.
Additional changes to noninterest income in 2024, compared to 2023, included a $26,000 increase in wealth management revenue due to increased sales of products and services following the transition to a new third-party platform, a $33,000 decrease in deposit related fees primarily due to lower interchange income from debit cards, and a $21,000 increase in loan related fees attributable to higher loan application deposit forfeitures collected in 2024.
Noninterest Expense. Noninterest expense increased $1.0 million, or 2.9% to $36.7 million for the year ended December 31, 2024 from $35.7 million for the year ended December 31, 2023. The following table provides a detailed analysis of the changes in the components of noninterest expense:
Year Ended
December 31, 2024 Year Ended
December 31, 2023 $ Change %
Change
(Dollars in thousands)
Salaries and employee benefits $ 20,652 $ 20,366 $ 286 1.4 %
Occupancy and equipment 4,789 4,748 41 0.9
Professional fees 3,011 2,288 723 31.6
Data processing 3,285 2,857 428 15.0
Regulatory assessments 662 763 (101) (13.2)
Insurance and bond premiums 477 468 9 1.9
Marketing 179 343 (164) (47.8)
Other general and administrative 3,638 3,833 (195) (5.1)
Total noninterest expense $ 36,693 $ 35,666 $ 1,027 2.9 %
For the year ended December 31, 2024, professional fees increased $723,000 to $3.0 million, primarily due to $826,000 in higher transaction-related expenses for the Global transaction compared to expenses for a terminated business combination in 2023. In addition, professional fees related to audits and examinations increased $46,000. These increases were partially offset by a $64,000 decrease in consulting fees and a $97,000 decrease in legal fees.
Data processing expense increased $428,000 for the year ended December 31, 2024, compared to the prior year, primarily due to the reclassification of certain processing costs previously categorized under other general and administrative expenses. Additionally, starting in March 2024, we became ineligible for certain vendor credits, which further contributed to the increase. Total vendor credits received in 2024 were $28,000, compared to $207,000 in 2023.
Salaries and employee benefits, the largest component of noninterest expense, increased $286,000 in 2024 compared to 2023 due to a number of factors: an $818,000 increase in in defined benefit expenses, primarily due to the purchase of a single premium group annuity to fulfill obligations to plan participants; a $187,000 increase in Director compensation; and a $1.1 million increase in bonuses, primarily due to a loan modification project for the Global transaction, incentive accrual
adjustments for the expected 2024 payout, and an expense adjustment for the under-accrual of 2023 incentive payout. These increases were partially offset by an $891,000 decline in deferred loan origination costs, related to the aforementioned loan modifications, a $363,000 decrease in stock-based compensation, a $130,000 decrease and $133,000 decrease in 401(k) and profit-sharing contributions, respectively, due to the termination of these programs at the end of the third quarter of 2024 in anticipation of the Global transaction closing, a $117,000 decrease in health insurance, and a $257,000 decrease in salaries and wages, due to a reduction in staffing in 2024.
These increases were partially offset by a $101,000 decrease in regulatory assessments, a $164,000 decrease in marketing expenses, and a $195,000 decrease in other general and administrative expense. Other general and administrative expense decreased primarily due to the reclassification of data processing cost, the absence of a $190,000 one-time expense related to the Bank’s 100-year celebration in 2023, a $111,000 decrease in state/local taxes, and a $77,000 reduction in Visa operating expenses, partially offset by a $165,000 increase in online deposit processing expenses and a $52,000 increase in miscellaneous expense for loan products.
Federal Income Tax Expense. We recorded a $156,000 federal income tax benefit for 2024, compared to $1.6 million income tax provision for 2023. The decrease in federal income tax provision for 2024 was primarily the result of a $6.9 million decrease in pretax net income.
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,
2024 2023 2022
Average Balance (1)
Interest and Dividends Yield/Cost Average Balance (1)
Interest and Dividends Yield/Cost Average Balance (1)
Interest and Dividends Yield/Cost
(Dollars in thousands)
Interest-earnings assets:
Loans receivable, net $ 1,139,864 $ 66,941 5.87 % $ 1,172,569 $ 66,938 5.71 % $ 1,128,835 $ 52,935 4.69 %
Investments, taxable(2)
150,746 6,886 4.57 190,968 7,965 4.17 180,085 5,105 2.83
Investments, non-taxable(2)
22,530 502 2.23 22,293 509 2.28 23,063 498 2.16
Interest-earning deposits 47,723 2,444 5.12 44,684 2,261 5.06 30,176 386 1.28
FHLB stock 6,614 597 9.03 6,857 485 7.07 6,256 318 5.08
Total interest-earning assets 1,367,477 77,370 5.66 1,437,371 78,158 5.44 1,368,415 59,242 4.33
Noninterest earning assets 88,738 92,140 87,324
Total average assets $ 1,456,215 $ 1,529,511 $ 1,455,739
Interest-bearing liabilities:
Interest-bearing demand accounts $ 57,078 $ 111 0.19 % $ 80,646 $ 1,013 1.26 % $ 101,744 $ 478 0.47 %
Savings accounts 17,734 8 0.05 20,612 6 0.03 23,823 7 0.03
Money market accounts 507,018 18,407 3.63 498,419 14,503 2.91 593,984 3,744 0.63
Certificates of deposit, retail 392,888 16,784 4.27 342,638 10,741 3.13 273,197 3,635 1.33
Brokered deposits 71,232 3,807 5.34 162,195 8,144 5.02 41,603 1,091 2.62
Total deposits 1,045,950 39,117 3.74 1,104,510 34,407 3.12 1,034,351 8,955 0.87
Advances from the FHLB and other borrowings 126,931 3,490 2.75 127,263 3,208 2.52 113,890 1,934 1.70
Total interest-bearing liabilities 1,172,881 42,607 3.63 1,231,773 37,615 3.05 1,148,241 10,889 0.95
Noninterest bearing liabilities 121,949 137,310 148,813
Average equity 161,385 160,428 158,685
Total average liabilities and equity $ 1,456,215 $ 1,529,511 $ 1,455,739
Net interest income $ 34,763 $ 40,543 $ 48,353
Net interest margin 2.54 % 2.82 % 3.53 %
Ratio of average interest-
earning assets to average
interest-bearing liabilities 116.59 % 116.69 % 119.17 %
________________
(1) The average loans receivable, net balances include nonaccrual loans and deferred fees (costs).
(2) Average balances of investments are based on fair value.
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.
Weighted Average Yield/Rate at
December 31, 2024 Net Yield/Rate at and for the
Year Ended December 31,
2024 2023 2022
Yield on interest-earning assets:
Loans receivable, net 5.76 % 5.87 % 5.71 % 4.69 %
Investments, taxable 4.07 4.57 4.17 2.83
Investments, non-taxable 1.98 2.23 2.28 2.16
Interest-earning deposits 4.37 5.12 5.06 1.28
FHLB stock 8.96 9.03 7.07 5.08
Total interest-earning assets 5.51 5.66 5.44 4.33
Rate paid on interest-bearing liabilities:
Interest-bearing demand accounts 0.14 0.19 1.26 0.47
Savings accounts 0.03 0.05 0.03 0.03
Money market accounts 3.51 3.63 2.91 0.63
Certificates of deposit, retail 4.41 4.27 3.13 1.33
Brokered deposits 4.74 5.34 5.02 2.62
Total interest-bearing deposits 3.71 3.74 3.12 0.87
Advances from the FHLB and other borrowings 2.23 2.75 2.52 1.70
Total interest-bearing liabilities 3.57 3.63 3.05 0.95
Interest rate spread 1.94 2.03 2.39 3.38
Net interest margin n/a 2.54 2.82 3.53
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, 2024 Compared to December 31, 2023 Change in Interest Year Ended December 31, 2023 Compared to December 31, 2022 Change in Interest
2024 2023
Rate Volume Total Rate Volume Total
(In thousands)
Interest-earning assets:
Loans receivable, net $ 1,870 $ (1,867) $ 3 $ 11,952 $ 2,051 $ 14,003
Investments, taxable 599 (1,678) (1,079) 2,551 309 2,860
Investments, non-taxable (12) 5 (7) 28 (17) 11
Interest-earning deposits 29 154 183 1,689 186 1,875
FHLB stock 129 (17) 112 136 31 167
Net change in interest income 2,615 (3,403) (788) 16,356 2,560 18,916
Interest-bearing liabilities:
Interest-bearing demand accounts (606) (296) (902) 634 (99) 535
Savings accounts 3 (1) 2 - (1) (1)
Money market accounts 3,654 250 3,904 11,361 (602) 10,759
Certificates of deposit, retail 4,468 1,575 6,043 6,182 924 7,106
Brokered deposits 230 (4,567) (4,337) 3,891 3,162 7,053
Advances from FHLB and other borrowings 290 (8) 282 1,047 227 1,274
Net change in interest expense 8,039 (3,047) 4,992 23,115 3,611 26,726
Net change in net interest income $ (5,424) $ (356) $ (5,780) $ (6,759) $ (1,051) $ (7,810)
Asset and Liability Management and Market Risk
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.
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.
•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 $100.0 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 changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented.
Certain assets, such as adjustable-rate mortgage loans, include features that limit interest rate changes both in the short term and over the life of the loan. Additionally, some of our adjustable-rate loans have interest rate floors, preventing the contractual rate from adjusting below a specified level. As of December 31, 2024, approximately 61.5% of our loans were adjustable-rate loans. Of these, $398.2 million, or 56.0%, carried a weighted-average interest rate of 5.02% and were at their floor rate. Some of these loans reprice at defined intervals, while prime-based adjustable-rate loans recalculate each time the prime rate changes. If a loan’s floor rate exceeds its fully indexed rate, the Bank does not benefit from market rate increases until the prime rate rises above the floor rate. At December 31, 2024, the Bank’s net loans receivable included $97.8 million of prime-based loans, all of which were priced above their floors.
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, 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 impact in our net interest income over the 12 months following December 31, 2024, assuming an immediate and uniform change in interest rates across all maturities. This analysis gives no effect to any actions we might take to counter the effects of the interest rate changes. Under all four rising rate scenarios, net interest income is projected to decline in the first year, with larger interest rate increases resulting in greater declines.
Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2024
Basis Point Change in Rates Net Interest Income % Change
(Dollars in thousands)
+400 $ 33,014 (12.06) %
+300 34,129 (9.09)
+200 35,223 (6.18)
+100 36,410 (3.02)
Base 37,542 -
(100) 38,518 2.60
(200) 39,467 5.13
(300) 40,337 7.45
(400) 41,291 9.99
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.
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, 2024 , the undisbursed portion of construction LIP totaled $58.0 million and unused lines of credit were $47.3 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, 2024, totaled $314.9 million and $44.8 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, 2024 to borrow an additional $281.2 million from the FHLB, based on our collateral capacity, $69.7 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 retail deposits. When these deposits are insufficient or when alternative funding sources offer more favorable rates or structures, we utilize options such as advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, dealer repurchase agreements, and other short-term alternatives. We may also liquidate assets, including selling investments at a loss, which could adversely impact our earnings and capital levels. During 2024, due to a decline in loan demands and our success in obtaining funding through our retail certificates of deposits, we were able to pay off some of the higher costing brokered deposits. If our loan origination increases, we may re-utilize this type of funding to manage our liquidity position, particularly if growth in retail deposits does not meet expectations.
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, and assuming the Global transaction does not close, we expect cash expenditures of $1.7 million for capital investment in property, plant and equipment during fiscal 2025.
Further, for the fiscal year ending December 31, 2025, we project that our fixed commitments will include (i) $907,000 of operating lease payments and (ii) other future obligations and accrued expenses of $19.4 million. At December 31, 2024, our $110.0 million in FHLB borrowings are all short-term and $100.0 million of our advances are tied to interest rate swap agreements and are expected to be renewed as they mature during 2025. 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.
Total stockholders’ equity was $161.6 million at December 31, 2024. 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, 2024, the Bank exceeded all regulatory capital requirements. Regulatory capital ratios for the Bank were as follows as of December 31, 2024: Total capital to risk-weighted assets was 16.65%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 15.40%; and Tier 1 capital to total assets was 11.16%. At December 31, 2024, 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 AFS 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 13: 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, 2024, First Financial Northwest, on an unconsolidated basis, had $5.2 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Spokane, Washington, PCAOB ID: 659)
Consolidated Balance Sheets as of December 31, 2024, and 2023 67
Consolidated Income Statements for the Years Ended December 31, 2024, and 2023 68
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2024, and 2023 69
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2024, and 2023 70
Consolidated Statements of Cash Flows for the Years Ended December 31, 2024, and 2023 71
Notes to Consolidated Financial Statements 73
[Letterhead of Moss Adams LLP]
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, 2024 and 2023, 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, 2024 and 2023, 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.
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.
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 $15.1 million at December 31, 2024. The allowance for credit losses on loans 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 on loans, 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 on loans involved a high degree of subjectivity.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to the allowance for credit losses on loans included the following, among others:
◦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 reasonable and are supported by the documentation provided by management.
◦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.
/s/ Moss Adams LLP
Spokane, Washington
March 20, 2025
We have served as the Company’s auditor since 2009.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31,
2024 2023
Assets
Cash on hand and in banks $ 9,535 $ 8,391
Interest-earning deposits with banks 36,182 22,138
Investments available-for-sale, at fair value (amortized cost of $164,382 at December 31, 2024 and $223,725 at December 31, 2023)
151,642 207,915
Investments held-to-maturity, at amortized cost (estimated fair value of $2,468 at December 31, 2024 and $2,456 at December 31, 2023)
2,468 2,456
Loans receivable, net of allowance of $15,066 and $15,306
1,140,186 1,175,925
Federal Home Loan Bank (“FHLB”) stock, at cost 5,853 6,527
Accrued interest receivable 6,108 7,359
Deferred tax assets, net 2,582 2,648
Premises and equipment, net 18,166 19,667
Bank owned life insurance (“BOLI”) 38,950 37,653
Prepaid expenses and other assets 9,676 10,478
Right of use asset (“ROU”), net 2,357 2,617
Goodwill 889 889
Core deposit intangible (“CDI”), net 295 419
Total assets $ 1,424,889 $ 1,505,082
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing deposits $ 80,772 $ 100,899
Interest-bearing deposits 1,050,628 1,093,208
Total deposits 1,131,400 1,194,107
FHLB advances 110,000 125,000
Advance payments from borrowers for taxes and insurance 2,873 2,952
Lease liability, net 2,550 2,806
Accrued interest payable 526 2,739
Other liabilities 15,985 15,818
Total liabilities 1,263,334 1,343,422
Commitments and contingencies (Note 14)
Stockholders’ Equity
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 9,230,010 shares at December 31, 2024, and 9,179,510 shares at December 31, 2023
93 92
Additional paid-in capital 72,823 73,035
Retained earnings, substantially restricted 94,892 96,206
Accumulated other comprehensive loss, net of tax (6,253) (7,673)
Total stockholders’ equity $ 161,555 $ 161,660
Total liabilities and stockholders’ equity $ 1,424,889 $ 1,505,082
See accompanying Notes to Consolidated Financial Statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)
Year Ended December 31,
2024 2023
Interest income
Loans, including fees $ 66,941 $ 66,938
Investments 7,388 8,474
Interest-earning deposits 2,444 2,261
Dividends on FHLB stock 597 485
Total interest income 77,370 78,158
Interest expense
Deposits 39,117 34,407
FHLB advances and other borrowings 3,490 3,208
Total interest expense 42,607 37615
Net interest income 34,763 40,543
Recapture of provision for credit losses (50) (208)
Net interest income after recapture of provision for credit losses 34,813 40,751
Noninterest income
BOLI income 1,245 1,081
Wealth management revenue, net 279 253
Deposit related fees 923 956
Loan related fees 296 275
Other 53 208
Total noninterest income 2,796 2,773
Noninterest expense
Salaries and employee benefits 20,652 20,366
Occupancy and equipment 4,789 4,748
Professional fees 3,011 2,288
Data processing 3,285 2,857
Regulatory assessments 662 763
Insurance and bond premiums 477 468
Marketing 179 343
Other general and administrative 3,638 3,833
Total noninterest expense 36,693 35,666
Income before (benefit) provision for federal income taxes 916 7,858
Federal income tax (benefit) provision (156) 1,553
Net income $ 1,072 $ 6,305
Basic earnings per common share $ 0.12 $ 0.69
Diluted earnings per common share $ 0.12 $ 0.69
Basic weighted average number of common shares outstanding 9,183,900 9,126,209
Diluted weighted average number of common shares outstanding 9,238,016 9,152,617
See accompanying Notes to Consolidated Financial Statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Year Ended December 31,
2024 2023
Net income $ 1,072 $ 6,305
Other comprehensive gain (loss), net of tax:
Unrealized holding gains on available-for-sale securities 3,069 2,340
Tax effect (644) (492)
Losses on cash flow hedges (1,272) (2,920)
Tax effect 267 613
Other comprehensive gain (loss), net of tax 1,420 (459)
Total comprehensive income $ 2,492 $ 5,846
See accompanying Notes to Consolidated Financial Statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
Shares Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated Other Comprehensive Loss, net of tax Total
Stockholders’ Equity
Balances at December 31, 2022 9,127,595 $ 91 $ 72,424 $ 95,059 $ (7,214) $ 160,360
Net income - - - 6,305 - 6,305
Other comprehensive loss, net of tax - - - - (459) (459)
Exercise of stock options 95,019 - 1,023 - - 1,023
Issuance of common stock - restricted stock awards, net 40,618 1 - - - 1
Compensation related to stock options and restricted stock awards - - 605 - - 605
Canceled common stock - restricted stock awards (83,722) - (1,017) - - (1,017)
Cash dividends declared and paid ($0.52 per share)
- - - (4,763) - (4,763)
Adjustment to beginning retained earnings, net of tax - adoption of ASU 2016-13 - - - (395) - (395)
Balances at December 31, 2023 9,179,510 92 73,035 96,206 (7,673) 161,660
Net income - - - 1,072 - 1,072
Other comprehensive gain, net of tax - - - - 1,420 1,420
Exercise of stock options 132,500 1 1,531 - - 1,532
Issuance of common stock - restricted stock awards, net 7,673 - - - - -
Compensation related to stock options and restricted stock awards - - 241 - - 241
Canceled common stock - stock awards (89,673) - (1,984) - - (1,984)
Cash dividends declared and paid ($0.26 per share)
- - - (2,386) - (2,386)
Balances at December 31, 2024 9,230,010 $ 93 $ 72,823 $ 94,892 $ (6,253) $ 161,555
See accompanying Notes to Consolidated Financial Statements.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2024 2023
Cash flows from operating activities:
Net income $ 1,072 $ 6,305
Adjustments to reconcile net income to net cash provided by operating activities
Recapture of provision for credit losses (50) (208)
Net amortization of premiums and discounts on investments 709 534
Depreciation of premises and equipment 1,915 2,028
Loss on disposal of premises and equipment - 4
Deferred federal income taxes (311) 175
Stock compensation expense 241 605
BOLI income (1,223) (1,081)
Annuity income (12) (12)
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets (346) (790)
Decrease in lease ROU asset 792 766
Decrease in advance payments from borrowers for taxes and insurance (79) (99)
Decrease (increase) in accrued interest receivable 1,251 (846)
Decrease in lease liability (788) (756)
(Decrease) increase in accrued interest payable (2,213) 2,411
Increase (decrease) increase in other liabilities 167 (4,865)
Net cash provided by operating activities 1,125 4,171
Cash flows from investing activities:
Proceeds from sales and call of investments 40,000 -
Principal repayments on investments 18,633 11,669
Net decrease (increase) in loans receivable 35,789 (9,134)
Purchases of premises and equipment (414) (507)
Sale of FHLB stock 674 985
Purchase of BOLI (74) (286)
Net cash provided by investing activities 94,608 2,727
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Continued)
Year Ended December 31,
2024 2023
Cash flows from financing activities:
Net (decrease) increase in deposits (62,707) 24,067
Advances from the FHLB 114,000 189,000
Repayments of advances from the FHLB (129,000) (209,000)
Proceeds from stock options exercises 1,532 1,023
Net share settlement of stock awards (1,984) (1,016)
Dividends paid (2,386) (4,763)
Net cash used by financing activities $ (80,545) $ (689)
Net increase in cash and cash equivalents $ 15,188 $ 6,209
Cash and cash equivalents at beginning of year 30,529 24,320
Cash and cash equivalents at end of year $ 45,717 $ 30,529
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 44,820 $ 35,204
Federal income taxes 635 1,900
Noncash transactions:
Unrealized gain arising during the year on investments AFS 3,069 2,340
Unrealized loss arising during the year on cash flow hedge (1,272) (2,920)
Initial recognition of ROU asset for new leases 532 108
Initial recognition of lease liability for new leases 532 108
Initial recognition of ACL - adoption of ASC 326 - 395
See accompanying Notes to Consolidated Financial Statements.
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 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 the allowance for credit losses (“ACL”), are subject to change.
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, 2024 and 2023.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Investments in debt securities are classified into one of three categories: (1) held-to-maturity (“HTM”), (2) available-for-sale (“AFS”), or (3) trading. At December 31, 2024 and 2023, we held investment securities classified as HTM and AFS, but none as trading.
Investments are categorized as HTM when we have the positive intent and ability to hold them to maturity. HTM 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 AFS investments 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, premiums 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 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
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally based 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, 2024 and 2023, the Company had no loans that were both experiencing financial difficulty and modified during the year.
Allowance for Credit Losses (AFS Investments)
For AFS investments 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 criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS investments 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 OCI. Changes in the allowance for credit losses are recorded as a provision or recapture for credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS investment is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Allowance for Credit Losses (HTM Investments)
The three annuities we own and classify as HTM were purchased to support payments to two executives 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
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value of the contract. For this reason, no allowance for credit losses was recorded for the years ended December 31, 2024 and 2023.
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 or recapture 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 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: (i) a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics, and (ii) 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 ACL 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 and necessary adjustments are recorded as a provision or recapture for credit losses. The ACL for unfunded commitments is included in the other liabilities section of the consolidated balance sheets.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Bank-Owned Life Insurance (BOLI)
The Company has purchased BOLI on certain key executives and officers. 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
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 EPS 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 Employee Stock Ownership Plan (“ESOP”) shares are committed to be released, they are included in the outstanding shares used in the basic EPS calculation.
Diluted EPS 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 AFS investments 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 operations are managed, and financial performance is evaluated, by our chief operating decision maker (“CODM”) which is the Management Committee, that consists of the Chief Executive Officer, Chief Operating/Financial Officer, Chief Lending Officer, Chief Risk Officer and Chief Banking Officer. The Bank is engaged in the business of a traditional banking institution, gathering deposits and originating loans for portfolio in its respective primary market areas. The Bank offers a wide variety of deposit products to its consumer and commercial customers. Lending activities include the origination of commercial real estate, construction/land, first mortgages on one-to-four family residences, multifamily, business and consumer loans. The performance of the Company is reviewed monthly by the Company’s Management Committee and Board of Directors. As resource allocation and performance decisions are not made based on discrete financial information of individual lines of business, the Company considers its current business and operations as a single reportable operating segment.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 (CDI)
A 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
In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing disclosures in Topic 289. The Company has determined that its current business and operations consist of a single business segment and a single reporting unit.
The amendments in this ASU are intended to improve segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The key amendments included in this ASU:
•Require disclosure on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and are included within each reported segment profit and loss;
•Require disclosure on an annual and interim basis, an amount for other segment items (defined in the ASU) and a description of its composition;
•Clarify that if the CODM uses more than one measure of the segment’s profit or loss in assessing performance, one or more of those additional measures may be reported; and
•Require disclosure of the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing performance.
The Company applied this ASU retrospectively and new disclosures have been added as applicable for a single reportable operating segment.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2023, FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09). The ASU focuses on income tax disclosures around effective tax rates and cash income taxes paid. ASU 2023-09 requires public business entities to disclose, on an annual basis, a rate reconciliation presented in both dollars and percentages in a tabular format. The guidance requires the rate reconciliation to include specific categories and provides further guidance on disaggregation of those categories based on a quantitative threshold equal to 5% or more of the amount determined by multiplying pretax income (loss) from continuing operations by the applicable statutory rate. For entities reconciling to the U.S. statutory rate of 21%, this would generally require disclosing any reconciling items that impact the rate by 1.05% or more.
ASU 2023-09 also identifies specific categories that would require disclosure, including the following:
•State and local income tax, net of federal (national) income tax effect;
•Foreign tax effects;
•Effect of changes in tax laws or rates enacted in the current period;
•Effect of cross-border tax laws;
•Enactment of new tax laws;
•Nontaxable or nondeductible items;
•Tax credits;
•Changes in valuation allowances; and
•Changes in unrecognized tax benefits.
ASU 2023-09 makes changes to annual disclosures of income taxes paid for all entities. ASU 2023-09 requires entities to disclose the amount of income taxes paid, net of refunds received, disaggregated by federal, state and foreign jurisdiction. Additionally, entities are required to disclose income taxes paid, net of refunds received, for individual jurisdictions that comprise 5% or more of total income taxes paid. The 5% threshold is evaluated using the absolute value of the net refund or net payment in each jurisdiction compared to the absolute value of the total income taxes paid (net of refunds received). ASU 2023-09 requires all entities to disclose disaggregated domestic and foreign pretax income (loss) from continuing operations along with disaggregated income tax expense (benefit) by federal, state and foreign components. Such disaggregation by jurisdiction should classify taxes by jurisdiction based on the jurisdiction imposing the taxes. ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024 (generally, calendar year 2025) and effective for all other business entities one year later. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or financial condition.
Note 2 - Investments
The following tables summarize the amortized cost and fair value of AFS investments at December 31, 2024 and 2023, and the corresponding amounts of gross unrealized gains and losses.
December 31, 2024
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
Fannie Mae $ 11,335 $ - $ (1,622) $ 9,713
Freddie Mac 11,117 - (1,519) 9,598
Ginnie Mae 26,691 148 (1,310) 25,529
Other 21,878 1 (893) 20,986
Municipal bonds 36,167 1 (5,046) 31,122
U.S. Government agencies 24,194 14 (532) 23,676
Corporate bonds 33,000 - (1,982) 31,018
$ 164,382 $ 164 $ (12,904) $ 151,642
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
Fannie Mae $ 11,562 $ - $ (1,684) $ 9,878
Freddie Mac 12,934 - (1,755) 11,179
Ginnie Mae 28,096 - (1,516) 26,580
Other 30,559 - (1,366) 29,193
Municipal bonds 36,571 42 (4,764) 31,849
U.S. Government agencies 71,003 5 (1,051) 69,957
Corporate bonds 33,000 - (3,721) 29,279
$ 223,725 $ 47 $ (15,857) $ 207,915
There were $2.5 million of investments classified as HTM at both December 31, 2024, and 2023. In January 2020, the Company purchased three annuity contracts to be held long-term to satisfy the benefit obligation associated with certain 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.
The amortized cost and estimated fair value of AFS investments at December 31, 2024, 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.
December 31, 2024
Amortized Cost Fair Value
(In thousands)
Due within one year $ 2,500 $ 2,476
Due after one year through five years 8,719 8,555
Due after five years through ten years 33,942 31,156
Due after ten years 48,200 43,629
93,361 85,816
Mortgage-backed investments 71,021 65,826
$ 164,382 $ 151,642
The maturities of HTM investments in annuities were determined at the time the initial contract was signed. They are set to extend until the end of the executives’ lives or until the annuities are fully 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. Securities with a carrying value of $28.8 million and $26.5 million were pledged as collateral for public deposits at December 31, 2024 and 2023, respectively, both of which exceeded the minimum collateral requirements established by the Washington Public Deposit Protection Commission. At both December 31, 2024 and 2023, there were no securities pledged as collateral for FHLB advances.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and other redemptions of AFS investments were as follows:
Year Ended December 31,
2024 2023
(In thousands)
Proceeds $ 40,000 $ -
Gross gains - -
Gross losses - -
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, 2024 and 2023.
December 31, 2024
Less Than 12 Months 12 Months or Longer Total
Fair Value Unrealized
Loss Fair Value Unrealized
Loss Fair Value Unrealized
Loss
(In thousands)
Mortgage-backed investments:
Fannie Mae $ - $ - $ 9,713 $ (1,622) $ 9,713 $ (1,622)
Freddie Mac - - 9,598 (1,519) 9,598 (1,519)
Ginnie Mae - - 13,986 (1,310) 13,986 (1,310)
Other 3,076 (20) 14,615 (873) 17,691 (893)
Municipal bonds 1,490 (10) 28,744 (5,036) 30,234 (5,046)
U.S. Government agencies 1,076 (1) 18,380 (531) 19,456 (532)
Corporate bonds - - 31,018 (1,982) 31,018 (1,982)
$ 5,642 $ (31) $ 126,054 $ (12,873) $ 131,696 $ (12,904)
December 31, 2023
Less Than 12 Months 12 Months or Longer Total
Fair Value Unrealized
Loss Fair Value Unrealized
Loss Fair Value Unrealized
Loss
(In thousands)
Mortgage-backed investments:
Fannie Mae $ - $ - $ 9,878 $ (1,684) $ 9,878 $ (1,684)
Freddie Mac 671 (57) 10,508 (1,698) 11,179 (1,755)
Ginnie Mae 11,601 (70) 14,979 (1,446) 26,580 (1,516)
Other - - 28,330 (1,366) 28,330 (1,366)
Municipal bonds 2,477 (16) 26,916 (4,748) 29,393 (4,764)
U.S. Government agencies - - 67,440 (1,051) 67,440 (1,051)
Corporate bonds 5,966 (34) 23,313 (3,687) 29,279 (3,721)
$ 20,715 $ (177) $ 181,364 $ (15,680) $ 202,079 $ (15,857)
At December 31, 2024 and 2023, the Company had 107 and 123 securities, respectively, with a gross unrealized loss position. Management reviewed the financial condition of the entities underlying the securities at both December 31, 2024 and 2023, and determined that no ACL was required. Management does not believe that the unrealized losses at December 31, 2024 and 2023, 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 investments for the years ended December 31, 2024 and 2023.
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, 2024, and 2023 are summarized as follows:
December 31,
2024 2023
(In thousands)
One-to-four family residential:
Permanent owner occupied $ 284,650 $ 284,471
Permanent non-owner occupied 217,420 228,752
502,070 513,223
Multifamily 126,303 138,149
Commercial real estate 374,398 377,859
Construction/land: (1)
One-to-four family residential 49,674 47,149
Multifamily 7,884 4,004
Land 9,582 9,771
67,140 60,924
Business 12,135 29,081
Consumer 73,206 71,995
Total loans 1,155,252 1,191,231
Less:
ACL for loans 15,066 15,306
Loans receivable, net $ 1,140,186 $ 1,175,925
____________
(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, 2024 and 2023, 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, 2024, the Company’s loan portfolio was comprised of one-to-four family residential loans representing 43.5% of the total loan portfolio, commercial real estate and multifamily loans representing 32.3% and 10.9%, respectively, and construction/land loans representing 5.8% of the total loan portfolio. Consumer and business loans accounted for the remaining 7.5% of the total loan portfolio. The Company’s five largest borrowing relationships had an aggregate total of $89.4 million at December 31, 2024, representing 7.7% of total loans receivable.
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, 2024 and 2023, was as follows:
December 31, 2024
Fixed Rate Adjustable Rate
Term to Maturity Principal Balance Term to Rate Adjustment Principal Balance
(In thousands)
Due within one year $ 16,314 Due within one year (1)
$ 310,837
After one year through three years 85,127 After one year through three years 209,970
After three years through five years 79,981 After three years through five years 117,243
After five years through ten years 71,297 After five years through ten years 72,768
Thereafter 191,715 Thereafter -
$ 444,434 $ 710,818
____________
(1) Includes $111.1 million of prime based loans and $153.7 million in loans that adjust based on SOFR.
December 31, 2023
Fixed Rate Adjustable Rate
Term to Maturity Principal Balance Term to Rate Adjustment Principal Balance
(In thousands)
Due within one year $ 27,714 Due within one year (1)
$ 310,260
After one year through three years 55,326 After one year through three years 169,981
After three years through five years 74,404 After three years through five years 173,914
After five years through ten years 71,210 After five years through ten years 101,724
Thereafter 206,698 Thereafter -
$ 435,352 $ 755,879
____________
(1) Includes $128.9 million of prime based loans and $108.2 million in loans that adjust based on SOFR.
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 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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•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, 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, 2024, and 2023, 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, 2024 and 2023:
December 31, 2024
Term Loans by Year of Origination
2024 2023 2022 2021 2020 Prior Total Loans
(In thousands)
One-to-four family residential
Pass $ 165,392 $ 62,048 $ 95,995 $ 49,312 $ 41,138 $ 87,179 $ 501,064
Watch - - - - - 675 675
Special mention - - - - - 32 32
Substandard - - - - - 299 299
Total one-to-four family residential $ 165,392 $ 62,048 $ 95,995 $ 49,312 $ 41,138 $ 88,185 $ 502,070
Current year-to-date (“YTD”) gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Multifamily
Pass $ 15,349 $ 3,295 $ 8,237 $ 19,567 $ 41,484 $ 27,234 $ 115,166
Watch - - - 71 - 9,505 9,576
Special mention - - - - - 12 12
Substandard - - - - - 1,549 1,549
Total multifamily $ 15,349 $ 3,295 $ 8,237 $ 19,638 $ 41,484 $ 38,300 $ 126,303
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Commercial real estate
Pass $ 32,936 $ 19,727 $ 30,941 $ 73,846 $ 76,193 $ 94,896 $ 328,539
Watch 2,829 - - - - 12,462 15,291
Special mention - - - - - - -
Substandard - - - - 526 30,042 30,568
Total commercial real estate $ 35,765 $ 19,727 $ 30,941 $ 73,846 $ 76,719 $ 137,400 $ 374,398
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2024
Term Loans by Year of Origination
2024 2023 2022 2021 2020 Prior Total Loans
(In thousands)
Construction/land
Pass $ 34,819 $ 22,280 $ 3,176 $ 6,865 $ - $ - $ 67,140
Watch - - - - - - -
Special mention - - - - - - -
Substandard - - - - - - -
Total construction/land $ 34,819 $ 22,280 $ 3,176 $ 6,865 $ - $ - $ 67,140
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Business
Pass $ 511 $ 1,602 $ 1,229 $ 81 $ 820 $ 7,892 $ 12,135
Watch - - - - - - -
Special mention - - - - - - -
Substandard - - - - - - -
Total business $ 511 $ 1,602 $ 1,229 $ 81 $ 820 $ 7,892 $ 12,135
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Consumer
Pass $ 17,931 $ 17,574 $ 18,199 $ 7,904 $ 4,626 $ 6,382 $ 72,616
Watch - - 23 - - - 23
Special mention - - 24 - - - 24
Substandard - - 301 201 - 41 543
Total consumer $ 17,931 $ 17,574 $ 18,547 $ 8,105 $ 4,626 $ 6,423 $ 73,206
Current YTD gross charge-offs $ 12 $ 7 $ 22 $ - $ - $ - $ 41
Total loans receivable, gross
Pass $ 266,938 $ 126,526 $ 157,777 $ 157,575 $ 164,261 $ 223,583 $ 1,096,660
Watch 2,829 - 23 71 - 22,642 25,565
Special mention - - 24 - - 44 68
Substandard - - 301 201 526 31,931 32,959
Total loans $ 269,767 $ 126,526 $ 158,125 $ 157,847 $ 164,787 $ 278,200 $ 1,155,252
Current YTD gross charge-offs $ 12 $ 7 $ 22 $ - $ - $ - $ 41
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $ 86,208 $ 142,563 $ 94,582 $ 61,946 $ 31,806 $ 95,012 $ 512,117
Watch - - - - - 683 683
Special mention - - - - - 130 130
Substandard - - - - - 293 293
Total one-to-four family residential $ 86,208 $ 142,563 $ 94,582 $ 61,946 $ 31,806 $ 96,118 $ 513,223
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Multifamily
Pass $ 3,329 $ 8,332 $ 22,787 $ 43,259 $ 25,988 $ 30,561 $ 134,256
Watch - - - - - 2,303 2,303
Special mention - - - - - - -
Substandard - - - - - 1,590 1,590
Total multifamily $ 3,329 $ 8,332 $ 22,787 $ 43,259 $ 25,988 $ 34,454 $ 138,149
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Commercial real estate
Pass $ 20,026 $ 35,054 $ 73,727 $ 78,204 $ 8,337 $ 98,316 $ 313,664
Watch - - 4,108 - 12,745 3,322 20,175
Special mention - - - - - - -
Substandard - - - 526 1,295 42,199 44,020
Total commercial real estate $ 20,026 $ 35,054 $ 77,835 $ 78,730 $ 22,377 $ 143,837 $ 377,859
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Construction/land
Pass $ 14,797 $ 26,286 $ 19,841 $ - $ - $ - $ 60,924
Watch - - - - - - -
Special mention - - - - - - -
Substandard - - - - - - -
Total construction/land $ 14,797 $ 26,286 $ 19,841 $ - $ - $ - $ 60,924
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
Business
Pass $ 1,480 $ 6,358 $ 388 $ 1,272 $ 1,486 $ 18,097 $ 29,081
Watch - - - - - - -
Special mention - - - - - - -
Substandard - - - - - - -
Total business $ 1,480 $ 6,358 $ 388 $ 1,272 $ 1,486 $ 18,097 $ 29,081
Current YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ -
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)
Consumer
Pass $ 23,937 $ 23,921 $ 10,190 $ 5,523 $ 5,260 $ 2,917 $ 71,748
Watch - 27 - - - - 27
Special mention - - - - - - -
Substandard - 19 201 - - - 220
Total consumer $ 23,937 $ 23,967 $ 10,391 $ 5,523 $ 5,260 $ 2,917 $ 71,995
Current YTD gross charge-offs $ - $ - $ - $ - $ 22 $ - $ 22
Total loans receivable, gross
Pass $ 149,777 $ 242,514 $ 221,515 $ 190,204 $ 72,877 $ 244,903 $ 1,121,790
Watch - 27 4,108 - 12,745 6,308 23,188
Special mention - - - - - 130 130
Substandard - 19 201 526 1,295 44,082 46,123
Total loans $ 149,777 $ 242,560 $ 225,824 $ 190,730 $ 86,917 $ 295,423 $ 1,191,231
Current YTD gross charge-offs $ - $ - $ - $ - $ 22 $ - $ 22
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize changes in the ACL for loans by type of loans, for the period indicated.
At or For the Year Ended December 31, 2024
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
ACL: (In thousands)
Beginning balance $ 5,747 $ 1,509 $ 3,895 $ 1,856 $ 387 $ 1,912 $ 15,306
Charge-offs - - - - - (41) (41)
Recoveries 1 - - - - - 1
(Recapture of provision) provision (332) 300 (410) 419 (223) 46 (200)
Ending balance $ 5,416 $ 1,809 $ 3,485 $ 2,275 $ 164 $ 1,917 $ 15,066
At or For the Year Ended December 31, 2023
One-to-Four Family Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
ACL: (In thousands)
Beginning balance $ 4,043 $ 1,210 $ 5,397 $ 1,717 $ 948 $ 1,912 $ 15,227
Adjustment for adoption of Topic 326 1,520 83 (970) 408 (510) (31) $ 500
Charge-offs - - - - - (22) (22)
Recoveries 1 - - - - - 1
Provision (recapture of provision) 183 216 (532) (269) (51) 53 (400)
Ending balance $ 5,747 $ 1,509 $ 3,895 $ 1,856 $ 387 $ 1,912 $ 15,306
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Past Due Loans. At December 31, 2024, total past due loans comprised 0.18% of total loans as compared to 0.12% at December 31, 2023.
The following tables represent a summary at December 31, 2024, and 2023, of the aging of loans by type:
Loans Past Due as of December 31, 2024
30-59 Days 60-89 Days 90 Days and Greater (1)
Total Current Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ 1,195 $ - $ 278 $ 1,473 $ 283,177 $ 284,650
Non-owner occupied - - 21 21 217,399 217,420
Multifamily - - - - 126,303 126,303
Commercial real estate - - - - 374,398 374,398
Construction/land - - - - 67,140 67,140
Total real estate 1,195 - 299 1,494 1,068,417 1,069,911
Business - - - - 12,135 12,135
Consumer 40 86 502 628 72,578 73,206
Total $ 1,235 $ 86 $ 801 $ 2,122 $ 1,153,130 $ 1,155,252
_________________________
(1) There were no loans 90 days and greater past due and still accruing interest at December 31, 2024.
Loans Past Due as of December 31, 2023
30-59 Days 60-89 Days 90 Days and Greater (1)
Total Current Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ - $ 378 $ 293 $ 671 $ 283,800 $ 284,471
Non-owner occupied - - 24 24 228,728 228,752
Multifamily - - - - 138,149 138,149
Commercial real estate - - - - 377,859 377,859
Construction/land - - - - 60,924 60,924
Total real estate - 378 317 695 1,089,460 1,090,155
Business - - - - 29,081 29,081
Consumer 453 9 220 682 71,313 71,995
Total $ 453 $ 387 $ 537 $ 1,377 $ 1,189,854 $ 1,191,231
________________________
(1) There were two one-to-four family residential loans that were 90 days or more past due and still accruing interest due to their strong collateralization.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual Loans. At December 31, 2024 and 2023, nonaccrual loans totaled $842,000, representing 0.06% of total assets and $220,000, representing 0.01% of total assets, respectively.
The following tables present a summary of loans individually evaluated for credit losses at December 31, 2024 and 2023, by the type of loan:
At December 31, 2024
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied $ 278 $ 282 $ -
Multifamily 1,549 1,549 -
Commercial real estate 30,555 30,608 -
Total 32,382 32,439 -
Loans with an allowance:
Total - - -
Total individually evaluated loans:
One-to-four family residential:
Owner occupied 278 282 -
Multifamily 1,549 1,549 -
Commercial real estate 30,555 30,608 -
Total $ 32,382 $ 32,439 $ -
_________________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2023
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied $ 293 $ 295 $ -
Multifamily 1,590 1,591 -
Commercial real estate 44,021 44,121 -
Total 45,904 46,007 -
Loans with an allowance:
Consumer 19 18 11
Total 19 18 11
Total individually evaluated loans:
One-to-four family residential:
Owner occupied 293 295 -
Multifamily 1,590 1,591 -
Commercial real estate 44,021 44,121 -
Consumer 19 18 11
Total $ 45,923 $ 46,025 $ 11
_________________
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
The following table presents the amortized cost basis of loans on nonaccrual status and loans 90 days or more past due and still accruing as of December 31, 2024:
December 31, 2024
Nonaccrual with No ACL Nonaccrual with ACL Total Nonaccrual 90 Days or More Past Due and Still Accruing
(In thousands)
One-to-four family residential $ - $ 299 $ 299 $ -
Consumer - 543 543 -
Total $ - $ 842 $ 842 $ -
At both December 31, 2024 and 2023, the Company had no loans outstanding with executive officers or directors.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Premises and Equipment
Premises and equipment consisted of the following at December 31, 2024 and 2023:
December 31,
2024 2023
(In thousands)
Land $ 2,226 $ 2,226
Buildings and improvements 21,960 21,917
Leasehold improvements 6,121 6,123
Furniture and fixtures 3,622 3,776
Equipment 2,353 2,353
Computer hardware and software 4,041 3,860
40,323 40,255
Less accumulated depreciation and amortization (22,457) (20,841)
Construction in process 300 253
Total premises and equipment, net $ 18,166 $ 19,667
Depreciation and amortization expense was $1.9 million and $2.0 million for the years ended December 31, 2024 and 2023, respectively.
Note 5 - 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.
•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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company used the following methods to measure fair value on a recurring or nonrecurring basis.
•Investments AFS: 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.
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, 2024
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)
AFS investments:
Mortgage-backed investments:
Fannie Mae $ 9,713 $ - $ 9,713 $ -
Freddie Mac 9,598 - 9,598 -
Ginnie Mae 25,529 - 25,529 -
Other 20,986 - 20,986 -
Municipal bonds 31,122 - 31,122 -
U.S. Government agencies 23,676 - 23,676 -
Corporate bonds 31,018 - 31,018 -
Total AFS 151,642 - 151,642 -
Derivative fair value asset 6,293 - 6,293 -
Total $ 157,935 $ - $ 157,935 $ -
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)
AFS investments:
Mortgage-backed investments:
Fannie Mae $ 9,878 $ - $ 9,878 $ -
Freddie Mac 11,179 - 11,179 -
Ginnie Mae 26,580 - 26,580 -
Other 29,193 - 29,193 -
Municipal bonds 31,849 - 31,849 -
U.S. Government agencies 69,957 39,603 30,354 -
Corporate bonds 29,279 - 29,279 -
Total AFS 207,915 39,603 168,312 -
Derivative fair value asset 7,565 - 7,565 -
Total $ 215,480 $ 39,603 $ 175,877 $ -
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.
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, 2024 and 2023.
December 31, 2024
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)
Collateral dependent loans (included in loans receivable) $ 32,382 $ - $ - $ 32,382
Total $ 32,382 $ - $ - $ 32,382
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)
Collateral dependent loans (included in loans receivable) $ 45,912 $ - $ - $ 45,912
Total $ 45,912 $ - $ - $ 45,912
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, 2024 and 2023.
December 31, 2024
Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average Change in Fair Value)
(Dollars in thousands)
Collateral dependent loans
$ 32,382 Market approach Appraised value of collateral discounted by expected selling costs 0.0% - 7.8%
(2.92%)
December 31, 2023
Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average Change in Fair Value)
(Dollars in thousands)
Collateral dependent loans
$ 45,912 Market approach Appraised value of collateral discounted by expected selling costs 0.0% - 14.26%
(0.04%)
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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of financial instruments at December 31, 2024 and 2023, were as follows:
December 31, 2024 Fair Value Measurements Using:
Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash on hand and in banks $ 9,535 $ 9,535 $ 9,535 $ - $ -
Interest-earning deposits 36,182 36,182 36,182 - -
Investments AFS 151,642 151,642 151,642 -
Investments HTM 2,468 2,468 - 2,468 -
Loans receivable, net 1,140,186 1,086,900 - - 1,086,900
FHLB stock 5,853 5,853 - 5,853 -
Accrued interest receivable 6,108 6,108 - 6,108 -
Derivative fair value asset 6,293 6,293 - 6,293 -
Financial Liabilities:
Deposits 634,526 634,526 634,526 - -
Certificates of deposit, retail 448,974 447,531 - 447,531 -
Brokered deposits 47,900 48,016 - 48,016 -
Advances from the FHLB 110,000 109,987 - 109,987 -
Accrued interest payable 526 526 - 526 -
December 31, 2023 Fair Value Measurements Using:
Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash on hand and in banks $ 8,391 $ 8,391 $ 8,391 $ - $ -
Interest-earning deposits 22,138 22,138 22,138 - -
Investments AFS 207,915 207,915 39,603 168,312 -
Investments HTM 2,456 2,456 - 2,456 -
Loans receivable, net 1,175,925 1,113,642 - - 1,113,642
FHLB stock 6,527 6,527 - 6,527 -
Accrued interest receivable 7,359 7,359 - 7,359 -
Derivative fair value asset 7,565 7,565 - 7,565 -
Financial Liabilities:
Deposits 706,162 706,162 706,162 - -
Certificates of deposit, retail 357,154 353,881 - 353,881 -
Brokered deposits 130,791 130,977 - 130,977 -
Advances from the FHLB 125,000 124,976 - 124,976 -
Accrued interest payable 2,739 2,739 - 2,739 -
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 6 - Accrued Interest Receivable
Accrued interest receivable consisted of the following at December 31, 2024 and 2023:
December 31,
2024 2023
(In thousands)
Loans receivable $ 5,135 $ 6,093
Investments 961 1,260
Interest-earning deposits 12 6
$ 6,108 $ 7,359
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Deposits
Deposit accounts consisted of the following at December 31, 2024 and 2023:
December 31,
2024 2023
(In thousands)
Noninterest-bearing $ 80,772 $ 100,899
Interest-bearing demand 56,957 56,968
Savings 16,277 18,886
Money market 480,520 529,411
Certificates of deposit, retail 448,974 357,153
Brokered deposits (1)
47,900 130,790
$ 1,131,400 $ 1,194,107
_______________
(1) Includes $47.9 million of brokered certificates of deposit at December 31, 2024, and $25.1 million of brokered interest-bearing demand accounts, $10.4 million of brokered money market accounts, and $95.3 million of brokered certificates of deposit at December 31, 2023.
At December 31, 2024, scheduled maturities of certificates of deposit were as follows:
December 31, Amount
(In thousands)
2025 $ 359,658
2026 90,700
2027 20,696
2028 12,428
2029 13,392
Total: (1)
$ 496,874
_______________
(1) Includes $47.9 million of brokered certificates of deposit.
Deposits included public funds of $78.9 million and $85.8 million at December 31, 2024 and 2023, respectively.
Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at December 31, 2024, and 2023, were $215.8 million and $171.4 million, respectively. Interest expense on certificates of deposit equaling or exceeding $250,000 totaled $7.3 million and $4.7 million for the years ended December 31, 2024 and 2023, respectively.
Included in total deposits are accounts of $2.1 million and $2.3 million at December 31, 2024 and 2023, respectively, which are controlled by related parties.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits for the periods indicated was as follows:
Year Ended December 31,
2024 2023
(In thousands)
Interest-bearing demand $ 111 $ 1,013
Savings 8 6
Money market 18,407 14,503
Certificates of deposit, retail 16,784 10,741
Brokered deposits 3,807 8,144
$ 39,117 $ 34,407
Note 8 - Other Borrowings
The Company maintained credit facilities with the FHLB at December 31, 2024 and 2023, totaling $507.6 million and $686.3 million, respectively. At December 31, 2024, the credit facility was collateralized by $208.5 million of one-to-four family residential loans, $138.4 million of commercial real estate loans, and $44.3 million of multifamily loans under a blanket lien arrangement. At December 31, 2023, the credit facility was collateralized by $224.7 million of one-to-four family residential loans, $168.7 million of commercial real estate loans, and $57.9 million of multifamily loans under a blanket lien arrangement. The Company also had unused line-of-credit facilities of $69.7 million with the FRB and $75.0 million with other financial institutions at December 31, 2024, with interest payable at the then stated rate.
Information related to FHLB advances and other borrowings during the years ended December 31, 2024 and 2023, is as follows:
Year ended December 31,
2024 2023
(Dollars in thousands)
Maximum borrowing outstanding at any month end $ 176,000 $ 160,000
Average borrowing outstanding during year 126,931 127,263
Balance outstanding at end of year 110,000 125,000
Average rate paid during the year 2.75 % 2.52 %
Weighted-average rate paid at end of year 2.23 2.22
Scheduled maturities of FHLB advances outstanding at December 31, 2024, were as follows:
Balance Due Weighted Average Interest Rate at December 31, 2024
(Dollars in thousands)
FHLB overnight Fed Funds $ 10,000 4.62 %
Fixed rate, maturing within one month 100,000 1.99
$ 110,000
Note 9 - Leases
The Company follows ASC Topic 842, Leases, recognizing ROU assets and lease liabilities on the Company’s consolidated balance sheets. At December 31, 2024, the Company had 13 operating leases for retail branch locations, with remaining initial lease terms ranging from two months to 6.1 years, and most of the 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 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
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2024, the Company was committed to paying $77,000 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, 2024, and 2023:
December 31, 2024 December 31, 2023
(Dollars in thousands)
Lease expense, year-to-date $ 1,164 $ 1,143
Lease ROU asset 2,357 2,617
Lease liability 2,550 2,806
Weighted average remaining term (in years) 4.31 4.81
Weighted average discount rate 2.60% 2.27%
The following table provides a reconciliation between the undiscounted minimum lease payments at December 31, 2024 and the discounted lease liability at that date:
December 31, 2024
(In thousands)
Due through one year $ 907
Due after one year through two years 516
Due after two years through three years 406
Due after three years through four years 392
Due after four years through five years 336
Due after five years 147
Total minimum lease payments 2,704
Less: present value discount 154
Lease liability $ 2,550
Note 10 - 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, 2024, the hedged items have a total notional amount of $100.0 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 six months to 4.8 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 1.93% 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 the respective hedge agreement and includes this amount as part of interest expense on borrowings on the Consolidated Income Statement.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2024, the $6.3 million net fair value gain of the cash flow hedges was reported with other assets. The tax effected amount of $5.0 million was included in Accumulated Other Comprehensive Income. There were no amounts recorded in the Consolidated Income Statements for the years ended December 31, 2024 or 2023, 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, 2024 and 2023:
Balance Sheet Location Fair Value at December 31, 2024 Fair Value at December 31, 2023
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedges Other assets $ 6,293 $ 7,565
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, 2024 and 2023:
Location 2024 Amount of Loss Recognized In OCI, net of tax 2023 Amount of Loss Recognized In OCI, net of tax
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedge Other Comprehensive Income $ 1,005 $ 2,307
Note 11 - Benefit Plans
Supplemental Executive Retirement Plan
The Company has entered into post-employment agreements with certain key officers to provide supplemental retirement benefits. The Company recorded $267,000 and $276,000 of compensation expense for the years ended December 31, 2024, and 2023, respectively. At December 31, 2024, a $1.4 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 SERPs. As of December 31, 2024, these annuities were reported as investments HTM with a fair value of $2.5 million on the Consolidated Balance Sheets.
401(k) Plan and Profit-sharing Plan
The Company maintained a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all employees after 60 days of continuous employment. Under this plan, employee contributions of up to 5% of compensation were matched 100% by the Company, with matching contributions vesting immediately. Employees were permitted to invest in various stock, money market, or fixed income plans. The Company contributed $413,000 and $543,000 to the plan for the years ended December 31, 2024 and 2023, respectively. To replace the ESOP benefits that matured in 2022, the Company introduced a profit-sharing plan in 2023, under which contribution ranging from 5% to 8% of each employee’s compensation were made annually, based on the Company’s profitability. The Company contributed $604,000 and $737,000 to the profit-sharing plan for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, the Company recorded no liability for either the 401(k) or profit-sharing plan, as both programs were terminated in the third quarter of 2024 in anticipation of closing the Global transaction.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
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, 2024, there were 833,252 total shares available for future grant under the 2016 Plan, including 136,626 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 $241,000 and $605,000 for the years ended December 31, 2024 and 2023, respectively. The related income tax benefit was $51,000 and $127,000 for the years ended December 31, 2024 and 2023, 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. Stock options have a contractual period of ten years. Any 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. At December 31, 2024, there were no stock options outstanding under the 2008 Plan.
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. At December 31, 2024, there were 30,000 stock options exercisable and outstanding 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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of options granted during 2023 was determined using the following weighted-average assumptions as of the grant date. No stock options were granted in 2024.
Annual Dividend Yield 4.31 %
Expected volatility 34.04 %
Risk-free interest rate 4.08 %
Expected term 6.25 years
Weighted-average grant date fair value per option granted $ 2.98
A summary of the Company’s stock option plan awards activity for the year ended December 31, 2024 follows:
Shares Weighted-
Average
Exercise Price Weighted-
Average
Remaining
Contractual
Term in Years Aggregate
Intrinsic Value
Outstanding at January 1, 2024 162,500 $ 11.65 $ 296,725
Exercised (132,500) 11.56 1,412,475
Outstanding at December 31, 2024 30,000 12.06 8.59 289,200
Vested and expected to vest assuming a 3% forfeiture rate over the vesting term
29,100 12.06 8.59 280,524
Exercisable at December 31, 2024 - - - -
As of December 31, 2024, unrecognized compensation cost related to nonvested stock options totaled $75,000.
Restricted Stock Awards
A summary of changes in nonvested restricted stock awards for the year ended December 31, 2024, is as follows:
Nonvested Shares Shares Weighted Average Grant Date Fair Value
Nonvested at January 1, 2024 27,618 $ 14.92
Granted 7,673 20.68
Vested (27,618) 14.92
Nonvested at December 31, 2024 7,673 20.68
Expected to vest assuming a 3% forfeiture rate over the vesting term
7,443 20.68
As of December 31, 2024, there was $27,000 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, 2024 and 2023, were $412,000 and $694,000, respectively.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Federal Income Taxes
The components of income tax expense for the years indicated are as follows:
Year Ended December 31,
2024 2023
(In thousands)
Current $ 155 $ 1,378
Deferred (311) 175
Total income tax (benefit) expense $ (156) $ 1,553
A reconciliation of the tax provision based on the statutory corporate rate of 21% for the year ended December 31, 2024, and 2023, on pretax income is as follows:
Year Ended December 31,
2024 2023
(In thousands)
Income tax expense at statutory rate $ 192 $ 1,650
Income tax effect of:
Tax exempt interest, net 108 75
BOLI income, net (257) (223)
Other, net (199) 51
Total income tax (benefit) expense $ (156) $ 1,553
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:
December 31,
2024 2023
(In thousands)
Deferred tax assets:
ACL for loans $ 3,164 $ 3,214
ACL for unfunded commitments 124 92
Deferred compensation 303 261
Net unrealized loss on investments available-for-sale 2,675 3,319
Employee benefit plans 29 182
Accrued expenses 122 106
Core deposit intangible 79 72
Expenses to facilitate branch acquisition 262 17
Split dollar life insurance 136 117
Lease liability 536 589
Total deferred tax assets 7,430 7,969
Deferred tax liabilities:
Loan origination fees and costs 1,603 1,368
Net unrealized gain on derivative cash flow hedge 1,321 1,588
Fixed assets 1,277 1,664
Goodwill 91 79
Right of use asset 495 550
Other, net 61 72
Total deferred tax liabilities $ 4,848 $ 5,321
Deferred tax assets, net $ 2,582 $ 2,648
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, 2024 and 2023, 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 evaluates both positive and negative evidence under the “more likely than not” standard. The weight given to the potential
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2024, 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, 2024 or 2023, 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 2021.
Note 13 - 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, 2024 and 2023, 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, 2024, 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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank’s actual capital amounts and ratios at December 31, 2024 and 2023, are presented in the following table.
To be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
December 31, 2024:
Total risk-based capital $ 173,748 16.65 % $ 83,485 8.00 % $ 104,356 10.00 %
Tier 1 risk-based capital 160,671 15.40 62,613 6.00 83,485 8.00
Common equity tier 1 capital (“CET1”) 160,671 15.40 46,960 4.50 67,831 6.50
Tier 1 leverage capital 160,671 11.16 57,608 4.00 72,011 5.00
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
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
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, 2024, the Bank’s capital conservation buffer was 8.65%.
Note 14 - 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 $105.3 million at December 31, 2024, and $83.6 million at December 31, 2023.
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 9 - 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
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 15 - 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,
2024 2023
(In thousands)
Assets
Cash and cash equivalents $ 212 $ 301
Interest-bearing deposits 4,979 8,464
Investment in subsidiaries 155,733 152,408
Receivable from subsidiaries 11 8
Deferred tax assets, net 9 -
Other assets 1,013 686
Total assets $ 161,957 $ 161,867
Liabilities and Stockholders’ Equity
Liabilities:
Payable to subsidiaries $ 224 $ 60
Deferred tax liability, net - 9
Other liabilities 178 138
Total liabilities 402 207
Stockholders’ equity 161,555 161,660
Total liabilities and stockholders’ equity $ 161,957 $ 161,867
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements
Year Ended December 31,
2024 2023
(In thousands)
Operating income:
Interest income:
Interest-bearing deposits with banks $ 67 $ 97
Total interest income 67 97
Noninterest income:
Other (loss) income (5) 164
Total noninterest (loss) income (5) 164
Total operating income 62 261
Operating expenses:
Other expenses 1,977 1,790
Total operating expenses 1,977 1,790
Loss before benefit for federal income taxes and equity in undistributed
earnings of subsidiaries (1,915) (1,529)
Federal income tax benefit (402) (316)
Loss before equity in undistributed loss of subsidiaries (1,513) (1,213)
Equity in undistributed earnings of subsidiaries 2,585 7,518
Net income $ 1,072 $ 6,305
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL NORTHWEST, INC.
Condensed Statements of Cash Flows
Year Ended December 31,
2024 2023
(In thousands)
Cash flows from operating activities:
Net income $ 1,072 $ 6,305
Adjustments to reconcile net income to net cash from operating
activities:
Equity in undistributed earnings of subsidiaries (2,585) (7,518)
Dividends received from subsidiary 763 4,806
Restricted stock compensation - 25
Change in deferred tax (asset) liability, net (18) 3
Change in receivables from subsidiaries (3) (5)
Change in payables to subsidiaries 164 (4)
Change in other assets (327) (450)
Changes in other liabilities 40 (28)
Net cash (used) provided by operating activities (894) 3,134
Cash flows from investing activities:
Net cash provided by investing activities - -
Cash flows from financing activities:
Proceeds from exercise of stock options 1,532 1,023
Proceeds for vested awards 158 553
Net share settlement of stock awards (1,984) (1,017)
Dividends paid (2,386) (4,763)
Net cash used in financing activities (2,680) (4,204)
Net decrease in cash (3,574) (1,070)
Cash and cash equivalents at beginning of year 8,765 9,835
Cash and cash equivalents at end of year $ 5,191 $ 8,765
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Earnings Per Share
The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods indicated.
Year Ended December 31,
2024 2023
(Dollars in thousands, except share data)
Net income $ 1,072 $ 6,305
Earnings allocated to participating securities (1) (18)
Earnings allocated to common shareholders $ 1,071 $ 6,287
Basic weighted-average common shares outstanding 9,183,900 9,126,209
Dilutive effect of stock options 48,413 18,680
Dilutive effect of restricted stock grants 5,703 7,728
Diluted weighted-average common shares outstanding 9,238,016 9,152,617
Basic EPS $ 0.12 $ 0.69
Diluted EPS $ 0.12 $ 0.69
For the year ended December 31, 2024, there were no options to purchase shares of common stock that were omitted from the computation of diluted EPS because their effect would be anti-dilutive. For the year ended December 31, 2023, there 80,000 options to purchase shares of common stock that were omitted from the computation of diluted EPS because their effect would be anti-dilutive.
Note 17 - 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.
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, 2024 and 2023:
Year Ended December 31,
2024 2023
(In thousands)
BOLI income (1)
$ 1,245 $ 1,081
Wealth management revenue 279 253
Deposit related fees 337 331
Debit card and ATM fees 586 625
Loan related fees 296 275
Other 53 208
Total noninterest income $ 2,796 $ 2,773
____________
(1) Not in scope of Topic 606
For the year ended December 31, 2024, substantially all of the Company’s revenues under the scope of Topic 606 were 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, 2024, 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.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 - Segment Disclosures
The Company is managed by legal entity and not by lines of business and its activities are considered to be a single industry segment for financial reporting purposes. The Bank is engaged in the single line of business of Financial Service/Banking which involves gathering deposits and originating loans in its primary market areas. The Bank manages its operations, allocates resources, and monitors and reports its financials as a single operating segment.
The Company’s CODM is the Management Committee, which consists of the Chief Executive Officer, Chief Operating/Financial Officer, Chief Lending Officer, Chief Risk Officer, and Chief Banking Officer. The CODM assesses performance based on net income that is reported on our Consolidated Statement of Operations. The CODM uses consolidated net income as the primary measure to evaluate resource allocations. The operating and financial condition data below is used to monitor budget versus actual results and assess performance.
Operating Data: Year Ended December 31,
2024 2023 2022
(In thousands)
Net interest income $ 34,763 $ 40,543 $ 48,353
Recapture of provision for credit losses (50) (208) (434)
Non-interest income 2,796 2,773 3,247
Non-interest expense 36,693 35,666 35,625
Net income 1,072 6,305 13,240
Financial Condition Data: Year Ended December 31,
2024 2023 2022
(In thousands)
Cash and securities (1)
$ 163,645 $ 218,762 $ 227,944
Loans receivable, net 1,140,186 1,175,925 1,167,083
Total assets 1,424,889 1,505,082 1,502,916
Core deposits 1,083,500 1,063,317 1,045,154
Total deposits 1,131,400 1,194,107 1,170,040
Key Financial Ratios: Year Ended December 31,
2024 2023 2022
Performance Ratios:
Return on average assets (2)
0.07 % 0.41 % 0.91 %
Net interest margin (tax equivalent) (3)
2.54 2.82 3.54
Non-interest expense to average assets 2.52 2.33 2.44
Efficiency ratio (4)
97.69 82.34 69.04
____________
(1) Includes investments AFS and HTM.
(2) Net income divided by average assets.
(3) Net interest income as a percent of average interest-earning assets on a tax equivalent basis.
(4) Non-interest expenses divided by the total of net interest income and non-interest income.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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, 2024, 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, 2024, 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, 2024. 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, 2024, which is included in Item 8. Financial Statements and Supplementary Data.
(b) Attestation report of the registered public accounting firm.
Not applicable.
(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, 2024 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, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
(a) None
(b) During the quarter ended December 31, 2024, 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.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item will be contained in an amendment to this Annual Report on Form 10-K (the “Form 10-K/A”), which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.
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.
Insider Trading Policy
First Financial Northwest maintains an insider trading policy governing the purchase, sale, and other dispositions of Company securities that applies to non-officer employees and other covered persons generally and a separate policy that applies to officers and directors and the Company specifically. We believe our insider trading policies and repurchase procedures are reasonably designed to promote compliance with insider trading laws, rules and regulations, and listing standards applicable to the Company. Copies of the Company’s insider trading policies are being filed as Exhibit 19.1 and 19.2 to this Annual Report on Form 10-K for the year ended December 31, 2024.
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, 2024, 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.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item will be contained in the Form 10-K/A, which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.
Equity Grant Timing Practices. First Financial Northwest’s Compensation Committee approves all equity award grants to our named executive officers on or before the grant date. Equity awards are typically granted to our named executive officers at the end of March and September. On occasion, the Compensation Committee may grant equity awards outside of these grant cycle for new hires, promotions, recognition, retention, or other purposes. While the Compensation Committee has discretionary authority to approve equity awards to our named executive officers outside of the cycle described above, the Compensation Committee does not have a practice or policy of granting equity awards in anticipation of the release of material nonpublic information and, in any event, we do not time the release of material non-public information in coordination with grants of equity awards in a manner that intentionally benefits our named executive officers or otherwise for the purpose of affecting the value of executive compensation. No option awards were granted to our named executive officers during 2024.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 required by this Item will be contained in the Form 10-K/A, which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.
(b) Security Ownership of Management.
The information required by this Item will be contained in the Form 10-K/A, which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.
(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, 2024.
Plan category 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)
Equity compensation plans approved by security holders:
2008 Equity Incentive Plan - $ - -
2016 Equity Incentive Plan (1)
- - 833,252
Equity compensation plans not approved by security holders N/A N/A N/A
Total - $ - 833,252
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(1) The shares available for future grant under the 2016 Equity Incentive Plan include 136,626 shares which may be granted as stock awards. Each share granted as stock award reduces the total available shares for grant by two shares.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item will be contained in the Form 10-K/A, which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this Item will be contained in the Form 10-K/A, which is expected to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2024.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits
2.1 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)
3.1 Articles of Incorporation of First Financial Northwest (2)
3.2 Amended and Restated Bylaws of First Financial Northwest (3)
4.1 Form of stock certificate of First Financial Northwest (2)
4.2 Description of Capital Stock of First Financial Northwest (4)
10.1 Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (5)
10.2 Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (6)
10.3 Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson(5)
10.4 Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III (6)
10.5 Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson (6)
10.6 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 (7)
10.7 Amendment No. 1 to Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III(8)
10.8 Amendment No. 1 to Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (8)
10.9 Amendment No. 1 to Executive Supplemental Retirement Plan Participation Agreement for Joseph W. Kiley III (8)
10.10 Amendment No. 1 to the 2020 Supplemental Executive Retirement Plan for Joseph W. Kiley III (8)
10.11 Amendment No. 1 to the 2020 Supplemental Executive Retirement Plan for Richard P. Jacobson (8)
10.12 Amendment No. 1 to Form of Change in Control Severance Agreement for Executive Officers (8)
14 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))
19.1 Trading in Securities and Confidentiality of Inside Information for Employees
19.2 Trading in Securities and Confidentiality of Inside Information for Officers and Directors
21 Subsidiaries
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
97 Policy relating to Recovery of Erroneously Awarded Compensation
101 The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended December 31, 2024, 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.
104 Cover Page Interactive Date File
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(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 January 15, 2020.
(7) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 21, 2020.
(8) 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.