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Real Risks To Know Before Investing In First Financial Northwest Inc (NASDAQ:FFNW)

Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. Economic growth impacts the stability of salaries and interest rate level which in turn affects borrowers’ demand for, and ability to repay, their loans. As a small-cap bank with a market capitalisation of US$158m, First Financial Northwest Inc’s (NASDAQ:FFNW) profit and value are directly affected by economic activity. Risk associate with repayment is measured by the level of bad debt which is an expense written off First Financial Northwest’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.

See our latest analysis for First Financial Northwest

NasdaqGS:FFNW Historical Debt December 3rd 18

Does First Financial Northwest Understand Its Own Risks?

First Financial Northwest’s forecasting and provisioning accuracy for its bad loans indicates it has a strong understanding of its own risk levels. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its large bad loan to bad debt ratio of over 500%, First Financial Northwest has excessively over-provisioned above the appropriate minimum of 100%, indicating the bank is extremely cautious with their expectation of bad debt and should adjust their forecast moving forward.

How Much Risk Is Too Much?

First Financial Northwest is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of First Financial Northwest’s profit. The bank’s bad debt only makes up a very small 0.044% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent

First Financial Northwest profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since First Financial Northwest’s total deposit to total liabilities is very high at 85% which is well-above the prudent level of 50% for banks, First Financial Northwest may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

The recent acquisition is expected to bring more opportunities for FFNW, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. I’ve bookmarked FFNW’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

  1. Future Outlook: What are well-informed industry analysts predicting for FFNW’s future growth? Take a look at our free research report of analyst consensus for FFNW’s outlook.
  2. Valuation: What is FFNW worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether FFNW is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.