KBRA Comments on Global Credit Union's Announced Agreement to Acquire First Financial Northwest Bank
23 Jan 2024 | New York
KBRA comments on Global Credit Union's ("Global") announced agreement to acquire First Financial Northwest Bank, a wholly-owned subsidiary of First Financial Northwest, Inc. (NASDAQ: FFNW).
On January 11, 2024, Anchorage, Alaska-based Global Credit Union (KBRA Senior Unsecured Debt: BBB / Negative Outlook) announced that it has entered into a definitive agreement in which Global will acquire Renton, Washington-based First Financial Northwest Bank, a wholly-owned subsidiary of First Financial Northwest, Inc. The transaction, valued at $231.2 million (1.37x P/TBV), is an all-cash deal consideration and is expected to close in 4Q24 pending regulatory approval. The acquisition is structured as a purchase and assumption agreement with Global purchasing substantially all assets and assuming substantially all liabilities of First Financial Northwest Bank that includes an estimated interest rate mark to market of ~$69 million. KBRA considers the deal to be in line with management's growth strategy, continuing to build upon its past successful transaction history with the state and NCUA regulators, as they have previously merged with three credit unions in the state of Washington. Despite being Global's first bank acquisition, and potentially the largest credit union purchase of a bank if approved by regulators, we consider the planned acquisition to be strategically favorable building market density in the economic vibrant western region of Washington where the company first began operations in the state 40 years ago. We believe the expansion will further strengthen the credit union's member relationships and its ability to provide business and commercial services to its membership base along with the addition of 15 physical branches. Additionally, over 95% of FFNW's customer base are currently eligible under Global's field of membership guidelines as residents of the state of Washington - potentially posing a reduced level of regulatory hurdles.
FFNW reported $1.5 billion in total assets at 3Q23, which is just under 13% of Global's asset base, and is expected to elevate the combined institution to ~$13 billion in total assets at close. With regard to the impact on financial metrics, the potential deal should be accretive to Global's earnings, potentially adding ~$20 million to $30 million to net income annually, partially offsetting the headwinds from the Durbin Amendment Global has faced since crossing over the $10 billion threshold in 2022. Additionally, the credit union anticipates typical cost save opportunities related to the acquisition. Both institutions have maintained favorable capital positions, and, while proforma capital has not been disclosed, we expect the net worth ratio to edge down in the lower 9% range, with the combined entity remaining above the well capitalized threshold post closing.
While FFNW's loan portfolio has a slight commercial tilt as 53% of total loans are collateralized by commercial real estate, with the remaining 42% collateralized by residential real estate, we view the acquired loan book as complementary to Global's loan portfolio. Additionally, the proforma loan portfolio should not change materially with the combined entity maintaining its consumer focus. Auto loans are expected to remain the largest concentration at ~42%, followed by residential mortgages at ~31%, and commercial loans comprising ~17%. We also acknowledge that Global, as a federally chartered credit union, has limitations on the types of loans it is permitted to hold, that said, the parties have an agreed to restructure these types of loans to an immaterial level by closing and does not pose a concern. Furthermore, FFNW has historically maintained pristine asset quality metrics, and Global's management team completed a comprehensive due diligence process, including a review of credit quality and lending processes. As such, when considering strong reserve levels at both institutions, we view the de minimis credit adjustment as adequate. The proposed acquisition would also add $1.2 billion in deposits with ~10% in NIB accounts, though we note, given a higher concentration in time deposits (40%) and average brokered deposits (16%), FFNW's average cost of deposits of 2.98% at 3Q23 tracks higher than Global's average cost of deposits of 1.10% at 3Q23, which may weigh on overall funding costs. Nonetheless, we expect Global will continue to maintain a strong, member focused, granular core deposit base, which given its wide geographic diversity (dispersed across five states) should be able to replace FFNW's higher cost deposits over time.
Overall, we view integration risks as comparatively minimal for this in-market deal, while also recognizing the strong cultural alignment between the two institutions. Moreover, we view the proposed transaction as neutral to Global's credit ratings over the near-term.