ANNUAL REPORT 2021
20 21 ANNUAL REPORT
To our Stakeholders
”In 2021, we opened new
branch locations in
Ferndale and Bellevue,
and relocated our
Fairhaven branch to a
more visible location. We
are looking forward to
harvesting each of these
investments in the
coming year and
beyond.”
We are pleased to share with you First Northwest Bancorp’s 2021 Annual Report. As
evidenced by our meaningful progress in asset growth and profitability, this year First
Northwest Bancorp and First Fed Bank adapted to meet the needs of our customers,
employees, shareholders, and the communities we serve. We accomplished this by
investing in financial technology, enhancing our digital delivery channels, expanding
financial inclusion, and increasing our physical footprint.
As you may have noticed, we renamed as First Fed Bank this year! The new name and
corresponding conversion to a commercial bank under Washington law reflect the name
we have affectionately gone by for nearly a century and the maturing business activities
the Bank developed in response to our growing community needs.
To support our progress last year, we invested in our people by hiring 59 new employees
in 2021. We also increased the base pay entry rate to $18 per hour demonstrating our
commitment to the people who enabled us to grow. In 2021, we opened new branch
locations in Ferndale and Bellevue, and relocated our Fairhaven branch to a more visible
location. We are looking forward to harvesting each of these investments in the coming
year and beyond.
BUILDING REVENUE – NON-INTEREST INCOME ACCOUNTS FOR
OVER 21.2% OF TOTAL OPERATING REVENUE DRIVEN BY THE
STRENGTH OF THE COMPANY’S MORTGAGE BANKING OPERATIONS
$6,570
$6,224
2019FY
2020FY
2021FY
(Dollars in thousands)
$58,298
$43,958
$37,865
$1,763
$2,127
$1,743
$1,253
TOTAL
SHAREHOLDERS’
EQUITY
$190.5M
Net Interest Income
Interchange Income
Revenue from Sold Loans
FIRST N ORTHWEST BANCORP
1
20 21 ANNUAL REPORT
2019
TOTAL
OPERATING
REVENUE:
$44.9M
2020
TOTAL
OPERATING
REVENUE:
$59.8M
2021
TOTAL
OPERATING
REVENUE:
$73.9M
OUR FINANCIAL PERFORMANCE
Despite continued economic uncertainty, we reported another year of record profits in 2021 totaling $15.4 million – a 49.1%
increase over 2020. Basic and diluted earnings per share increased to $1.63 for 2021 compared to $1.07 for the previous year.
This increase in earnings per share resulted from the combined impact of improved earnings and the successful execution of our
share repurchase program.
We continue to focus on expanding the balance sheet and improving the bottom line. Last year, deposits increased $247.1 million
to $1.58 billion at year-end. Total loans increased $203.1 million, or 17. 6%, and total assets grew $266.7 million, or 16.1%, to
$1.92 billion in 2021.
The branches in our historical markets on the Olympic Peninsula grew in a meaningful way in 2020 and 2021. Deposit balances at
these six branches grew to $1.15 billion in 2021. This was a result of meeting the needs of businesses and consumers in these
communities through PPP and other lending and deposit initiatives.
Our capital position remains strong and improves each quarter as we add net profits to equity. We look forward to continuing to
grow our franchise and creating value for our communities, customers, employees and shareholders. To that end, we raised our
quarterly cash dividend 17% to $0.07 per share in November 2021.
OUR GOVERNANCE COMMITMENT
Our continued growth and investment in technology is exciting and promising! These enhancements add to the convenience for
our customers while creating efficiencies for our staff. Our Board remains committed to strong governance and oversight as we
grow. We regularly review both the board and management leadership structure, purpose, and oversight, making changes where
appropriate, to ensure sharp focus and crisp execution of our goals. To that end we welcomed our second new Board member in
18 months last year. David Blake retired in September 2021 after 16 years of Board service. Gabriel Galanda was appointed in the
same month and has been nominated for election at the May 2022 annual meeting. Mr. Galanda’s impressive background in
complex, multi-party litigation and crisis management, representing Indigenous nations, businesses and citizens adds valuable
insight and expertise to our Board.
2
FIRST N ORTHWEST BANCORP
20 21 ANNUAL REPORT
Our Board also passed its own Environmental, Social, and Governance (“ESG”) Policy, mandating Nominating and Corporate
Governance Committee oversight and reporting of internal ESG practices. In accordance with the Board’s commitment, First
Northwest published its inaugural Sustainability Accounting Standards Board Fact Sheet in November 2021 detailing industry-
specific ESG metrics through the date of the report. Please visit https://investor.ourfirstfed.com/ESG/ to view the report.
OUR COMMUNITY INVESTMENT
First Northwest, through First Fed, has a long history of investing in our local communities. This investment goes far beyond
traditional business metrics and is based in our vision: to create wellbeing and prosperity for our employees, customers, and
communities. In practice, this investment translates to sponsorships and donations of over $1.1 million (combined with the First
Federal Community Foundation) in 2021. Additionally, our employees used paid volunteer hours and personal time to invest over
4,400 volunteer service hours in the communities we serve. We know our community investments pay dividends by empowering
our neighbors, stimulating local economic growth, and generating long-term customer loyalty.
OUR FUTURE
We are excited to celebrate our centennial year in 2022 and continue to deliver strong performance through traditional banking
services as well as using technology to acquire new customer relationships and deepen existing ones. This includes the efforts we
are making with our fintech partner, Quin Ventures, Inc., which can be found at https://helloquin.com. We remain keenly aware
of First Northwest’s historic and future impact in the communities we serve and we work every day to ensure First Northwest is
positioned to deliver extraordinary value to our customers, employees, shareholders, and communities for centuries to come. We
are grateful for your ongoing support and loyalty to First Northwest Bancorp.
Sincerely,
STEPHEN OLIVER
Chairman, Board of Directors
MATT DEINES
President and Chief Executive Officer
FIRST N ORTHWEST BANCORP
3
20 21 ANNUAL REPORT
2021 FOUNDATION CONTRIBUTIONS
“The Foundation has created lasting impact in the communities
we serve with over $5.3 million in support since 2015.”
2021 Total Contibutions: $865,000
—Matthew P. Deines, President & CEO, First Fed
$115,000
ECONOMIC
DEVELOPMENT
GRANTS
$65,000
COVID(cid:2)19
EMERGENCY
RESPONSE
GRANTS
$865,000
2021 TOTAL
CONTRIBUTIONS
$330,000
AFFORDABLE
HOUSING
GRANTS
$100,000
COMMUNITY
SUPPORT
GRANTS
$255,000
COMMUNITY
DEVELOPMENT
GRANTS
First Fed created and funded the First Federal Community Foundation in January 2015 to continue its long tradition of
giving back to the communities it serves. As of March 31, 2015, the Bank’s generous gift of cash and stock was valued at
more than twelve million dollars. Since that time, the Foundation has awarded $5.3 million in grants to recipients
located in the communities in which First Fed operates a full service branch in Washington, including Clallam, Jefferson,
Kitsap, King, and Whatcom counties. The Foundation’s awards target four key priorities: Community Support;
Affordable Housing; Economic Development; and Community Development. In 2021, the Foundation also provided
COVID-19 Emergency Response grants.
First Fed is proud of the Foundation and the work it does and is proud to work side-by-side with the Foundation to
improve the communities in which it operates. Although a separate 501(c)3 nonprofit corporation, the Foundation’s
board and officers include members of First Fed’s board. Volunteers from First Fed also serve on the Foundation’s
Advisory Committee. With encouragement from its Board, First Fed’s employees interact regularly with the
Foundation, promoting its benefits within their communities and participating in Foundation events.
4
FIRST N ORTHWEST BANCORP
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-36741
FIRST NORTHWEST BANCORP
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation or organization)
46-1259100
(I.R.S. Employer I.D. Number)
105 West 8th Street, Port Angeles, Washington
(Address of principal executive offices)
Registrant's telephone number, including area code:
98362
(Zip Code)
(360) 457-0461
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.01 per share
Trading Symbol(s):
FNWB
Name of each exchange on which registered:
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At March 10, 2022, the registrant had 10,006,022 shares of common stock issued and outstanding. The aggregate market value of the
voting stock held by non-affiliates of the registrant based on the closing price of such stock as quoted on The Nasdaq Stock Market, LLC
as of June 30, 2021, was $170,874,610.
Portions of the registrant's Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE:
- 1 -
FIRST NORTHWEST BANCORP
2021 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Forward-Looking Statements
Available Information
PART I
Item 1. Business
General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiary and Other Activities
Competition
Employees
How We Are Regulated
Taxation
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Our Business and Operating Strategy
Critical Accounting Policies
New Accounting Pronouncements
Comparison of Financial Condition at December 31, 2021 and December 31, 2020
Comparison of Results of Operations for the Years Ended December 31, 2021 and
December 31, 2020
Average Balances, Interest and Average Yields/Cost
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity Management
Off-Balance Sheet Activities
Commitments and Off-Balance Sheet Arrangements
Capital Resources
Effect of Inflation and Changing Prices
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
4
5
6
6
6
8
25
33
36
41
42
42
44
55
56
68
68
68
68
69
69
70
70
71
73
74
74
77
81
82
82
84
85
85
85
86
86
87
87
- 2 -
FIRST NORTHWEST BANCORP
2021 ANNUAL REPORT ON FORM 10-K
(Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV.
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
149
149
150
150
150
150
151
151
151
151
152
153
As used in this report, the terms, we, our, and us, and Company refer to First Northwest Bancorp ("First
Northwest"), its consolidated subsidiary and its joint venture controlling interest, unless the context indicates
otherwise. When we refer to First Fed or the Bank in this report, we are referring to First Fed Bank, the
wholly owned subsidiary of First Northwest Bancorp. When we refer to "Quin" or "Quin Ventures" in this
report, we are referring to Quin Ventures, Inc., a First Northwest joint venture. First Northwest, the Bank, and
Quin Ventures are collectively referred to as the "Company."
- 3 -
Forward-Looking Statements
Certain matters in this Annual Report on Form 10-K ("Form 10-K"), including information included or
incorporated by reference, constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions that are not historical facts, and other statements often identified by
words such as "believes," "expects," "anticipates," "estimates," or similar expressions.
These forward-looking statements are based on current beliefs and expectations of management and are
inherently subject to significant business, economic and competitive uncertainties and contingencies, many of
which are beyond our control. Actual results may differ materially from those contemplated by the forward-
looking statements due to, among others, the following factors:
the effects of the COVID-19 pandemic, including on our credit quality and operations, as well as its
impact on general economic conditions;
legislative or regulatory changes, including actions taken by governmental authorities in response to
inflationary pressures, the COVID-19 pandemic, and climate change;
the risks associated with lending and potential adverse changes in the credit quality of loans in our
portfolio, particularly with respect to borrowers affected by the COVID-19 pandemic, natural
disasters, or climate change;
a decrease in the market demand for loans that we originate for sale;
our ability to control operating costs and expenses;
whether our management team can implement our operational strategy, including but not limited to
our efforts to achieve loan and revenue growth;
our ability to successfully execute on acquisition strategies and integrate any newly acquired assets,
liabilities, customers, systems, and management personnel into our operations and our ability to
realize related cost savings within expected time frames;
our ability to successfully execute on growth strategies related to our entry into new markets;
our ability to develop user-friendly digital applications to serve existing customers and attract new
customers;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to
be incorrect and result in significant declines in valuation;
changes in the levels of general interest rates, and the relative differences between short and long-
term interest rates, deposit interest rates, our net interest margin and funding sources;
increased competitive pressures among financial services companies, particularly from non-
traditional banking entities such as challenger banks, fintech, and mega technology companies;
our ability to attract and retain deposits;
changes in consumer spending, borrowing and savings habits, resulting in reduced demand for
banking products and services;
results of examinations of us by the Washington State Department of Financial Institutions,
Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San
Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect
our liquidity and earnings;
legislative or regulatory changes that adversely affect our business;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our
information technology systems or on the third-party vendors who perform several of our critical
processing functions;
any failure of key third-party vendors to perform their obligations to us; and
other economic, competitive, governmental, regulatory and technical factors affecting our operations,
pricing, products and services and other risks described elsewhere in our filings with the Securities
and Exchange Commission, including risks discussed under "Item 1.A. -- Risk Factors" in this Form
10-K.
- 4 -
Further, statements about the potential effects of the COVID-19 pandemic on the Banks businesses and
financial results and condition may constitute forward-looking statements and are subject to the risk that the
actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to
factors and future developments that are uncertain, unpredictable and in many cases beyond the Banks control,
including the direct and indirect impact of the ongoing pandemic on the Bank, its customers and third parties.
These developments could have an adverse impact on our financial position and our results of operations.
Any forward-looking statements are based upon managements beliefs and assumptions at the time they
are made. We undertake no obligation to publicly update or revise any forward-looking statements included or
incorporated by reference in this document or to update the reasons why actual results could differ from those
contained in such statements, whether as a result of new information, future events or otherwise. Due to these
risks, uncertainties and assumptions, we cannot assure that the forward-looking statements discussed in this
report will occur, and you should not put undue reliance on any forward-looking statements.
Available Information
The Company provides an Investor Relations link on its website (www.ourfirstfed.com) to the
Securities and Exchange Commissions ("SEC") website (www.sec.gov) for purposes of providing copies of its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy
statements. Other than an investors own Internet access charges, these filings are available free of charge. The
information contained on our website is not included as part of, or incorporated by reference into, this Form 10-
K.
- 5 -
Item 1. Business
General
PART I
First Northwest Bancorp, a Washington corporation, is the bank holding company for First Fed Bank.
In addition to the Bank, the Company has a controlling interest in Quin Ventures, Inc., which operates a digital
financial wellness platform nationwide.
At December 31, 2021, the Company had total assets of $1.92 billion, net loans of $1.35 billion, total
deposits of $1.58 billion, and total shareholders' equity of $190.5 million. The Company's business activities are
generally limited to passive investment activities and oversight of its investments in First Fed and Quin
Ventures. The Company also entered into partnerships to strategically invest into fintech-related businesses,
which may result in the development of additional investment opportunities. Aside from these investments, the
information set forth in this report, including consolidated financial statements and related data, relates primarily
to First Fed.
First Northwest is a bank holding company subject to regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve"). First Fed is examined and regulated by the Washington State
Department of Financial Institutions, Division of Banks ("DFI") and by the Federal Deposit Insurance
Corporation ("FDIC"). First Fed is required to have certain reserves set by the Federal Reserve and is a member
of the Federal Home Loan Bank of Des Moines ("FHLB"), which is one of the 11 regional banks in the Federal
Home Loan Bank System ("FHLB System").
First Fed Bank is a community-oriented financial institution serving Western Washington with offices
in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We have twelve full-service branches and two
business centers.
We offer a wide range of products and services focused on the financial needs of the communities we
serve. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and
multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and
consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over
the last five years, we have significantly increased the origination of commercial real estate, multi-family real
estate, construction, and commercial business loans, and more recently have increased our consumer loan
portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and
business deposit products, including transaction accounts, savings and money market accounts and certificates of
deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing
activities.
The executive office of the Company is located at 105 West 8th Street, Port Angeles, Washington
98362, and its telephone number is (360) 457-0461.
Market Area
We operate through twelve full-service branch offices and two business centers located in Washington
State. We have five branches in Clallam County, one in Jefferson County, one in King County, two in Kitsap
County, and three in Whatcom County. We have one business center located in King County and one in
Whatcom County. All population and income data below is derived from the U.S. Census Bureau website.
- 6 -
Clallam County has a population of approximately 77,331 and estimated median family income of
$57,126. The economic base in Clallam County is dependent on government, healthcare, education, tourism,
marine services, forest products, agriculture, and technology industries. The primary employers in Clallam
County include the Olympic Medical Center, Peninsula College, the Port Angeles School District, Clallam
County government, Jamestown S'Klallam Tribe, Clallam Bay Corrections Center, and the Westport Shipyard.
According to the U.S. Bureau of Labor Statistics, the unemployment rate for Clallam County was 4.5% at
December 31, 2021, compared to 7.8% at December 31, 2020. By comparison, the unemployment rate for the
state of Washington was 4.5%, and the national average was 3.9% at December 31, 2021.
Jefferson County has a population of approximately 31,729 and estimated median family income
of $54,471. The economic base in Jefferson County is dependent on government, healthcare, education, tourism,
arts and culture, maritime and boat building, and small-scale manufacturing. The primary employers in Jefferson
County include Port Townsend Paper, Jefferson Healthcare, Port Townsend School District, the Port Authority
of Port Townsend and related marine trade, and the Jefferson County government. According to the U.S. Bureau
of Labor Statistics, the unemployment rate for Jefferson County was 4.1% at December 31, 2021, compared
to 7.4% at December 31, 2020.
Kitsap County has a population of approximately 271,473 and estimated median family income of
$79,624. The economic base of Kitsap County is largely supported by the United States Navy through personnel
stationed at Kitsap Naval Base along with other employers supporting the military. Private industries that
support the economic base are healthcare, retail and tourism. Other primary employers in Kitsap County include
the Department of Defense, Harrison Medical Center, Walmart, and Port Madison Enterprises, which owns and
operates the Clearwater Casino and Resort, gas stations and other retail operations. According to the U.S. Bureau
of Labor Statistics, the unemployment rate for Kitsap County was 3.3% at December 31, 2021, compared
to 6.0% at December 31, 2020.
Whatcom County has a population of approximately 229,247 and estimated median family income of
$69,372. The economic base of Whatcom County is largely supported by healthcare, education and crude oil
refinery industries. There is some niche manufacturing and a large variety of other small businesses that create a
well-rounded economy with a close proximity to the Canadian border bringing in shoppers seeking retail
products and services. The primary employers in Whatcom County include PeaceHealth Medical Center,
Western Washington University, Bellingham School District, and BP Cherry Point Refinery. According to the
U.S. Bureau of Labor Statistics, the unemployment rate for Whatcom County was 4.0% at December 31, 2021,
compared to 7.0% at December 31, 2020.
King County, which includes the City of Seattle, has a population of approximately 2.3 million and
estimated median family income of $102,594. The economic base of King County is largely supported by
technology, services, and manufacturing industries. The primary employers in King County include Microsoft,
Amazon, Boeing, Starbucks, and the King County government. According to the U.S. Bureau of Labor Statistics,
the unemployment rate for King County was 3.2% at December 31, 2021, compared to 4.3% at December 31,
2020.
As a part of our business plan, we intend to extend our operations throughout the Puget Sound Region
and beyond. This region dominates the economy of the Pacific Northwest and is broadly defined as the area
surrounding the Puget Sound that extends into the northwestern section of the state of Washington. The
population of this additional region (beyond our current market area) is approximately 2.3 million, or 29.5% of
the state's population. The market area is a mix of urban, suburban and rural areas, with the Seattle metropolitan
area as a well-developed urban center. The region extends from Whatcom County in the north on the Canadian
border to Thurston and Pierce counties to the south. Other key metropolitan areas within the Puget Sound region
include Bellingham (Whatcom County), Mount Vernon (Skagit County), Everett (Snohomish County), Tacoma
(Pierce County) and Olympia (Thurston County).
- 7 -
Key employment sectors include aerospace, military, information technology, biotechnology,
education, logistics, international trade, and tourism. The region is well known for the long-term presence of The
Boeing Corporation and Microsoft, two major industry leaders, and since the turn of the century, Amazon.com.
The military presence includes a number of large installations serving the U.S. Air Force, Army and Navy.
Given the employment profile and the presence of the University of Washington and other universities, the
region's workforce is highly educated. Washington's geographic proximity to the Pacific Rim along with a deep-
water port makes it a center for international trade, which contributes significantly to the regional economy. The
local ports make Washington the ninth largest exporting state in the nation. The top five trading partners with
Washington include China, Canada, Japan, Mexico and South Korea. Tourism has also developed into a major
industry, due to the scenic beauty, temperate climate, and incredible food and culture. Maritime industry
employment, supported by the trade and fishing industries, is also an important employment sector.
For a discussion regarding the competition in our primary market area, see "Competition."
Lending Activities
General. First Feds principal lending activities are concentrated in real estate secured loans with first
lien one- to four-family mortgage, commercial, and multi-family loans. First Fed also makes construction and
land loans (including lot loans and multi-family acquisition-renovation loans), commercial business loans, and
consumer loans, consisting primarily of automobile loans, manufactured home loans, and home-equity loans and
lines of credit.
Loan Portfolio Analysis
The following table represents information concerning the composition of our loan portfolio, excluding
loans held for sale, by the type of loan at the dates indicated:
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
2021
Amount
December 31,
2020
Percent
(Dollars in thousands)
Amount
Percent
$
294,965
172,409
363,299
224,709
1,055,382
21.7% $
12.7
26.8
16.5
77.7
39,172
182,769
221,941
79,838
2.9
13.5
16.4
5.9
309,828
162,467
296,574
123,627
892,496
33,103
128,233
161,336
100,201
26.8%
14.1
25.7
10.7
77.3
2.9
11.1
14.0
8.7
Total loans
1,357,161
100.0%
1,154,033
100.0%
Less:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
4,772
(12,995)
15,124
4,346
(6,129)
13,847
Total loans, net
$
1,350,260
$
1,141,969
- 8 -
Fixed-Rate and Adjustable-Rate Loans
The following table shows the composition of our loan portfolio, excluding loans held for sale, in dollar
amounts and in percentages by fixed rates and adjustable rates at the dates indicated:
Fixed-rate loans:
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total fixed-rate loans
Adjustable-rate loans:
Real estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total adjustable-rate loans
Total loans
Less:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
Total loans, net
2021
Amount
December 31,
2020
Percent
(Dollars in thousands)
Amount
Percent
$
203,746
65,331
127,522
73,104
469,703
18,910
182,412
201,322
52,406
723,431
91,219
107,078
235,777
151,605
585,679
20,262
357
20,619
27,432
633,730
15.0% $
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One- to Four-Family Real Estate Lending. At December 31, 2021, one- to four-family residential
mortgage loans (excluding loans held for sale) totaled $295.0 million, or 21.7%, of our total loan portfolio,
including $31.4 million, or 10.6%, of loans secured by properties outside the state of Washington, primarily
purchased loans in the state of California. We originate both fixed and adjustable-rate residential loans, which
can be sold in the secondary market or retained in our portfolio, and supplement those originations with loan
purchases from time to time, depending on our balance sheet objectives. Residential loans are underwritten to
either secondary market standards for sale or to internal underwriting standards, which may not meet Federal
Home Loan Mortgage Corporation ("Freddie Mac") or Federal National Mortgage Association ("Fannie Mae")
eligibility requirements.
Fixed-rate residential mortgages are offered with repayment terms between 10 and 30 years, priced
from Freddie Mac posted daily pricing indications adjusted for economic and competitive considerations.
Adjustable-rate residential mortgage products with similar amortization terms are also offered, with an interest
rate that is typically fixed for an initial period ranging from one to seven years with annual adjustments
thereafter. Future interest rate adjustments include periodic caps of no more than 2% and lifetime caps of 5% to
6% above the initial interest rate, with no borrower prepayment restrictions.
Adjustable-rate mortgage loans could increase credit risk when interest rates rise. An increase to the
borrower's loan payment may affect the borrower's ability to repay and could increase the probability of default.
To mitigate this risk to both the borrower and First Fed, adjustable-rate loans contain both periodic and lifetime
interest rate caps, limiting the amount of payment changes. In addition, depending on market conditions, we may
underwrite the borrower at a higher interest rate and payment amount than the initial rate. At December 31,
2021, the average interest rate on our adjustable-rate mortgage loans was approximately 30 basis points over the
fully indexed rate. As of December 31, 2021, we had $91.2 million, or 6.7%, of adjustable-rate residential
mortgage loans in our residential loan portfolio.
The underwriting process considers a variety of factors including credit history, debt to income ratios,
property type, loan to value ratio, and occupancy. For loans with over 80% loan to value ratios, we typically
require private mortgage insurance, which reduces our exposure to loss in the event of a loan default. Credit risk
is also mitigated by obtaining title insurance, hazard insurance, and flood insurance. Residential mortgage loans
which require appraisals are appraised by independent fee-based appraisers.
In connection with rules and regulations issued by the Consumer Financial Protection Bureau
("CFPB"), we are required to make a reasonable, good-faith determination before or when we consummate a
mortgage loan that the borrower has a reasonable ability to repay the loan, and in some cases involving qualified
mortgages, we are presumed to have complied with this requirement. We believe that mortgage loans originated
by the bank meet these standards.
First Fed does not actively engage in subprime mortgage lending, either through advertising, marketing,
underwriting and/or risk selection, and has no established program to originate or purchase subprime mortgage
loans.
Commercial and Multi-Family Real Estate Lending. At December 31, 2021, $363.3 million, or
26.8%, and $172.4 million, or 12.7%, of our total loan portfolio was secured by commercial and multi-family
real estate property, respectively. At December 31, 2021, we have identified $90.4 million, or 16.9%, of our
commercial real estate portfolio as owner-occupied commercial real estate and $445.3 million, 83.1%, is secured
by income producing, or non-owner-occupied, commercial and multi-family real estate. Substantially all of our
commercial real estate and multi-family loans are secured by properties located in the state of Washington.
- 12 -
Commercial and multi-family real estate loans are generally priced at a higher rate of interest than one-
to four-family residential loans, to compensate for the greater risk associated with higher loan balances and the
complexity of underwriting and monitoring these loans. Repayment on loans secured by commercial or multi-
family properties is dependent on successful management by the property owner to create sufficient net
operating income to meet debt service requirements. Changes in economic and real estate market conditions can
affect net operating income, capitalization rates, and ultimately the valuation and marketability of the collateral.
As a result, we analyze market data including vacancy rates, absorption percentages, leasing rates, and
competing projects under development. Interest rate, occupancy and capitalization rate stress testing are required
as part of our underwriting analysis. If the borrower is a corporation, we generally require and obtain personal
guarantees from principals, which include underwriting of their personal financial statements, tax returns, cash
flows and individual credit reports, to provide us with additional support and a secondary source for repayment
of the debt.
We offer both fixed- and adjustable-rate loans on commercial and multi-family real estate, which may
include balloon payments. As of December 31, 2021, we had $235.8 million in adjustable-rate commercial real
estate loans and $107.1 million in adjustable-rate multi-family loans. Commercial and multi-family real estate
loans with adjustable rates generally adjust after an initial period of three to five years and have maturity dates of
three to ten years. Amortization terms are generally limited to terms up to 25 years on commercial real estate
loans and up to 30 years on multi-family loans. Adjustable-rate multi-family residential and commercial real
estate loans are generally priced to market indices with appropriate margins, which may include the U.S.
Constant Maturity Treasury Rate, The Wall Street Journal prime rate, or a similar term FHLB borrowing rate.
During 2019, the Bank moved away from the London Interbank Offered Rate ("LIBOR") as a market
index in anticipation of its complete sunset in 2023 and in order to mitigate the transition of existing loans tied to
LIBOR to the Secured Overnight Financing Rate ("SOFR") index. We currently utilize LIBOR on floating rate
adjustable-rate conversion ("ARC") loan and Main Street Lending contracts; however, these contracts stipulate
that we can use a different index upon the sunset of LIBOR. Substantially all adjustable-rate commercial and
multi-family real estate loans are subject to a floor rate, and the weighted average floor rate on these loans was
2.98% at December 31, 2021. Of the adjustable-rate commercial loans, 74.35% are subject to a ceiling rate, and
the weighted average ceiling rate on those loans was 15.07% at December 31, 2021.
The maximum loan to value ratio for commercial and multi-family real estate loans is typically limited
to 75% of an appraiser opinion of market value. The minimum debt service coverage ratio is 1.25 for non-owner-
occupied and owner-occupied properties. We require independent appraisals or evaluations on all loans secured
by commercial or multi-family real estate from an approved appraisers list.
Once we make most commercial real estate or multi-family loans, we monitor the relationship at least
annually to assure the borrower continues to meet certain loan requirements as set forth at origination, which
may include an annual inspection of the property. The scope of the review is based on relationship size, with
those $1.5 million or greater subject to a full credit review at least annually, which includes detailed financial
and cash flow analysis, property inspection, covenant compliance and annual risk rating certification.
Relationships $750,000 or greater are subject to brief financial and cash flow analysis, covenant compliance and
annual risk rating certification. While we cannot prevent loans from becoming delinquent, we believe our
monitoring and formal review processes provide us with the opportunity to better identify problem loans in a
timely manner and to work with the borrower prior to the loan becoming delinquent.
- 13 -
The following table provides information on multi-family and commercial real estate loans by type at
the dates indicated:
Non-owner occupied
Multi-family
Office building
Retail
Hospitality
Mixed use
Condominium
Warehouse
Self-storage
Health care
Vehicle dealership
Other non-owner occupied
2021
Amount
Percent
December 31,
2020
Amount
Percent
(Dollars in thousands)
2019
Amount
Percent
$ 172,409
63,209
47,710
44,385
20,938
19,781
15,374
13,246
8,374
1,152
38,705
32.2% $ 158,964
58,715
11.8
45,645
8.9
50,243
8.3
19,920
3.9
3,923
3.7
7,193
2.8
12,290
2.5
16,365
1.6
1,169
0.2
21,198
7.2
34.6% $
12.8
9.9
10.9
4.3
0.9
1.5
2.7
3.6
0.2
4.6
96,098
52,420
48,487
51,055
16,589
113
6,263
10,269
12,390
2,451
12,115
27.3%
14.9
13.8
14.5
4.7
1.7
2.9
3.5
0.7
3.5
Total non-owner occupied
445,283
83.1
395,625
86.0
308,250
87.5
Owner occupied
Health care
Office building
Warehouse
Retail
Mixed use
Vehicle dealership
Manufacturing
Hospitality
Condominium
Other owner-occupied
24,123
20,769
16,266
8,777
4,458
4,289
1,987
374
372
9,010
4.5
3.9
3.0
1.6
0.8
0.8
0.4
0.1
0.1
1.7
21,595
10,455
4,444
7,713
4,487
6,716
2,103
346
376
5,181
4.7
2.3
1.0
1.7
1.0
1.5
0.5
0.1
0.1
1.1
14,091
6,873
3,351
2,631
1,370
7,249
2,138
361
5,506
4.0
2.0
1.0
0.7
0.4
2.1
0.6
0.1
1.6
Total owner occupied
90,425
16.9
63,416
14.0
43,570
12.5
Summary by type
Multi-family
Office building
Retail
Hospitality
Health care
Warehouse
Mixed use
Condominium
Self-storage
Vehicle dealership
Manufacturing
Other non-owner occupied
Other owner-occupied
172,409
83,978
56,487
44,759
32,497
31,640
25,396
20,153
13,246
5,441
1,987
38,705
9,010
32.2
15.7
10.5
8.4
6.1
5.8
4.7
3.8
2.5
1.0
0.4
7.2
1.7
158,964
69,170
53,358
50,589
37,960
11,637
24,407
4,299
12,290
7,885
2,103
21,198
5,181
34.6
15.1
11.6
11.0
8.3
2.5
5.3
1.0
2.7
1.7
0.5
4.6
1.1
96,098
59,293
51,118
51,416
26,481
9,614
17,959
113
10,269
9,700
2,138
12,115
5,506
27.3
16.9
14.5
14.6
7.5
2.7
5.1
2.9
2.8
0.6
3.5
1.6
Total multi-family and commercial real
estate
$ 535,708
100.0% $ 459,041
100.0% $ 351,820
100.0%
- 14 -
If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period
can be a lengthy process with substantial holding costs. Vacancies, deferred maintenance, repairs and market
factors can result in losses during the time it takes to stabilize a property. Depending on the individual
circumstances, initial charge-offs and subsequent losses relating to multi-family and commercial loans can be
substantial and unpredictable.
The average outstanding loan in our commercial real estate portfolio, including multi-family loans, was
$1.4 million as of December 31, 2021. We generally target individual commercial and multi-family real estate
loans between $1.0 million and $10.0 million to small and mid-size owners and investors in our market areas as
well as other parts of Washington. We will also make commercial and multi-family real estate loans in other
states if we have a pre-existing relationship with the borrower.
Our three largest commercial and multi-family borrowing relationships, including current loan balances
and unused commitments, at December 31, 2021 consisted of a $31.2 million relationship secured by multi-
family real estate and multi-family construction in Chelan County, Washington and Kootenai County,
Idaho; a $23.7 million relationship secured by multi-family residential and multi-family construction in King,
Pierce, and Kitsap Counties; and a $22.2 million relationship secured by multi-family and business construction
in Pierce and Kitsap Counties.
Construction and Land Lending. Our construction and land loans increased $101.1 million, or 81.8%,
to $224.7 million, or 16.5% of the total loan portfolio at December 31, 2021, compared to $123.6 million, or
10.7%, at December 31, 2020. At December 31, 2021, the undisbursed portion of construction loans in process
totaled $194.3 million compared to $155.1 million at December 31, 2020.
First Fed offers an "all-in-one" residential custom construction loan product, which upon completion of
construction will be held in our loan portfolio. We also originate construction loans for certain commercial real
estate projects. These projects include, but are not limited to, subdivisions, multi-family, retail, office,
warehouse, hotel, and office buildings. We also offer commercial acquisition-renovation loans that have a small
construction component combined with a traditional real estate loan. Underwriting criteria on construction loans
include, but are not limited to, minimum debt service coverage requirements of 1.25 or better, loan to value
limitations, pre-leasing requirements, construction cost over-run contingency reserves, interest and absorption
period reserves, occupancy, capitalization rates and interest rate stress testing, as well as other underwriting
criteria. Underwriting criteria on commercial acquisition-renovation loans during the interest-only period
include, but are not limited to, loan to value limitations and debt service coverage requirements of 1.00 or better,
based on in-place rents and amortization of full commitment. These loans begin amortizing once renovations
have been completed.
Construction loan applications generally require architectural and working plans, a material
specifications list, a detailed cost breakdown and a construction contract. Construction loan advances are based
on progress payments for "work in place" based on detailed line-item construction budgets. Independent
construction inspectors are used to evaluate the construction draw request relative to the progress. Our
construction administrator reviews all construction projects, inspection reports, and construction loan advance
requests to ensure they are appropriate and in compliance with all loan conditions. Other risk management tools
include title insurance, date down endorsements or periodic lien inspections prior to the payment of construction
loan advances. In some cases, general contractors may be required to provide sub-contractor lien releases for any
work performed prior to the filing of our deed of trust or prior to each construction loan advance.
Custom and speculative construction valuations are based on the assumption that the project will be
built in accordance with plans and specifications submitted to us at the time of the loan application. The
appraiser takes into consideration the proposed design and market appeal of the improvements, based on current
market conditions and demand for homes, although the improvements may not be completed for twelve months
or longer, depending on the complexity of the plans and specifications and market conditions.
- 15 -
Land acquisition, development and construction loans are available to local contractors and developers
for the purpose of holding and/or developing residential building sites and homes when market conditions
warrant such activity. Land acquisition loans are secured by a first lien on the property and are generally limited
to 65% of the acquisition price or the appraised value, whichever is less. Development land loans are generally
limited to 75% of the discounted appraised value based on the projected lot sale absorption rate and associated
carry and liquidation costs of the developed lots and homes. Underwriting criteria for acquisition and
development loans include evidence of preliminary plat approval, and a review of compliance with state and
Federal environmental protection and disclosure laws, engineering plans, detailed cost breakdowns and
marketing plans. Other risk management tools include acquisition of title insurance and review of feasibility and
market absorption reports. These loans have been limited to projects within the state of Washington.
At December 31, 2021, the average construction commitment for single-family residential construction
was $724,000, $6.0 million for multi-family construction, $4.7 million for acquisition-renovation loans, and $3.4
million for commercial real estate construction. The largest construction commitments for multi-family,
acquisition-renovation, and commercial real estate were $18.6 million, $16.6 million, and $14.3 million,
respectively, at December 31, 2021.
Substantially all of our land acquisition, development and construction lending 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, as is the case
for acquisition and development loans. When original interest reserves set up at origination are exhausted, no
additional reserves are permitted unless the loan is re-analyzed and it is determined that the additional reserves
are appropriate.
The success of land acquisition, development and construction lending is dependent upon completion of
the project and the sale or leasing of the property for repayment of the loan. Because of the uncertainties inherent
in the estimates related to construction costs, the market value of the completed project, the demand for the
property at completion, market conditions, the rates of interest paid, and other factors, actual results are difficult
to predict and variations from expectations can have a significant adverse effect on a borrower's ability to repay
loans and the value and marketability of the underlying collateral. In addition, because an incomplete
construction project is difficult to sell in the event of default, we may be required to advance additional funds
and/or contract with another builder in order to complete construction. There is a risk that we may not fully
recover unpaid loan funds and associated construction and liquidation costs under these circumstances.
Speculative construction loans carry additional risk associated with identifying an end-purchaser for the finished
project. In 2020, we implemented an extension fee matrix to entice commercial borrowers to finish projects on
time, which we believe mitigates risk in this area.
We also originate individual lot loans, which are secured by a first lien on the property, for borrowers
who are planning to build on the lot within the next five years. Generally, these loans have a maximum loan to
value ratio of 75% for improved lands (legal access, water and power). The interest rate on these loans is fixed
with a 20-year amortization and a five-year term.
At the dates indicated, the composition of our construction and land portfolio was as follows:
2021
December 31,
2020
(In thousands)
2019
One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Land
$
39,733 $
89,655
51,099
35,671
8,551
24,029 $
34,513
39,346
16,918
8,821
Total construction and land
$
224,709 $
123,627 $
16,127
10,465
3,325
7,270
37,187
- 16 -
Our construction and land loans are geographically disbursed primarily throughout the state of
Washington and, as a result, these loans are susceptible to risks that may be different depending on the location
of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in
monitoring our higher-risk construction projects while lower-risk projects are monitored by internal staff.
The following tables show our construction commitments by type and geographic concentration at the
dates indicated:
December 31, 2021
Construction Commitment
One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total commitment
Construction Funds Disbursed
One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total disbursed
Undisbursed Commitment
One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total undisbursed
Land Funds Disbursed
One- to four-family residential
Commercial real estate
Total disbursed for land
$
$
$
$
$
$
$
$
Olympic
Peninsula
Puget
Sound
Region
Other
Washington
(In thousands)
Oregon
Total
32,785 $
2,938
12,489
48,212 $
57,050 $
182,151
36,536
50,372
326,109 $
4,430 $
4,095
16,638
2,535
27,698 $
$
8,435
8,435 $
94,265
194,681
56,112
65,396
410,454
10,242 $
2,449
3,486
16,177 $
28,929 $
79,707
32,789
29,484
170,909 $
562 $
2,414
15,861
2,701
21,538 $
$
7,534
7,534 $
39,733
89,655
51,099
35,671
216,158
22,543 $
489
9,003
32,035 $
28,121 $
102,444
3,747
20,888
155,200 $
3,868 $
1,681
777
(166)
6,160 $
$
901
901 $
54,532
105,026
5,013
29,725
194,296
3,502 $
3,502 $
3,556 $
1,302
4,858 $
191 $
191 $
$
$
7,249
1,302
8,551
- 17 -
December 31, 2020
Construction Commitment
One- to four-family residential
Multi-family residential
Commercial real estate
Total commitment
Construction Funds Disbursed
One- to four-family residential
Multi-family residential
Commercial real estate
Total disbursed
Undisbursed Commitment
One- to four-family residential
Multi-family residential
Commercial real estate
Total undisbursed
Land Funds Disbursed
One- to four-family residential
Commercial real estate
Total disbursed for land
$
$
$
$
$
$
$
$
Olympic
Peninsula
Puget
Sound
Region
Other
Washington
(In thousands)
Oregon
Total
15,473 $
1,644
2,282
19,399 $
29,827 $
145,701
46,103
221,631 $
1,477 $
16,637
2,755
20,869 $
$
8,020
8,020 $
46,777
172,002
51,140
269,919
7,208 $
1,297
1,677
10,182 $
15,976 $
57,262
14,812
88,050 $
845 $
15,300
429
16,574 $
$
$
24,029
73,859
16,918
114,806
8,265 $
347
605
9,217 $
13,851 $
88,439
31,291
133,581 $
632 $
1,337
2,326
4,295 $
$
8,020
8,020 $
22,748
98,143
34,222
155,113
4,350 $
4,350 $
2,728 $
1,343
4,071 $
347 $
347 $
53 $
53 $
7,478
1,343
8,821
Consumer Lending. We offer a variety of consumer loans, including home equity loans and lines of
credit, new and used automobile loans, loans on other miscellaneous vehicles, and personal lines of credit. At
December 31, 2021, home equity loans and lines of credit totaled $39.2 million, or 2.9% of the loan portfolio.
Our interest rates on home equity loans are priced for risk based on credit score, loan to value and overall
capacity of the applicant. Home equity loans are made for the improvement of residential properties and other
consumer needs. Some of these loans are secured by first liens; however, the majority of these loans are secured
by a second deed of trust on the residential property. Fixed rate, fully amortizing home equity loans in first lien
position are available with repayment periods ranging from 5 to 20 years. We also offer, to borrowers who
qualify, a ten-year home equity line of credit with an option for a discounted initial fixed interest rate for the first
year with the interest rate adjusting monthly thereafter based on a margin over the prime rate; payments are
interest-only during the ten-year draw period. The balance and rate are fixed after that period and the principal
amortized over the remaining fifteen-year period of the loan. Options for equity loans on non-owner occupied
properties are offered under more conservative requirements. Additionally, terms are available under a bridge
loan product consisting of a short-term equity loan used to facilitate the acquisition of a separate residential
property. Home equity fixed and line of credit products in second lien positions behind a non-First Fed mortgage
have a maximum loan amount of $250,000. Home equity loans and lines of credit have greater risk than one- to
four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first
mortgage on the property. We may or may not have private mortgage insurance coverage.
- 18 -
We originate, refinance, or purchase auto loans with a maximum term of up to 180 months depending
on the age and condition of the vehicle and strength of the borrower. Loan rates for auto lending, as well as all
other consumer loans, are priced based on the specific loan type and the risks involved. Direct and indirect
lending sources are used to originate and purchase auto loans, respectively. At December 31, 2021, auto loans
totaled $120.6 million, of which $106.7 million were purchased and $10.6 million were originated through
indirect dealer programs described below, the remaining $3.3 million were originated through our branches.
Indirect auto loans were originated with auto dealerships located throughout our market areas through a
third-party service provider that also facilitated a portion of the underwriting and origination of these loans based
on our underwriting and pricing criteria. During 2020, we ended our relationship with that service provider,
effectively eliminating new production. We may, however, work directly with local auto dealerships in the
future. Indirect auto loan customers receive a fixed rate loan in an amount and at an interest rate that is based on
review of their FICO credit score, age of the vehicle, and loan term. Our underwriting and pricing criteria for
indirect auto loans focuses primarily on the ability of the borrower to repay the loan rather than the value of the
underlying collateral. The loan term on indirect auto loans averages 70 months, which is comparable to national
auto industry data.
We purchase auto loans through a partnership with a loan originator that operates in all 50 states,
underwriting and funding loans for classic (25 years or older) and collector (premium price with limited
production) vehicles. These loans typically range from $10,000 to over $600,000 with terms that range from 84
to 180 months and generally require down payments of 10% to 20%. We receive loan pools each week with
complete packages that we are able to underwrite to determine whether to purchase or pass on all loans
submitted. These loans present unique risks with the collateral being located across the country; however, our
loan originator helps mitigate risk of loss by providing an option to facilitate the collection efforts should
repossession become necessary, for which we would incur a cost if we did it ourselves. Historically, losses on
these types of loans are less than 1% and First Fed experienced loss rates of 0.06% and 0.01% for the years
ended December 31, 2021 and 2020, respectively.
We began purchasing manufactured home loans during 2020 through a partnership with a loan
originator that underwrites and funds these loans. At December 31, 2021, $58.3 million of manufactured home
loans was included in consumer loans. These loans range from $18,000 to $335,000 with terms that range from
120 to 360 months. We receive loan pools with complete packages that we underwrite to determine whether to
purchase or pass on some, or all, of the loans submitted. The seller retains the servicing on these loans. The
collateral may include both real estate and personal property depending on whether or not the title to the subject
property has been eliminated. A reserve account equal to approximately 8% of the unpaid balance serves as a
credit enhancement to help protect against charge offs and prepaid loans. The loan originator has had an average
loss rate of 0.6% since 2007 for this program.
Consumer loans represent additional risks because of the mobility and rapidly depreciating nature of
consumer assets in contrast to real estate-based collateral. If a borrower defaults, repossession and liquidation of
the collateral may not provide sufficient proceeds to satisfy the outstanding loan balance. Other factors that may
account for potential loan losses on consumer loans include deferred maintenance and damages. While
subsequent legal actions and judgments against borrowers in default may be appropriate, such collection efforts
and costs may not always be warranted and are evaluated on a case-by-case basis. Consumer loan collections are
dependent on the borrowers continuing financial stability and federal and state laws, including federal and state
bankruptcy and insolvency laws, which may limit the amount that can be recovered on these loans.
- 19 -
Commercial Business Lending. As of December 31, 2021, commercial business loans totaled
$79.8 million, or 5.9% of our loan portfolio. Included in commercial business loans was $26.3 million in loans
through the Northpointe Bank Mortgage Participation Program ("Northpointe MPP"), which provides interim
financing to mortgage originators based on the contractual sale agreement of a mortgage loan. The Northpointe
MPP interim loan is funded upon receipt of a valid contractual sale agreement and repaid to us when the cash
settlement for that loan occurs and the mortgage originator has been paid, generally within 30 days. Management
selects which mortgage originators to finance based on a review of their business, loan pricing, and origination
volumes. At our discretion, we may add or remove mortgage originators from time to time. We also have limited
our balance of loans made through the Northpointe MPP to $75.0 million at December 31, 2021. The actual
balance in the Northpointe MPP can fluctuate significantly due to variances in the timing of funding and
repayments, as well as Northpointe's ability to maintain mortgage origination volumes, which has resulted in
lower average balances in 2021 compared to 2020.
During the years ended December 31, 2021 and 2020, we provided assistance to many small businesses
through the Small Business Administration's Paycheck Protection Program ("SBA PPP"). This program
provided small businesses with funds to pay up to eight weeks of payroll costs including benefits. A portion of
the funds could also be used to pay interest on mortgages, rent, and utilities. On June 5, 2020, the Paycheck
Protection Program Flexibility Act ("PPPFA") was enacted. Main provisions of the PPPFA extended the
repayment period from two to five years, extended the covered expense period from eight to 24 weeks, and
lowered the percent of forgiveness amount required to be used for eligible payroll costs to 60%. The PPPFA also
extended the repayment start date until after the SBA finalized the application process for loan forgiveness.
We processed $32.2 million of loans for 515 customers through the SBA PPP program as of December
31, 2020, the average loan amount approved was approximately $63,000. We processed an additional $35.0
million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of
$82,000. Payments by borrowers on these loans begin six months after the note date, and interest, at 1%,
continued to accrue during the six-month deferment. Loans can be forgiven in whole or part (up to full principal
and any accrued interest). We received $1.8 million and $1.4 million of fee income for loans originated in 2021
and 2020, respectively, which is accreted into income over the life of the loan. The remaining fee balance is
taken into income when the loan pays off. We recognized deferred fee income, net of deferred costs, of $1.7
million and $643,000 for the years ended December 31, 2021 and 2020, respectively, through SBA PPP loan
accretion and payoff activity. The remaining net deferred fee balance at December 31, 2021, was $390,000. We
partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness
application process. SBA PPP loan balances totaling $14.6 million were included in commercial business loans
at December 31, 2021.
The remaining balance of commercial business loans includes lines of credit, term loans, and letters of
credit used for general business purposes, including seasonal and permanent working capital, equipment
financing, and general investments. These loans are typically secured by business assets, and loan terms vary
from one to seven years with floating rates indexed to similar FHLB advance rates, The Wall Street Journal
prime rate, LIBOR or other indices. These loans typically have shorter maturity terms and higher interest spreads
than real estate loans but generally involve more credit risk because of the type and nature of the collateral. Our
commercial business lending underwriting includes an analysis of the borrowers financial condition, past,
present and future cash flows, and the collateral pledged as security. We generally obtain personal guarantees on
our commercial business loans. We focus our commercial lending activities on small-to-medium sized, privately
held companies with local or regional businesses that operate in our market area.
- 20 -
Commercial business loans are originated based on the cash flow of the borrowing entity, which may be
unpredictable due to normal business cycles, industry changes, and economic and political conditions. Secondary
and tertiary sources of repayment are guarantor cash flows and collateral liquidation. Most often, collateral for
commercial business loans consists of real estate, accounts receivable, inventory, or equipment. Collateral may
fluctuate in value, which can reduce liquidation proceeds, and our ability to collect on accounts receivable or
other third-party payments can affect the amount of losses we incur in the event of default. Similar to
commercial and multi-family real estate loans, commercial business relationships of $1.5 million or greater are
subject to a formal review of the entire lending relationship at least annually.
Loan Origination and Underwriting. Our loans are obtained from a variety of sources, including
existing or walk-in customers, business development, referrals, and advertising, among others. All of our
consumer loan products, including residential mortgage loans and secured and unsecured consumer loans, are
processed through our centralized processing and underwriting center. Commercial business loans, including
commercial and multi-family real estate loans, are originated by our relationship managers ("RMs") and
underwritten centrally with credit presentations submitted for approval to the appropriate individuals and
committee(s) with lending authority designated by the Board of Directors (the "Board").
Lending Authority. Through its current policy, the Board delegates lending authority to the Banks
management and staff and to the Senior Loan Committee ("SLC"). Overdrafts and small business express loans
require one signature. The Chief Banking Officer ("CBO") and the Chief Operating Officer ("COO") have the
authority to approve overdrafts up to $100,000; the Chief Credit Officer ("CCO"), Chief Financial Officer
("CFO"), and Chief Executive Officer ("CEO") have the authority to approve overdrafts up to $250,000; and
certain other staff and management have authority to approve overdrafts ranging from $5,000 to $50,000. Our
small business express loans, which are commercial business loans of $100,000 or less, are approved by the
CCO or designated personnel and management. In addition, the CCO may approve Automated Clearing House
and Remote Deposit Capture transactions in any amount and has the authority to approve most modifications and
extensions of credit in any amount for terms of less than one year.
Mortgage loan underwriters have approval authority up to $667,000. The Director of Mortgage and
Consumer Credit has approval authority of $1.0 million, and the CCO has approval authority of $2.0 million.
Mortgage loans over $2.0 million are approved by the SLC.
For commercial loans, the CCO has approval authority of $10.0 million based on aggregate credit
exposure, and other personnel have approval authority ranging from $500,000 to $4.0 million. Commercial loan
relationships over $10.0 million are approved by the SLC.
The Director of Mortgage and Consumer Credit has approval authority for consumer loans up to $1.0
million and certain named individuals have authority ranging from $150,000 to $500,000. Additionally, we have
assigned authority to approve indirect auto loans and wholesale partnerships meeting our underwriting and
pricing criteria to our third-party service providers.
The SLC (on a monthly basis) and the Board Loan Committee ("BLC") (on a quarterly basis) review
loan portfolio quality, credit concentrations, production, and industry trends and provide directional oversight
over our lending policies. The BLC also reviews, on a quarterly basis, policy exceptions, and related risk
concerns. Additionally, all loan approval policies are reviewed no less than annually.
Washington law provides for loans to one borrower restrictions, which restricts total loans and
extensions of credit by a bank to 20% of its unimpaired capital and surplus, which was $42.4 million at
December 31, 2021. First Fed, however, restricts its loans to one borrower to no more than 60% of the Bank's
lending limit, which is adjusted quarterly and was $31.8 million at December 31, 2021, unless specifically
approved by the SLC as an exception to policy. The following table provides a summary of our five largest
relationships at December 31, 2021.
- 21 -
Total Commitment
(In thousands)
$31,170
23,667
22,210
20,052
19,417
Number of Loans in
Relationship
5
4
3
11
4
Primary Collateral Type
Multi-family Construction
Multi-family Construction
Multi-family Construction
Multi-family Real Estate
Multi-family Construction
Loan Originations, Servicing, Purchases and Sales. We originate mortgage, consumer, multi-family
and commercial real estate, and commercial business loans for our portfolio utilizing fixed- and adjustable-rate
loan terms. We also purchase whole and participation loans on a servicing retained or released basis. During the
years ended December 31, 2021, 2020, and 2019, our total loan originations were $780.5 million,
$871.3 million, and $199.8 million, respectively.
During the years ended December 31, 2021, 2020, and 2019, we purchased $115.5 million,
$88.3 million, and $68.0 million of loans, respectively. During the last year, the majority of purchases consisted
of auto loans purchased through our partnership with an originator specializing in classic and collector vehicles
and manufactured home loans purchased through our partnership with an originator specializing in that type of
lending. A secondary source of purchased loans were commercial real estate loans and participations, whereby
we receive a portion of a loan originated by another lender who retains the servicing and customer relationship
and may, depending on the terms of the agreement, retain a portion of the interest as a servicing fee. Loan pools
purchased prior to 2018 consisted mainly of loans exceeding conforming loan limits, or "jumbo loans," secured
by single family residential properties located in the states of Washington and California. Purchased loans, loan
pools, and participations are underwritten by our credit administration department and approved by the
appropriate loan committee(s) prior to purchase, according to our lending authority guidelines. We may pay a
purchase premium or receive a purchase discount on fully originated loans that we purchase. Premiums and
discounts are capitalized at the time of purchase and amortized over the remaining contractual life of the loan.
We had $13.0 million, $6.1 million, and $4.5 million of net premiums paid on purchased loans at December 31,
2021, 2020, and 2019.
The Olympic Peninsula region, which includes a substantial concentration of our depositors and
borrowers, has experienced limited population growth, and the region's unemployment rate is higher than both
the state and national unemployment rates. As a result, it has been part of our strategy to originate and purchase
loans outside of these areas in the counties surrounding the Puget Sound and elsewhere. As part of that, we may
purchase loans with different credit and underwriting criteria than those we originate organically.
We sell residential first mortgage loans in the secondary market. The majority of residential mortgages
we originate are fixed rate, which we may sell to the secondary market to manage our interest rate risk and
improve noninterest income. During the years ended December 31, 2021, 2020, and 2019, we sold
$113.0 million, $184.4 million, and $58.0 million of residential mortgage loans, respectively. Our secondary
market relationship for residential loans is with Freddie Mac and other select third-party purchasers, which
provides us greater flexibility in choosing the best pricing, whether we are selling on a servicing retained or
released basis.
At December 31, 2021, we were servicing $454.5 million of loans for others. We earned sold loan
servicing income of $1,013,000, $452,000, and $424,000 for the years ended December 31, 2021, 2020, and
2019, respectively. Servicing rights for these loans had a fair value of $3.8 million at December 31, 2021. See
Note 6 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data," of this Form 10-K.
- 22 -
In general, loans are sold on a non-recourse basis to third-party purchasers, subject to a provision for
repurchase in the event of a breach of representation, warranty or covenant made at the time of sale. During
fiscal 2008, we sold loans with "life of the loan" recourse provisions to Freddie Mac, and beginning in May
2013, Freddie Mac has required loans guaranteed by the United States Department of Agriculture to be sold with
"life of the loan" recourse provisions as well. These recourse provisions require us to repurchase the loan upon
default. The balance of loans serviced for others with life of the loan recourse provisions was $2.0 million at
December 31, 2021. There were no loans repurchased during the years ended December 31, 2021, 2020, and
2019.
We may solicit one or more financial institutions to take a portion of a commercial real estate loan in
order to manage risk, concentrations, or to generate income through gain on sale or servicing fees. In that case, a
participation agreement outlines the indirect relationship between the Bank and the participant with regard to
borrower access, loan servicing, loan documentation, and other matters. The participant's involvement is
typically limited, and the participation interest is generally sold without recourse. We typically retain an
ownership interest in the loan as well as the loan servicing rights in order to maintain our direct relationship with
the borrower and better manage our credit risk. During the year ended December 31, 2021, we sold $43.5 million
in multi-family real estate loans, retaining only the servicing, and $4.3 million in commercial construction loans,
retaining both the servicing and a portion of the loan balances. During the year ended December 31, 2020, we
sold $13.4 million in commercial real estate loan participations, retaining both the servicing and a portion of the
loan balances.
In 2021, we expanded our relationship with the Small Business Administration to include additional
products. The SBA loans generally carry a 90% government guarantee. The Bank holds the unguaranteed portion
of the note and sells the guaranteed portion. The Bank retains the servicing on these loans. We sold $4.1 million
of SBA participations during the year ended December 31, 2021.
Gains, losses and transfer fees on sales of one- to four-family and commercial real estate loans are
recognized at the time of the sale. Our net gain on sale of residential real estate, commercial real estate, and SBA
loans was $5.3 million, $6.4 million, and $1.1 million for the years ended December 31, 2021, 2020, and
2019, respectively.
- 23 -
The following table shows our loan origination, sale and repayment activities for the periods indicated:
2021
Year Ended December 31,
2020
(In thousands)
2019
$
$
167,712
62,044
66,182
127,440
6,613
10,525
39,331
479,847
19,600
48,492
69,776
111,554
30,012
12
21,172
300,618
780,465
1,440
1,014
4,134
64,644
44,230
115,462
113,031
43,491
1,837
4,340
2,267
164,966
527,833
692,799
203,128
$
$
247,802
42,663
55,641
59,623
5,994
2,970
43,964
458,657
25,606
50,749
34,472
185,686
13,183
102,988
412,684
871,341
28,652
2,000
37,626
20,003
88,281
184,356
184,356
504,990
689,346
270,276
$
59,834
2,900
26,981
5,594
17,327
6,519
119,155
15,419
8,104
25,128
22,252
8,118
3
1,670
80,694
199,849
167
19,679
6,000
42,188
68,034
58,039
58,039
195,817
253,856
14,027
$
Originations by type:
Fixed-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total fixed-rate
Adjustable-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total adjustable-rate
Total loans originated
Purchases by type:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Auto
Manufactured homes
Total loans purchased
Sales and Repayments:
One- to four-family sold
Multi-family sold
Commercial real estate sold
Construction sold
Commercial business sold
Total loans sold
Total principal repayments, charge-offs and transfers to real
estate owned and repossessed assets
Total reductions
Net loan activity
- 24 -
Loan Origination and Other Fees. Loan origination fees paid by borrowers generally are based on a
percentage of the principal amount of the loan. Accounting standards 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 as income or expense at the time of
prepayment or sale. We had $4.8 million, $4.3 million, and $206,000 of net deferred loan fees at December 31,
2021, 2020, and 2019, respectively. In addition, we receive fees for loan commitments, late payments and
miscellaneous services.
Asset Quality
Management of asset quality includes loan performance monitoring and reporting as well as utilization
of both internal and independent third-party loan reviews. The primary objective of our loan review process is to
measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize
loan loss exposure. From the time of origination through final repayment, all loans are assigned a risk rating
based on pre-determined criteria. The risk rating is monitored annually for most loans and may change during
the life of the loan as appropriate.
Loan reviews vary by loan type and complexity. Some loans may warrant detailed individual review,
while other loans may have less risk based upon size, or be of a homogeneous nature, such as consumer loans
and loans secured by residential real estate. Homogeneous loans may be reviewed based on indicators such as
delinquency or credit rating. In cases of significant concern, re-evaluation of the loan and associated risks are
documented by completing a loan risk assessment and action plan.
The following table shows our delinquent loans by type of loan and number of days delinquent as of
December 31, 2021.
Loans Delinquent For:
60-89 Days
90 Days and Over
Total Loans Delinquent 60
Days or More
Number Amount
Percent
of Loan
Category Number Amount
Percent
of Loan
Category Number Amount
Percent
of Loan
Category
(Dollars in thousands)
Consumer
loans:
Auto and other
consumer
4 $
368
0.2%
9 $
99
0.1%
13 $
467
0.3%
- 25 -
Nonperforming Assets. Nonperforming assets include nonperforming loans, real estate owned, and
other repossessed assets. Troubled debt restructurings ("TDR") include nonperforming and performing loans that
have been restructured. Nonperforming assets as a percent of total assets was 0.1% at December 31, 2021, 2020,
and 2019. At each of the dates indicated in the following table, there were no loans delinquent more than 90 days
that were accruing interest.
2021
December 31,
2020
(Dollars in thousands)
2019
$
494
71
22
587
282
512
794
$
912
284
157
26
1,379
73
821
894
698
109
29
836
112
848
960
1,381
2,273
1,796
2
62
92
1,381
$
2,275
$
1,950
1,792
1,792
51
1,843
$
$
2,162
2,162
62
2,224
$
$
2,371
107
643
3,121
160
263
3,544
0.1%
0.2%
29
$
108
$
0.2%
81
$
$
$
$
$
Nonaccrual loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Home equity
Auto and other consumer
Total consumer loans
Total nonaccrual loans
Real estate owned:
Construction and land
Repossessed personal property
Total nonperforming assets
TDR loans:
One- to four-family
Multi-family
Commercial real estate
Total real estate loans
Home equity
Commercial business
Total restructured loans
Nonaccrual and 90 days or more past due loans as a
percentage of total loans
Nonperforming TDR loans included in total nonaccrual loans
and total restructured loans above
- 26 -
For the years ended December 31, 2021, 2020, and 2019, gross interest income which would have been
recorded had the nonaccrual loans been current in accordance with their original terms amounted to
$679,000, $686,000, and $301,000, respectively. The amount that was included in interest income on a cash
basis on nonaccrual loans was $48,000, $85,000, and $50,000 for the years ended December 31, 2021, 2020, and
2019, respectively.
Other Loans of Concern. In addition to nonperforming assets set forth in the table above, as of
December 31, 2021, there were 21 loans totaling $23.5 million that continue to accrue interest but for which
management has concerns about the ability of these borrowers to comply with loan repayment terms. These
loans have been considered in management's determination of our allowance for loan losses.
Real Estate Owned and Repossessed Property. Real property we acquire through collection and
foreclosure efforts is classified as real estate owned. These properties are recorded at the lower of cost, which is
the unpaid principal balance of the related loan, or the fair market value of the property less selling costs. Real
estate owned properties are generally listed with a real estate broker, included in the multiple listing service, and
actively marketed. Other repossessed property, including automobiles, is also recorded at the lower of cost or fair
market value less selling costs. As of December 31, 2021, we had no repossessed real or personal property
owned.
Restructured Loans. According to United States Generally Accepted Accounting Principles
("GAAP"), we are required to account for certain loan modifications or restructurings as a TDR. In general, the
modification or restructuring of a debt is considered a TDR if we, for economic or legal reasons related to a
borrowers financial difficulties, grant a concession to the borrower under more favorable terms and conditions
than we would grant to an ordinary bank customer under the normal course of business.
We engage in other general loan restructures and modifications not considered as TDR loans, which
may include lowering interest rates, extending the maturity date, deferring or re-amortizing monthly payments or
other concessions, provided that such concessions are not below market rates or considered material and outside
of the terms and conditions granted to other borrowers in the ordinary course of business. These general loan
restructures and modifications are made on a case-by-case basis.
Adversely classified loans that are subsequently modified and placed in nonaccrual status are generally
not returned to accrual status until a period of at least six months with consecutive satisfactory payment
performance has occurred, and a return to accrual status is further supported by current financial information and
analysis which demonstrates a particular borrower has the financial capacity to meet future debt service
requirements.
As of December 31, 2021, we had loans with an aggregate principal balance of $1.8 million that were
identified as TDR loans, of which all but $29,000 were performing in accordance with their revised payment
terms and on accrual status. Included in the allowance for loan losses at December 31, 2021 was a reserve
of $21,000 related to TDR loans. Nonaccrual TDR loans are classified as substandard while accruing TDR loans
may be classified at any level in our loan grading system depending upon verified repayment sources, collateral
values and repayment history.
In March 2020, the Bank announced COVID-19 loan modification programs to support and provide
relief for its borrowers during the COVID-19 pandemic. The Company followed the CARES Act and
interagency guidance from the federal banking agencies when determining if a borrower's modification is subject
to TDR classification. See "COVID-19 Loan Modifications" below.
COVID-19 Loan Modifications. The CARES Act provided guidance around the modification of loans
as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made
on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not
TDRs. This included short-term modifications such as payment deferrals, fee waivers, extensions of repayment
terms, or other delays in payment that were insignificant. Borrowers were considered current under the CARES
- 27 -
Act and related regulatory guidance if they were less than 30 days past due on their contractual payments at the
time a modification program is implemented. During the year ended December 31, 2020, the Company made
COVID-19 pandemic related modifications on 357 loans totaling $177.6 million. No loans remained on COVID-
19 deferral as of December 31, 2021. Loan modifications in accordance with the CARES Act and related
regulatory guidance were still subject to an evaluation in regard to determining whether or not a loan is deemed
to be impaired. See Note 1 and Note 3 of the Notes to the Consolidated Financial Statements included in Item
8,"Financial Statements and Supplementary Data," of this Form 10-K for additional information.
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 when material conditions are
identified which raise issues about the financial capacity, collateral or other conditions which may compromise
the borrowers ability to satisfactorily perform under the terms of the loan. 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 as substandard with the added
characteristic that the weaknesses present make near term collection or liquidation highly questionable and
improbable. Assets classified as loss are those considered uncollectible or of no material value. Assets that do
not currently expose us to sufficient risk to warrant classification as substandard or doubtful but possess
identified weaknesses are classified by us as either watch or special mention assets. Our credit administration
department, management, and the Board review the analysis and approve the specific loan loss allowance for
these loans.
General reserve loan loss allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which, unlike specific allowances on impaired
loans, have not been specifically allocated to particular problem assets. When an institution identifies a problem
asset as an unavoidable and imminent loss, it is required to partially or fully charge-off such assets in the period
in which they are deemed uncollectible. Our determination as to the classification of our assets and the amount
of our valuation allowances is subject to review by the DFI and the FDIC, who can order specific charge-offs or
the establishment of additional loan loss allowances.
We review, at least quarterly, the problem assets in our portfolio to determine whether any assets
require reclassification. Based on our review, as of December 31, 2021, 2020, and 2019, we had classified loans
of $12.6 million, $7.5 million, and $5.0 million, respectively. We had no other classified assets at these dates. In
addition, at December 31, 2021 we had $12.3 million of special mention loans.
Classified loans, consisting solely of substandard loans, were as follows at the dates indicated:
2021
December 31,
2020
(In thousands)
2019
Real estate loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer loans:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
$
764 $
10,948
22
11,734
350
513
863
1,771 $
284
4,155
64
6,274
154
868
1,022
232
Total loans
$
12,597 $
7,528 $
- 28 -
869
297
1,294
29
2,489
227
955
1,182
1,279
4,950
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Allowance for Loan Losses. The allowance for loan losses was $15.1 million, or 1.1% of total loans, at
December 31, 2021, compared to $13.9 million, or 1.2%, at December 31, 2020. On a quarterly basis,
management prepares a report of the allowance for loan losses and establishes the provision for credit losses
based on its analysis of the risk composition of our loan portfolio, delinquency levels, loss experience, economic
conditions, seasoning of the loan portfolios, and other factors related to the collectability of the loan
portfolio. When determining the appropriate loss factors in fiscal 2020, management took into consideration
the impact of the COVID-19 pandemic on such factors as the national and state unemployment rates and related
trends, the amount of and timing of financial assistance provided by the government, consumer spending levels
and trends, industries significantly impacted by the COVID-19 pandemic, and the Bank's COVID-19 loan
modification program. In fiscal 2021, management continued to monitor these same measures and trends as the
economy recovered from the considerable impact of the COVID-19 pandemic.
Quantitative analysis is necessary to calculate accounting estimates for loan loss reserves, and we also
recognize that qualitative factors such as economic, market, industry and political changes can adversely affect
loan quality. These qualitative factors are updated and approved by management on a quarterly basis. Each
quarter, a report on the allowance for loan losses, including the application and discussion of quantitative and
qualitative factors established during the quarter, is reviewed by the Board's loan committee and presented for
approval to the full Board. The allowance is increased or decreased by the provision for or recapture of loan
losses, which is charged or credited against current period operating results, and decreased by the amount of
actual loan charge-offs, net of recoveries, and improvements in asset quality.
Our methodology for analyzing the allowance for loan losses consists of two components: general and
specific allowances. The formula for the general loan loss reserve allowance is determined by applying an
estimated quantified loss percentage, as well as qualitative factors, to various groups of loans. We use a three-
year loss history including loss percentages based on various historical measures such as the amount and type of
classified loans, past due ratios, loss experience, and economic conditions, which could affect the collectability
of the respective loan types. Qualitative factors and adjustments to the loan loss reserve calculations are largely
subjective but also include objective variables such as unemployment rates, falling or rising real estate values,
real estate and retail sales, demographics and other known significant economic indicators. A general allowance
is then established, based upon the analysis of the above conditions, to recognize the inherent risk associated
with the entire loan portfolio. A specific allowance is established when management believes a borrowers
financial and/or collateral condition has materially deteriorated to a point of impairment, and loss is highly
probable for that specific loan.
We define a loan as being impaired when, based on current information and events, it is probable we
will be unable to collect amounts due under the contractual terms of the loan agreement. Large groups of smaller
balance homogeneous loans, such as residential mortgage loans and consumer loans, are grouped together for
impairment analysis and reserve calculation. All other loans are evaluated for impairment on an individual basis.
In the process of identifying loans as impaired, management takes into consideration factors which include
payment history, collateral value, financial condition of the borrower, and the probability of collecting scheduled
payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a
loan being classified as impaired. The significance of payment delays and shortfalls is considered by
management on a case-by-case basis, after taking into consideration the totality of circumstances surrounding the
loans and borrowers, including payment history and amounts of any payment shortfall, length and reason for
delay, and likelihood of return to stable performance. As of December 31, 2021, we had impaired loans of
$3.2 million, compared to $5.5 million at December 31, 2020.
In determining specific reserves for those loans evaluated for impairment on an individual basis,
management utilizes the valuation shown in the most recent appraisal of the collateral and may adjust that
valuation as additional information becomes available. Generally, appraisals or evaluations are updated
subsequent to the time of origination, whenever management identifies a loan as impaired or potentially being
impaired. Events which may trigger an updated appraisal or evaluation include, but are not limited to, borrower
delinquency, material technical defaults, annual review of borrowers financial condition, property tax and/or
assessment delinquency, deferred maintenance or other information known or discovered by us.
- 30 -
Impaired collateral dependent loans require a current valuation and analysis to determine the net value
of the collateral for loan loss reserve purposes. Our policy is to update these values every 12 months if the loan
and collateral remains impaired, except for smaller balance, homogeneous loans, which are applied a reserve
according to their risk weighting and loan class. Certain types of collateral, depending on market conditions, may
require more frequent appraisals, updates or evaluations. When the results of the impairment analysis indicate a
potential loss, the loan is classified as substandard and is analyzed to determine if a specific reserve amount is to
be established or adjusted to reflect any further deterioration in the value of the collateral that may occur prior to
liquidation or reinstatement. The impairment analysis takes into consideration the primary, secondary, and
tertiary sources of repayment and whether impairment is likely to be temporary in nature or liquidation is
anticipated.
Management believes that our allowance for loan losses as of December 31, 2021, is adequate to absorb
the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates
and assumptions used in its determination of the adequacy of the allowance 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 provision that
may be required will not adversely impact our financial condition and results of operations. In addition, the
determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of
the routine examination process, which may result in the establishment of additional reserves based upon their
evaluation of information available to them at the time of their examination.
The following table summarizes the distribution of our allowance for loan losses at the dates indicated.
2021
Percent of
loans in
each
category to
total
Amount
December 31,
2020
Percent of
loans in
each
category to
total
Amount
(Dollars in thousands)
2019
Percent of
loans in
each
category to
total
Amount
Allocated at end of period to:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Unallocated
Total
$
$
3,184
1,816
3,996
2,672
407
2,221
470
358
15,124
21.7% $
12.7
26.8
16.5
2.9
13.5
5.9
100.0% $
3,469
1,764
3,420
1,461
368
2,642
429
294
13,847
26.8% $
14.1
25.7
10.7
2.9
11.1
8.7
100.0% $
3,024
888
2,243
399
454
2,261
208
151
9,628
34.6%
10.9
28.9
4.2
4.0
12.7
4.7
100.0%
- 31 -
The following table sets forth an analysis of our allowance for loan losses:
Allowance at beginning of period
Charge-offs:
$
One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total charge-offs
Recoveries:
One- to four-family
Construction and land
Home equity
Auto and other consumer
Commercial business
Total recoveries
Net (charge-offs) recoveries
Provision for loan losses
Balance at end of period
2021
Year Ended December 31,
2020
(Dollars in thousands)
$
9,628
$
13,847
(12)
(865)
(877)
6
8
76
714
804
(5)
(992)
(997)
58
5
13
94
170
2019
9,533
(884)
(3)
(887)
5
2
45
259
2
313
(73)
1,350
15,124
$
(827)
5,046
13,847
$
$
(574)
669
9,628
Net (charge-offs) recoveries as a percentage of average loans
outstanding
%
(0.1)%
(0.1)%
Net (charge-offs) recoveries as a percentage of average
nonperforming assets
(4.0)%
(39.1)%
(30.4)%
Allowance as a percentage of nonperforming loans
1095.1%
609.2%
536.1%
Allowance as a percentage of total loans
1.1%
1.2%
1.1%
Average loans receivable, net
Average total loans
$ 1,239,919
$ 1,249,605
$
$
970,039
978,799
$
$
865,372
870,696
- 32 -
Investment Activities
General. Under Washington law, commercial banks are permitted, subject to certain limitations, to
invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings institutions, bankers acceptances,
repurchase agreements, federal funds, commercial paper, investment grade corporate debt, and obligations of
states and their political subdivisions.
Our Treasurer, under the direction of the CFO, has the responsibility for the management of our
investment portfolio. Various factors are considered when making investment decisions, including the
marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments
will be affected by various market conditions, including the current and anticipated slope of the yield curve, the
level of interest rates, the trend of deposit inflows, and the anticipated demand for funds from deposit
withdrawals and loan originations and purchases.
The general objective of our investment portfolio is to provide liquidity, maintain earnings, and manage
risk, including credit, reinvestment, liquidity and interest rate risk.
Securities. Total investment securities decreased $20.1 million, or 5.5%, to $344.2 million at December
31, 2021, from $364.3 million at December 31, 2020, mainly as a result of sales and principal payments partially
offset by purchases.
The issuers of mortgage-backed agency securities ("MBS") held in our portfolio, which include Fannie
Mae, Freddie Mac, and Government National Mortgage Association ("Ginnie Mae"), and certain issuers of
agency bonds held in our portfolio, which include FHLB, Fannie Mae, and the U.S. Small Business
Administration, guarantee the timely principal and interest payments in the event of default. Asset-backed
security ("ABS") agency bonds held in our portfolio include securities which are backed by student loans where
payment is not guaranteed by the issuer. The underlying student loans are reinsured by the U.S. Department of
Education, which mitigates a significant portion of their risk of loss. Municipal bonds consist of a mix of taxable
and non-taxable revenue and general obligation bonds issued by various local and state government entities that
use their revenue-generating and taxing authority as a source of repayment of their debt. Our municipal bonds
are considered investment grade, and we monitor their credit quality on an ongoing basis.
ABS and MBS corporate securities have no guarantees in the event of default and therefore warrant
continued monitoring for credit quality. Our MBS corporate securities consist of fixed and variable rate
mortgages issued by various corporations, and our ABS corporate securities consist of a mix of variable rate
collateralized loan obligations in managed funds, which we believe have sufficient subordination to mitigate the
risk of loss on these investments, and certain corporate debt securities. Monitoring of these securities may
include, but is not limited to, reviewing credit quality standards such as delinquency, subordination, and credit
ratings. Our rated corporate securities are considered investment grade and non-rated corporate securities are
subject to regular internal review to ensure they meet the Company's investment criteria.
During the fourth quarter of 2019, the Bank marked its held to maturity investments as available for
sale in order to provide greater flexibility to manage changes in the investment portfolio. Management does not
intend to place securities into a held-to-maturity portfolio in the foreseeable future.
As a member of the FHLB, we had an average balance of $4.1 million in stock of the FHLB for the
twelve months ended December 31, 2021. We received $190,000, $255,000, and $332,000 in dividends from the
FHLB during the years ended December 31, 2021, 2020, and 2019, respectively.
- 33 -
The table below sets forth information regarding the composition of our securities portfolio and other
investments at the dates indicated. At December 31, 2021, our securities portfolio contained securities issued by
the United States Government and its agencies as well as securities issued by Capital Funding Mortgage Trust
("CFGMS") which had an aggregate book value in excess of 10% of our equity capital. The book value and fair
market value of CFGMS securities were both $32.2 million at December 31, 2021.
2021
December 31,
2020
2019
Book
Value
Fair
Value
Book
Value
Fair
Value
Book
Value
Fair
Value
(In thousands)
$110,497 $113,364 $122,667 $127,862 $ 39,524 $ 39,282
1,947
1,920
62,934
63,820
29,796
28,858
Securities available for sale:
Municipal bonds
International agency issued bonds (Agency
bonds)
U.S. government agency issued asset-backed
securities (ABS agency)
Corporate issued asset-backed securities (ABS
corporate)
14,556
14,489
29,661
29,280
41,728
40,855
Corporate issued debt securities (Corporate
debt)
58,906
59,789
35,408
35,510
9,986
9,643
U.S. Small Business Administration securities
(SBA)
Mortgage-backed:
U.S. government agency issued mortgage-
14,404
14,680
18,420
18,564
28,423
28,459
backed securities (MBS agency)
80,877
79,962
61,859
62,683
159,697
160,167
Corporate issued mortgage-backed securities
(MBS corporate)
Total available for sale
60,317
341,504
60,008
344,212
26,458
357,407
26,577
364,296
8,374
317,528
8,316
315,580
FHLB stock
Total securities
5,196
5,196
5,977
5,977
6,034
6,034
$346,700 $349,408 $363,384 $370,273 $323,562 $321,614
- 34 -
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The Company may hold certain investment securities in an unrealized loss position that are not
considered other than temporarily impaired ("OTTI"). At December 31, 2021, of the 164 investment securities
held, there were 76 investment securities with $2.5 million of unrealized losses and a fair value of approximately
$156.4 million. At December 31, 2020, of the 144 investment securities held, there were 36 investment securities
with $1.5 million of unrealized losses and a fair value of approximately $99.4 million. We had no OTTI on
investment securities at either December 31, 2021 or December 31, 2020.
Deposit Activities and Other Sources of Funds
General. Deposits, borrowings and loan and investment cash flows are the major sources of our funds
for lending, investment, and general business purposes. Scheduled loan and investment repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and other market conditions. Borrowings from the FHLB and subordinated
debt 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 consists of interest and noninterest-bearing checking, savings, money market
accounts, and certificates of deposit. We rely on marketing activities, digital channels, branch facilities, mail and
contact center services, relationship management, word of mouth referrals, and a broad range of deposit products
and payment services to attract and retain customer deposits.
Deposits. Deposits are attracted from within our market area through the offering of a broad selection
of deposit instruments, including checking accounts, money market deposit accounts, savings accounts and
certificates of deposit with a variety of rates. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit, and the interest rate, among other factors. In
determining the terms of our deposit accounts, we consider the development of long-term profitable customer
relationships, current market interest rates, current maturity structure and deposit mix, our customer preferences,
and the profitability of acquiring customer deposits compared to alternative sources.
Deposit Activity. The following table sets forth activity in our total deposit balance for the periods
Year Ended December 31,
2021
2020
(Dollars in thousands)
1,333,517
243,667
3,396
1,580,580
1,001,645
325,209
6,663
1,333,517
$
$
$
$
2019
940,260
53,081
8,304
1,001,645
247,063
$
331,872
$
61,385
18.5%
33.1%
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indicated.
Beginning balance
Net deposits
Interest credited
Ending balance
Net increase
Percent increase
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- 38 -
Deposit Maturities. The following table sets forth the rate and maturity information of our time deposit
certificates at December 31, 2021.
0.00- 0.99 % 1.00- 1.99 % 2.00- 2.99 % Total
(Dollars in thousands)
Percent
of Total
$
Certificate accounts maturing in quarter
ending:
March 31, 2022
June 30, 2022
September 30, 2022
December 31, 2022
March 31, 2023
June 30, 2023
September 30, 2023
December 31, 2023
March 31, 2024
June 30, 2024
September 30, 2024
December 31, 2024
Thereafter
$
41,127
25,737
37,092
17,661
4,830
3,909
19,509
15,561
1,831
2,551
775
6,089
14,864
$
13,689
8,466
3,234
497
2,711
1,695
2,617
211
228
563
6,317
1,886
218
2,729
1,136
279
550
1,185
1,913
2,059
2,070
801
653
$
56,702
34,421
43,055
19,294
7,820
6,154
23,311
17,685
4,118
4,621
1,576
7,305
21,181
22.8%
13.9
17.4
7.8
3.2
2.5
9.4
7.2
1.7
1.9
0.6
3.0
8.6
Total
$ 191,536
$
40,228
$
15,479
$ 247,243
100.0%
Percent of total
77.4%
16.3%
6.3%
100.0%
Jumbo Certificates. The following table indicates the amount of our jumbo certificates of deposit by
time remaining until maturity as of December 31, 2021. Jumbo certificates of deposit are certificates in amounts
of $100,000 or more.
3 Months
or Less
Over 3 to 6
Months
Maturity
Over 6 to
12 Months
(In thousands)
Over 12
Months
Total
Certificates of deposit less than $100,000
Certificates of deposit of $100,000 or more
$
10,203 $
46,499
17,428 $
16,993
22,900 $
39,449
63,223 $ 113,754
133,489
30,548
Total certificates
$
56,702 $
34,421 $
62,349 $
93,771 $ 247,243
The Federal Reserve requires First Fed to maintain reserves on transaction accounts or non-personal
time deposits. These reserves may be in the form of cash or noninterest-bearing deposits with the Federal
Reserve Bank of San Francisco. Negotiable order of withdrawal accounts and other types of accounts that permit
payments or transfers to third parties fall within the definition of transaction accounts and are subject to the
reserve requirements, as are any non-personal time deposits at a commercial bank. As of December 31, 2021, our
deposit with the Federal Reserve Bank of San Francisco and vault cash exceeded our reserve requirements.
- 39 -
Borrowings. We use advances from the FHLB, including short-term overnight, short-term advances
with initial maturities of less than one year, and longer-term advances maturing in one year or more, to
supplement our supply of lendable funds, to meet ongoing liquidity needs, and to mitigate interest rate risk. 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 pledged assets including mortgage loans and investment
securities. Advances are 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 committed credit facility with the FHLB, and at December 31, 2021, had pledged loan and
security collateral to support a borrowing capacity of $481.2 million. In addition, we have a letter of credit
established in conjunction with assuming the Bellevue branch lease liability. At December 31, 2021, outstanding
advances from the FHLB totaled $80.0 million and the letter of credit balance was $772,000, leaving a
remaining borrowing capacity of $400.4 million.
First Fed also established a borrowing arrangement to use the Federal Reserve Board of San Francisco's
("FRB") discount window. At December 31, 2021, we had pledged securities as collateral to support a borrowing
capacity of $17.2 million. No funds have been borrowed on this arrangement to date.
On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-
floating rate subordinated notes due 2031 (the Notes) to certain qualified institutional buyers and institutional
accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3
million after deducting placement agent fees and other offering expenses. The Notes have been structured to
qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net
proceeds of the offering for general corporate purposes and provided $20.0 million to the Bank as Tier 1 capital.
The following tables set forth information regarding our borrowings at the end of and during the periods
indicated. The tables include both long- and short-term borrowings.
Maximum balance:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Subordinated debt
Average balances:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Subordinated debt
Weighted average interest rate:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Subordinated debt, net
2021
Year Ended December 31,
2020
(Dollars in thousands)
2019
$
$
$
$
80,000
40,000
40,000
52,500
5,207
30,370
$
$
55,000
100,021
50,000
54,548
65,000
45,000
90,889
56,250
3,750
53,156
1.46%
0.30
3.96
1.75%
0.60
3.34%
2.33
2.33
- 40 -
Balance outstanding at end of period:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Subordinated debt
Total borrowings
Weighted average interest rate at end of period:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Subordinated debt, net
Subsidiary and Other Activities
2021
Year Ended December 31,
2020
(Dollars in thousands)
2019
$
$
80,000
40,000
120,000
$
$
50,000
59,977
109,977
$
$
50,000
45,000
17,930
112,930
1.52%
0.31
3.01
1.53%
0.32
2.98%
1.79
1.80
First Fed has two active subsidiaries in order to participate in historic tax credit transactions. The first
subsidiary, 202 Master Tenant, LLC, was formed in August 2016 in partnership with the Peninsula College
Foundation. Makers Square Master Tenant, LLC was formed in February 2021 in partnership with the Fort
Worden Foundation. These entities meet the criteria for reporting under the equity method of accounting.
In December 2019, the Company entered into a limited partnership with Canapi Ventures Fund, LP. to
strategically invest in fintech-related businesses. The Company is dedicated to the discovery of, and investment
in, those fintech-related companies that we expect may also contribute to the evolution of digital solutions
applicable to the banking industry. This commitment will be for up to ten years, with cash installments totaling
up to $3.0 million to be paid into the partnership over a period not to exceed the first five years, beginning in
2020. As of December 31, 2021, $1.7 million had been contributed to this partnership. The recorded investment
was $3.0 million at December 31, 2021.
In September 2021, the Company entered into a limited partnership with BankTech Ventures, L.P. to
strategically invest in fintech-related businesses. This commitment will be for up to ten years, with cash
installments totaling up to $1.0 million to be paid into the partnership over a period not to exceed the first five
years, beginning in 2021. As of December 31, 2021, $120,000 had been contributed to this partnership.
In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the
"Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc.("POM"), and Quin Ventures, Inc. ("Quin"
or "Quin Ventures"). First Northwest has partially fulfilled its commitment to extend $15.0 million to Quin
Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the
Company's common stock to POM with a value of $500,000. Under the Joint Venture Agreement, the Company
and POM have established Quin to develop a digital financial wellness platform that will offer personal financial
services to the general public. Under a related Marketing and Banking Services Agreement, Quin will promote
the services offered through the digital financial wellness platform and the Bank will provide banking services to
the customers who utilize the platform. The Marketing and Banking Services Agreement sets forth the terms
governing the parties commercial and economic commitments and responsibilities, including the fees to be paid
by the Bank to fund the costs of acquiring customers and the distribution of interchange fees.
In 2022 and beyond, the Company intends to explore additional opportunities to expand its fintech
capabilities that will advance its competitive position.
- 41 -
Competition
We face competition in originating loans from other banks, credit unions, life insurance companies,
mortgage bankers, public and private capital markets, and digital lenders. In general, the primary factors in
competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality
of service. We offer competitive terms and conditions and compete by delivering high-quality, personal service
to our customers. Competition for loans is also strong due to the number and variety of institutions competing in
our market areas. For instance, competition for loans is particularly intense in the larger markets in the Puget
Sound area, such as Seattle, Washington.
Competition for deposits is primarily from other banks, credit unions, mutual funds, and other
alternative investment vehicles such as securities firms, insurance companies, etc., which may be offered locally
or via the Internet. We expect continued competition from such financial institutions and investment vehicles in
the foreseeable future, including competition from digital banking competitors, challenger banks, and "Fintech"
companies that rely on technology to provide financial services. We compete for these deposits by offering
excellent service and a variety of deposit accounts at competitive rates and through our branch network. We also
compete for deposits by offering a variety of financial services, including online and mobile banking capabilities.
Based on the most recent branch data provided by the FDIC, as of June 30, 2021, First Feds share of bank,
savings bank and savings and loan association deposits in Clallam and Jefferson counties was 38.7% and 23.2%,
respectively, and was less than 4% in Whatcom and Kitsap counties.
Employees and Human Capital Resources
At December 31, 2021, we had 288 full-time equivalent employees. At that date, the average tenure of
all of our full-time employees was approximately 4.8 years while the average tenure of our executive officers
was approximately 5.6 years. None of our employees are represented by collective bargaining agreements. We
believe our employee relations to be excellent.
Our Board of Directors guides the implementation of our corporate mission, vision, and values as an
important element of risk oversight because our people are integral to the success of our corporate strategy. Our
Board holds senior management accountable for embodying, maintaining, and communicating our culture to
employees. In that regard, our corporate mission, vision, and values are designed to promote commitment to
making the lives of all those around us better and to uphold that principle in everything we do. That commitment
has been a central pillar in our approach to our employees and the communities we have proudly served for
nearly 100 years. Our culture is designed to adhere to the timeless values of optimism, respect, initiative, growth,
and ownership. In keeping with that culture, we strive to be a force for good in everyday life and expect our
people to treat each other and our customers with the highest level of care and respect, going out of their way to
do the right thing. We dedicate resources to promote a safe and inclusive workplace; attract, develop, and retain
talented, diverse employees; promote a culture of integrity, caring, and excellence; and reward and recognize
employees for both the results they deliver and, just as importantly, how they deliver them. We also seek to
design careers that are fulfilling ones, with competitive compensation and benefits alongside a positive work-life
balance, and we dedicate resources to fostering professional and personal growth with continuing education, on-
the-job training, and development programs. This devotion to our people has earned us recognition on Forbes
magazine's Best-in-State Bank list in 2021.
Our employees are the cornerstone of our success as an organization. We are committed to attracting,
retaining, and promoting highly qualified individuals from a diverse array of backgrounds. We believe
employing a diverse workforce enhances our ability to serve our customers and our communities. We have
established a voluntary, employee-led and -staffed Diversity, Equity, and Inclusion team that is committed to
promoting a diverse, equitable, and inclusive work environment for all employees. We seek to better understand
the financial needs of our prospective and current customers by promoting and fostering a workforce that reflects
the communities we serve, along with providing relevant financial service products. As we move forward, we
will continue to grow our diversity, equity, and inclusion efforts in a manner consistent with our company vision:
to create well-being and prosperity for our employees, customers, and communities.
- 42 -
Information About Our Executive Officers
The following is a description of the principal occupation and employment of the executive officers of
the Company and the Bank as of December 31, 2021:
Matthew P. Deines, age 48, became President and Chief Executive Officer ("CEO") and Director of
First Fed on August 1, 2019, and was elected President, CEO, and director of the Company on December 5,
2019. He serves as the Board Chairman for Quin Ventures, Inc., in which the Company has a 50% equity
interest. In over 18 years of banking, he has experience in a variety of areas, including strategic planning and
acquisitions, investor relations, financial reporting, and fintech, as well as operations, information technology,
payments, internal controls and board governance. Mr. Deines served as Executive Vice President and Chief
Financial Officer ("CFO") of Liberty Bay Bank from November 2018 until May 2019. Prior to that, he began
work at Sound Community Bank as its CFO in February 2002 and was promoted to Executive Vice President in
January 2005. In 2008, Mr. Deines also became Executive Vice President, CFO, and Corporate Secretary of
Sound Financial Bancorp, Inc. ("SFBC"). He held these roles at Sound Community Bank and SFBC until March
2018. In 2000, he received his Washington Certified Public Accountant certificate, currently inactive, while
working for O'Rourke, Sacher & Moulton, LLP. Mr. Deines serves as a Director for the Washington Bankers
Association ("WBA") and has been a conference speaker and instructor for the WBA. He is actively involved
with several non-profit organizations.
Geri Bullard, age 56, is Executive Vice President and Chief Financial Officer of First Fed, a position
she has held since March 2020. Ms. Bullard joined First Fed as Senior Vice President and Treasurer in January
2020. Prior to joining First Fed, Ms. Bullard served as Controller and Chief Financial Officer at Salal Credit
Union, located in Seattle, from August 2018 to January 2020; Chief Financial Officer of First Sound Bank, also
in Seattle, from February 2017 to August 2018; and Controller at Sound Community Bank from October 2015 to
February 2017. Ms. Bullard also served as a bank examiner for the State of Idaho. Ms. Bullard holds a Bachelor
of Science degree from Humboldt State University and is a licensed CPA.
Christopher J. Riffle, age 46, is Executive Vice President and Chief Operating Officer (COO), and
General Counsel of the Company and First Fed. Mr. Riffle has held the COO position since October 2018 and
has served as General Counsel since September 2017. He serves as a director for Quin Ventures, Inc., in which
the Company has a 50% equity interest. Prior to joining First Fed, Mr. Riffle was a partner at the Platt Irwin Law
Firm in Port Angeles, Washington, where he managed a civil legal practice representing clients in a variety of
contexts. Mr. Riffle was at Platt Irwin Law Firm from 2008 to 2017 and served as outside general counsel for
First Fed starting in 2009.
Terry Anderson, age 53, is Executive Vice President and Chief Credit Officer of First Fed, a position
he has held since 2018. Mr. Anderson has more than two decades of management experience in credit
administration, sales, commercial banking and strategic planning. He most recently served as Executive Vice
President and Chief Credit Officer for South Sound Bank for more than six years and has previously worked in a
variety of positions with West Coast Bank, US Bank, and Bank of America.
Kelly A. Liske, age 45, is Executive Vice President and Chief Banking Officer of First Fed, a position
she has held since July 2013. Ms. Liske served as a Commercial Relationship Manager and Vice President for
First Fed from July 2011 to July 2013. Prior to that she served as the Branch Manager, Assistant Vice President
for First Feds Port Townsend Branch from 2006 until 2011. Prior to joining First Fed, Ms. Liske was employed
for 11 years at Washington Mutual where she held various positions in the Retail Banking Division.
Derek J. Brown, age 51, is Executive Vice President and Chief Human Resources and Marketing
Officer of First Fed, a position he has held since March 2020. Mr. Brown served as a Senior Vice President and
Chief Human Resources and Marketing Officer for First Fed from January 2018 to March 2020, and Senior Vice
President and Director of Human Resources from October 2015 to January 2018. Prior to joining First Fed, he
served as a Human Resources and business leader at Citibank and held Human Resources leadership roles within
the financial, professional services, and healthcare industries. He holds a Bachelor of Science degree in
Management and Human Resources from Utah State University, a Master of Business Administration from
Weber State University, and is a graduate of the Pacific Coast Banking School at the University of Washington.
- 43 -
How We Are Regulated
First Northwest Bancorp and First Fed are subject to federal, state, and local laws that may change from
time to time. This section provides a general overview of the federal and state regulatory framework applicable
to First Northwest Bancorp and First Fed. The descriptions of laws and regulations included herein do not
purport to be complete and are qualified in their entirety by reference to the actual laws and regulations.
These statutes and regulations, as well as related policies, continue to be subject to change by Congress,
state legislatures, and federal and state regulators. Changes in statutes, regulations, or regulatory policies
applicable to First Northwest Bancorp and First Fed (including their interpretation or implementation) cannot be
predicted and could have a material effect on First Northwest Bancorps and First Feds business and operations.
Numerous changes to the statutes, regulations, and regulatory policies applicable to First Northwest Bancorp and
First Fed have been made or proposed in recent years. Any such legislation or regulatory changes in the future
by the FDIC, DFI, Federal Reserve or the CFPB could adversely affect our operations and financial condition.
Regulation of First Fed Bank
General. First Fed, as a state-chartered commercial bank, is subject to applicable provisions of
Washington law and to regulations and examinations of the DFI. It also is subject to examination and regulation
by the FDIC, which insures the deposits of First Fed to the maximum extent permitted by law. During these state
or federal regulatory examinations, the examiners may, among other things, require First Fed to provide for
higher general or specific loan loss reserves, which can impact our capital and earnings. This regulation of First
Fed is intended for the protection of depositors and the deposit insurance fund ("DIF") of the FDIC and not for
the purpose of protecting the shareholder(s) of First Fed or First Northwest Bancorp. First Fed is required to
maintain minimum levels of regulatory capital and is subject to some limitations on the payment of dividends to
First Northwest Bancorp. See " Capital Requirements" and " Dividends."
Federal and State Enforcement Authority and Actions. As part of its supervisory authority over
Washington-chartered commercial banks, the DFI may initiate enforcement proceedings to obtain a cease-and-
desist order against an institution believed to have engaged in unsafe and unsound practices or to have violated a
law, regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to
initiate enforcement actions against insured institutions for similar reasons and may terminate the deposit
insurance of such an institution if the FDIC determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition. Both agencies may utilize less formal supervisory tools to
address their concerns about the condition, operations, or compliance status of a commercial bank.
Regulation by the Washington Department of Financial Institutions. State laws and regulations
govern First Fed'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. As a state-chartered commercial bank, First Fed must pay semi-annual assessments,
examination costs and certain other charges to the DFI.
Washington law generally provides the same powers for Washington commercial banks as federally and
other-state chartered banks and savings institutions with branches in Washington, subject to the approval of the
DFI. Washington commercial banks are permitted to charge the maximum interest rates on loans and other
extensions of credit to Washington residents which are allowable for a national bank in another state if higher
than Washington limits. In addition, the DFI may approve applications by Washington commercial banks to
engage in an otherwise unauthorized activity if the DFI determines that the activity is closely related to banking
and First Fed is otherwise qualified under the statute. This additional authority, however, is subject to review and
approval by the FDIC if the activity is not permissible for national banks.
- 44 -
Regulation of Management. Federal law (1) sets forth circumstances under which officers or directors
of a bank may be removed by the bank's federal supervisory agency; (2) as discussed below, places restraints on
lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (3)
generally prohibits management personnel of a bank from serving as directors or in other management positions
of another financial institution whose assets exceed a specified amount or which has an office within a specified
geographic area.
Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to
executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1)
must be made on substantially the same terms (including interest rates and collateral) and follow credit
underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions
with persons not related to the lending bank; and (2) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts
to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties,
regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the "Dodd-Frank Act") and federal regulations place additional restrictions on
loans to insiders and generally prohibit loans to senior officers other than for certain specified purposes.
Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts
in First Fed up to $250,000 per separately insured depositor. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.
Our deposit insurance premiums for the year ended December 31, 2021, were $752,000. No institution may pay
a dividend to its parent holding company if it is in default on its federal deposit insurance assessment.
The FDIC calculates assessments for small institutions (those with less than $10 billion in assets) based
on an institutions weighted average CAMELS component ratings and certain financial ratios. Currently,
assessment rates range from 3 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 6 to
30 basis points for those with a CAMELS composite score of 3, and 16 to 30 basis points for those with
CAMELS Composite scores of 4 or 5, subject to certain adjustments. Assessment rates are scheduled to decrease
in the future as the reserve ratio increases. The reserve ratio is the ratio of the net worth of the DIF to aggregate
insured deposits.
The FDIC has authority to increase insurance assessments, and any significant increases would have an
adverse effect on the operating expenses and results of operations of First Fed. Management cannot predict what
assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The FDIC may also prohibit any
insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the
DIF. We do not currently know of any practice, condition, or violation that may lead to termination of our
deposit insurance.
Prompt Corrective Action. Federal statutes establish a supervisory framework, designed to place
restrictions on an insured depository institution if its capital levels begin to show signs of weakness, based on
five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." An institutions category depends upon where its capital
levels are in relation to relevant capital measures, which include risk-based capital measures, Tier 1 and common
equity Tier 1 capital measures, a leverage ratio capital measure, and certain other factors. The federal banking
agencies have adopted regulations that implement this statutory framework.
- 45 -
Under these regulations, an institution is treated as well capitalized if it has a ratio of total capital to
risk-weighted assets of 10.0% or more (the total risk-based capital ratio); a ratio of common equity Tier 1 capital
to risk-weighted assets (the Tier 1 risk-based capital ratio) of 8.0% or more; a ratio of Tier 1 common equity
capital to risk-weighted assets of 6.5% or more (the common equity Tier 1 capital ratio); a ratio of Tier 1 capital
to average consolidated assets (the leverage ratio) of 5.0% or more; and the institution is not subject to a federal
order, agreement, or directive to meet a specific capital level. An institution is considered adequately capitalized
if it is not well capitalized but it has a total risk-based capital ratio of 8.0% or more; a Tier 1 risk-based capital
ratio of 6.0% or more; a common equity Tier 1 capital ratio of 4.5% or more; and a leverage ratio of 4.0% or
more. The classifications for "undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" institutions are also set forth in the regulations. 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. Any institution which is neither well capitalized nor adequately capitalized is considered
undercapitalized. Further, an institution may be downgraded to a category lower than indicated by its capital
ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory
examination rating.
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 First Fed to comply with applicable capital requirements would, if not remedied,
result in 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,
2021, First Fed was categorized as "well capitalized" under the regulatory capital requirements described below.
For additional information, see Note 11 of the Notes to Consolidated Financial Statements included in Item 8,
"Financial Statements and Supplementary Data," of this Form 10-K.
Capital Requirements. Federal regulations require insured depository institutions and bank holding
companies to meet several minimum capital standards. The minimum capital level requirements applicable to
First Northwest Bancorp and First Fed are: (i) a common equity Tier 1 ("CET1") capital to risk-based assets ratio
of 4.5%; (ii) a Tier 1 capital to risk-based assets ratio of 6%; (iii) a total capital to risk-based assets ratio of 8%;
and (iv) a Tier 1 capital to total assets leverage ratio of 4%.
In addition to the minimum risk-based capital ratios, the capital regulations require a capital
conservation buffer, designed to absorb losses during periods of economic stress, consisting of additional CET1
capital of more than 2.5% of risk-weighted assets above the required minimum risk-based ratios in order to avoid
limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
As of December 31, 2021, First Northwest Bancorp and First Fed each met the requirements to be "well
capitalized" and met the capital conservation buffer requirement. Management monitors the capital levels of
First Northwest Bancorp and First Fed to provide for current and future business opportunities and to meet
regulatory guidelines for "well capitalized" institutions. For additional information regarding First Northwest
Bancorps and First Feds required and actual capital levels at December 31, 2021, see Note 11 of the Notes to
Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this
Form 10-K.
The Federal Reserve and the FDIC have authority to establish individual minimum capital requirements
in appropriate cases upon a determination that an institutions capital level is or may become inadequate
considering particular risks or circumstances. Management believes that, under the current regulations, First
Northwest Bancorp and First Fed will continue to meet their minimum capital requirements in the foreseeable
future.
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Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by
regulation, guidelines for all insured depository institutions relating to internal controls, information systems and
internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset
quality; earnings; and compensation, fees, and benefits. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. Each insured depository institution must implement a
comprehensive written information security program that includes administrative, technical, and physical
safeguards appropriate to the institutions size and complexity and the nature and scope of its activities. The
information security program must be designed to ensure the security and confidentiality of customer
information, protect against any unanticipated threats or hazards to the security or integrity of such information,
protect against unauthorized access to or use of such information that could result in substantial harm or
inconvenience to any customer, and ensure the proper disposal of customer and consumer information. Each
insured depository institution must also develop and implement a risk-based response program to address
incidents of unauthorized access to customer information in customer information systems. 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. First Fed has established comprehensive policies and risk
management procedures to ensure the safety and soundness of First Fed.
Federal Home Loan Bank System. First Fed is a member of the FHLB of Des Moines. As a member,
First Fed is required to purchase and maintain stock in the FHLB. At December 31, 2021, First Fed held $5.2
million in FHLB stock, which was in compliance with this requirement. Each FHLB serves as a reserve or
central bank for its members within its assigned region, and it is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. Each FHLB makes loans or
advances to members in accordance with policies and procedures, established by its Board of Directors, subject
to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB, and all long-term advances are required to provide
funds for residential home financing. At December 31, 2021, First Fed had $80.0 million of outstanding
advances from the FHLB of Des Moines. See Item 1, "Business Deposit Activities and Other Sources of Funds
Borrowings."
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 affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of First Fed's FHLB of Des Moines stock may result in a corresponding
reduction in its 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 banks total assets, (3) acquiring
up to 10% of the voting stock of a company that solely provides or reinsures directors 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 if certain requirements are met.
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Dividends. Dividends from First Fed, which are subject to regulation and limitation, constitute a major
source of funds for dividends paid by First Northwest Bancorp to shareholders. As a general rule, regulatory
authorities may prohibit banks and bank holding companies from paying dividends in a manner that would
constitute an unsafe or unsound banking practice. For example, regulators have stated that paying dividends that
deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice and
that an institution should generally pay dividends only out of current operating earnings. In addition, a bank may
not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. According to Washington law, First Fed 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.
Dividends on First Feds capital stock may not be paid in an aggregate amount greater than the aggregate
retained earnings of First Fed without the approval of the Director of the DFI.
Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions
with their affiliates, including their bank holding companies. The Dodd-Frank Act further extended the definition
of an "affiliate" and treats credit exposure arising from derivative transactions, securities lending, and borrowing
transactions as covered transactions under the regulations. Transactions deemed to be a "covered
transaction" under Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent
company or the nonbank subsidiaries of the bank holding company are limited to 10% of the bank subsidiarys
capital and surplus and, with respect to the parent company and all such nonbank subsidiaries, to an aggregate of
20% of the bank subsidiarys capital and 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 non-affiliates.
Community Reinvestment Act. First Fed is subject to the provisions of the Community Reinvestment
Act of 1977 (the "CRA"), which requires the appropriate federal bank regulatory agency to assess a banks
performance under the CRA in meeting the credit needs of the community serviced by the bank, including low-
and moderate -income neighborhoods. The regulatory agencys assessment of a banks record is made available
to the public. Further, a banks CRA performance rating must be considered in connection with a banks
application, among other things, to establish a new branch office that will accept deposits; to relocate an existing
office; or to merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In some cases, a bank's failure to comply with the CRA, or CRA protests filed by interested
parties during applicable comment periods, can result in the denial or delay of such transactions. First
Fed received a "satisfactory" rating during its most recent CRA examination.
Commercial Real Estate Ratios. The federal banking regulators issued guidance reminding financial
institutions to reexamine the existing regulations regarding concentrations in commercial real estate lending,
including acquisition, development and construction lending. 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 banking regulators are directed to examine each banks exposure to commercial real estate
loans that are dependent on cash flow from the real estate held as collateral and to focus their supervisory
resources on institutions that may have significant commercial real estate loan concentration risk. The guidance
provides that the strength of an institutions lending and risk management practices with respect to such
concentrations will be considered in evaluating capital adequacy and does not specifically limit a banks
commercial real estate lending to a specified concentration level.
Privacy Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA)
modernized the financial services industry by establishing a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms and other financial service providers. First
Fed is subject to FDIC regulations implementing the privacy protection provisions of the GLBA. These
regulations require First Fed to disclose its privacy policy, including informing consumers of its information
sharing practices and informing consumers of their rights to opt out of certain practices.
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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, 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
which 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
First Fed, that have made loans secured by properties with potential hazardous waste contamination (such as
petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Federal Reserve System. The Federal Reserve Board requires that all depository institutions maintain
reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or
noninterest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW)
accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a
commercial bank. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement
ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. As of
December 31, 2021, First Fed was in compliance with the reserve requirements in place at that time.
Anti-Money Laundering and Anti-Terrorism. The Bank Secrecy Act ("BSA") requires all financial
institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering
and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements (such
as reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your
customer" documentation requirements.
The Anti-Money Laundering Act of 2020 (AMLA), which amends the BSA, was enacted in January
2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-
money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering
compliance for financial institutions; requires the U.S. Department of the Treasury to promulgate priorities for
anti-money laundering and countering the financing of terrorism policy; requires the development of standards
for testing technology and internal processes for BSA compliance; expands enforcement- and investigation-
related authority, including increasing available sanctions for certain BSA violations; and expands BSA
whistleblower incentives and protections. Many of the statutory provisions in the AMLA will require additional
rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things,
rulemaking and implementation guidance. In June 2021, the Financial Crimes Enforcement Network, a bureau of
the U.S. Department of the Treasury, issued the priorities for anti-money laundering and countering the
financing of terrorism policy required under the AMLA. The priorities include corruption, cybercrime, terrorist
financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 ("Patriot Act"), intended to combat terrorism, was renewed with certain
amendments in 2006. In relevant part, the Patriot Act (1) prohibits banks from providing correspondent accounts
directly to foreign shell banks; (2) imposes due diligence requirements on banks opening or holding accounts for
foreign financial institutions or wealthy foreign individuals; (3) requires financial institutions to establish an anti-
money laundering compliance program; and (4) eliminates civil liability for persons who file suspicious activity
reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism,
including expanded government access to bank account records.
Regulators are directed to consider a bank holding companys and a banks effectiveness in combating
money laundering when reviewing and ruling on applications under the BHCA and the Bank Merger Act. First
Northwest Bancorp and First Fed have established comprehensive compliance programs designed to comply
with the requirements of the BSA and Patriot Act.
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Other Consumer Protection Laws and Regulations. The Dodd-Frank Act, among other things,
established the CFPB as an independent bureau of the Federal Reserve Board. The CFPB assumed responsibility
for the implementation of the federal financial consumer protection and fair lending laws and regulations and has
authority to impose new requirements. First Fed is subject to consumer protection regulations issued by the
CFPB, but as a smaller financial institution, it is generally subject to supervision and enforcement by the FDIC
and the DFI with respect to our compliance with consumer financial protection laws and CFPB regulations.
First Fed 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 the list set forth below is not
exhaustive, some of 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 way financial institutions must deal with
customers when taking deposits, making loans, collecting loans, and providing other services. In recent years,
examination and enforcement by federal and state banking agencies for compliance with consumer protection
laws and regulations have increased and become more intense. Failure to comply with these laws and regulations
can subject First Fed 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. First Fed has
established a comprehensive compliance system to ensure consumer protection.
Regulation and Supervision of First Northwest Bancorp
General. First Northwest Bancorp is a bank holding company registered with the Federal Reserve and
the sole shareholder of First Fed. 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
promulgated thereunder. This regulation and oversight is generally intended to ensure that First Northwest
Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without
endangering the financial health of First Fed.
As a bank holding company, First Northwest Bancorp is required to file semi-annual and annual reports
with the Federal Reserve and any additional information required by the Federal Reserve and is subject to
regular examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over
bank holding companies, including 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/or for unsafe or unsound
practices.
The Bank Holding Company Act. Under the BHCA, First Northwest Bancorp 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 banks 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 banks by being prepared to use available resources
to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity (including
at times when a bank holding company may not be in a financial position to provide such resources or when it
may not be in the bank holding companys or its shareholders' best interests to do so), and should maintain the
financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks.
Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to
certain other indebtedness of the bank subsidiaries. A bank holding company's failure to meet its obligation to
serve as a source of strength to its subsidiary banks 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.
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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
generally include, among others, 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.
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. A bank holding company that meets certain supervisory and financial
standards and elects to be designated as a financial holding company may also engage in certain securities,
insurance and merchant banking activities, and other activities determined to be financial in nature or incidental
to financial activities.
Regulatory Capital Requirements. The Federal Reserve has adopted capital rules pursuant to which it
assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing
applications under the BHCA. These rules apply on a consolidated basis to bank holding companies with $3.0
billion or more in assets, or with fewer assets but certain risky activities, and on a bank-only basis to other
companies. When applicable, the bank holding company capital adequacy and conservation buffer rules are the
same as those imposed by the FDIC. For additional information, see the section above entitled "- Regulation of
First Fed Bank - Capital Regulation" and Note 11 of the Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
Interstate Banking. The Dodd-Frank Act eliminated interstate branching restrictions that were
implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate
Act") and removed many restrictions on de novo interstate branching by state and federally chartered banks. The
Federal Reserve may approve an application of a bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than the bank holding company's home state,
without regard to whether the transaction is prohibited by the laws of any state.
The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the
minimum time period of five years, or longer if specified by the law of the host state. In addition, the Federal
Reserve generally may not approve an application for an interstate merger transaction if the applicant controls or
would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a branch. Federal law does not affect
the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled
by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the
federal law. Banks may establish de novo branches in any state, subject to regulatory approval.
The federal banking agencies are authorized to approve interstate merger transactions without regard to
whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a
law prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also
subject to the nationwide and statewide insured deposit concentration amounts described above. Federal bank
regulations prohibit banks from using their interstate branches primarily for deposit production, and federal bank
regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.
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Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted
rules establishing standards for assessing whether the interchange fees that may be charged with respect to
certain electronic transactions are "reasonable and proportional" to the costs incurred by issuers for processing
such transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee, among other
requirements. As of December 31, 2021, First Northwest Bancorp and First Fed qualified for the small issuer
exemption from the Federal Reserves interchange fee cap, which applies to any debit card issuer that has total
consolidated assets of less than $10 billion as of the end of the previous calendar year.
Restrictions on Dividends. First Northwest Bancorp's ability to declare and pay dividends is subject to
the Federal Reserve limits and Washington law, and it may depend on its ability to receive dividends from First
Fed, as discussed above.
The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding
companies. In particular, the policy limits the payment of a cash dividend by a bank holding company if the
holding company's net income for the past year is not sufficient to cover both the cash dividend and a rate of
earnings retention that is consistent with capital needs, asset quality, and overall financial condition. A bank
holding company that does not meet any applicable capital standard would not be able to pay any cash dividends
under this policy. A bank holding company not subject to consolidated capital requirements is expected not to
pay dividends unless its debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal
Reserve also has indicated that it would be inappropriate for a company experiencing serious financial problems
to borrow funds to pay dividends. The capital conservation buffer requirements may limit First Northwest
Bancorp's ability to pay dividends.
Except for a company that meets the well-capitalized standard for bank holding companies, is well
managed, and is not subject to any unresolved supervisory issues, a bank holding company 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 12 months, is equal to 10.0% or more of the company's
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 or regulatory
order, condition, or written agreement.
Under Washington corporate law, First Northwest Bancorp 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 the sum of its total liabilities. These various laws and regulatory policies may affect
First Northwest Bancorps ability to pay dividends or otherwise engage in capital distributions.
Tying Arrangements. First Northwest Bancorp and First Fed are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of
services. For example, with certain exceptions, neither First Northwest Bancorp nor First Fed may condition an
extension of credit to a customer on either (1) a requirement that the customer obtain additional services
provided by First Northwest Bancorp or First Fed; or (2) an agreement by the customer to refrain from obtaining
other services from a competitor.
The Dodd-Frank Act. The Dodd-Frank Act was signed into law in July 2010 and imposes restrictions
and an expanded framework of regulatory oversight for financial institutions, including depository institutions,
and required new capital regulations that are discussed above under "- Regulation of First Fed - Capital
Regulations." In addition, among other changes, the Dodd-Frank Act requires public companies, like First
Northwest Bancorp, to (i) provide their shareholders with a non-binding vote (a) at least once every three years
on the compensation paid to executive officers and (b) at least once every six years on whether they should have
a "say on pay" vote every one, two, or three years; (ii) have a separate, non-binding shareholder vote regarding
golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions,
dispositions, or other transactions that would trigger the parachute payments; and (iii) provide disclosure in
annual proxy materials concerning the relationship between the executive compensation paid and the financial
performance of the issuer.
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In August 2015, the Securities and Exchange Commission ("SEC") adopted a rule mandated by the
Dodd-Frank Act that requires a public company to disclose the ratio of the Chief Executive Officer's annual total
compensation to the median annual total compensation of all other employees. The rule is intended to provide
shareholders with information that they can use to evaluate a Chief Executive Officers compensation.
Federal Securities Law. The stock of First Northwest Bancorp is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result, First Northwest Bancorp is
subject to the information, proxy solicitation, insider trading restrictions, and other requirements under the
Exchange Act.
First Northwest Bancorp stock held by persons who are affiliates of First Northwest Bancorp may not
be resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal shareholders. If First Northwest Bancorp meets specified
current public information requirements, each affiliate of First Northwest Bancorp will be able to sell in the
public market, without registration, a limited number of shares in any three-month period.
The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to First
Northwest Bancorp as a registered company under the Exchange Act. The stated goals of these Sarbanes-Oxley
requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related regulations and
policies include very specific additional disclosure requirements and new corporate governance rules. The
Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and its committees.
Recent and Proposed Legislation. The economic and political environment of the past several years
has led to a number of proposed legislative, governmental, and regulatory initiatives that may significantly
impact the banking industry. Other regulatory initiatives by federal and state agencies may also significantly
impact First Northwest Bancorp's and First Feds business. First Northwest Bancorp and First Fed cannot predict
whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on its
operations, competitive situation, financial conditions, or results of operations. Recent history has demonstrated
that new legislation or changes to existing laws or regulations typically result in a greater compliance burden
(and therefore increase the general costs of doing business), and the current administration under President Biden
has indicated a general intent to regulate the financial services industry more strictly than the administration of
his predecessor.
Effects of Federal Government Monetary Policy. First Northwest Bancorps earnings and growth are
affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to
promote maximum employment, stable prices, and moderate long-term interest rates. Through its open market
operations in U.S. government securities, control of the discount rate applicable to borrowings, establishment of
reserve requirements against certain deposits, and control of the interest rate applicable to excess reserve
balances and reverse repurchase agreements, the Federal Reserve influences the availability and cost of money
and credit and, ultimately, a range of economic variables including employment, output, and the prices of goods
and services. Recently, the Federal Reserve has suggested that its focus will shift from policies supportive of
economic growth, including the maintenance of low interest rates and other credit support, to policies that seek
to address the rapid increase in inflation experienced in 2021. The nature and impact of future changes in
monetary policies and their impact on First Northwest Bancorp and First Fed cannot be predicted with certainty.
Cybersecurity. In February 2018, the SEC published interpretive guidance to assist public companies
in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory
guidance, are in addition to notification and disclosure requirements under state and federal banking law and
regulations.
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The federal banking regulators regularly issue new guidance and standards, and update existing
guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial
institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly
develop appropriate security controls and risk management processes. If First Fed fails to observe such
regulatory guidance or standards, it could be subject to various regulatory sanctions, including financial
penalties.
In November 2021, the federal banking agencies adopted a Final Rule, with compliance required by
May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of
determining that a computer-security incident has materially disrupted or degraded, or is reasonably likely to
materially disrupt or degrade, the banking organizations ability to carry out banking operations or deliver
banking products and services to a material portion of its customer base, its businesses and operations that would
result in material loss, or its operations that would impact the stability of the United States.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards
and regulations. Recently, several states have adopted regulations requiring certain financial institutions to
implement cybersecurity programs and many states, including Washington, have also recently implemented or
modified their data breach notification, information security and data privacy requirements. We expect this trend
of state-level activity in those areas to continue, and are continually monitoring developments in the states in
which our customers are located.
Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are
expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these
threats, as well as the expanding use of internet banking, mobile banking and other technology-based products
and services by us and our customers. Cybersecurity concerns are further heightened by Russia's recent invasion
of Ukraine.
COVID-19 Legislation and Regulation. Governments at the federal, state, and local levels have taken
significant steps over the last two years to address the impact of the COVID-19 pandemic. On March 27, 2020,
the CARES Act was signed into law, which included $350 billion in stimulus for small businesses under the
SBA PPP, along with direct stimulus payments for many eligible Americans. The initial amounts available under
the SBA PPP were quickly exhausted, and Congress twice provided historic amounts of additional funding to the
SBA PPP and to other programs in support of spending for hospitals, schools and local governments, for
vaccination efforts and virus testing, and for other related purposes. The SBA PPP ended in the second quarter of
2021, although we continue to receive and process applications for forgiveness and many borrowers remain
eligible. The legislative and regulatory landscape surrounding the COVID-19 pandemic, and the effects of
legislative and regulatory initiatives on the economy, have been subject to rapid change, and may continue to
evolve, and neither the Company nor First Fed can predict with certainty the impact it will have on our results of
operations or business generally.
Environmental, Social and Governance. Bank regulatory agencies and the SEC have shown
increasing interest in environmental, social and internal governance matters (often referred to as ESG) and
have stated their intent to heighten regulatory oversight of companies efforts to address the effect of ESG issues
on their businesses. First Northwest Bancorp and First Fed are committed to considering ESG factors, which we
recognize are key drivers of long-term business growth, in the development of our business strategies. We
believe our commitment to good corporate citizenship and the achievement of ESG policy goals enhances our
ability to pursue business opportunity and manage risk across our business, and supports our values in addressing
the environmental and social challenges faced by the communities we serve. Our Board oversees our ESG
activities, including our ESG strategies, compliance, and goals. Additionally, our Nominating and Corporate
Governance Committee oversees our policies and operational controls for environmental, health, safety and
social risks. The Nominating and Corporate Governance Committee meets regularly to set ESG goals for the
Company, as well as to monitor progress and results.
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Taxation
Federal Taxation
General. First Northwest Bancorp and First Fed are 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 First Northwest Bancorp or First Fed. First Fed is no
longer subject to U.S. federal income tax examinations by tax authorities for years ended before December 31,
2017. See Note 9 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements
and Supplementary Data," of this Form 10-K.
First Northwest Bancorp will file a consolidated federal income tax return with First Fed. Accordingly,
any cash distributions made by First Northwest Bancorp to its shareholders would be considered 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, First Fed currently reports its income and
expenses on the accrual method of accounting. Beginning with the six months ended December 31, 2017, federal
income tax returns are filed using a December 31 year end. Prior periods, through June 30, 2017, used a fiscal
year ending on June 30 for filing federal income tax returns.
Corporate Dividends-Received Deduction. First Northwest Bancorp may eliminate from its income
dividends received from First Fed as a wholly owned subsidiary of First Northwest Bancorp if it elects to file a
consolidated return with First Fed. The corporate dividends-received deduction is 100%, or 65%, 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 payor of the dividend. Corporations that own less than 20% of
the stock of a corporation distributing a dividend may deduct 50% of dividends received or accrued on their
behalf.
Washington Taxation
The Company and First Fed are subject to a business and occupation tax imposed under Washington
law at the rate of 1.75% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on
residential properties and certain investment securities are exempt from this tax.
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Item 1A. Risk Factors.
Economy and Our Markets
Adverse economic conditions in market areas we serve could adversely impact our earnings and could
increase the credit risk associated with our loan portfolio.
A significant portion of our loans are to businesses and individuals in the state of Washington. An
economic decline affecting our region could have a material adverse effect on our business, financial condition,
results of operations, and prospects. Weakness in the global economy has adversely affected many businesses
operating in our markets that are dependent on international trade. Other businesses in our market area and
around the world were impacted in a significant way by the COVID-19 pandemic.
While real estate values and unemployment rates have recently improved, deterioration in economic
conditions in the market areas we serve, in particular the North Olympic Peninsula and Puget Sound area of
Washington State, could result in the following consequences, any of which could have a materially adverse
impact on our business, financial condition and results of operations:
loan delinquencies, problem assets and foreclosures may increase;
demand for our products and services may decline, possibly resulting in a decrease in our total loans or
assets;
collateral for loans made may decline further in value, exposing us to increased risk of loss on existing
loans and reducing customers borrowing power;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor
commitments to us; and
the amount of our deposits may decrease and the composition of our deposits may be adversely
affected.
A decline in local economic conditions may have a greater effect on our earnings and capital than on
the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically
diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate
values, our financial condition and profitability could be adversely affected. Adverse changes in the regional and
general economy could reduce our growth rate, impair our ability to collect loans, and generally have a negative
effect on our financial condition and results of operations.
Public health crises, geopolitical developments, acts of terrorism, natural disasters, climate change and
other external factors could harm our business.
Public health crises, such as the global outbreak of COVID-19, domestic or geopolitical crises, such as
the recent invasion of Ukraine by Russia, political instability or civil unrest, terrorism, human error or other
events outside of our control, could cause disruptions to our business or the United States economy, and our
business and operating results could suffer. Natural disasters may disrupt our operations, result in damage to our
properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in
which we operate. Climate change may worsen the severity and impact of future natural disasters and other
extreme weather-related events that could cause disruption to our business and operations. Chronic results of
climate change such as shifting weather patterns could also cause disruption to the business and operations of our
customers, with potential negative effects on our loan portfolio and growth opportunities. A significant natural
disaster, such as a tsunami, earthquake, fire or flood, where we or our customers live and do business, could have
a material adverse impact on our local market areas and ability to conduct business, and our insurance coverage
may be insufficient to compensate for losses that may occur. The effects of any of the foregoing factors could
have a material adverse effect on our business, operations and financial condition.
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Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs,
which could adversely affect our earnings and capital levels.
Liquidity is essential to our business. We rely on a variety of sources in order to meet our potential
liquidity demands. We require enough liquidity to meet customer loan requests, customer deposit maturities and
withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal
operating conditions and other unpredictable circumstances, including events causing industry or general
financial market stress. A tightening of the credit markets and the inability to obtain adequate funding may
negatively affect our liquidity, asset growth and, consequently, our earnings capability and capital levels. In
addition to any deposit growth, and the sale of loans or investment securities, maturity of investment securities
and loan payments, we rely from time to time on advances from the FHLB and certain other wholesale funding
sources to meet liquidity demands. Our liquidity position could be significantly constrained if we were unable to
access funds from the FHLB or other wholesale funding sources.
Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of
our business activity as a result of a downturn in the markets in which our loans are concentrated, negative
operating results, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors
that are not specific to us, such as a disruption in the financial markets or negative views and expectations about
the prospects for the financial services industry or deterioration in credit markets. Any decline in available
funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill
obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in
turn, have a material adverse effect on our business, financial condition and results of operations.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These
deposits are required to be secured by certain investment grade securities or other collateral to ensure repayment,
which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit
sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged
collateral. Although these funds historically have been a relatively stable source of funds for us, availability
depends on the individual municipality's fiscal policies and cash flow needs.
The COVID-19 pandemic has adversely impacted our ability to conduct business and may adversely
impact our financial results and those of our customers. The ultimate impact will depend on future
developments, which are highly uncertain and cannot be predicted, including the scope and duration of
the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has significantly affected our operations and the way we provide banking
services to businesses and individuals. As an essential business, we provided banking and financial services to
our customers throughout the pandemic. We returned to regular lobby and drive-thru access at our branch
locations in May 2021. In addition, we continue to provide access to banking and financial services through
online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone.
If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services
to our customers.
A number of our employees currently are working remotely to enable us to continue to provide banking
services to our customers. Heightened cybersecurity, information security and operational risks may result from
these remote work-from-home arrangements. We also could be adversely affected if key personnel or a
significant number of employees were to become unavailable due to the effects and restrictions of the COVID-
19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor
transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively
impact our ability to serve our customers. Although we have business continuity plans and other safeguards in
place, there is no assurance that such plans and safeguards will be effective.
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There is pervasive uncertainty surrounding the future economic conditions that will emerge in the years
following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar
degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To
date, the COVID-19 pandemic has resulted in changes in the demand for certain loan types, including
government sponsored programs such as the Paycheck Protection Program, deposit availability, and market
interest rates. Because the length of the pandemic and the efficacy of the extraordinary measures being put in
place to address its economic consequences are unknown, our net interest income and net interest margin may
continue to be adversely affected.
Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation
of the allowance for loan losses, such estimates involve significant judgment and are made in the context of
substantial uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio.
Consistent with guidance provided by banking regulators, we modified loans by providing various loan payment
deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, not
every borrower may be able to make full payments on their loans once the COVID-19 pandemic is resolved. Any
increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and
may have a material negative effect on our financial condition and results of operations.
SBA PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and
guidance issued by the SBA and other government agencies. The great majority of our SBA PPP borrowers have
received full or partial forgiveness of their loan obligations. We have credit risk on SBA PPP loans if the SBA
determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including
any issue with the eligibility of a borrower to receive an SBA PPP loan. As of December 31, 2021, we hold and
service SBA PPP loans with an aggregate balance of $14.6 million.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to
recover from its effects, the length of which is unknown, and during which we may experience a recession. As a
result, we anticipate our business may be materially and adversely affected during this recovery. To the extent
the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of
operations, it may also have the effect of heightening many of the other risks described in this section.
Credit and Asset Quality
Our increased emphasis on commercial real estate lending subjects us to various risks that could
adversely impact our results of operations and financial condition.
We have increased the amount of our commercial real estate and multi-family loans to $535.7 million,
or 39.5% of our total loan portfolio, at December 31, 2021, from $459.0 million, or 39.8%, of our total loan
portfolio at December 31, 2020. We intend to continue to increase, subject to market demand, our origination
and purchase of commercial real estate loans. As an institutions concentration in commercial real estate lending
increases, it becomes subject to more scrutiny by the FDIC under its policies applicable to management of its
portfolio of commercial loans.
Our increased focus on this type of lending has increased our risk profile. Commercial real estate loans
are intended to enhance the average yield of our earning assets; however, they do involve a different level of risk
of delinquency or collection than one- to four-family loans. The repayment of commercial real estate loans
typically is dependent on the successful operation and income stream of the borrowers business, or the ability to
lease the property at sufficient rates, and the value of the real estate securing the loan as collateral, which can be
significantly affected by economic conditions. These loans also involve larger balances to a single borrower or
groups of related borrowers. Some of our commercial 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 compared to an adverse development with respect to a single one- to four-family
residential mortgage loan.
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Since commercial real estate loans generally have large balances, deterioration in the quality of
commercial loans may result in the need to significantly increase our provision for loan losses and charge-offs
will likely be larger on a per loan basis compared to consumer loans. As a result, deterioration of this portfolio
could materially adversely affect our future earnings. Collateral evaluation and financial statement analysis in
these types of loans also requires a more detailed analysis at the time of loan underwriting and on an ongoing
basis. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral is typically
longer than for a one- to four-family residence because the market for most types of commercial real estate is not
readily liquid, which results in less opportunity to mitigate credit risk by selling part or all of our interest in these
assets. At December 31, 2021, we had $71,000 of nonperforming commercial real estate loans and $0 of
nonperforming multi-family loans in our portfolio.
The significant growth in our loan portfolio and expansion into new markets may increase our credit risk.
Since the completion of our initial public offering in January 2015, we have grown substantially in
terms of total assets, total loans, total deposits, employees, and locations, expanding our business activities
throughout the Puget Sound region. Our commercial loan portfolio, which includes loans secured by commercial
and multi-family real estate as well as business assets, has increased to $615.6 million, or 45.4% of total loans, at
December 31, 2021, from $559.2 million, or 48.5% of total loans, at December 31, 2020. Construction and land
loans have increased to $224.7 million, or 16.5% of total loans, at December 31, 2021, from $123.6 million, or
10.7% of total loans, at December 31, 2020. Rapidly growing loan portfolios are, by their nature, less seasoned
and our experience with these loans may not provide us with a significant payment history pattern. Rapid growth
combined with the geographic expansion of our lending area may make estimating loan loss allowances more
difficult and more susceptible to changes in estimates, and to losses exceeding estimates, than our more seasoned
portfolio of loans in our traditional lending area. As a result, it is difficult to predict the future performance of
these parts of our loan portfolio. These loans may develop delinquency or charge-off levels above our historical
experience, which could adversely affect our future performance.
We plan to continue both strategic and opportunistic growth, understanding that we may see a slowing
of growth as we mature and manage capital down to more efficient levels. Continued growth can present
substantial demands on management personnel, line employees, and other aspects of our operations, especially if
our growth occurs rapidly. We may face difficulties in managing that growth effectively, which could damage
our reputation, limit our growth, and negatively affect our operating results. Also see "Our expansion strategy
will cause our expenses to increase and may negatively affect our earnings."
We have a concentration of large loans outstanding to a limited number of borrowers that increases our
risk of loss.
First Fed has extended significant amounts of credit to a limited number of borrowers, largely in
connection with high-end residential real estate and commercial and multi-family real estate loans. At December
31, 2021, the aggregate amount of loans, including unused commitments, to First Fed's five largest borrowers
(including related entities) amounted to approximately $116.5 million. Outstanding loan balances for the ten
largest borrowing relationships at December 31, 2021, totaled $146.6 million, or 10.8% of total loans. Although
none of the loans to First Fed's 20 largest borrowers were nonperforming loans as of December 31, 2021,
concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio. If one or
more of these borrowers is not able to service the contractual repayment, the potential loss to First Fed is more
likely to have a material adverse impact on our business, financial condition and results of operations.
Our construction and land loans are based upon estimates of costs and the value of the completed project.
During the year ended December 31, 2021, our construction and land loans increased $101.1 million, or
81.8%, to $224.7 million, or 16.5%, of the total loan portfolio at December 31, 2021 and consisted of properties
secured by one- to four-family residential of $39.7 million, multi-family of $89.7 million, commercial
acquisition-renovation of $51.1 million, commercial real estate of $35.7 million, and land of $8.6 million. Land
loans include raw land and land acquisition and development loans.
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Construction and land development lending generally involves additional risks when compared with
permanent residential lending because funds are advanced upon estimates of costs in relation to values associated
with the completed project that will produce a future value at completion. Because of the uncertainties inherent
in estimating construction costs, the market value of the completed project, the effects of governmental
regulation on real property, and changes in demand, it is relatively difficult to evaluate accurately the total funds
required to complete a project and the completed project loan-to-value ratio, which 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.
A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and
foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon
foreclosure. Some of our builders have more than one loan outstanding with us, and an adverse development
with respect to one loan or one credit relationship may expose us to a significantly greater risk of loss.
In addition, during the term of most of our construction loans, no payment from the borrower is
required since the accumulated interest is added to the principal of the loan through an interest reserve. As a
result, these loans often involve the disbursement of funds with repayment substantially dependent on the
successful outcome of the 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 and assume the market risk of selling the project at a future market price, which may or
may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs.
Our business may be adversely affected by credit risk associated with residential real estate.
At December 31, 2021, $334.1 million, or 24.6% of our total loan portfolio, consisted of one- to four-
family mortgage loans and home equity loans secured by residential properties. Lending on residential property
is 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. Declines in residential real estate values
securing these types of loans may increase the level of borrower defaults and losses above the recent charge-off
experience on these loans. Jumbo one- to four-family residential loans that do not conform to secondary market
mortgage requirements for our market areas would not be immediately saleable to Freddie Mac or other
investors and may expose us to increased risk because of their larger balances. Further, a significant amount of
our home equity lines of credit consist of second mortgage loans.
For those home equity lines secured by a second mortgage, it is unlikely that we will be successful in
recovering all or a portion of our loan balances in the event of default unless we are prepared to repay the first
mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the
property. For these reasons we may experience higher rates of delinquencies, default and losses on loans secured
by junior liens.
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Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which
may be unpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2021, we had $79.8 million, or 5.9% of total loans, in commercial business loans.
Commercial business lending involves risks that are different from those associated with residential and
commercial real estate lending. Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values, with liquidation of the underlying real estate
collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial
business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. These borrowers' cash flows may be unpredictable, and collateral securing
these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment,
inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is
often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may
be obsolete or of limited use, among other things. SBA PPP loans totaling $14.6 million are included in
commercial business loans.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
We make various assumptions and judgments about the collectability of our loan portfolio, including
the creditworthiness of our 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 allowance for loan losses, we review our
loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are
incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan
portfolio, resulting in additions to our allowance for loan losses through the provision for losses on loans which
is charged against income.
Additionally, pursuant to our growth strategy, management recognizes that significant new loan growth,
new loan products, new market areas, and the refinancing of existing loans, resulting in portfolios composed of
unseasoned loans that may not perform in a historical or projected manner, may increase the risk that our
allowance may be insufficient to absorb losses without significant additional provisions. Significant provisions
to our allowance could materially decrease our net income. In addition, bank regulatory agencies periodically
review our allowance for loan losses and may require an increase in the provision for possible loan losses or the
recognition of further loan charge-offs, based on judgments different than those of management.
In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need
additional provisions to replenish the allowance for loan losses. Any additional provisions will result in a
decrease in net income, and possibly capital, and may have a material adverse effect on our financial condition
and results of operations.
In addition, the Financial Accounting Standards Board has adopted a new accounting standard update
("ASU") 2016-13 that will be effective on January 1, 2023. This standard, referred to as Current Expected Credit
Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit
losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the
current method of providing allowances for credit losses that are probable, which may require us to increase our
allowance for loan losses, and may greatly increase the types of data we would need to collect and review to
determine the appropriate level of the allowance for credit losses. For more on this ASU, see Note 1 of the Notes
to Consolidated Financial Statements - Recently Issued Accounting Pronouncements contained in Item 8 of this
report.
If our nonperforming assets increase, our earnings will be adversely affected.
At December 31, 2021, our nonperforming assets, which consist of nonaccrual loans, real estate owned
and repossessed assets, were $1.4 million, or 0.1% of total assets. Our nonperforming assets adversely affect our
net income in various ways.
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If additional borrowers become delinquent and do not pay their loans and we are unable to successfully
manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a
material adverse effect on our financial condition and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and
can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited
to, ratings agency actions, defaults or other adverse events affecting the issuer or the underlying collateral, if any,
of the security, changes in market interest rates, and continued instability in the capital markets. Additionally,
financial markets may be adversely affected by the current or anticipated impact of military conflict, including
the recent invasion by Russia of Ukraine, terrorism, or other geopolitical events. These factors, among others,
could cause other-than-temporary-impairment ("OTTI"), realized and/or unrealized losses in future periods, and
declines in other comprehensive income, which could materially affect our business, financial condition, and
results of operations. Determining OTTI requires complex, subjective judgments about the future financial
performance and liquidity of the security's issuer and underlying collateral, if any, to assess the probability of
receiving all contractual principal and interest payments due, and these estimates may differ significantly from
actual future performance of the security.
If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and tax assessed values when a loan has been
foreclosed and the property taken in as real estate owned and at certain other times during the assets holding
period. Our net book value of the loan at the time of foreclosure and thereafter is compared to the
updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded
for any excess in the assets net book value over its fair value. If our valuation process is incorrect, or if property
values decline, the fair value of our real estate owned may not be sufficient to recover our carrying value in such
assets, resulting in the need for additional charge-offs. In addition, bank regulators periodically review our real
estate owned and may require us to recognize further charge-offs. Significant charge-offs to our real estate
owned could have a material adverse effect on our financial condition and results of operations.
We operate in a highly competitive industry.
We face substantial competition in all areas of our operations from a variety of different competitors,
many of which are larger and may have more financial resources. These competitors primarily include national,
regional and digital banks within the various markets in which we operate. We also face competition from many
other types of financial institutions, including savings and loans, credit unions, mortgage banking finance
companies, brokerage firms, insurance companies and other financial intermediaries. The financial services
industry could become even more competitive as a result of legislative, regulatory and technological changes and
continued consolidation. Also, technology has lowered barriers to entry and made it possible for nonbanks to
offer products and services traditionally provided by banks, such as automatic transfer and automatic payment
systems. Competitors in these nonbank sectors may have fewer regulatory constraints, as well as lower cost
structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a
result, may offer a broader range of products and services as well as better pricing for those products and
services than we can.
Failure to perform in any of these areas could significantly weaken our competitive position, which
could adversely affect our growth and profitability and result in a material adverse effect on our financial
condition and results of operations.
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We are subject to certain risks in connection with our use of networks and technology systems.
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, unauthorized access,
misuse, computer viruses, 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. 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.
We support the ability of our customers to transact business through multiple automated methods. As
such, we may be susceptible to fraud performed through these technologies.
Security breaches in our Internet banking activities could further expose us to possible liability and
damage our reputation. 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. These
precautions may not protect our systems from compromises or breaches of our security measures, which could
result in significant legal liability, heightened regulatory scrutiny or fines, violations of consumer protection and
privacy laws, and significant damage to our reputation and our business.
Our security measures may not protect us from systems failures or interruptions. While we have
established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can
be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition,
we outsource certain aspects of our data processing and other operational functions to certain third-party
providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with
them, our ability to adequately process and account for transactions could be affected, and our business
operations could be adversely impacted. Threats to information security also exist in the processing of customer
and consumer information through various other vendors and their personnel.
The occurrence of any failures or interruptions may require us to identify alternative sources of such
services, and we cannot assure that we would be able to negotiate terms that are as favorable to us or 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.
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Interest Rates, Operations and Risk Management
We are subject to interest rate risk.
Our earnings and cash flows are largely dependent on our net interest income. Interest rates are highly
sensitive to many factors that are beyond our control, including general economic conditions and policies of
various governmental and regulatory agencies, particularly the Federal Reserve. When the Federal Reserve
Board increases the Fed Funds rate, overall interest rates will likely rise, which may negatively impact housing
markets by reducing refinancing activity and new home purchases, and may also adversely affect the U.S.
economy and, as a result, our business as a whole. Changes in monetary policy, including changes in interest
rates, could influence not only the interest we receive on loans and investments and the amount of interest we
pay on deposits and borrowings, but these changes could also affect (i) our ability to originate and/or sell loans
(ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and
our ability to realize gains from sales of such assets; (iii) our ability to obtain and retain deposits in competition
with other available investment alternatives; (iv) the ability of our borrowers to repay adjustable or variable rate
loans; and (v) the average duration of our mortgage-backed securities portfolio and other interest-earning assets.
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.
Earnings could also be adversely affected if the interest rates received on loans and other investments fall more
quickly than the interest rates paid on deposits and other borrowings.
Changes in interest rates could also have a negative impact on our results of operations by reducing the
ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net
interest margin is the net interest income divided by average interest-earning assets. Changes in interest rates-up
or down-could adversely affect our net interest margin and, as a result, our net interest income. Although the
yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in
interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our
liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in
interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our
assets, causing our net interest margin to contract until the yields on interest-earning assets catch up. Changes in
the slope of the "yield curve", or the spread between short-term and long-term interest rates, could also reduce
our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than
long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve
flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases
relative to the yield we can earn on our assets.
A sustained increase in market interest rates could adversely affect our earnings. As a result of the
exceptionally low interest rate environment for the past few years, an increasing percentage of our deposits have
been composed 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, would be adversely affected.
Changes in interest rates also affect the value of our interest-earning assets, including our 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 our shareholders equity.
- 64 -
Although management believes it has implemented effective asset and liability management strategies
to reduce the potential effects of changes in interest rates on our results of operations, any substantial,
unexpected or prolonged change in market interest rates could have a material adverse effect on our financial
condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely will
not fully predict or capture the impact of actual interest rate changes on our balance sheet. See Item 7.
"Managements Discussion and Analysis of Financial Condition and Results of Operations Asset and Liability
Management and Market Risk," of this Form 10-K for additional information.
Changes in the method of determining the LIBOR or other reference rates may adversely impact the
value of loans receivable and other financial instruments we hold that are linked to LIBOR or other
reference rates in ways that are difficult to predict and could adversely impact our financial condition or
results of operations.
In July 2017, the United Kingdom Financial Conduct Authority announced the potential replacement of
the London Interbank Offered Rate ("LIBOR") at the end of 2021. LIBOR is used extensively in the U.S. and
globally as a "benchmark" or "reference rate" for various commercial and financial contracts. In response, the
Alternative Reference Rates Committee (ARRC), made up of financial and capital market institutions, was
convened to address the replacement of LIBOR in the U.S. The ARRC identified a potential successor to LIBOR
in the Secured Overnight Financing Rate (SOFR) and has crafted a plan to facilitate the transition. Our
subordinated debt issued in March 2021 provides for application the SOFR rate to determine the interest that will
be payable on the Notes beginning in March 2026. There are significant conceptual and technical differences
between LIBOR and SOFR. At this time, no consensus exists as to what rate or rates may become acceptable
alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-
based securities, variable rate loans, and other securities or financial arrangements. ICE Benchmark
Administration (IBA), the authorized and regulated administrator of LIBOR, recently announced it would
consult on its plans for discontinuation of LIBOR. IBA ended publication of some LIBOR tenors on December
31, 2021, and intends to end publication of the remaining LIBOR tenors in June 2023. Financial services
regulators and industry groups are seeking to develop alternate reference rate indices or reference rates. The
transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems,
product design and hedging strategies. It is not currently possible to determine whether, or to what extent, the
replacement of LIBOR will impact the value of any loans and other financial obligations or extensions of credit
we hold or that are due to us, that are linked to LIBOR or other reference rates, or whether, or to what extent,
such changes may impact our financial condition or results of operations.
Decreased volumes and lower gains on sales of loans could adversely impact our noninterest income.
We originate and sell one- to four-family mortgage loans. Our mortgage banking income is a significant
portion of our noninterest income. We generate gains on the sale of one- to four-family mortgage loans pursuant
to programs currently offered by Freddie Mac and other secondary market investors. Any future changes in their
purchase programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws
that significantly affect the activity of such entities could, in turn, materially adversely affect our results of
operations.
Further, in a rising or higher interest rate environment, our originations of mortgage loans may
decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in
mortgage banking revenues and a corresponding decrease in noninterest income. In addition, our results of
operations are affected by the amount of noninterest expense associated with mortgage banking activities, such
as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs.
During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we
are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell
loans into the secondary market without recourse, we are required to give customary representations and
warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may
require us to repurchase the loans and we may incur a loss on the repurchase.
- 65 -
A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on such
loans.
At December 31, 2021, $33.8 million of our one- to four-family, $64.0 million of our consumer, and
$18.1 million of our commercial real estate loan portfolios were serviced by third parties. When a loan goes into
default, it is the responsibility of the third-party servicer to enforce the borrowers obligation to repay the
outstanding indebtedness. We are reliant on the servicer to bring the loan current, enter into a satisfactory loan
modification or foreclose on the property on behalf of First Fed. We must comply with any loan modification
entered into by the servicer even if we would not otherwise agree to the modified terms, which may result in a
reduction in our interest income due to the loan modification. Delays in foreclosing on property, whether caused
by restrictions under state or federal law or the failure of a third-party servicer to timely pursue foreclosure
action, may increase our potential loss on such property, due to factors such as lack of maintenance, unpaid
property taxes and adverse changes in market conditions. These delays may adversely affect our ability to limit
our credit losses.
Regulatory Matters
Our lending limit may restrict our growth.
Washington law provides that Washington chartered commercial banks are subject to loans-to-one-
borrower restrictions, which generally restrict total loans and extensions of credit by a bank to 20% of its
unimpaired capital and surplus. As a result, under Washington law, First Fed would be limited to loans to one
borrower of $42.4 million at December 31, 2021. Under its current policy, First Fed has elected to restrict its
loans to one borrower to no more than 60% of the Bank's lending limit, which is adjusted quarterly and
was $31.8 million at December 31, 2021, unless specifically approved by the Senior Loan Committee as an
exception to policy. This amount is significantly less than that of many of our competitors and may discourage
potential commercial borrowers who have credit needs in excess of our loans to one borrower lending limit from
doing business with us. Our loans to one borrower restriction also impacts the efficiency of our commercial
lending operation because it lowers our average loan size, which means we have to generate a higher number of
transactions to achieve the same portfolio volume. We can accommodate larger loans by selling participations in
those loans to other financial partners, but this strategy is not the most efficient or always available. We may not
be able to attract or maintain clients seeking larger loans or may not be able to sell participations in these loans
on terms we consider favorable.
We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
We are subject to extensive examination, supervision and comprehensive regulation by the Federal
Reserve, the FDIC as insurer of our deposits, and by the DFI. First Northwest Bancorp is subject to regulation
and supervision by the Federal Reserve (as a bank holding company) and regulation by the State of Washington
(as a Washington corporation). The Bank is subject to regulation and supervision by the FDIC and the DFI. Such
regulation and supervision govern the activities in which we may engage, primarily for the protection of
depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including the ability to impose restrictions on an institutions
operations, require additional capital, reclassify assets, determine the adequacy of an institutions allowance for
loan losses and determine the level of deposit insurance premiums assessed. Any future changes to the laws,
rules and regulations applicable to us could make compliance more difficult and expensive, or otherwise
adversely affect our business, financial condition or prospects.
We are also subject to tax, accounting, securities, insurance, monetary laws and regulations, rules,
standards, policies, and interpretations that control the methods by which financial institutions conduct business.
These may change significantly over time, which could materially impact our business and have a significant
adverse effect on our cost of regulatory compliance and results of operations. Further, changes in accounting
standards and their interpretation may materially impact how we report, potentially retroactively, our financial
condition and results of operations.
- 66 -
Changes in federal policy and at regulatory agencies are expected to occur over time through policy and
personnel changes, which could lead to changes involving the level of oversight and focus on the financial
services industry. The nature, timing, and economic and political effects of potential changes to the current legal
and regulatory framework affecting financial institutions remain highly uncertain. If changes to laws, rules
and/or regulations applicable to us are made, such changes could offset the otherwise anticipated increase in
operating and compliance costs (included in noninterest expense); however, no assurance can be given as to
whether such changes will occur or what may result from such changes.
The CFPB, which was created under the Dodd-Frank Act, has issued, and continues to issue, rules
related to consumer protection, including The Truth in Lending Act and the Real Estate Settlement Procedures
Act Integrated Disclosure (TRID), which combines certain disclosures that consumers receive in connection with
applying for and closing a mortgage loan. These CFPB rules, including rules generally prohibiting creditors from
extending mortgage loans without regard for the consumer's ability to repay, may adversely affect the volume of
mortgage loans that we underwrite and subject us to increased potential liabilities related to such residential loan
origination activities. The CFPB has adopted a number of additional requirements and issued additional
guidance, including with respect to indirect auto lending, appraisals, escrow accounts and servicing, each of
which may entail increased compliance costs.
General Risk Factors
We are dependent on key personnel and the loss of one or more of those key persons may materially and
adversely affect our prospects.
We rely heavily on the efforts and abilities of our executive officers, and certain other key management
personnel, which make up our management team. The loss of the services of any of our current management
team could have a material adverse impact on our operations. The ability to attract, retain and season
replacements to our management team presents risks to executing our business plan. Changes in our current
management team and their responsibilities may be disruptive to our business and operations and could have a
material adverse effect on our business, financial condition, and results of operations. While we believe that our
relationship with our management team is good, we cannot guarantee that all members of our management team
will remain with our organization.
Our consideration of whole bank, branch acquisitions, or fintech partnerships in the future may expose us
to financial, execution and operational risks that could adversely affect us.
We may evaluate supplementing organic growth by acquiring other financial institutions or their
businesses that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks
associated with this strategy, however, including the following:
We may be exposed to potential asset quality issues or unknown or contingent liabilities of the financial
institutions, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates,
our results of operations and financial condition may be materially negatively affected;
The acquisition of other entities generally requires integration of systems, procedures and personnel of the
acquired entity into our company to make the transaction economically successful. This integration process
is complicated and time consuming and can also be disruptive to the customers of the acquired business. If
the integration process is not conducted successfully, we may not realize the anticipated economic benefits
of particular acquisitions within the expected time frame, and we may lose customers or employees of the
acquired business. We may also experience greater than anticipated customer losses even if the integration
process is successful; and
To finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our
liquidity, or raise additional capital, which could dilute the interests of our existing shareholders.
- 67 -
Our expansion strategy will cause our expenses to increase and may negatively affect our earnings.
Over the past seven years, we have opened four new full-service branches and two business centers. We
also acquired a branch from another financial institution in 2021. We may continue to open or purchase new
branches and lending centers, and the success of our expansion strategy into new markets 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 or to the degree
that we projected and opening new offices will increase our operating expenses. The cost of opening additional
de novo branches and lending centers is uncertain, and projected timelines and estimated dollar amounts
involved in opening new offices could differ significantly from actual results. In addition, we may not
successfully manage the costs and implementation risks associated with our branching strategy. Accordingly,
any new branch or lending center may negatively impact our earnings for some period of time until the office
reaches certain economies of scale, and there is a risk that our new offices will not be successful even after they
have been established.
We also plan to expand our digital footprint through partnerships with and investments in fintech
companies. The new technology and start-up companies we invest in may not be as successful as anticipated or
may fail, resulting a total loss of our related investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company's main administrative office is located at 105 West Eighth Street, Port Angeles, WA
98362. As of December 31, 2021, we conducted our business through twelve branch offices located in Clallam,
Jefferson, King, Kitsap, and Whatcom Counties, Washington; two business centers located in King and
Whatcom Counties, Washington; and our main administrative office and a support service center located in
Clallam County, Washington. The Company owns seven branch offices, the main administrative office and the
support services center. The remaining five branch offices and two business centers are leased. The net book
value of the Companys properties totaled $14.7 million at December 31, 2021. Additional information is
presented in Note 4 - Premises and Equipment and Note 5 - Leases of the Notes to the Consolidated Financial
Statements included in "Item 8. Financial Statements and Supplementary Data."
Item 3. Legal Proceedings
The Company and First Fed are involved from time to time in various claims and legal actions arising
in the ordinary course of business. There are currently no matters that, in the opinion of management, would
have a material adverse effect on our consolidated financial position, results of operation, or liquidity.
Item 4. Mine Safety Disclosures
Not applicable
- 68 -
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market and Holder Information. Our common stock is listed on The Nasdaq Stock Market LLCs
Global Market, under the symbol "FNWB." As of the close of business on March 10, 2022, there
were 10,006,022 shares of common stock issued and outstanding and we had approximately 539 shareholders of
record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers.
Stock Repurchases. The Company's repurchase programs permit shares to be repurchased in the open
market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in
accordance with the SEC's Rule 10b5-1. On October 28, 2020, the Company announced that its Board of
Directors had authorized the repurchase and retirement of up to an additional 1,023,420 shares of its common
stock.
The following table provides information regarding repurchases of the Company's common stock
during the quarter ended December 31, 2021.
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)
24,801 $
5,502
33,722
64,025 $
17.51
18.31
18.58
18.10
24,801
2,934
29,830
57,565
691,134
688,200
658,370
Period
October 1, 2021 - October 31, 2021
November 1, 2021 - November 30, 2021
December 1, 2021 - December 31, 2021
Total
(1) Shares repurchased by the Company during the quarter include shares acquired from participants in
connection with cancellation of restricted stock to pay withholding taxes totaling 0 shares, 2,568 shares,
and 3,892 shares, respectively, for the periods indicated.
(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of
up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common
stock issued and outstanding as of October 27, 2020. As of December 31, 2021, a total of 365,050 shares,
or 35.7% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased
at an average cost of $17.05 per share, leaving 658,370 shares available for future purchases.
Item 6. [Reserved]
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
General
First Northwest is a bank holding company primarily engaged in the business activity of its subsidiary,
First Fed. First Fed is a community-oriented financial institution serving Clallam, Jefferson, King, Kitsap, and
Whatcom counties in Washington State, through its twelve full-service branches and two business centers. We
offer a wide range of products and services focused on the financial security and payment needs of the
communities we serve. While we have a concentration of first lien one- to four-family mortgage loans, in order
to diversify our portfolio and increase interest income, we have increased our origination of commercial real
estate, multi-family real estate, construction, and commercial business loans, and have increased our auto and
consumer loans through originations, indirect auto lending, and purchased auto loan programs. We continue to
originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary
market to increase noninterest income and manage interest rate risk or retain select loans in our portfolio to
enhance interest income. We offer traditional consumer and business deposit products, including transaction
accounts, savings and money market accounts and certificates of deposit for individuals, businesses and
nonprofit organizations. Deposits are our primary source of funding for our lending and investing activities.
First Fed is impacted by prevailing economic conditions as well as government policies and regulations
concerning, among other things, monetary and fiscal affairs, including fiscal stimulus, interest rate policy and
open market operations, housing and financial institutions. Deposit flows are influenced by various factors,
including sales and marketing efforts, interest rates paid on competing deposits, available alternative investments
such as the stock market, account maturities, government stimulus and unemployment programs, and the overall
level of personal income and savings. Lending activities are influenced by prevailing interest rates and property
values in our markets, the demand for funds, the number and quality of lenders employed by First Fed, and
regional economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income is the difference
between interest income earned on our loans and investments and interest expense paid on our deposits and
borrowings. Changes in levels of interest rates can affect our net interest income. A secondary source of income
is noninterest income, which includes revenue we receive from providing products and services, including
service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and
other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, and
gains and losses from sales of securities.
An offset to net interest income is the provision for loan losses, which represents the periodic charge to
operations required to adequately provide for probable losses inherent in our loan portfolio through our
allowance for loan losses. As a loan's risk rating improves, property values increase, or recoveries of amounts
previously charged off are received, a recapture of previously recognized provision for loan losses may be added
to net interest income.
The noninterest expenses we incur in operating our business consist of salaries and employee benefit
costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments,
digital delivery and data processing expenses, advertising and promotion expenses, expenses related to real
estate and personal property owned, state and local taxes, federal income tax, and other miscellaneous expenses.
- 70 -
Our Business and Operating Strategy
Our operating strategy is focused on diversifying our loan portfolio, expanding our deposit product
offerings, and enhancing our infrastructure. Certain highlights of our operations in the last three years include:
Expanding our market presence. We hired several experienced and talented bankers with connections
throughout Western Washington. We opened a full-service branch in Ferndale, Washington and purchased a
branch in Bellevue, Washington. Through these new locations, we have realized growth in deposits and
expanded our ability to secure customer relationships and lending opportunities outside of our market areas
in the North Olympic Peninsula; Kitsap Peninsula; and Bellingham, Washington. We also utilize technology
to expand our market presence and to service new and existing businesses and consumers.
Investing in financial technology ("fintech") companies. We have a ten-year commitment to invest in
Canapi, which provides funding to fintech start-ups. The Canapi relationship allows us early access to
companies producing technology and apps that may be of interest as we grow in the fintech sector. One such
connection led us to POM and our partnership in Quin Ventures to build a financial wellness platform. We
also have a ten-year commitment to invest in BankTech, a newly formed venture capital fund with a focus
on technology designed for community banks.
Enhancing the loan portfolio. We have significantly increased the origination of commercial real estate,
multi-family real estate, and construction and land loans, as well as our portfolio of commercial business
loans. This helped to increase overall net interest income.
Adding new servicing capabilities. In addition to traditional consumer and business deposit products, we
offer remote deposit capture, consumer and small business digital banking, and commercial digital banking
capabilities. At our branch locations in Forks, Port Angeles, Silverdale, Bainbridge Island, and Bellingham,
Washington, and at our main administrative building and downtown locations in Port Angeles, Washington,
we have implemented interactive teller machines, allowing our customers to conduct business with a teller
through a video monitor.
Enhancing our infrastructure. We have focused on upgrading our infrastructure, in terms of both
equipment and personnel, in order to support our changing lending and deposit capabilities and position
ourselves for growth.
Our objective is to be an independent, high performing bank focused on meeting the needs of
individuals, small businesses and community organizations throughout our market areas with exceptional service
and competitive products. We intend to implement these strategies to achieve our objectives:
Increasing our portfolio of higher yielding commercial loans. Through increased loan originations, we
intend to increase our loan to deposit ratio and the percentage of our loan portfolio consisting of higher-
yielding commercial real estate and commercial business loans. These loan categories offer higher risk-
adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than traditional fixed-
rate, one- to four-family residential loans. Our commercial and multifamily real estate and commercial
business loans have increased from $559.2 million, or 48.5% of total loans, at December 31, 2020, to $615.6
million, or 45.4% of total loans, at December 31, 2021. We also increased our commercial construction
lending from $90.8 million, or 7.9% of total loans, at December 31, 2020, to $176.4 million, or 13.0% of
total loans, at December 31, 2021. The increase resulted in part from building the commercial team by
adding talented lenders; developing relationships with loan referral sources, including our Board of
Directors and loan brokers; pursuing loan purchase and participation opportunities; competing successfully
in new and existing markets; and benefiting from the improvement of the economy in northwestern
Washington.
Increasing noninterest income. We plan to broaden our offerings of SBA loan products, which provide the
opportunity to sell the guaranteed portion of loans originated, adding to our gain on sale of loans while also
generating servicing fee income. We will continue our participation in the ARC program to
generate additional loan fee income. We will maintain our focus on mortgage loan sales to increase income
from both sale and servicing fees. We may also sell loans in order to manage concentrations and risk, which
would generate gain and possibly additional servicing income. We anticipate that future revenue will be
generated through our fintech partnerships and banking-as-a-service, which would add transactional income
and increased interchange fee income.
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Maintaining our focus on asset quality. We believe that strong asset quality is a key to our long-term
financial success. We are focused on monitoring existing performing loans, resolving nonperforming loans,
and selling foreclosed assets. Nonperforming assets were $2.3 million at December 31, 2020 and $1.4
million at December 31, 2021. We have taken proactive steps to resolve our nonperforming loans, including
negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when
appropriate. We have also accepted short payoffs on delinquent loans, particularly when such payoffs result
in a smaller loss to us than foreclosure. We also retain the services of independent firms to periodically
review segments of our loan portfolio and provide comments regarding our loan policies and procedures.
Attracting core deposits and other deposit products. Our strategy is to emphasize relationship banking
with our customers to obtain a greater share of their deposits, with specific emphasis on their primary
transaction accounts. We believe this emphasis will help to increase our level of core deposits. In addition to
our retail branches, we continually upgrade our digital delivery solutions, such as on-line personal financial
management, business online banking, business remote deposit products, mobile remote deposit services
through smartphones and tablets, account-to-account transfer services between First Fed and other banks,
and person-to-person funds transfer through smartphones and tablets, enabling us to compete effectively
with banks of all sizes. We enhanced our integrated mobile banking platform by introducing applications for
both smartphones and tablets, upgraded our business on-line banking platform, and extended banking hours
through our interactive teller machines. In 2020, we significantly increased our level of commercial demand
deposits with the addition of a Treasury Management department.
Expanding our market presence and capturing business opportunities resulting from changes in the
competitive environment. By delivering high quality, customer-focused products and services, we believe
we can attract additional borrowers and depositors and thus increase our market share and revenue
generation in our market areas. We intend to continue our franchise growth. We expect that community
bank consolidation will continue to take place and may consider acquiring additional individual branches or
other banks. Our primary focus for expansion will be in Western Washington; however, we may offer
digital delivery in other markets.
Hiring experienced employees with a customer sales and service focus. Our goal is to compete by
relying on the strength of our customer service and relationship building. We believe that our ability to
continue to attract and retain banking professionals who have significant knowledge of existing and new
market areas, possess strong commercial banking sales and service skills, and maintain a focus on
community relationships will enhance our success. We intend to hire additional lenders and relationship
managers who are established in their communities to enhance our market position and add profitable
growth opportunities.
Improving our digital presence and streamlining the customer experience. By investing in and
improving on the interfaces that connect customers to our products and services, we believe we will be in a
better position to compete and grow in an environment that is becoming increasingly technology driven. We
intend to invest in our online presence and engage in digital strategies that will help us to successfully
compete in an ever-changing digital marketplace. In 2019, the Company committed to fund $3.0 million in
Canapi to identify and infuse capital into certain promising digital companies for which we may have an
interest in using their services at some future date or which may result in additional investment
opportunities. This commitment includes management participation in meetings and events that we feel will
benefit us when making decisions regarding digital services offerings and customer engagement. We
introduced a new online mortgage application with a leading fintech partner in 2020 and launched new
digital deposit application and consumer loan origination platforms in 2021.
Exploring alternative lending opportunities to improve interest income. We strive to grow the balance
sheet and leverage capital in a safe and sound manner and believe that lending opportunities outside of
organic originations may be a valuable source of interest income. We continued to engage with Northpointe
Bank to participate in interim financing for mortgage originators during the year and have increased our
auto loan portfolio significantly as a result of our partnership involving the purchase of loans made to
borrowers purchasing high-end automobiles and classic cars. We also engaged with Triad Financial Services
in 2020 to purchase a pool of manufactured home loans as well as purchase individual loans on an ongoing
basis. We will continue to explore other opportunities such as these as a means to improve net income and
supplement organic originations.
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Expanding into the digital and fintech markets. Banking-as-a-service offers significant growth
opportunities. The fintech and digital banking markets offer innovation and expansion that First Fed can
support through servicing products offered. We announced our partnership with Splash in January 2022 to
collaborate on developing and deploying consumer loan products and solutions throughout the country. We
continue to explore additional opportunities to partner with fintech and digital banking partners in order to
expand this part of our digital strategy.
Critical Accounting Policies
We have certain accounting policies that are important to the assessment of our financial condition,
since they require management to make difficult, complex or subjective judgments, some of which may relate to
matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes
as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments
include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes
in the financial condition of borrowers. Our accounting policies are discussed in detail in Note 1 of the Notes to
Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this
Form 10-K.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as
necessary to cover losses inherent in the loan portfolio as of the balance sheet date. The allowance is established
through the provision for loan losses, which is charged to income. Determining the amount of the allowance for
loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish
the allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash
flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various
elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews, and
the Board of Directors approves, at least quarterly, the level of the allowance and the provision for loan losses
based on past loss experience, current economic conditions and other factors related to the collectability of the
loan portfolio. Although we believe that we use the best information available to establish the allowance for loan
losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially
from the assumptions used in making the evaluation. In addition, the FDIC and the DFI, as an integral part of
their examination process, periodically review our allowance for loan losses and may require us to recognize
adjustments to the allowance based on their judgment about information available at the time of their
examination. A large loss could deplete the allowance and require increased provisions for loan losses to
replenish the allowance, which would adversely affect earnings. See Note 3 of the Notes to Consolidated
Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Mortgage Servicing Rights. We record mortgage servicing rights on loans originated and subsequently
sold into the secondary market. We stratify our capitalized mortgage servicing rights based on the type, term and
interest rates of the underlying loans. Mortgage servicing rights are initially recognized at fair value. The value is
determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and
delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management
judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be
negatively affected. See Notes 1 and 6 to the Notes to Consolidated Financial Statements included in Item
8, "Financial Statements and Supplementary Data" of this Form 10-K.
- 73 -
Income Taxes. Management makes estimates and judgments to calculate certain tax liabilities and to
determine the recoverability of certain deferred tax assets, which arise from temporary differences between the
tax and financial statement recognition of revenues and expenses. We also estimate a valuation allowance for
deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the
recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently
subjective. In evaluating the recoverability of deferred tax assets, management considers all available positive
and negative evidence, including past operating results, recent cumulative losses - both capital and operating -
and the forecast of future taxable income, both capital gains and operating. In determining future taxable income,
management makes assumptions for the amount of taxable income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies. These assumptions require judgments about
future taxable income and are consistent with the plans and estimates to manage our business. Any reduction in
estimated future taxable income may require us to record a valuation allowance against deferred tax assets. An
increase in the valuation allowance would result in additional income tax expense in the period and could have a
significant impact on future earnings.
Fair Value. Fair values of financial instruments are estimated using relevant market information and
other assumptions. 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 these estimates.
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of
the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary
Data" of this Form 10-K.
Comparison of Financial Condition at December 31, 2021 and December 31, 2020
Assets. Total assets increased $266.7 million, or 16.1%, to $1.92 billion at December 31, 2021,
from $1.65 billion at December 31, 2020, primarily due to an increase in new deposits.
Total loans, excluding loans held for sale, increased $203.1 million, or 17.6%, during the year ended
December 31, 2021. Multi-family and commercial real estate loans increased $76.7 million, or 16.7%, consisting
mainly of an increase in multi-family real estate loans of $66.7 million. Auto and other consumer loans increased
$54.5 million, or 42.5%, with the purchase of a pool of manufactured home loans as well as purchases of
individual manufactured home loans and specialty auto loans. Commercial business loans decreased $20.4
million due to a decrease in the Northpointe Bank Mortgage Participation Program and payoffs of SBA
Paycheck Protection Program loans.
One- to four-family residential loans decreased $14.9 million, or 4.8%, as payoffs outpaced new loan
production during the year. We continue to focus on the origination of one- to four-family mortgage loans with
the intention of retaining certain loans that may not be readily sold in the secondary market, while selling the
majority of our saleable production to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other
investors.
Construction and land loans increased $101.1 million, or 81.8%. There was $194.3 million in
undisbursed construction commitments at December 31, 2021 compared to $155.1 million at December 31,
2020. Undisbursed construction commitments at December 31, 2021 included $54.5 million of mainly custom
one- to four-family residential construction, $105.0 million of multi-family construction, $29.7 million of
commercial real estate construction, and $5.0 million of commercial acquisition-renovation construction. Our
construction loans are geographically disbursed throughout the state of Washington with two commitments for
properties in Oregon. We manage our construction lending by utilizing a licensed third-party vendor to assist us
in monitoring our construction projects. Internal staff monitor certain projects, which enhances fee income
related to these loans.
- 74 -
During the year ended December 31, 2021, the Company originated $780.5 million of loans, of which
$226.4 million, or 29.0%, were originated in the Olympic Peninsula region; $479.7 million, or 61.5%, in the
Puget Sound region; $42.7 million, or 5.5%, in other areas in Washington; and $31.6 million, or 4.1%, in other
states. The Company also purchased loans totaling $115.5 million with the largest concentration of property
located in California.
Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total loans
Less:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
Total loans receivable, net
December 31, 2021
December 31, 2020
(In thousands)
$
$
$
294,965
172,409
363,299
224,709
1,055,382
39,172
182,769
221,941
79,838
309,828
162,467
296,574
123,627
892,496
33,103
128,233
161,336
100,201
1,357,161
1,154,033
4,772
(12,995)
15,124
1,350,260
$
4,346
(6,129)
13,847
1,141,969
Our allowance for loan losses increased $1.3 million, or 9.2%, during the year ended December 31,
2021, as the result of loan growth. Asset quality has remained stable year over year despite the uncertain
economic conditions due to the pandemic. As a result, a negative provision of $150,000 was taken during
2021. Management continues to closely monitor these conditions. The allowance for loan losses as a percentage
of total loans was 1.1% at December 31, 2021 and 1.2% at December 31, 2020. There was no material change in
our allowance for loan losses as a percentage of total loans during the year ended December 31, 2021 compared
to 2020. We believe our allowance for loan losses is adequate to cover inherent losses in the loan portfolio.
Nonperforming loans decreased $892,000, or 39.2%, during the year ended December 31, 2021 to $1.4
million. This decrease was mainly the result of decreases in nonperforming one- to four-family of $418,000, auto
and other consumer of $309,000, and multi-family loans of $284,000, partially offset by an increase in home
equity loans of $209,000. Nonperforming loans to total loans was 0.1% at December 31, 2021, a decline
from 0.2% at December 31, 2020. Real estate owned and repossessed assets decreased $2,000, or 100.0%, as
defaulted auto loans were sold. The allowance for loan losses as a percentage of nonperforming loans increased
to 1095.1% at December 31, 2021 from 609.2% at December 31, 2020 as result of the decrease in
nonperforming loans.
- 75 -
At December 31, 2021, substantially all restructured loans were performing in accordance with their
modified payment terms and returned to accrual status. Classified loans, consisting solely of substandard loans,
increased by $5.1 million, or 67.3%, to $12.6 million at December 31, 2021, from $7.5 million at December 31,
2020. The change in classified loans was mainly the result of an increase in substandard commercial real estate
during the year. The Bank continued to work with its borrowers to facilitate satisfactory repayment.
In late March 2020, the Bank announced loan modification programs to support and provide relief for
its borrowers during the COVID-19 pandemic. Loans subject to payment forbearance under the Bank's COVID-
19 loan modification program are not reported as delinquent during the forbearance time period. For additional
information, see "COVID-19 Loan Modifications" in Item 1.
Total investment securities decreased $20.1 million, or 5.5%, to $344.2 million at December 31, 2021,
from $364.3 million at December 31, 2020. The year-over-year decrease was the result of sales, prepayment
activity, and normal amortization during the year, partially offset by purchases. During 2021, we purchased
$148.4 million of available-for-sale securities as a source of additional interest income. We also took advantage
of market opportunities to improve long-term yields, reduce our LIBOR risk, and manage duration by selling
$107.8 million of available-for-sale securities for a total gain of $2.4 million during the same period. The
estimated average life of the total investment securities portfolio was 5.7 years, and the average repricing term
was approximately 7.3 years as of December 31, 2021, based on the interest rate environment at that time. We
anticipate the investment portfolio will continue to provide additional interest income, act as a source of liquidity
to fund loan growth and give us the ability to manage interest rate risk.
Mortgage-backed securities represent the largest portion of our investment portfolio and totaled $140.0
million at December 31, 2021, an increase of $50.7 million, or 56.8% from $89.3 million at December 31, 2020.
Municipal bonds are the second largest segment, totaling $113.4 million at December 31, 2021, a decrease
of $14.5 million, or 11.3%, from $127.9 million at December 31, 2020. Other investment securities, including
U.S. government agencies, corporate and asset-backed securities, were $90.9 million at December 31, 2021, an
increase of $56.3 million, or 38.3% from $147.2 million at December 31, 2020. At December 31, 2021, the
investment portfolio contained 43.0% of amortizing securities, compared to 48.0% at December 31, 2020. The
projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-
backed securities portfolio, is generally affected by changing interest rates. We continue to focus on growing our
loan portfolio and improving our earning asset mix over the long term, as evidenced by net loan growth
exceeding the rate of investments during the year. We may purchase investment securities as a source of
additional interest income and in lieu of carrying higher cash balances at nominal interest rates. For additional
information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementary Data," of this Form 10-K.
Liabilities. Total liabilities increased $262.6 million, or 17.9%, to $1.73 billion at December 31, 2021,
from $1.47 billion at December 31, 2020, mainly due to deposit account balances increasing $247.1 million, or
18.5%, to $1.58 billion at December 31, 2021 from $1.33 billion at December 31, 2020. Money market accounts
increased $168.7 million, transaction accounts increased $69.0 million, and savings accounts increased $30.2
million as customers significantly increased their liquidity during the year. Certificates of deposit decreased
$61.5 million, or 19.9%, to $247.2 million at December 31, 2021. Included in certificates of deposit balances at
year end were $65.7 million in brokered certificates of deposit. Our focus will continue to be on increasing our
customer deposits and maintaining a stable source of funding for our continued growth.
FHLB borrowings decreased $30.0 million, or 27.3%, to $80.0 million at December 31, 2021, from
$110.0 million at December 31, 2020, as lower-cost deposit balances increased. Overnight variable-
rate advances were repaid, helping to manage our cost of funds and interest rate risk.
- 76 -
On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-
floating rate subordinated notes due 2031 (the Notes) to certain qualified institutional buyers and institutional
accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3
million after deducting placement agent fees and other offering expenses. The Notes are structured to qualify as
Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of
the offering for general corporate purposes and provided $20.0 million to the Bank as Tier 1 capital. The
remaining balance at December 31, 2021 was $39.3 million.
Equity. Total shareholders' equity increased $4.6 million, or 2.5%, to $191.0 million at December 31,
2021, from $186.4 million at December 31, 2020. This increase during the year resulted from net income of
$15.4 million and an increase of $2.4 million related to our stock-based compensation plans. These increases
were partially offset by a decrease of $6.0 million related to our repurchase of shares, a decrease of $5.2 million
due to the change in accumulated other comprehensive loss related to the change in unrealized market value of
available for sale securities, net of tax, and $2.5 million in dividends paid in 2021. During the year ended
December 31, 2021, we repurchased 349,497 shares of common stock at an average cost of $17.07 per share,
pursuant to the Company's 2020 stock repurchase plans.
Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020
General. The Company had net income for the year ended December 31, 2021 of $15.4 million,
compared to net income of $10.3 million for the year ended December 31, 2020, an increase of $5.1 million, or
49.1%. The increase in net income was due to increases in net interest income and noninterest income. We
earned $1.63 per common and diluted share for the year ended December 31, 2021, compared to $1.07 per
common and diluted share for the year ended December 31, 2020. The increase in earnings per share year-over-
year was the result of an increase in net income combined with lower weighted-average common shares
outstanding of 9,133,953 basic and 9,228,740 diluted shares in 2021, compared to 9,370,778 basic
and 9,402,198 diluted shares for the same period in 2020. The decrease in average shares year-over-year is due
to our share repurchase program and restricted stock award forfeitures offset by restricted stock award grants.
Net Interest Income. Net interest income increased $14.3 million, or 32.6%, to $58.3 million for the
year ended December 31, 2021, from $44.0 million for the year ended December 31, 2020, mainly as the result
of additional interest income related to the increase in the average balances of loans receivable and investment
securities.
The average balance of loans receivable increased $270.0 million, at an average yield of 4.44%, for the
year ended December 31, 2021 compared to an average yield of 4.44%, for the year ended December 31, 2020.
The cost of interest-bearing liabilities decreased to 0.43% for the year ended December 31, 2021 compared to
0.75% for the year ended December 31, 2020. The combination of increased loan receivable balances and lower
cost of funds resulted in a 24 basis point increase in our net interest margin to 3.51% at December 31, 2021,
from 3.27% at December 31, 2020.
Net interest income increased $14.3 million during the year ended December 31, 2021 compared to the
year ended December 31, 2020, of which $12.5 million was the result of an increase in volume and $1.8 million
due to changes in yields. As noted above, loans receivable was the main contributor to the increase in net interest
income with $12.0 million due to an increase in average volumes. The decrease to the cost of average interest-
bearing liabilities for the year ended December 31, 2021 was due primarily to lower rates paid on deposit
accounts, partially offset by an increase from the subordinated debt issued in 2021.
Interest Income. Interest income increased $12.0 million, or 23.2%, to $63.7 million for the year ended
December 31, 2021 from $51.7 million for the comparable period in 2020, primarily due to an increase in the
average balance of loans receivable. Interest and fees on loans receivable increased $12.0 million as a result.
- 77 -
Interest income on investment securities increased $250,000 to $5.8 million for the year ended
December 31, 2021 compared to $5.6 million for the year ended December 31, 2020. The increase in interest
income on investment securities was driven by a $17.1 million increase in the average balance during the year to
$244.4 million for the year ended December 31, 2021 compared to $227.3 million for the year ended December
31, 2020. The average yield decreased 7 basis points. The change in average yields on investment securities does
not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and
related securities decreased $151,000 to $2.6 million for the year ended December 31, 2021 from $2.7 million
for the year ended December 31, 2020, commensurate with a decline in the average balance of $3.2 million and a
decrease in average yield of 7 basis points.
The following table compares average earning asset balances, associated yields, and resulting changes
in interest income for the periods shown:
Year Ended December 31,
2021
2020
Average
Balance
Outstanding
$ 1,239,919
244,364
120,636
4,058
52,242
$ 1,661,219
Average
Balance
Outstanding
(Dollars in thousands)
Yield
Yield
Increase/
(Decrease)
in Interest
Income
4.44% $
2.38
2.11
4.68
0.16
970,039
227,269
123,838
4,495
20,129
4.44% $
2.45
2.18
5.67
0.47
11,966
250
(151)
(65)
(11)
3.83% $ 1,345,770
3.84% $
11,989
Loans receivable, net
Investment securities
Mortgage-backed securities
FHLB stock
Interest-bearing deposits in banks
Total interest-earning assets
Interest Expense. Total interest expense decreased $2.4 million, or 30.4%, for the year ended
December 31, 2021, compared to the prior year, with decreases in deposit costs of $3.3 million, partially offset
by increases in borrowing costs of $916,000. Deposit costs decreased due to the decrease in the interest rates
combined with growth in lower-rate non-maturity deposits. The average balance of interest-bearing deposits
increased $197.1 million, or 20.6%, to $1.15 billion for the year ended December 31, 2021 from $957.3 million
for the year ended December 31, 2020, as we continued to target growth in deposits in new and existing market
areas. Additionally, the bank experienced deposit growth due the significant inflow of deposits into the banking
system during the pandemic due to government stimulus payments and changes to consumer and business
savings and spending habits. During the year ended December 31, 2021, the cost of certificates of deposit
decreased $2.3 million due to a decrease in the average rate paid of 59 basis points. The average rate paid on
savings accounts decreased 43 basis points and the cost of money market accounts decreased 21 basis points
even though the average balance of all deposit accounts increased $300.6 million. The average cost of all
interest-bearing deposit products decreased 41 basis points to 0.29% for the year ended December 31, 2021 from
0.70% for the year ended December 31, 2020. Borrowing rates decreased 42.7%, or 32 basis points, mainly due
to lower rates paid on overnight and long-term borrowings, partially offset by the subordinated debt issued in
March 2021.
- 78 -
The following table details average balances, cost of funds and the change in interest expense for the
periods shown:
Year Ended December 31,
2021
2020
Average
Balance
Outstanding
$
175,608
525,986
185,315
267,521
54,033
30,370
$ 1,238,833
Average
Balance
Outstanding
(Dollars in thousands)
Rate
Rate
Increase/
(Decrease)
in Interest
Expense
135,315
0.02% $
332,854
0.22
170,016
0.07
319,096
0.77
73,268
1.43
3.96
0.43% $ 1,030,549
0.03% $
0.43
0.50
1.36
1.45
0.75% $
6
(281)
(715)
(2,277)
(287)
1,203
(2,351)
Interest-bearing transaction
Money market accounts
Savings accounts
Certificates of deposit
FHLB borrowings
Subordinated debt, net
Total interest-bearing liabilities
Provision for Loan Losses. The provision for loan losses decreased during the year ended December
31, 2021 compared to 2020. The lower provision reflects improvement in economic conditions, less uncertainty
regarding the impact of COVID-19, and stable credit quality compared to the prior year. Management took a
negative provision of $150,000 during 2021.
The following table details activity and information related to the allowance for loan losses for the
periods shown:
Provision for loan losses
Charge offs net of recoveries
Allowance for loan losses
Allowance for losses as a percentage of total gross loans receivable at the end
$
Year Ended December 31,
2021
2020
(Dollars in thousands)
$
1,350
(73)
15,124
5,046
(827)
13,847
of this period
Total nonaccrual loans
Allowance for loan losses as a percentage of nonaccrual loans at end of period
Nonaccrual and 90 days or more past due loans as a percentage of total loans
Total loans
1.1%
1,381
1095.1%
0.1%
1.2%
1,796
771.0%
0.2%
$
1,357,161
$
1,154,033
Noninterest Income. Noninterest income decreased 1.3% to $15.6 million for the year ended
December 31, 2021, compared to $15.9 million for the year ended December 31, 2020, reflecting a lower gain on
sale of mortgage loans, lower gain on sale of securities, and a decrease in the cash surrender value of bank
owned life insurance (BOLI) due to a one-time increase recorded in the third quarter of 2020 from a restructure
of the BOLI policies in 2020. Decreases were partially offset by increases in the gain on sale of commercial
loans and related servicing asset, SBA and adjustable-rate conversion program participation fees, and a gain on
our investment in Canapi Ventures Fund LP.
- 79 -
The following table provides a detailed analysis of the changes in the components of noninterest income
for the periods shown:
Loan and deposit service fees
Sold loan servicing fees, net of amortization
Net gain on sale of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned
life insurance, net
Other income
Total noninterest income
Year Ended December 31,
Increase (Decrease)
2021
Amount
2020
(Dollars in thousands)
Percent
$
$
3,860 $
946
5,278
2,410
3,454 $
137
6,433
3,147
965
2,179
15,638 $
1,826
849
15,846 $
406
809
(1,155)
(737)
(861)
1,330
(208)
11.8%
590.5
(18.0)
(23.4)
(47.2)
156.7
(1.3)%
Noninterest Expense. Noninterest expense increased to $54.4 million for the year ended December 31,
2021, from $41.5 million for the year ended December 31, 2020. The year-over-year increase reflects higher
compensation expense, including salaries, production-related commissions, incentives and benefits, as well as
costs associated with expanding our footprint with two new locations and the relocation of our Fairhaven branch,
and technology enhancements for digital and mobile banking products.
The following table provides an analysis of the changes in the components of noninterest expense for
the periods shown:
Year Ended December 31,
Increase (Decrease)
Percent
2020
Amount
(Dollars in thousands)
Compensation and benefits
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Professional fees
FDIC insurance premium
FHLB prepayment penalty
Other
Total
2021
33,515 $
6,244
4,312
1,189
1,213
2,040
1,997
752
3,151
54,413 $
$
$
24,590 $
4,637
3,879
985
930
1,506
1,523
245
210
2,959
41,464 $
8,925
1,607
433
204
283
534
474
507
(210)
192
12,949
36.3%
34.7
11.2
20.7
30.4
35.5
31.1
206.9
(100.0)
6.5
31.2%
Provision for Income Tax. The provision for income tax for the year ended December 31, 2021, was
$3.2 million compared to $3.0 million for the year ended December 31, 2020, reflecting higher net income
before provision for income tax in the current year, while the prior year included a penalty recorded related to
the surrender of a bank-owned life insurance policy in the third quarter of 2020 which resulted in a higher tax
provision as well as a higher effective tax rate for the related period.
- 80 -
Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest
margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets
to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets,
rates paid on interest-bearing liabilities and the resultant spread at December 31, 2021 and 2020. Income and all
average balances are monthly average balances, which management deems to be not materially different than
daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield.
At
December
31,
2021
Yield/
Rate
Year Ended December 31,
Average
Balance
Outstanding
2021
Interest
Earned/
Paid
Yield/
Rate
Average
Balance
Outstanding
2020
Interest
Earned/
Paid
Yield/
Rate
Interest-earning assets:
Loans receivable, net (1)
Investment securities
Mortgage-backed securities
FHLB dividends
Interest-bearing deposits in banks
Total interest-earning assets (2)
Noninterest-earning assets
Total average assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit
Total deposits
FHLB borrowings
Subordinated debt, net
Total interest-bearing liabilities
Noninterest-bearing deposits
Noninterest-bearing liabilities
Average equity
Total interest-bearing liabilities
Net interest income
Net interest rate spread
Net earning assets
Net interest margin (3)
Average interest-earning assets to
average interest-bearing liabilities
(Dollars in thousands)
4.44% $
2.38
2.11
4.68
0.16
3.83
970,039
227,269
123,838
4,495
20,129
1,345,770
91,125
$ 1,436,895
$ 43,063
5,569
2,701
255
94
51,682
4.44%
2.45
2.18
5.67
0.47
3.84
$ 55,029
5,819
2,550
190
83
63,671
$
43
1,165
128
2,060
3,396
774
1,203
5,373
4.39% $ 1,239,919
244,364
2.85
120,636
2.31
4,058
4.85
52,242
0.18
1,661,219
3.80
104,011
$ 1,765,230
0.01
0.21
0.05
0.62
0.19
1.34
3.94
0.33
$
175,608
525,986
185,315
267,521
1,154,430
54,033
30,370
1,238,833
308,467
29,715
188,215
$ 1,765,230
3.47
$
422,386
$
37
1,446
843
4,337
6,663
1,061
7,724
0.02
0.22
0.07
0.77
0.29
1.43
3.96
0.43
$
135,315
332,854
170,016
319,096
957,281
73,268
1,030,549
205,043
22,805
178,498
$ 1,436,895
0.03
0.43
0.50
1.36
0.70
1.45
0.75
3.09
3.27
$ 58,298
$ 43,958
3.40
3.51
$
315,221
134.1%
130.6%
(1) The average loans receivable, net balances include nonaccrual loans.
(2) Includes interest-bearing deposits (cash) at other financial institutions.
(3) Net interest income divided by average interest-earning assets.
- 81 -
Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and interest expense for
major components of interest-earning assets and interest-bearing liabilities. The presentation distinguishes
between the changes related to outstanding balances and the changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i)
changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot
be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Interest-earning assets:
Loans receivable
Investment and mortgage-backed securities
FHLB stock
Other(1)
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit
FHLB advances
Subordinated debt
Total interest-bearing liabilities
Net change in interest income
Year Ended
December 31, 2021 vs. 2020
Increase (Decrease) Due to
Volume
Rate
(In thousands)
Total Increase
(Decrease)
$
$
$
$
$
11,966 $
349
(25)
151
12,441 $
18 $
827
79
(700)
(277)
(53) $
$
(250)
(40)
(162)
(452) $
(12) $
(1,108)
(794)
(1,577)
(10)
1,203
(2,298) $
11,966
99
(65)
(11)
11,989
6
(281)
(715)
(2,277)
(287)
1,203
(2,351)
12,494 $
1,846 $
14,340
(1) Includes interest-bearing deposits (cash) at other financial institutions.
Asset and Liability Management and Market Risk
Risk Management Overview. Managing risk is an essential part of successfully managing a financial
institution. Our Enterprise Risk Management Committee reports key risk indicators to the Board of Directors
through the Audit Committee. The most prominent risk exposures management monitors are strategic, credit,
interest rate, liquidity, operational, compliance, reputational, cybersecurity, and legal risk. We utilize the services
of outside firms to assist us in our asset and liability management and our analysis of market risk.
- 82 -
Interest Rate Risk Management. We manage the interest rate sensitivity of interest-earning assets and
interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment.
Deposit accounts may reprice more quickly in response to changes in market interest rates because of their
shorter maturities. Certain adjustable-rate investment securities, home equity lines of credit, and commercial real
estate loans that are tied to the prime rate, the twelve-month constant maturity treasury, the London Interbank
Offered Rate ("LIBOR"), or the Secured Overnight Financing Rate ("SOFR") will also reprice higher when
market interest rates increase. Increases in interest rates should beneficially affect our earnings when variable or
adjustable interest-earning assets reprice at higher interest rates faster than it takes for deposit and borrowing
costs to reprice higher. Decreases in interest rates may adversely affect earnings as variable and adjustable assets
will reprice lower which will reduce interest income. Given the current low cost of funding there is little ability
to reduce funding costs to offset the decrease in interest income. Additionally, lower rates may result in
increased prepayments and refinancing associated with loans and investment securities, particularly consumer
and one- to four-family residential loans and MBS securities with no prepayment restrictions, which are then
reinvested into lower yielding assets, further reducing interest income.
We currently do not participate in hedging programs, interest rate swaps or other activities involving the
use of derivative financial instruments to manage interest rate risk.
Interest Rate Sensitivity Analysis. Management uses an interest rate sensitivity analysis to review our
level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of
our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in
market interest rates. The present value of equity is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market
risk sensitive instruments in the event of a sudden and sustained 100 to 300 basis point increase or a 100 basis
point decrease in market interest rates with no effect given to any future steps that management might take to
counter the impact of that interest rate movement. The following table presents the change in the present value of
First Feds equity at December 31, 2021, that would occur in the event of an immediate change in interest rates
based on management's assumptions.
December 31, 2021
Economic Value of Equity
Basis Point Change in Interest
Rates
$ Amount
$ Change
% Change
EVE Ratio %
(Dollars in thousands)
+ 300
+ 200
+ 100
0
-100
$
331,261 $
330,571
328,392
323,824
292,916
7,437
6,747
4,568
(30,908)
2.3%
2.1
1.4
(9.5)
18.7%
18.2
17.7
17.0
15.1
Using the same assumptions as above, the sensitivity of our projected net interest income over a one-
year period for the year ended December 31, 2021, is as follows:
Basis Point Change
in Interest Rates
$ Amount
December 31, 2021
Projected Net Interest Income
$ Change
(Dollars in thousands)
% Change
$
+ 300
+ 200
+ 100
0
-100
$
62,967
62,364
61,695
61,542
59,991
- 83 -
1,425
822
153
(1,551)
2.3%
1.3
0.2
(2.5)
Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates,
and the market values of certain assets under differing interest rate scenarios, among others. As with any method
of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the
foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest rates. Also, 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 may take longer to adjust to changes in market rates. Additionally, certain assets have
features, such as rate caps or floors, which restrict changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could deviate significantly from those assumed in calculating the table.
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term
nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of
securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities
are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and
prepayments on loans and investment securities are greatly influenced by general interest rates, economic
conditions and competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our investments in liquid assets based upon an assessment of expected
loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and objectives
of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels
of these assets depend on our operating, financing, lending and investing activities during any given period. At
December 31, 2021, cash and cash equivalents totaled $126.0 million, and securities classified as available-for-
sale, which provide additional potential sources of liquidity, had a market value of $344.2 million. We have
pledged collateral to support borrowings from the FHLB of $80.0 million. We have also pledged collateral to the
Federal Reserve Bank of San Francisco to secure discount window advances; however, no funds were borrowed
as of December 31, 2021.
At December 31, 2021, we had $2.7 million in loan commitments outstanding and an additional $270.5
million in undisbursed loans, including undisbursed construction commitments, and standby letters of credit.
Certificates of deposit due within one year of December 31, 2021 totaled $153.5 million, or 62.1% of
certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects
customers' hesitancy to invest their funds for longer periods in this low-rate environment. Management believes,
based on past experience, that a significant portion of our certificates of deposit will be renewed or rolled into
new certificates of deposit given the current rate environment; however, should rates continue to stay at lower
levels, balances could continue to shift into more liquid money market accounts over time. If these maturing
deposits are not renewed or rolled into other deposit products, however, we will be required to seek other sources
of funds, which may include borrowings and brokered deposits. We also can attract and retain deposits by
adjusting the interest rates offered, including the offering of promotional rates on certificates of deposit to
encourage the renewal or rollover of maturing certificates of deposit and mitigate the risk of loss of these
deposits to our competitors. Depending on market conditions, we may also be required to pay higher rates on
borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate
offerings. We believe that business developed by our sales teams, including our commercial relationship
managers, branch managers and members of our branch network, and the general cash flows from our existing
lending and investment activities, will afford us enough long-term liquidity. For additional information, see the
Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of
this Form 10-K.
- 84 -
The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First
Fed, and cash received from the issuance of subordinated debt for liquidity to pay its operating expenses and
other financial obligations. At December 31, 2021, the Company (on an unconsolidated basis) had liquid assets
of $14.1 million.
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not
recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit,
interest rate and liquidity risks. These transactions are used primarily to manage customers requests for funding
and take the form of loan commitments and lines of credit. For the year ended December 31, 2021, we engaged
in no off-balance sheet transactions likely to have a material effect on our financial condition, results of
operations or cash flows.
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks
as of December 31, 2021:
Commitments to originate loans:
Fixed-rate loans
Variable-rate loans
Unfunded commitments under lines of credit
Unfunded commitments under existing construction loans
Standby letters of credit
Total
Capital Resources
Amount of Commitment Expiration - Per Period
Total Amounts
Committed
Due in One Year
(In thousands)
$
$
1,658
1,062
75,977
194,296
212
273,205
$
$
1,658
1,062
75,977
194,296
212
273,205
First Northwest Bancorp is a bank holding company subject to regulation by the Federal Reserve. As a
bank holding company, we are subject to capital adequacy requirements of the Federal Reserve under the Bank
Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Our subsidiary, First
Fed, is subject to minimum capital requirements imposed by the FDIC. Capital adequacy requirements are
quantitative measures established by regulation that require us to maintain minimum amounts and ratios of
capital.
First Fed is subject to meeting minimum capital adequacy requirements for common equity Tier 1
("CET1") capital, Tier 1 risk-based capital, total risk-based capital, and tier 1 capital ("leverage"). Failure to
meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions
by bank regulators that, if undertaken, could have a direct material effect on the Companys financial statements.
First Fed is subject to capital requirements adopted by the Federal Reserve and the FDIC. See Item 1,
"Business-How We Are Regulated," and Note 11 of the Notes to Consolidated Financial Statements included in
Item 8, "Financial Statements and Supplementary Data," of this Form 10-K for additional information regarding
First Northwest Bancorp and First Feds regulatory capital requirements.
- 85 -
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,
First Northwest Bancorp and First Fed must maintain CET1 capital at an amount greater than the required
minimum levels plus a capital conservation buffer. This new capital conservation buffer requirement was phased
in starting in January 2016 until fully implemented in the amount of 2.5% of risk-weighted assets in January
2019. As of December 31, 2021, the conservation buffer was 2.5%.
Consistent with our goals to operate a sound and profitable organization, our policy for First Fed is to
maintain its "well-capitalized" status in accordance with regulatory standards. At December 31, 2021, the Bank
and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well
capitalized" under FDIC regulatory capital guidelines.
The following table provides the capital requirements and actual results at December 31, 2021.
Actual
Amount
Ratio
Minimum Capital
Requirements
Amount
(Dollars in thousands)
Ratio
Minimum Required to
be Well-Capitalized
Ratio
Amount
$ 196,319
10.6% $
74,362
4.0% $
92,953
5.0%
196,319
13.8
64,081
4.5
92,562
196,319
13.8
85,442
6.0
113,923
6.5
8.0
211,828
14.9
113,923
8.0
142,403
10.0
Tier I leverage capital (to
average assets)
Bank only
Common equity tier I (to risk-
weighted assets)
Bank only
Tier I risk-based capital (to
risk-weighted assets)
Bank only
Total risk-based capital (to
risk-weighted assets)
Bank only
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been
prepared according to generally accepted accounting principles in the United States, which require the
measurement of financial and operating results in terms of historical dollars without considering the change in
the relative purchasing power of money over time due to inflation. The primary impact of inflation on our
operations is reflected in increased operating costs and the effect that general inflation may have on both short-
term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than do general levels of inflation. Although inflation expectations do affect
interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of
goods and services.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial
Statements and Supplementary Data," of this Form 10-K.
- 86 -
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 - Market Risk and Asset and Liability Management" of this Form 10-K is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington,
PCAOB ID: 659)
Consolidated Balance Sheets, December 31, 2021 and 2020
Consolidated Statements of Income For the Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2021 and 2020
Consolidated Statements of Changes in Shareholders Equity For the Years Ended December 31, 2021
and 2020
Consolidated Statements of Cash Flows For the Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
88
90
91
92
93
94
96
- 87 -
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
First Northwest Bancorp and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Northwest Bancorp and
Subsidiary’ (the “Company”) as of December 31, 2021 and 2020, 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, 2021 and 2020, 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.
- 88 -
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was 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 matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Allowance for Loan Losses
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated
allowance for loan losses balance was $15.1 million at December 31, 2021. The allowance for loan
losses is maintained to provide for estimated inherent losses based on evaluating known and
inherent risks in the loan portfolio, and is based upon the Company’s analysis of the factors
underlying the quality of the loan portfolio. These factors include, among others, changes in the size
and composition of the loan portfolio, actual loan loss experience, current economic conditions,
analysis of individual loans for which full collectability may not be assured, and determination of the
discounted cash flows or determination of the existence and realizable value of the collateral and
guarantees securing the loans.
We identified management’s estimation of the qualitative factor adjustment, which is used in the
allowance for loan losses calculation, as a critical audit matter. The qualitative factors are comprised
of subjective factors used to estimate losses related to factors that are not captured in the historical
loss rates, and are based on management’s evaluation of available internal and external data and
involves significant management judgment. The qualitative factor adjustment is added to the historical
loss rate to calculate the allowance for loan losses. Auditing management’s judgments regarding the
determination of the qualitative factor adjustment applied to the allowance for loan losses involved a
high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included:
• Obtaining an understanding of the design and implementation of controls relating to
management’s calculation of the allowance for loan losses, including controls over the
determination of the qualitative factor adjustment used.
• Obtaining management’s analysis and supporting documentation related to the qualitative
factors and tested whether the qualitative factors used in the calculation of the allowance for
loan losses were supported by the analysis provided by management, as well as tested
source data used in management’s analysis.
Performing an independent sensitivity analysis to evaluate the reasonableness of the
qualitative factor adjustment used by management to account for inherent losses that are not
captured in the allowance for loan losses based on historical loss rates alone.
Testing the qualitative factor adjustment was applied appropriately into the allowance for loan
loss calculation.
•
•
Everett, Washington
March 18, 2022
We have served as the Company’s auditor since 2002.
- 89 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2021
December 31, 2020
$
$
$
ASSETS
Cash and due from banks
Interest-bearing deposits in banks
Investment securities available for sale, at fair value
Loans held for sale
Loans receivable (net of allowance for loan losses of $15,124
and $13,847)
Federal Home Loan Bank (FHLB) stock, at cost
Accrued interest receivable
Premises and equipment, net
Servicing rights on sold loans, net
Bank-owned life insurance, net
Goodwill and other intangible assets
Prepaid expenses and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Borrowings
Subordinated debt, net
Accrued interest payable
Accrued expenses and other liabilities
Advances from borrowers for taxes and insurance
Total liabilities
Commitments and Contingencies (Note 13)
Shareholders' Equity
Preferred stock, $0.01 par value, authorized 5,000,000 shares, no
shares issued or outstanding
Common stock, $0.01 par value, authorized 75,000,000 shares;
issued and outstanding 9,972,698 at December 31, 2021; issued
and outstanding 10,247,185 at December 31, 2020
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Unearned employee stock ownership plan (ESOP) shares
Total parent's shareholders' equity
Noncontrolling interest in Quin Ventures, Inc.
Total shareholders' equity
$
13,868
112,148
344,212
760
1,350,260
5,196
5,289
19,830
3,282
39,318
1,183
25,735
13,508
51,647
364,296
3,753
1,141,969
5,977
6,966
14,785
2,120
38,353
10,975
1,921,081
$
1,654,349
$
1,580,580
80,000
39,280
393
29,240
1,108
1,730,601
1,333,517
109,977
53
23,303
1,116
1,467,966
100
96,131
103,014
288
(8,572)
190,961
(481)
190,480
102
97,412
92,657
5,442
(9,230)
186,383
186,383
Total liabilities and shareholders' equity
$
1,921,081
$
1,654,349
See accompanying notes to the consolidated financial statements.
- 90 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Year Ended December 31,
2021
2020
INTEREST INCOME
Interest and fees on loans receivable
Interest on mortgage-backed and related securities
Interest on investment securities
Interest-bearing deposits and other
FHLB dividends
Total interest income
INTEREST EXPENSE
Deposits
Borrowings
Subordinated debt
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses
NONINTEREST INCOME
Loan and deposit service fees
Sold loan servicing fees, net of amortization
Net gain on sale of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned life insurance, net
Other income
Total noninterest income
NONINTEREST EXPENSE
Compensation and benefits
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Professional fees
FDIC insurance premium
FHLB prepayment penalty
Other
Total noninterest expense
INCOME BEFORE PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
Net loss attributable to noncontrolling interest in Quin Ventures, Inc.
NET INCOME ATTRIBUTABLE TO PARENT
Basic and diluted earnings per common share
$
$
$
55,029
2,550
5,819
83
190
63,671
3,396
774
1,203
5,373
58,298
1,350
56,948
3,860
946
5,278
2,410
965
2,179
15,638
33,515
6,244
4,312
1,189
1,213
2,040
1,997
752
3,151
54,413
18,173
3,194
14,979
439
15,418
1.63
$
$
$
43,063
2,701
5,569
94
255
51,682
6,663
1,061
7,724
43,958
5,046
38,912
3,454
137
6,433
3,147
1,826
849
15,846
24,590
4,637
3,879
985
930
1,506
1,523
245
210
2,959
41,464
13,294
2,954
10,340
10,340
1.07
See accompanying notes to the consolidated financial statements.
- 91 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
NET INCOME
Other comprehensive income:
Unrealized holding (losses) gains on investments available for sale
arising during the period
Income tax benefit (provision) related to unrealized holding (losses)
gains
Unrecognized defined benefit ("DB") plan unrealized holding gain and
prior service cost, net of amortization
Income tax benefit related to DB plan prior service cost, net of
amortization
Reclassification adjustment for net (gains) losses on sales of securities
realized in income
Income tax benefit related to reclassification adjustment on sales of
securities
Other comprehensive (loss) income, net of tax
COMPREHENSIVE INCOME
Comprehensive (loss) income attributable to noncontrolling interest
For the Year Ended December 31,
2021
2020
$
14,979
$
10,340
(1,771)
11,984
373
(2,517)
(2,344)
492
(2,410)
(3,147)
506
(5,154)
9,825
(439)
661
6,981
17,321
COMPREHENSIVE INCOME ATTRIBUTABLE TO PARENT
$
10,264
$
17,321
See accompanying notes to the consolidated financial statements.
- 92 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Accumulated
Other
Comprehensive
Gain
Net of Tax
Noncontrolling
Interest
Total
Shareholders'
Equity
BALANCE,
December 31, 2019
Net income
Common stock
repurchased
Restricted stock
awards granted net
of forfeitures
Restricted stock
awards canceled
Other
comprehensive
income, net of tax
Share-based
compensation
Allocation of ESOP
shares
Cash dividends
declared and paid
($0.21 per share)
BALANCE,
December 31, 2020
Net income
Common stock
issued and initial
investment in Quin
Ventures
Common stock
repurchased
Restricted stock
awards granted net
of forfeitures
Restricted stock
awards canceled
Other
comprehensive loss,
net of tax
Share-based
compensation
Allocation of ESOP
shares
Cash dividends
declared and paid
($0.25 per share)
BALANCE,
December 31, 2021
10,731,639 $
107 $ 102,017 $ 86,156 $ (9,890) $
(1,539) $
$
176,851
(575,859)
(6)
(5,753)
(1,654)
10,340
105,124
(13,719)
1
(1)
(178)
6,981
1,295
32
660
(2,185)
10,340
(7,413)
(178)
6,981
1,295
692
(2,185)
10,247,185 $
102 $
97,412 $ 92,657 $ (9,230) $
5,442 $
$
186,383
15,418
(439)
14,979
29,719
1
498
(44)
(42)
413
(349,497)
(4)
(3,491)
(2,484)
64,839
(19,548)
1
(1)
(352)
(5,154)
1,794
271
658
(2,533)
(5,979)
(352)
(5,154)
1,794
929
(2,533)
9,972,698 $
100 $
96,131 $103,014 $ (8,572) $
288 $
(481) $
190,480
See accompanying notes to the consolidated financial statements.
- 93 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before noncontrolling interest
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
Amortization of core deposit intangible
Amortization and accretion of premiums and discounts on
investments, net
Accretion (amortization) of deferred loan fees, net
Amortization of debt issuance costs
Amortization of servicing rights on sold loans
Additions to servicing rights on sold loans
Net (decrease) increase on the valuation allowance on servicing rights
on sold loans
Provision for loan losses
Deferred federal income taxes, net
Allocation of ESOP shares
Share-based compensation
Gain on sale of loans, net
Gain on sale of securities available for sale, net
Increase in cash surrender value of life insurance, net
Origination of loans held for sale
Proceeds from loans held for sale
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable
(Increase) decrease in prepaid expenses and other assets
Increase (decrease) in accrued interest payable
Increase in accrued expenses and other liabilities
For the Year Ended December 31,
2021
2020
$
14,979
$
10,340
1,432
5
1,753
1,260
57
108
(1,233)
(37)
1,350
63
675
2,294
(5,278)
(2,410)
(965)
(137,715)
145,986
1,677
(15,404)
340
6,218
1,375
1,551
(1,113)
278
(1,564)
37
5,046
(1,131)
475
1,295
(6,433)
(3,147)
(1,826)
(187,959)
191,142
(3,035)
781
(319)
7,463
Net cash from operating activities
15,155
13,256
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale
Proceeds from maturities, calls, and principal repayments of securities
available for sale
Proceeds from sales of securities available for sale
Redemption of FHLB stock
Purchase of bank-owned life insurance policy
Net increase in loans receivable
Purchase of premises and equipment, net
Capital contributions to equity investments
Capital contributions to low-income housing tax credit partnerships
Net cash acquired from branch acquisition
(152,930)
(305,713)
59,663
109,829
781
(210,901)
(6,019)
(584)
(248)
63,545
57,166
210,264
57
(6,500)
(267,994)
(1,818)
(1,416)
Net cash from investing activities
(136,864)
(315,954)
See accompanying notes to the consolidated financial statements.
- 94 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended December 31,
2021
2020
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
Proceeds from long-term FHLB advances
Repayment of long-term FHLB advances
Net decrease in short-term FHLB advances
Proceeds from issuance of subordinated debt, net
Net decrease in advances from borrowers for taxes and insurance
Net share settlement of stock awards
Repurchase of common stock
Payment of dividends
Net cash from financing activities
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings
Income taxes
Prior unrecognized service cost of defined benefit plan transferred to
single-employer plan
NONCASH INVESTING ACTIVITIES
Unrealized (loss) gain on securities available for sale
Loans transferred to real estate owned and repossessed assets, net of
deferred loan fees and allowance for loan losses
Investment in low-income housing tax credit partnership and related
funding commitment
Lease liabilities arising from obtaining right-of-use assets
BUSINESS COMBINATION (See Note 17)
Fair value of assets acquired
Fair value of liabilities assumed
$
$
$
$
$
$
$
$
$
$
$
$
182,196
40,000
(10,000)
(59,977)
39,223
(8)
(352)
(5,979)
(2,533)
331,872
30,000
(30,000)
(2,953)
(29)
(178)
(7,413)
(2,185)
182,570
319,114
60,861
65,155
16,416
48,739
126,016
$
65,155
4,550
4,270
2,718
$
$
$
(4,181) $
$
4,949
4,402
1,340
65,947
$
$
$
$
8,043
2,900
8,837
529
1,047
See accompanying notes to the consolidated financial statements.
- 95 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Nature of operations - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the
holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the
Bank's conversion from a mutual to stock form of organization (the "Conversion").
In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at
an offering price of $10.00 per share for gross proceeds of $121.7 million. An additional 933,360 shares of
Company common stock and $400,000 in cash were contributed to the First Federal Community Foundation
("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the
issuance of a total of 13,100,360 shares. The Company received $117.6 million in net proceeds from the stock
offering of which $58.4 million were contributed to the Bank upon Conversion.
At the time of Conversion, the Bank established a liquidation account in an amount equal to its total net worth,
approximately $79.7 million, as of June 30, 2014, the latest statement of financial condition appearing in First
Northwest's prospectus. The liquidation account is maintained for the benefit of eligible depositors who continue
to maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the
extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an
eligible holders interest in the liquidation account. In the event of a complete liquidation, each eligible depositor
will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current
adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment
of dividends, and the Bank may not pay dividends if those dividends would reduce equity capital below the
required liquidation account amount.
Pursuant to the Conversion, the Banks Board of Directors adopted an ESOP which purchased in the open
market 8% of the common stock originally issued for a total of 1,048,029 shares. As of December 15, 2015,
1,048,029 shares, or 100.0% of the total, had been purchased. As of December 31, 2021, First Northwest had
allocated 333,396 shares from the total shares purchased to participants.
In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint
Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or
"Quin Ventures"). First Northwest has partially fulfilled its commitment to extend $15.0 million to Quin
Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the
Company's common stock to POM with a value of $500,000.
On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank
Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of
Port Angeles.
First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."
First Northwest's business activities generally are limited to passive investment activities and oversight of its
investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the
consolidated financial statements and related data, relates primarily to the Bank.
The Bank is a community-oriented financial institution providing commercial and consumer banking services to
individuals and businesses in Western Washington State with offices in Clallam, Jefferson, Kitsap, King, and
Whatcom counties. These services include deposit and lending transactions that are supplemented with
borrowing and investing activities.
- 96 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of estimates - The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make assumptions. These assumptions result
in estimates that affect the reported amounts of assets and liabilities, revenues and expenses, disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and
expense during the reporting period. Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to a determination of the allowance for loan
losses, fair value of financial instruments, deferred tax assets and liabilities, and the valuation of impaired loans.
Principles of consolidation - The accompanying consolidated financial statements include the accounts of First
Northwest Bancorp and its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures,
Inc. All material intercompany accounts and transactions have been eliminated in consolidation. While First
Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a
controlling interest for financial reporting purposes under Accounting Standards Codification 810. The Quin
Ventures net loss allocable to POM is shown on the financial statements where applicable thorough a
noncontrolling interest adjustment.
Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and
determined there are no such events or transactions requiring recognition or disclosure.
Cash and cash equivalents - Cash and cash equivalents consist of currency on hand, due from banks, and
interest-bearing deposits with financial institutions with an original maturity of three months or less. The
amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects First
Fed to credit risk. First Fed has not experienced any losses due to balances exceeding FDIC insurance limits.
Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances
on deposit with the Federal Reserve Bank of San Francisco. The deposit requirement was zero at both December
31, 2021 and 2020. First Fed was in compliance with its reserve requirements at December 31, 2021 and 2020.
Equity securities - Equity securities, except those accounted for under the equity method of accounting or those
that result in consolidation of the investee, are carried at fair value. Changes in the fair value of investments in
equity securities are recorded in other non-interest income.
Investment securities - Investment securities are classified into one of three categories: (1) held-to-maturity, (2)
available-for-sale, or (3) trading. First Fed had no trading securities at December 31, 2021 and 2020. Investment
securities are categorized as held-to-maturity when First Fed has the positive intent and ability to hold those
securities to maturity. First Fed had no held-to-maturity securities at December 31, 2021 and 2020.
Securities that are held-to-maturity are stated at cost and adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income.
Investment securities categorized as available for sale are generally held for investment purposes (to maturity),
although unanticipated future events may result in the sale of some securities. Available-for-sale securities are
recorded at fair value, with the unrealized holding gain or loss reported in other comprehensive income (OCI),
net of tax, as a separate component of shareholders' equity. Realized gains or losses are determined using the
amortized cost basis of securities sold using the specific identification method and are included in earnings.
Dividend and interest income on investments are recognized when earned. Premiums and discounts on securities
without call features are recognized in interest income using the level yield method over the period to maturity.
Premiums on securities with call features are amortized to the earliest call date.
- 97 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews investment securities for other-than-temporary impairment (OTTI) on a quarterly basis.
For debt securities, the Company considers whether management intends to sell a security or if it is likely that
the Company will be required to sell the security before recovery of the amortized cost basis of the investment,
which may be maturity. For debt securities, if management intends to sell the security or it is likely that the
Company will be required to sell the security before recovering its cost basis, the entire impairment loss would
be recognized as OTTI and charged against earnings. If management does not intend to sell the security and it is
not likely that the Company 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. Projected cash flows are
discounted by the original or current effective interest rate depending on the nature of the security being
measured for potential OTTI. The remaining impairment related to all other factors, i.e., the difference between
the present value of the cash flows expected to be collected and fair value, is recognized as a charge to OCI.
Impairment losses related to all other factors are presented as separate categories within OCI. If there is an
indication of additional credit losses, the security is re-evaluated according to the procedures described above.
Federal Home Loan Bank stock - First Feds investment in Federal Home Loan Bank of Des Moines (FHLB)
stock is carried at cost, which approximates fair value. As a member of the FHLB system, First Fed is required to
maintain a minimum investment in FHLB stock based on specific percentages of its outstanding mortgages, total
assets, or FHLB advances. At December 31, 2021 and 2020, First Feds minimum investment requirement was
approximately $5.2 million and $5.9 million, respectively. First Fed was in compliance with the FHLB minimum
investment requirement at December 31, 2021 and 2020. First Fed may request redemption at par value of any
stock in excess of the amount First Fed is required to hold. Stock redemptions are granted at the discretion of the
FHLB.
Management evaluates FHLB stock for impairment based on its assessment of the ultimate recoverability of cost
rather than by recognizing temporary declines in value. The determination of whether a decline affects the
ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of
the FHLB compared with the capital stock amount for the FHLB and the length of time this situation has
persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory
changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the
FHLB. Based on its evaluation, First Fed did not recognize an OTTI loss on its FHLB stock at December 31,
2021 and 2020.
Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value. Fair value is determined based upon market prices from third-party
purchasers and brokers. Net unrealized losses, if any, are recognized through a valuation allowance by charges to
earnings. Gains or losses on the sale of loans are recognized at the time of sale and determined by the difference
between net sale proceeds and the net book value of the loan less the estimated fair value of any retained
mortgage servicing rights.
Loans receivable - Loans are stated at the amount of unpaid principal, net of charge-offs, unearned income,
allowance for loan loss (ALLL) and any deferred fees or costs. Interest on loans is calculated using the simple
interest method based on the month end balance of the principal amount outstanding and is credited to income as
earned. The estimated life is adjusted for prepayments.
- 98 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each loan segment and class inherently contains differing credit risk profiles depending on the unique aspects of
that segment or class of loans. For example, borrowers tend to consider their primary residence and access to
transportation for employment-related purposes as basic requirements; accordingly, many consumers prioritize
making payments on real estate first-mortgage loans and vehicle loans. Conversely, second-mortgage real estate
loans or unsecured loans may not be supported by sufficient collateral; thus, in the event of financial hardship,
borrowers may tend to place less importance on maintaining these loans as current and the Bank may not have
adequate collateral to provide a secondary source of repayment in the event of default. Notwithstanding the
various risk profiles unique to each class of loan, management believes that the credit risk for all loans is
similarly dependent on essentially the same factors, including the financial strength of the borrower, the cash
flow available to service maturing debt obligations, the condition and value of underlying collateral, the financial
strength of any guarantors, and other factors.
Loans are classified as impaired when, based on current information and events, it is probable that First Fed will
be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of
the original loan agreement. The carrying value of impaired loans is based on the present value of expected
future cash flows discounted at each loans effective interest rate or, for collateral dependent loans, at fair value
of the collateral, less selling costs. If the measurement of each impaired loans value is less than the recorded
investment in the loan, First Fed recognizes this impairment and adjusts the carrying value of the loan to fair
value through the allowance for loan losses. This can be accomplished by charging off the impaired portion of
the loan or establishing a specific component to be provided for in the allowance for loan losses.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent, unless the credit is
well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier
date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against
interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until
qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably assured. For those loans placed on non-
accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower
demonstrates repayment ability over a period of not less than six months.
Loan fees and purchased premiums - Loan origination fees and certain direct origination costs are deferred
and amortized as an adjustment to the yield of the loan over the contractual life using the effective interest
method. In the event a loan is sold, the remaining deferred loan origination fees and/or costs are recognized as a
component of gains or losses on the sale of loans. We may pay a purchase premium or receive a purchase
discount on fully originated loans that we purchase. Premiums and discounts are capitalized at the time of
purchase and amortized as an adjustment to the yield over the contractual life using the effective interest method.
Allowance for loan losses - First Fed maintains a general allowance for loan losses based on evaluating known
and inherent risks in the loan portfolio, including managements continuing analysis of the factors underlying the
quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, and current and anticipated economic conditions. When determining the appropriate
historical loss and qualitative factors, management took into consideration the impact of the COVID-19
pandemic on such factors as the national and state unemployment rates and related trends, the amount of and
timing of financial assistance provided by the government, consumer spending levels and trends, industries
significantly impacted by the COVID-19 pandemic, and the Company's COVID-19 loan modification program.
Qualitative factors such as economic, market, industry, and political changes are also considered for calculation
of the allowance. The appropriateness of the allowance for loan losses is estimated based upon these factors and
trends identified by management at the time the consolidated financial statements are prepared. The reserve is an
estimate based upon factors and trends identified by management at the time the financial statements are
prepared.
- 99 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ultimate recovery of loans is susceptible to future market factors beyond First Feds control, which may
result in losses or recoveries differing significantly from those provided in the consolidated financial statements.
In addition, various regulatory agencies, as an integral part of their examination processes, periodically review
First Feds allowance for loan losses. Such agencies may require First Fed to recognize additional provisions for
loan losses based on their judgment using information available to them at the time of their examination.
Allowances for losses on specific problem loans are charged to income when it is determined that the value of
these loans and properties, in the judgment of management, is impaired. First Fed accounts for impaired loans in
accordance with Accounting Standards Codification (ASC) 310-10-35, ReceivablesOverallSubsequent
Measurement. A loan is considered impaired when, based on current information and events, it is probable that
First Fed will be unable to collect all amounts due according to the contractual terms of the loan agreement.
When a loan has been identified as being impaired, the amount of the impairment is measured by using
discounted cash flows, except when it is determined that the sole source of repayment for the loan is the
operation or liquidation of the underlying collateral. In such cases, impairment is measured at current fair value
generally based on a current appraisal of the collateral, reduced by estimated selling costs. When the
measurement of the impaired loan is less than the recorded investment in the loan (including collected interest
that has been applied to principal, net deferred loan fees or costs, and unamortized premiums or discounts), loan
impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. Uncollected
accrued interest is reversed against interest income.
If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the
principal balance. The impairment amount for small balance homogeneous loans is calculated using the adjusted
historical loss rate for the class and risk category related to each loan, unless the loan is subject to a troubled debt
restructuring ("TDR").
A TDR is a loan for which First Fed, for reasons related to the borrowers financial difficulties, grants a
concession to the borrower that First Fed would not otherwise consider. The loan terms that have been modified
or restructured due to the borrowers financial difficulty include, but are not limited to, a reduction in the stated
interest rate; an extension of the maturity; an interest rate below market; a reduction in the face amount of the
debt; a reduction in the accrued interest; or extension, deferral, renewal, or rewrite of the original loan terms.
The restructured loans may be classified "special mention" or "substandard" depending on the severity of the
modification. Loans that were paid current at the time of modification may be upgraded in their classification
after a sustained period of repayment performance, usually six months or longer, and there is reasonable
assurance that repayment will continue. Loans that are past due at the time of modification are classified
"substandard" and placed on nonaccrual status.
TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period
of repayment performance, usually six months or longer, and there is a reasonable assurance that repayment will
continue. First Fed allows reclassification of a troubled debt restructuring back into the general loan pool (as a
non-troubled debt restructuring) if the borrower is able to refinance the loan at then-current market rates and
meet all of the underwriting criteria of First Fed required of other borrowers. The refinance must be based on the
borrowers ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.
- 100 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2020, the Company announced loan modification programs to support and provide relief for its
borrowers during the novel coronavirus of 2019 ("COVID-19") pandemic. The Company has followed the loan
modification criteria within the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"),
which was signed into law on March 27, 2020, and interagency guidance from the federal banking agencies
when determining if a borrower's modification is subject to a TDR classification. On December 27, 2020, the
Consolidated Appropriations Act, 2021 (the Relief Act) was signed into law, which further extended the relief
to the earlier of January 1, 2022 or 60 days after the date of termination of the national emergency. If it is
determined that the modification does not meet the criteria under the CARES Act or interagency guidance to be
excluded from TDR classification, the Company evaluates the loan modifications under its existing TDR
framework. Loans subject to forbearance under the COVID-19 loan modification program are not reported as
past due or placed on non-accrual status during the forbearance time period, and interest income continues to be
recognized over the contractual life of the loans.
Reserve for unfunded commitments - Management maintains a reserve for unfunded commitments to absorb
probable losses associated with off-balance sheet commitments to lend funds such as unused lines of credit and
the undisbursed portion of construction loans. Management determines the adequacy of the reserve based on
reviews of individual exposures, current economic conditions, and other relevant factors. The reserve is based on
estimates and ultimate losses may vary from the current estimates. The reserve is evaluated on a regular basis
and necessary adjustments are reported in earnings during the period in which they become known. The reserve
for unfunded commitments is included in "Accrued expenses and other liabilities" on the consolidated balance
sheets.
Real estate owned and repossessed assets - Real estate owned and repossessed assets include real estate and
personal property acquired through foreclosure or repossession and may include in-substance foreclosed
properties. These properties are initially recorded at the fair market value of the property less selling costs.
Properties are subsequently evaluated for impairment. In-substance foreclosed properties are those properties for
which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken
place.
Loan servicing rights - Originated servicing rights are recorded when loans are originated and subsequently
sold with the servicing rights retained. Servicing assets are initially capitalized at fair value with the income
statement effect recorded in gains on sales of loans. Management uses a valuation model that calculates the
present value of future cash flows to determine the fair value of servicing rights. Assumptions used in the
valuation model include market discount rates and anticipated prepayment speeds. In addition, estimates of the
cost of servicing per loan, an inflation rate, ancillary income per loan, and default rates are used. The fair value
of the servicing asset is amortized into noninterest income in proportion to, and over the period of, estimated
future net servicing income.
Management assesses impairment of the loan servicing rights based on recalculations of the present value of
remaining future cash flows using updated market discount rates and prepayment speeds. Subsequent loan
prepayments and changes in prepayment assumptions in excess of those forecasted can adversely impact the
carrying value of the servicing rights. Impairment is assessed on a stratified basis with any impairment
recognized through a valuation allowance for each impaired stratum. The servicing rights are stratified based on
the predominant risk characteristics of the underlying loans: fixed-rate loans and adjustable-rate loans. The effect
of changes in market interest rates on estimated rates of loan prepayments is the predominant risk characteristic
for loan servicing rights. The valuation model incorporates assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate,
an inflation rate, ancillary income, prepayment speeds, and default rates and losses.
- 101 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sold loan servicing income represents fees earned for servicing loans. Fees for servicing sold loans are generally
based upon a percentage of the principal balance of the loans serviced, as well as related ancillary income such
as late charges. Servicing income is recognized as earned unless collection is doubtful. The caption in the
consolidated statement of income "Sold loan servicing fees, net of amortization" includes sold loan servicing
income, amortization of loan servicing rights, the effects of sold loan servicing run-off, and impairment, if
applicable.
Income taxes - First Fed accounts for income taxes in accordance with the provisions of ASC 740-10, Income
Taxes, which requires the use of the asset and liability method of accounting for income taxes. Deferred tax
assets and liabilities are recognized for their future tax consequences, attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is recognized and computed on the straight-line method over the estimated useful lives as follows:
Buildings
Furniture, fixtures, and equipment
Software
Automobiles
Years
37.5 - 50
3 - 10
3
5
Goodwill - Goodwill is recorded from a business combination as the difference in the purchase price and fair
value of assets acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not
amortized. The Company will perform a goodwill impairment on an annual basis. Additionally, the Company
will perform an impairment analysis as needed when circumstances indicate impairment potentially exists. Any
impairment will be recorded as noninterest expense and corresponding reduction in intangible asset on the
consolidated financial statements.
Core deposit intangible - A core deposit intangible ("CDI") asset is recognized from the assumption of core
deposit liabilities in connection with the acquisition of one branch from Sterling Bank and Trust of Southfield,
Michigan (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
noninterest expense on the Consolidated Income Statement.
Leases - Operating lease right-of-use ("ROU") assets represent the Company's right to use the underlying asset
during the lease term and operating lease liabilities represent the Company's obligation to make lease payments
arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based
on the present value of the future lease payments using the Company's incremental borrowing rate. The
Company does not capitalize short-term leases, which are leases with terms of twelve months or less. ROU
assets and related operating lease liabilities are remeasured when lease terms are amended, extended, or when
management intends to exercise available extension options.
Low Income Housing Tax Credit Investment - The Company has an equity investment in a Low Income
Housing Tax Credit Investment ("LIHTC") partnership which is an indirect federal subsidy that finances low-
income housing projects. As a limited liability investor in this partnership, the Company receives a tax benefit in
the form of a tax deduction from partnership operating losses and a federal income tax credit. The federal income
tax credit is earned over a 10-year period as a result of the investment properties meeting certain criteria and is
subject to recapture for noncompliance with such criteria over a 15-year period.
- 102 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the LIHTC under the proportional amortization method and amortizes the initial cost
of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance on the Consolidated Statements of Income as a component of income tax expense. The
Company reports the carrying value of the equity investment in the unconsolidated LIHTC in Prepaid expenses
and other assets on the Companys Consolidated Balance Sheets.
The maximum exposure to loss in the LIHTC is the amount of equity invested and credit extended by the
Company. The Company has evaluated the variable interests held by the Company in the LIHTC investment and
determined that the Company does not have controlling financial interests in such investment and is not the
primary beneficiary.
Transfers of financial assets - Transfers of an entire financial asset, a group of financial assets, or a
participating interest in an entire financial asset are accounted for as sales when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated
from First Fed, (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) First Fed does not maintain effective control over
the transferred assets through an agreement to repurchase them before their maturity. The mortgage loans that
are sold with recourse provisions are accounted for as sales until such time as the loan defaults.
Periodically, First Fed sells mortgage loans with "life of the loan" recourse provisions, requiring First Fed to
repurchase the loan at any time if it defaults. The remaining balance of such loans at December 31, 2021 and
2020, was approximately $2.0 million and $2.7 million, respectively. Of these loans, no loans were repurchased
during the years ended December 31, 2021 or 2020. There is an associated allowance of $11,000 and $11,000 at
December 31, 2021 and 2020, respectively, included in "accrued expenses and other liabilities" on the
consolidated balance sheets related to these loans.
Bank-owned life insurance - The carrying amount of life insurance approximates fair value. Fair value of life
insurance is estimated using the cash surrender value, less applicable surrender charges. The change in cash
surrender value is included in noninterest income.
Off-balance-sheet credit-related financial instruments - In the ordinary course of business, First Fed has
entered into commitments to extend credit, including commitments under lines of credit, commercial letters of
credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Advertising costs - First Fed expenses advertising costs as they are incurred.
Comprehensive income (loss) - Accounting principles generally require that recognized revenue, expenses, and
gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity
section of the consolidated balance sheets, such items, along with net income (loss), are components of
comprehensive income (loss).
Dividend restriction - Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the Company or by the Company to shareholders.
- 103 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of noninterest income evaluated under Topic 606 - The Company recognizes revenue as it is
earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The
following is a discussion of key revenues within the scope of the new revenue guidance.
Deposit fees - The Company earns fees from its deposit customers for account maintenance, transaction-based
activity and overdraft services. Account maintenance fees consist primarily of account fees and analyzed
account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the
fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit
accounts are charged to deposit customers for specific services provided to the customer, such as non-
sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction
occurs and the fees are recognized at the time each specific service is provided to the customer. Deposit fees
are included in Service Fees on the Consolidated Statements of Income.
Debit card interchange income - Debit and Automated Teller Machine ("ATM") interchange income represent
fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit
cardholder transactions through card networks. In addition, the Company earns interchange fees for use of its
ATMs by customers of other banking institutions. Interchange fees are based on purchase volumes and other
factors and are recognized as transactions occur. The performance obligation is satisfied and the fees are
earned when the cost of the transaction is charged to the cardholder's debit card. Certain expenses directly
associated with the credit and debit card are netted against interchange income. Debit card interchange
income is included in Service Fees on the Consolidated Statements of Income.
Third-party credit card interchange income - Third-party credit card interchange income represents fees
earned when a credit card issued by the Bank through a third-party vendor is used. Similar to the debit card
interchange, the Bank earns an interchange fee for each transaction made with a Bank-branded credit card. The
performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the
cardholder's credit card. Certain expenses directly related to the third-party credit card interchange contract are
netted against interchange income. Third-party credit card interchange income is included in Service Fees on
the Consolidated Statements of Income.
Investment services revenue - Commissions received on the sale of investment related products is determined
by a percentage of underlying instruments sold and is recognized when the sale is finalized. Investment
services revenue is included in Other Income on the Consolidated Statements of Income.
Gains/losses on the sale of other real estate owned are included in non-interest expense and are generally
recognized when the performance obligation is complete. This is typically at delivery of control over the
property to the buyer at time of each real estate closing.
Fair value measurements - Fair values of financial instruments are estimated using relevant market information
and other assumptions (Note 14). 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 these estimates.
Segment information - First Fed is engaged in the business of attracting deposits and providing lending
services. Substantially all income is derived from a diverse base of commercial, mortgage, and consumer lending
activities and investments. The Companys activities are considered to be a single industry segment for financial
reporting purposes.
- 104 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan - The cost of shares issued to the ESOP but not yet allocated to participants is
shown as a reduction of shareholders' equity. Compensation expense is based on the market price of shares as
they are committed to be released to participants' accounts. Dividends on allocated and unallocated ESOP shares
reduce debt and accrued interest.
Earnings per Common Share - Earnings per share ("EPS") is computed using the two-class method. The two-
class method is an earnings allocation formula that determines earnings per share for each class of common stock
and participating security according to dividends declared or accumulated and participation rights in
undistributed earnings. Under the two-class method, basic EPS is computed by dividing earnings allocated to
common shareholders by the weighted average number of common shares outstanding for the period. Earnings
allocated to common shareholders represents net income reduced by earnings allocated to participating
securities. ESOP shares that are committed to be released are outstanding for EPS calculation purposes, while
unallocated ESOP shares are not considered outstanding for basic or diluted EPS calculations. Diluted EPS is
computed by dividing net income by the weighted average common shares outstanding plus the number of
additional common shares that would have been outstanding if unvested restricted stock awards were included
unless those additional shares would have been anti-dilutive. For the diluted EPS computation, the treasury stock
method is applied and compared to the two-class method and whichever method results in a more dilutive impact
is utilized to calculate diluted EPS.
Recently adopted accounting pronouncements
In November 2019, the FASB issued Accounting Standards Update ("ASU") 2019-10, Financial Instruments
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU
2019-10 defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs
2016-13, 2019-04, and 2019-05. The effective date for smaller reporting companies was changed from the
interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after
December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15,
2018. The Company adopted this ASU and anticipates implementing CECL effective January 1, 2023.
In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The standard also clarifies and amends existing
guidance to improve consistent application. This ASU, which is effective for fiscal years beginning after
December 15, 2020, did not have a material impact on the Company's financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-
Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction
between accounting standards related to equity securities, equity method investments, and certain derivatives
including accounting for the transition into and out of the equity method and measuring certain purchased
options and forward contracts to acquire investments. The ASU, which is effective for fiscal years beginning
after December 15, 2020, did not have a material effect on the Company's financial statements.
In August 2021, the FASB issued ASU No. 2021-06, Presentation of Financial Statements (Topic 205),
Financial Services - Depository and Lending (Topic 942), and Financial Services - Investment Companies
(Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rules Release No. 33-10786, Amendments
to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical
Disclosures for Bank and Savings and Loan Registrants. ASU 2021-06 was effective upon addition to the
Accounting Standards Codification in August 2021. This ASU did not have a material impact on the Company's
financial statements.
- 105 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently issued accounting pronouncements not yet adopted
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Loss, with subsequent
amendments issued in ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU updates the guidance on
recognition and measurement of credit losses for financial assets. The new requirements, known as the current
expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses
rather than incurred losses. ASU No. 2016-13 is now effective for fiscal years beginning after December 15,
2022, including interim periods within those fiscal years. Upon adoption, the Company will change processes
and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to
consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the
incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary
impairment on investment securities available for sale will be replaced with an allowance approach.
Additional updates were issued in ASU No. 2019-04, Codification Improvements to Topic 326, Financial
Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825), Financial Instruments. This ASU
clarifies and improves guidance related to the previously issued standards on credit losses, hedging and
recognition and measurement of financial instruments. The amendments provide entities with various
measurement alternatives and policy elections related to accounting for credit losses and accrued interest
receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of
accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements.
The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of
financial assets and trade receivables that were previously written off and expected to be written off. The
amendments also allow entities to use projections of future interest rate environments when using a discounted
cash flow method to measure expected credit losses on variable-rate financial instruments.
In addition, new updates were issued through ASU No. 2019-05, Financial Instruments - Credit Losses (Topic
326): Targeted Transition Relief. This amendment allows entities to elect the fair value option on certain
financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an
instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20
except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference
between the instruments fair value and carrying amount is recognized as a cumulative-effect adjustment.
The Company is evaluating the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, and
will closely monitor developments and additional guidance to determine the potential impact on the Companys
consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of
these ASUs will have on the Company's consolidated financial statements. The Company's internal project
management team continues to review models, work with our third-party vendor, and discuss changes to
processes and procedures to ensure the Company is fully compliant with the amendments at the adoption
date. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The
Company plans to adopt this guidance on January 1, 2023.
- 106 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other ASUs not yet adopted
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional guidance to ease
the potential burden in accounting for reference rate reform. The ASU provides optional expedients and
exceptions for applying generally accepted accounting principles to contract modifications and hedging
relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate
(LIBOR) or another reference rate expected to be discontinued. It is intended to help stakeholders during the
global market-wide reference rate transition period. This ASU is effective for all entities as of March 12, 2020
through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and
other financial instruments that are either directly or indirectly influenced by LIBOR. The Company is in the
process of evaluating ASU No. 2020-04 and its impact on the Companys transition away from LIBOR for its
loan and other financial instruments, with no material expected impact on the Company's financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. ASU No.
2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and
hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 also
amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope
clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
This ASU was effective upon issuance and generally can be applied through December 31, 2022. The adoption
of ASU 2021-01 is not expected to have a material impact on the Companys financial statements.
Reclassifications - Certain amounts in prior periods have been reclassified to conform to the current audited
financial statement presentation with no effect on net income or shareholders' equity.
- 107 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as
available-for-sale at December 31, 2021, are summarized as follows:
Available for Sale
Municipal bonds
International agency issued bonds (Agency bonds)
Corporate issued asset-backed securities (ABS corporate)
Corporate issued debt securities (Corporate debt)
U.S. Small Business Administration securities (SBA)
Mortgage-Backed Securities:
U.S. government agency issued mortgage-backed
securities (MBS agency)
Corporate issued mortgage-backed securities (MBS
corporate)
Amortized
Cost
December 31, 2021
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(In thousands)
Estimated
Fair Value
$ 110,497 $
1,947
14,556
58,906
14,404
3,207 $
1,450
276
(340) $ 113,364
1,920
(27)
14,489
(67)
59,789
(567)
14,680
80,877
60,317
248
71
(1,163)
79,962
(380)
60,008
Total securities available for sale
$ 341,504 $
5,252 $
(2,544) $ 344,212
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as
available-for-sale at December 31, 2020, are summarized as follows:
Available for Sale
Municipal bonds
U.S. government agency issued asset-backed securities
(ABS agency)
ABS corporate
Corporate debt
SBA
Mortgage-Backed Securities
MBS agency
MBS corporate
December 31, 2020
Gross
Gross
Unrealized
Unrealized
Gains
Losses
(In thousands)
Estimated
Fair Value
Cost
$ 122,667 $
5,212 $
(17) $ 127,862
62,934
29,661
35,408
18,420
61,859
26,458
1,240
37
687
144
876
162
(354)
(418)
(585)
(52)
(43)
63,820
29,280
35,510
18,564
62,683
26,577
Total securities available for sale
$ 357,407 $
8,358 $
(1,469) $ 364,296
- 108 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the unrealized gross losses and fair value of the investment portfolio by length of time
that individual securities in each category have been in a continuous loss position as of December 31, 2021:
Less Than Twelve
Months
Twelve Months or
Longer
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
(In thousands)
Available for Sale
Municipal bonds
Agency bonds
ABS corporate
Corporate debt
SBA
Mortgage-Backed Securities
MBS agency
MBS corporate
Total
$
(306) $ 23,125 $
(27)
(67)
(333)
(713)
(374)
1,920
10,976
18,890
39,029
32,849
(34) $
(234)
1,475 $
9,752
69
(340) $ 24,600
1,920
(27)
10,976
(67)
28,642
(567)
69
$
(1,820) $ 126,789 $
(724) $ 29,603 $
(450)
(6)
12,802
5,505
(1,163)
(380)
51,831
38,354
(2,544) $ 156,392
The following table shows the unrealized gross losses and fair value of the investment portfolio by length of time
that individual securities in each category have been in a continuous loss position as of December 31, 2020:
Less Than Twelve
Months
Twelve Months or
Longer
Total
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Available for Sale
Municipal bonds
ABS Agency
ABS Corporate
Corporate debt
SBA
Mortgage-Backed Securities
MBS agency
MBS corporate
Total
(In thousands)
(2) $
1,319 $
(17) $
$
(15) $
(8)
5,214 $
5,892
63
(52)
(43)
18,516
10,003
(354)
(418)
(577)
21,430
27,283
9,409
47
261
$
(118) $ 39,688 $
(1,351) $ 59,749 $
(354)
(418)
(585)
6,533
21,430
27,283
15,301
110
(52)
(43)
18,777
10,003
(1,469) $ 99,437
The Company may hold certain investment securities in an unrealized loss position that are not considered OTTI.
At December 31, 2021, there were 76 investment securities with $2.5 million of unrealized losses and a fair
value of approximately $156.4 million. At December 31, 2020, there were 36 investment securities with $1.5
million of unrealized losses and a fair value of approximately $99.4 million.
- 109 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes that the unrealized losses on investment securities relate principally to the general change
in interest rates and illiquidity, and not credit quality, that has occurred since the initial purchase, and such
unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.
Certain investments in a loss position are guaranteed by government entities or government sponsored entities.
The Company does not intend to sell the securities in an unrealized loss position and believes it is not likely it
will be required to sell these investments prior to a market price recovery or maturity.
There were no OTTI losses during the years ended December 31, 2021 and 2020.
The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the
following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties; therefore, these securities are shown separately.
Mortgage-backed securities:
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
December 31, 2021
December 31, 2020
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(In thousands)
$
7,827 $
24,347
8,466
100,554
7,832 $
24,371
8,391
99,376
80 $
12,446
75,791
84
12,402
76,774
Total mortgage-backed securities
141,194
139,970
88,317
89,260
All other investment securities:
Due within one year
Due after one through five years
Due after five through ten years
Due after ten years
6,391
79,679
114,240
6,289
80,807
117,146
2,210
74,568
192,312
2,328
74,351
198,357
Total all other investment securities
200,310
204,242
269,090
275,036
Total investment securities
$ 341,504 $ 344,212 $ 357,407 $ 364,296
Sales of available-for-sale securities were as follows:
For the Year Ended
December 31,
2021
2020
(In thousands)
$
109,829 $
2,827
(417)
210,264
4,537
(1,390)
Proceeds
Gross gains
Gross losses
- 110 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Loans Receivable
Loans receivable consist of the following at the dates indicated:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total loans
Less:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
December 31, 2021
December 31, 2020
(In thousands)
$
$
294,965
172,409
363,299
224,709
1,055,382
39,172
182,769
221,941
79,838
309,828
162,467
296,574
123,627
892,496
33,103
128,233
161,336
100,201
1,357,161
1,154,033
4,772
(12,995)
15,124
4,346
(6,129)
13,847
Total loans receivable, net
$
1,350,260
$
1,141,969
- 111 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans, by the earlier of next repricing date or maturity, at the dates indicated:
Adjustable-rate loans
Due within one year
After one but within five years
After five but within ten years
After ten years
Fixed-rate loans
Due within one year
After one but within five years
After five but within ten years
After ten years
Total loans
December 31, 2021
December 31, 2020
(In thousands)
$
$
$
302,187
258,094
54,351
19,098
633,730
31,970
148,233
194,245
348,983
723,431
1,357,161
$
$
149,701
231,491
83,286
16,608
481,086
54,903
107,785
219,014
291,245
672,947
1,154,033
The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to multiple indices.
Future market factors may affect the correlation of adjustable loan interest rates with the rates First Fed pays on
the short-term deposits that have been primarily used to fund such loans.
The following tables summarize changes in the ALLL and the loan portfolio by segment and impairment method
at or for the periods shown:
At or For the Year Ended December 31, 2021
One- to
four-
family
Multi-
family
Commercial
real estate
Construction
and land
Home
equity
(In thousands)
Auto and
other
consumer
Commercial
business
Unallocated
Total
ALLL:
Beginning balance
(Recapture of)
provision for loan
losses
Charge-offs
Recoveries
Ending balance
$ 3,469 $ 1,764 $
3,420 $
1,461 $
368 $ 2,642 $
429 $
294 $13,847
(291)
6
52
$ 3,184 $ 1,816 $
576
3,996 $
1,203
8
2,672 $
(25)
(12)
76
(270)
(865)
714
407 $ 2,221 $
41
470 $
64
1,350
(877)
804
358 $15,124
- 112 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2021
One- to
four-
family
Multi-
family
Commercial
real estate
Construction
and land
Auto and
other
consumer
Commercial
business
Unallocated
Total
Home
equity
(In thousands)
407 $
402
5
2,672 $
2,672
Total ALLL
General reserve
Specific reserve
$
3,184 $
3,159
25
1,816 $
1,816
3,996 $
3,996
2,221 $
2,138
83
470 $
470
358 $
358
15,124
15,011
113
Total loans
General reserves
(1)
Specific reserves
(2)
$294,965 $172,409 $ 363,299 $ 224,709 $39,172 $182,769 $
79,838 $
$1,357,161
292,708
172,409
363,228
224,687
38,839
182,257
79,838
1,353,966
2,257
71
22
333
512
3,195
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
At or For the Year Ended December 31, 2020
One- to
four-
family
Multi-
family
Commercial
real estate
Construction
and land
Home
equity
(In thousands)
Auto and
other
consumer
Commercial
business
Unallocated
Total
ALLL:
Beginning balance
Provision for
(recapture of) loan
losses
Charge-offs
Recoveries
Ending balance
$ 3,024 $
888 $
2,243 $
399 $
454 $ 2,261 $
208 $
151 $ 9,628
387
58
876
$ 3,469 $ 1,764 $
1,177
3,420 $
1,062
(5)
5
1,461 $
1,279
(992)
94
(99)
13
368 $ 2,642 $
221
429 $
143
5,046
(997)
170
294 $13,847
At December 31, 2020
One- to
four-
family
Multi-
family
Commercial
real estate
Construction
and land
Auto and
other
consumer
Home
equity
(In thousands)
368 $
3,469 $
1,764 $
3,420 $
1,461 $
2,642 $
429 $
294 $
13,847
Commercial
business
Unallocated
Total
3,433
1,764
3,419
1,461
364
2,366
36
1
4
276
429
294
13,530
317
Total ALLL $
General
reserve
Specific
reserve
Total loans
General
reserves (1)
Specific
reserves (2)
$309,828 $162,467 $
296,574 $
123,627 $33,103 $ 128,233 $
100,201 $
$1,154,033
306,862
162,183
295,296
123,601
32,968
127,411
100,201
1,148,522
2,966
284
1,278
26
135
822
5,511
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
- 113 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of loans individually evaluated for impairment by portfolio segment
including the average recorded investment in and interest income recognized on impaired loans at or for the
periods shown:
December 31, 2021
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
(In thousands)
Year Ended
December 31, 2021
Interest
Income
Recognized
Average
Recorded
Investment
With no allowance recorded:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
With an allowance recorded:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
Total impaired loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
$
$
212 $
71
26
309
247 $
177
24
59
77
584
$
219 $
94
1,016
32
29
1,390
2,045
22
307
512
2,886
2,245
22
329
512
3,108
25
5
83
113
2,281
121
24
155
653
3,234
2,257
71
22
333
512
3,195 $
2,492
177
46
388
589
3,692 $
25
5
83
113 $
2,500
94
1,137
24
187
682
4,624 $
12
1
7
20
138
1
9
13
161
150
1
10
20
181
- 114 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of loans individually evaluated for impairment by portfolio segment
including the average recorded investment in and interest income recognized on impaired loans at or for the
periods shown:
December 31, 2020
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
(In thousands)
Year Ended
December 31, 2020
Interest
Income
Recognized
Average
Recorded
Investment
With no allowance recorded:
One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
With an allowance recorded:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
Total impaired loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total
$
227 $
257 $
1,216
37
1,764
2,739
62
26
98
822
3,747
1,308
29
94
224
2,196
2,941
62
26
157
953
4,139
$
36
1
4
276
317
168 $
1,213
9
41
68
1,718
3,197
119
301
27
186
721
109
4,660
2,966
284
1,278
26
135
822
5,511 $
3,198
284
1,370
55
251
1,177
6,335 $
$
36
1
4
276
317 $
3,365
338
1,514
36
227
721
177
6,378 $
13
33
1
13
60
177
3
3
9
33
225
190
36
3
10
46
285
Interest income recognized on a cash basis on impaired loans for the years ended December 31, 2021 and 2020,
was $162,000 and $256,000, respectively.
- 115 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Total nonaccrual loans
December 31, 2021
December 31, 2020
(In thousands)
$
$
$
494
71
22
282
512
912
284
157
26
73
821
1,381
$
2,273
Past due loans - There were no loans past due 90 days or more and still accruing interest at December 31, 2021
and 2020.
The following table presents the recorded investment of past due loans, by class, as of December 31, 2021:
30-59
Days Past
Due
60-89
Days Past
Due
90 Days or
More Past
Due
Total Past
Due
Current
Total
Loans
(In thousands)
$
786 $
293
1,079
$
$
786 $ 294,179 $ 294,965
172,409
363,299
224,709
293
1,055,382
1,079
172,409
363,299
224,416
1,054,303
83
469
552
7
368
368
99
99
83
936
1,019
39,089
181,833
220,922
39,172
182,769
221,941
7
79,831
79,838
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total loans
$
1,638 $
368 $
99 $
2,105 $1,355,056 $1,357,161
- 116 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment of past due loans, by class, as of December 31, 2020:
30-59
Days Past
Due
60-89
Days Past
Due
90 Days or
More Past
Due
Total Past
Due
Current
Total
Loans
(In thousands)
$
406 $
56
462
132 $
132
29 $
26
55
567 $ 309,261 $ 309,828
162,467
296,574
123,627
82
892,496
649
162,467
296,574
123,545
891,847
94
815
909
138
138
137
137
94
1,090
1,184
33,009
127,143
160,152
33,103
128,233
161,336
100,201
100,201
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total loans
$
1,371 $
270 $
192 $
1,833 $1,152,200 $1,154,033
Credit quality indicator - Federal regulations provide for the classification of lower quality loans and other
assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point
risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current
net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those
characterized by the distinct possibility that First Fed 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 First Fed classifies problem assets as either substandard or doubtful, it may establish a specific allowance
to address the risk specifically or First Fed may allow the loss to be addressed in the general allowance. General
allowances represent loss allowances that have been established to recognize the inherent risk associated with
lending activities but that, 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 such assets in
the period in which they are deemed uncollectible. Assets that do not currently expose First Fed to sufficient risk
to warrant classification as substandard or doubtful but possess identified weaknesses are designated as either
watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise
classified are considered pass graded loans and are rated 1-3 in our risk rating system.
Additionally, First Fed categorizes loans as performing or nonperforming based on payment activity. Loans that
are more than 90 days past due and nonaccrual loans are considered nonperforming.
- 117 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the internally assigned grade as of December 31, 2021, by class of loans:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Pass
Watch
Special
Mention
(In thousands)
Substandard
Total
$ 291,421 $
153,704
326,444
215,262
986,831
2,727 $
18,705
22,850
295
44,577
53 $
3,057
9,130
12,240
764 $ 294,965
172,409
363,299
10,948
224,709
22
1,055,382
11,734
38,739
181,356
220,095
79,616
83
835
918
222
65
65
350
513
863
39,172
182,769
221,941
79,838
Total loans
$1,286,542 $
45,717 $
12,305 $
12,597 $1,357,161
The following table represents the internally assigned grade as of December 31, 2020, by class of loans:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Pass
Watch
Special
Mention
(In thousands)
Substandard
Total
$ 303,840 $
146,536
250,970
114,575
815,921
2,487 $
15,647
20,759
8,914
47,807
1,730 $
20,690
74
22,494
1,771 $ 309,828
162,467
296,574
123,627
892,496
284
4,155
64
6,274
32,500
124,115
156,615
349
2,034
2,383
100
1,216
1,316
154
868
1,022
33,103
128,233
161,336
Commercial business loans
92,010
7,791
168
232
100,201
Total loans
$1,064,546 $
57,981 $
23,978 $
7,528 $1,154,033
- 118 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the credit risk profile based on payment activity as of December 31, 2021, by
class of loans:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Consumer:
Home equity
Auto and other consumer
Commercial business loans
Nonperforming
Performing
(In thousands)
Total
$
494 $
71
22
294,471 $
172,409
363,228
224,687
294,965
172,409
363,299
224,709
282
512
38,890
182,257
39,172
182,769
79,838
79,838
Total loans
$
1,381 $
1,355,780 $
1,357,161
The following table represents the credit risk profile based on payment activity as of December 31, 2020, by
class of loans:
Real Estate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Consumer:
Home equity
Auto and other consumer
Commercial business loans
Nonperforming
Performing
(In thousands)
Total
$
912 $
284
157
26
308,916 $
162,183
296,417
123,601
309,828
162,467
296,574
123,627
73
821
33,030
127,412
33,103
128,233
100,201
100,201
Total loans
$
2,273 $
1,151,760 $
1,154,033
- 119 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020, ("CARES
Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which
outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were
current as defined under the CARES Act prior to any relief, are not TDRs. This included short-term (i.e., six
months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in
payment that are insignificant. Borrowers were considered current under the CARES Act and related regulatory
guidance if they are less than 30 days past due on their contractual payments at the time a modification program
is implemented. Through December 31, 2020, the Company had granted COVID-19 pandemic related temporary
loan modifications on a total of 357 loans aggregating to $177.6 million. Loan modifications in accordance with
the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining
whether or not a loan is deemed to be impaired. As of December 31, 2021, no loans remain on deferral.
The following is a summary of information pertaining to TDR loans included in impaired loans at the dates
indicated:
December 31, 2021
December 31, 2020
Total TDR loans
Allowance for loan losses related to TDR loans
Total nonaccrual TDR loans
$
$
(In thousands)
1,843
21
29
2,224
26
108
There were no newly restructured and renewals or modifications of existing TDR loans that occurred during the
year ended December 31, 2021.
The following is a summary of TDR loans that incurred a payment default within 12 months of the restructure
date during the year ended December 31, 2021.
TDR loans that subsequently defaulted
One- to four-family
Number of
Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
1 $
29 $
$
$
29
The following table presents newly restructured and renewals or modifications of existing TDR loans by class
that occurred during the year ended December 31, 2020, by type of concession granted:
Pre-modification outstanding recorded
investment
One- to four-family
Post-modification outstanding recorded
investment
One- to four-family
Number of
Contracts
Rate
Modification
Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
1 $
29 $
$
$
29
1 $
29 $
$
$
29
There were no TDR loans that incurred a payment default within 12 months of the restructure date during the
year ended December 31, 2020.
No additional funds are committed to be advanced in connection with TDR loans at December 31, 2021.
- 120 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.
One- to four-family
Home equity
Total TDR loans
$
$
December 31, 2021
Nonaccrual
Accrual
Total
December 31, 2020
Nonaccrual
Accrual
Total
1,763 $
51
29 $
(In thousands)
1,792 $
51
2,054 $
62
108 $
2,162
62
1,814 $
29 $
1,843 $
2,116 $
108 $
2,224
Note 4 - Premises and Equipment
Premises and equipment consist of the following as of:
Land
Buildings
Building improvements
Furniture, fixtures, and equipment
Software
Automobiles
Construction in progress
Less accumulated depreciation and amortization
$
December 31, 2021 December 31, 2020
(In thousands)
2,907 $
6,697
14,492
7,512
599
66
3,361
35,634
(15,804)
19,830 $
2,564
6,075
12,067
7,063
1,261
66
1,257
30,353
(15,568)
14,785
$
Depreciation expense was $1.43 million and $1.38 million for the years ended December 31, 2021 and 2020,
respectively.
Note 5 - Leases
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and all subsequent ASUs that are
related to Topic 842. The Company, as lessee, leases certain assets for use in its operations. Leased assets
primarily include retail branches and operation centers. For each lease with an original term greater than 12
months, the Company records a lease liability and a corresponding right of use ("ROU") asset, based on the
present value of lease payments over the lease term. The discount rate used in determining the present value is
the Company's incremental borrowing rate using the FHLB fixed advance rate based on the remaining lease term
as of January 1, 2019, or the commencement date for subsequent leases. At December 31, 2021, the Company's
ROU assets included in other assets and lease liabilities included in other liabilities were $7.6 million and $7.7
million, respectively.
Total costs incurred by the Company, as a lessee, were $868,000 and $587,000 for the years ended December 31,
2021 and 2020, respectively, and principally related to contractual lease payments on operating leases. The
Company's leases do not impose significant covenants or other restrictions on the Company.
The Bank has lease agreements with unaffiliated parties for eight locations, including five full-service branches,
two business centers, and a parking easement. Lease expirations range from one to twenty years, with additional
renewal options on certain leases ranging from two to ten years. If the exercise of a renewal option is considered
to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and
lease liability.
- 121 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents amounts relevant to the Company's assets leased for use in its operations for the
years ended December 31, 2021 and 2020:
Operating cash flows from operating leases
Right of use assets obtained in exchange for new operating lease
liabilities
December 31, 2021 December 31, 2020
(In Thousands)
868 $
587
$
4,364
1,047
The following table presents the weighted-average remaining lease terms and discount rates of the Company's
assets leased for use in its operations at December 31, 2021:
December 31, 2021 December 31, 2020
Weighted-average remaining lease term of operating leases (in
years)
Weighted-average discount rate of operating leases
10.8
2.4%
12.5
3.2%
All lease agreements require the Bank to pay its pro-rata share of building operating expenses. The minimum
annual lease payments under non-cancelable operating leases with initial or remaining terms of one year or more
through the initial lease term are as follows:
Twelve-month period ending:
2022
2023
2024
2025
2026
Thereafter
Total minimum payments required
Less imputed interest
Present value of lease liabilities
Note 6 - Servicing Rights on Sold Loans
December 31, 2021
(In Thousands)
$
$
$
831
852
886
925
903
4,825
9,222
1,488
7,734
Mortgage loans serviced for FHLB, Fannie Mae, and Freddie Mac are not included in the accompanying
consolidated balance sheets. Selected commercial loan balances have also been sold in whole or in part to
various participants, including the Main Street Lending Program, with servicing retained by First Fed and are not
included in the accompanying consolidated balance sheets. The unpaid principal balances of serviced loans,
primarily mortgage loans, were $454.4 million and $268.2 million at December 31, 2021 and 2020, respectively.
Loan servicing rights for the periods shown are as follows:
Balance at beginning of period
Additions
Amortization
Valuation allowance net recovery (impairment)
Balance at end of period
- 122 -
For the Year Ended December 31,
2021
2020
$
$
(In thousands)
2,120 $
1,234
(109)
37
3,282 $
871
1,564
(278)
(37)
2,120
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate change in valuation allowance for loan servicing rights for the periods shown are as follows:
Balance at beginning of period
Impairments
Recoveries
Balance at end of period
For the Year Ended December 31,
2020
2021
(In thousands)
(37) $
37
$
(37)
(37)
$
$
The key economic assumptions used in determining the fair value of loan servicing rights for the periods shown
are as follows:
Constant prepayment rate
Weighted-average life (years)
Yield to maturity discount
For the Year Ended December 31,
2020
2021
9.3%
5.4
10.3%
14.4%
4.8
8.4%
The fair values of loan servicing rights are approximately $3.8 million and $2.2 million at December 31, 2021
and 2020, respectively.
The following represents servicing and late fees earned in connection with loan servicing rights and is included
in the accompanying consolidated financial statements as a component of noninterest income for the periods
shown:
Servicing fees
Late fees
Note 7 - Deposits
For the Year Ended December 31,
2020
2021
$
(In thousands)
1,013
9
$
452
12
The aggregate amount of time deposits that meet or exceed the FDIC insured limit, currently $250,000, at
December 31, 2021 and 2020, was $75.1 million and $91.7 million, respectively. Deposits and weighted-average
interest rates at the dates indicated are as follows:
December 31, 2021
December 31, 2020
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit
Amount
$ 343,932
196,970
597,815
194,620
247,243
$1,580,580
- 123 -
Weighted-
Average
Interest
Rate
Weighted-
Average
Interest
Rate
Amount
(Dollars in thousands)
% $ 274,930
156,241
429,143
164,434
308,769
0.01%
0.21%
0.05%
0.62%
0.19% $1,333,517
%
0.01%
0.31%
0.17%
1.00%
0.36%
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of certificates at the dates indicated are as follows:
Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years
After five years
December 31, 2021
(In thousands)
$
$
153,472
54,970
17,620
14,358
6,823
247,243
Brokered certificates of deposits of $65.7 million and $89.6 million are included in the December 31, 2021 and
2020 certificate of deposits totals above, respectively.
Deposits at December 31, 2021 and 2020, include $134.1 million and $80.9 million, respectively, in public fund
deposits. Investment securities with a carrying value of $67.9 million and $48.1 million were pledged as
collateral for these deposits at December 31, 2021 and 2020, respectively. This exceeds the minimum collateral
requirements established by the Washington Public Deposit Protection Commission.
Interest on deposits by type for the periods shown was as follows:
Demand deposits
Money market accounts
Savings accounts
Certificates of deposit
Note 8 - Borrowings
For the Year Ended December 31,
2021
2020
(In thousands)
$
$
$
43
1,165
128
2,060
3,396
$
37
1,446
843
4,337
6,663
First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 40% of total
assets, subject to the amount of FHLB stock ownership and certain collateral requirements.
First Fed has entered into borrowing arrangements with the FHLB to borrow funds primarily under long-term,
fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until
paid. First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of
funds. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate,
and multi-family loans receivable in the amounts of $699.5 million and $641.7 million at December 31, 2021
and 2020, respectively. Investment securities with a carrying value of $152,000 were also pledged as collateral
at December 31, 2020. No investment securities were pledged as collateral at December 31, 2021.
First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco
("FRB") to utilize the discount window for short-term borrowing. No funds have been borrowed to
date. Investment securities with a carrying value of $17.2 million were pledged to the FRB at December 31,
2021.
- 124 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-floating
rate subordinated notes due 2031 (the Notes) to certain qualified institutional buyers and institutional
accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3
million after deducting placement agent fees and other offering expenses. The Notes have been structured to
qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net
proceeds of the offering for general corporate purposes and has provided $20.0 million to the Bank as Tier 1
capital.
FHLB advances and subordinated debt outstanding by type of advance were as follows:
December 31, 2021
December 31, 2020
Long-term advances
Overnight variable-rate advances
Subordinated debt
$
(In thousands)
$
80,000
40,000
50,000
59,977
The maximum and average outstanding balances and average interest rates on overnight variable-rate advances
were as follows:
Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average daily interest rates
Annual
Period End
Interest expense during the period
For the Year Ended December 31,
2021
2020
(Dollars in thousands)
$
40,000
5,207
$
100,021
54,548
0.30%
0.31%
6
0.60%
0.32%
132
The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances are
as follows:
Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years
After five years
December 31, 2021
December 31, 2020
Weighted-
Average
Interest
Rate
Weighted-
Average
Interest
Rate
Amount
(Dollars in thousands)
Amount
% $
1.54
1.47
1.42
1.55
1.76
1.52
$
15,000
15,000
25,000
15,000
10,000
80,000
% $
1.79
1.54
1.47
1.36
1.53
$
10,000
15,000
15,000
10,000
50,000
- 125 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maximum and average outstanding balances and average interest rates on FHLB long-term, fixed-rate
advances were as follows:
Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates
Annual
Period End
Interest expense during the period
For the Year Ended December 31,
2021
2020
(Dollars in thousands)
$
80,000
52,500
$
55,000
50,000
1.46%
1.52%
768
1.75%
1.53%
920
The maximum and average outstanding balances and average interest rates on subordinated debt were as follows:
Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates
Annual
Period End
Interest expense during the period
Note 9 - Federal Taxes on Income
For the Year Ended December 31,
2021
2020
(Dollars in thousands)
$
40,000
30,370
$
3.96%
3.01%
1,203
%
%
The provision for income taxes for the periods shown is summarized as follows:
Current
Deferred
For the Year Ended December 31,
2021
2020
$
$
(In thousands)
3,131 $
63
3,194 $
4,085
(1,131)
2,954
A reconciliation of the tax provision (benefit) based on statutory corporate tax rates, estimated to be 21% for the
year ended December 31, 2021, on pre-tax income and the provision (benefit) shown in the accompanying
consolidated statements of income for the periods shown is summarized as follows:
Income taxes computed at statutory rates
Tax-exempt income
Bank-owned life insurance income
Bank-owned life insurance penalty for early surrender of contract
Other, net
For the Year Ended December 31,
2021
2020
$
$
(In thousands)
3,909 $
(218)
(203)
(294)
3,194 $
2,792
(236)
(383)
748
33
2,954
- 126 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated
earnings of approximately $6.4 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.
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.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act,
among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years
beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020, to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.
The Company has evaluated the impact of the CARES Act and determined that none of the changes would result
in a material income tax benefit to the Company.
On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law and extends several
provisions of the CARES Act. As of December 31, 2020, the Company determined that neither this Act nor
changes to income tax laws or regulations in other jurisdictions will have a significant impact on our effective
tax rate.
The Company applies the provisions of FASB ASC 740 that require the application of a more-likely-than-not
recognition criterion for the reporting of uncertain tax positions on its financial statements. The Company had no
unrecognized tax assets at December 31, 2021 and 2020. During the years ended December 31, 2021 and 2020,
the Company recognized no interest and penalties. The Company recognizes interest and penalties in income tax
expense. The Company files income tax returns in the U.S. federal jurisdiction and is no longer subject to U.S.
federal income tax examinations by tax authorities for years ending before December 31, 2017.
- 127 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net deferred tax assets and liabilities at the periods shown are summarized as follows:
December 31,
2021
December 31,
2020
(In thousands)
Deferred tax assets
Allowance for loan losses
Accrued compensation
Nonaccrual loans
ESOP timing differences
Restricted stock awards
Deferred lease liabilities
Total deferred tax assets
Deferred tax liabilities
Deferred loan fees
Unrealized gain on securities available for sale
FHLB stock dividends
Accumulated depreciation
Deferred investment gain
Defined benefit plan
Right of use assets
Other, net
Total deferred tax liabilities
$
$
3,255
461
1
173
312
1,654
5,856
702
569
417
609
341
59
1,595
3
4,295
Deferred tax asset, net
$
1,561
$
2,971
602
1
159
152
868
4,753
605
1,447
421
632
58
840
4
4,007
746
- 128 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Benefit Plans
Multi-employer Pension Plan
The Bank participated in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra DB Plan), a
tax-qualified defined-benefit pension plan that covered substantially all employees after one year of continuous
employment. Pension benefits vested over a period of five years of credited service. The Pentegra DB Plans
Employer Identification Number is 13-5645888 and the Plan Number is 12004. The Pentegra DB Plan operates
as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee
Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code. There are no collective
bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra Defined Benefit
Plan was frozen and no new benefits were allowed as of February 1, 2010.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the
assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a
participating employer may be used to provide benefits to participants of other participating employers.
The table below presents the funded status (market value of plan assets divided by funding target) of the plan as
of July 1:
Source
Our plan
2020
Valuation Report
109.7%
There was no change to the funded status of the plan as of December 31, 2020. First Feds contributions to the
Pentegra DB Plan were not more than 5% of the total contributions to the Pentegra DB Plan. First Feds policy
was to fund pension costs as accrued.
Total contributions during the periods shown were:
Year Ended
December 31, 2020
Date Paid
Amount
(In thousands)
$
12/24/2020
364
Change from Multi-employer to Single-employer Pension Plan
Effective March 23, 2021, the Company withdrew from the Pentegra Defined Benefit Plan for Financial
Institutions ("Pentegra DB Plan") and established the First Federal Defined Benefit Plan ("Bank DB Plan"), a
single-employer plan. On March 23, 2021, all assets and liabilities were transferred from the Pentegra DB Plan
to the newly established Bank DB Plan.
The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available
under the plan are frozen. The plan provides defined benefits based on years of service and final average salary
prior to the freeze. The Company uses December 31 as the measurement date for this plan. The initial
measurement period will be March 23, 2021 December 31, 2021.
- 129 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of plan assets and projected benefit obligation on the March 23, 2021, Bank DB Plan adoption
date were $14,705,000 and $14,197,000, respectively. A $2,717,599 cash contribution was made to the Pentegra
DB Plan in March 2021 prior to the transition. A prior service cost of $1.6 million, net of tax, was included in
accumulated other comprehensive loss on the Company's balance sheet at December 31, 2021. The prior service
cost is expected to be amortized over 15 years.
Fair value, January 1
Actual return on plan assets
Company contributions
Settlements and curtailments
Benefits paid
Federal subsidy on benefits paid
Fair value, December 31
Change in projected benefit obligation
Projected benefit obligation, January 1
Service cost
Interest cost
Plan amendments
Settlements and curtailments
Actuarial loss
Benefits paid
Federal subsidy on benefits paid
Projected benefit obligation, December 31
Amounts recognized on Consolidated Balance Sheet
Other assets
Accumulated other comprehensive income
Net amount recognized, December 31
Funded status, December 31
Accumulated benefit obligation
Overfunded (underfunded) status of ABO
Provision for future salaries
Projected benefit obligation
Weighted-average assumptions, December 31
Discount rate
Rate of compensation increase
Interest-crediting rate
December 31, 2021
(Dollars in thousands)
14,705
$
1,618
(502)
15,821
14,197
304
1,329
(502)
15,328
493
(1,852)
2,345
15,328
493
15,328
2.65%
N/A
0.00%
- 130 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not expect to make a contribution to the Bank DB Plan in 2022. It is the policy of the
Company to fund no less than the minimum funding amount required by ERISA.
For the Year Ended
December 31, 2021
(Dollars in thousands)
Components of Net Period Benefit Cost (Income)
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Other
Net periodic benefit cost (income)
Other changes recognized in other comprehensive income
Net (gain) loss
Amortization of prior service (cost) credit
Other
Net periodic benefit cost (income)
Weighted-average assumptions used to determine net cost
$
$
Discount rate
Expected return on plan assets
Rate of compensation increase
304
(538)
(26)
(260)
249
26
275
2.65%
5.75%
N/A
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the
target asset allocation of the plan and the Long-Term Capital Market Assumptions for the corresponding fiscal
year end. Gains and losses are recognized in accordance with the standard amortization provisions of the
applicable accounting guidance. The Company's net periodic benefit income recognized for the Bank DB Plan is
sensitive to the discount rate and expected return on plan assets.
From initial funding in the first quarter of 2021 through December 31, 2021, the Bank DB Plan assets have been
invested primarily in fixed income and large U.S. equity funds, with additional investments in international
equity, real estate, and small/mid-range U.S. equity funds. The target allocations for 2022 by asset category are
presented in the table below.
Asset Category
Fixed Income
U.S. Equities
Non-U.S. Equities
Real Assets
80% - 100%
10% - 30%
0% - 20%
0% - 10%
- 131 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Benefit payments projected to be made from the Bank DB Plan are as follows:
December 31, 2021
(Dollars in thousands)
Estimated future benefit payments
2022
2023
2024
2025
2026
Years 2027 - 2031
Thereafter
Projected benefit obligation
$
$
2,390
900
1,010
870
700
3,980
5,478
15,328
Fair value measurements, including descriptions of Level 1, 2, and 3 of the fair value hierarchy and the valuation
methods employed by the Company are provided in Note 14 - Fair Value Measurements. Plan investment assets
measured at fair value by level and in total are as follows:
December 31, 2021
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
4,848 $
781
1,389
7,769
1,034
(In thousands)
$
$
15,821 $
$
$
$
Total
4,848
781
1,389
7,769
1,034
15,821
Large U.S. Equity
Small/Mid U.S. Equity
International Equity
Fixed Income
Other
Nonqualified Deferred Compensation Plan
First Fed also sponsors a nonqualified Deferred Compensation Plan for members of the Board of Directors and
eligible officer-level employees. This plan, approved by the Board on February 1, 2012, allows eligible
participants to defer and invest a portion of their earnings in a selection of investment options identified in the
plan at no expense to First Fed. All deferrals are remitted to Principal, the Plan Administrator, and held in a trust.
The aggregate balance held in trust at December 31, 2021, was $1.3 million.
The Company also has agreements with certain key officers that provide for potential payments upon retirement,
disability, termination, change in control and death.
- 132 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) Plan
First Fed maintains a single-employer 401(k) plan. Employees may contribute up to 100% of their pre-tax
compensation to the 401(k) plan, subject to regulatory limits. First Fed provides matching funds of 50% limited
to the first 6% of salary contributed. First Fed's contributions were $569,000 and $380,000 during the years
ended December 31, 2021 and December 31, 2020, respectively.
Employee Stock Ownership Plan
In connection with the mutual to stock conversion, the Company established an ESOP for eligible employees of
the Company and the Bank. Employees of the Company who have been credited with at least 1,000 hours of
service during a 12-month period are eligible to participate in the ESOP.
Pursuant to the Plan, the ESOP purchased in the open market 8% of the common stock originally issued in the
mutual to stock conversion. As of December 31, 2021, 1,048,029 shares, or 100% of the total, have been
purchased in the open market at an average price of $12.45 per share with funds borrowed from First Northwest.
The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First
Northwest over a period of 20 years, bearing estimated interest at 2.46%.
Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP
participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. The
loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the
Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest
payments of $835,000 were made by the ESOP during the years ended December 31, 2021 and 2020.
As shares are committed to be released from collateral, the Company reports compensation expense equal to the
average daily market prices of the shares and the shares become outstanding for EPS computations. The
compensation expense is accrued monthly throughout the year. Dividends on allocated and unallocated ESOP
shares will be recorded as a reduction of debt and accrued interest.
Compensation expense related to the ESOP for the years ended December 31, 2021 and 2020, was $675,000 and
$475,000, respectively.
Shares issued to the ESOP as of the dates indicated are as follows:
Allocated shares
Committed-to-be-released shares
Unallocated shares
December 31, 2021
December 31, 2020
(Dollars in thousands)
333,396
26,442
688,191
280,507
26,442
741,080
Total ESOP shares issued
1,048,029
1,048,029
Fair value of unallocated shares
$
13,901
$
11,561
- 133 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based Compensation
On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity
Incentive Plan (the "2015 EIP"), which provided for the grant of incentive stock options, non-qualified stock
options, restricted stock and restricted stock units to eligible participants. The cost of awards under the 2015 EIP
generally is based on the fair value of the awards on their grant date. Shares of common stock issued under the
EIP may be authorized but unissued shares or repurchased shares. During the year ended June 30, 2017, the
Company purchased and retired 523,014 shares of common stock to be used for future stock awards.
In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan
("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock shares or restricted stock units, and performance share awards to
eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair
value of the awards on their grant date. The maximum number of shares that may be utilized for awards under
the 2020 EIP is 520,000. At December 31, 2021, there were 344,537 total shares available for grant under the
2020 EIP, all of which are available to be granted as restricted shares. Following adoption of the 2020 EIP, no
additional awards may be made under the 2015 EIP. At December 31, 2021, 103,520 restricted shares are
outstanding under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.
During the years ended December 31, 2021 and 2020, restricted awards for 102,033 and 161,224 shares were
awarded, respectively, and no stock options were granted. Restricted shares vest ratably over periods of up to
five years from the date of grant provided the eligible participant remains in service to the Company. The
Company recognizes compensation expense for the restricted awards based on the fair value of the shares at the
grant date amortized over the stated period.
For the years ended December 31, 2021 and 2020, total compensation expense for the 2015 and 2020 EIPs
was $1.8 million and $1.3 million, respectively.
Included in the above compensation expense for the years ended December 31, 2021 and 2020, was directors'
compensation of $368,000 and $358,000, respectively.
The following tables provide a summary of changes in non-vested restricted awards for the periods shown:
Non-vested at January 1, 2021
Granted
Vested
Canceled (1)
Forfeited
Non-vested at December 31, 2021
For the Year Ended
December 31, 2021
Shares
Weighted-Average Grant
Date Fair Value
292,892 $
102,033
(101,751)
(19,548)
(37,194)
236,432
13.96
18.49
13.63
13.63
13.30
16.19
(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current
stock price at the vesting date to cover the participant's tax obligation of the vested shares. The surrendered
shares are canceled and are unavailable for reissue.
- 134 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, there was $3.0 million of total unrecognized compensation cost related to non-vested
restricted shares. The cost is expected to be recognized over the remaining weighted-average vesting period of
approximately 2.26 years.
Note 11 - Regulatory Capital Requirements
Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion
depositors. The Company is a bank holding company under the supervision of the Federal Reserve Bank of San
Francisco. 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.
The Bank is a federally insured institution and thereby is subject to the capital requirements established by the
FDIC. The Federal Reserve Board capital requirements generally parallel the FDIC requirements. 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 guidelines that involve quantitative measures of the Banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and
classification 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.
The minimum requirements are a ratio of common equity Tier 1 capital ("CET1 capital") to total risk-weighted
assets the ("CET1 risk-based ratio") of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a
leverage ratio of 4.0%. In addition to the minimum regulatory capital ratios, First Northwest Bancorp and First
Fed must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-
weighted assets in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses based on percentages of retained income that could be utilized for such actions. At
December 31, 2021, the Bank's CETI capital exceeded the required capital conservation buffer.
At periodic intervals, banking regulators routinely examine First Northwest and First Fed as part of their legally
prescribed oversight of the banking industry. A future examination could include a review of certain transactions
or other amounts reported in the Company's consolidated financial statements. Based on these examinations, the
regulators can direct that the Company's consolidated financial statements be adjusted in accordance with their
findings. In view of the uncertain regulatory environment in which First Northwest and First Fed operate, the
extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the
accompanying consolidated financial statements cannot presently be determined.
At December 31, 2021, First Fed exceeded all regulatory capital requirements. As of December 31, 2021, the
most recent regulatory notifications categorized First Fed as "well capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total
risk-based, CET1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management believes have changed First Feds
category.
- 135 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual and required capital amounts and ratios are presented for First Fed in the following table:
Actual
Amount
Ratio
For Capital Adequacy
Purposes
Amount
(Dollars in thousands)
Ratio
To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action Provision
Ratio
Amount
As of December 31, 2021
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
As of December 31, 2020
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
$ 196,319
196,319
211,828
196,319
$ 159,842
159,842
173,998
159,842
Note 12 - Related Party Transactions
13.79% $
13.79
14.88
10.56
64,081
85,442
113,923
74,362
4.50% $
6.00
8.00
4.00
92,562
113,923
142,403
92,953
13.40% $
13.40
14.59
10.28
53,678
71,571
95,427
62,194
4.50% $
6.00
8.00
4.00
77,535
95,427
119,284
77,742
6.50%
8.00
10.00
5.00
6.50%
8.00
10.00
5.00
Certain directors and executive officers are also customers who transact business with First Fed. All loans and
commitments included in such transactions were made in compliance with applicable laws on substantially the
same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions
with other persons and do not involve more than the normal risk of collectability or present any other
unfavorable features.
The following table presents the activity in loans to directors and executive officers for the periods shown:
Beginning balance
Loan advances
Loan repayments
Reclassifications (1)
Ending balance
For the Year Ended December 31,
2021
2020
(In thousands)
$
$
$
143
1
(11)
(133)
$
689
4
(550)
143
(1) Represents loans that were once considered related party but are no longer considered related party or loans
that were not related party that subsequently became related party loans.
Deposits and certificates from related parties totaled $3.2 million and $3.0 million at December 31, 2021 and
2020, respectively.
- 136 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Commitments and Contingencies
First Fed is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments generally represent a commitment to extend
credit in the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheets.
First Feds exposure to credit loss, in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit, is represented by the contractual notional amount of those instruments. First
Fed uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
Management does not anticipate any material loss as a result of these transactions.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established by the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of these commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First
Fed evaluates each customers creditworthiness on a case-by-case basis. First Fed did not incur any significant
losses on its commitments for the years ended December 31, 2021, and 2020.
The following financial instruments were outstanding whose contract amounts represent credit risk at:
December 31, 2021
December 31, 2020
Commitments to grant loans
Standby letters of credit
Unfunded commitments under lines of credit or existing loans
$
(In thousands)
2,720
212
270,273
$
1,629
182
212,114
Variable Interests - Low Income Housing Tax Credit Investments - The carrying value of the unconsolidated
LIHTC investment was $4.9 million and $0 as of December 31, 2021 and 2020, respectively. During the years
ended December 31, 2021 and 2020, the Company recognized no tax benefit or proportional amortization.
Total unfunded contingent commitments related to the Companys LIHTC investment totaled $4.7 million and
$0 at December 31, 2021 and 2020, respectively. The Company expects to fund LIHTC commitments of
$1.2 million during the year ending December 31, 2023 and $3.4 million during the year ending December 31,
2024, with the remaining commitments of $87,000 funded by December 31, 2035. There were no impairment
losses on the Companys LIHTC investment during the years ended December 31, 2021 and 2020.
Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which,
in the opinion of management, have no current material effect on First Feds consolidated financial statements.
Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack
of diversification, such as having substantial loan concentrations in a specific type of loan within First Feds loan
portfolio, thereby exposing First Fed to greater risks resulting from adverse economic, political, regulatory,
geographic, industrial, or credit developments. Loans to one borrower are subject to the state banking regulations
general limitation of 20 percent of First Feds equity, excluding accumulated other comprehensive income. At
December 31, 2021 and 2020, First Feds most significant concentration of credit risk was in loans secured by
real estate. These loans totaled approximately $1.12 billion and $929.2 million, or 82.5% and 80.5%, of First
Feds total loan portfolio at December 31, 2021 and 2020, respectively. Real estate construction, including land
acquisition and land development, commercial real estate, multi-family, home equity, and one- to four-family
residential loans, are included in the total loans secured by real estate for purposes of this calculation.
- 137 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2021 and 2020, First Feds most significant investment concentration of credit risk was with
the U.S. Government, its agencies, and Government-Sponsored Enterprises (GSEs). First Feds exposure, which
results from positions in securities issued by the U.S. Government, its agencies, and securities guaranteed by
GSEs, was $99.8 million and $151.0 million, or 28.6% and 40.8%, of First Feds total investment portfolio
(including FHLB stock) at December 31, 2021 and 2020, respectively. At December 31, 2021, First Fed's second
most significant exposure was from municipal bonds totaling $113.4 million, or 32.4%, of the total investment
portfolio.
Note 14 - Fair Value Measurements
Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants
in the Companys principal market. The Company has established and documented its process for determining
the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when
available, for identical or similar assets or liabilities. In the absence of quoted market prices, management
determines the fair value of the Companys assets and liabilities using valuation models or third-party pricing
services, both of which rely on market-based parameters when available, such as interest rate yield curves,
option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on
managements judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other
relevant inputs.
Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified.
Valuation methodologies are refined as more market-based data becomes available.
A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs
used in the valuation process. The inputs used in determining fair value in each of the three levels of the
hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or
yield curves; or (iii) inputs derived principally from or corroborated by observable market data.
Level 3 - Unobservable inputs.
The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in
the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the
lowest level input that is significant to the overall fair value measurement.
Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are
available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid
government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.
If quoted prices are not available, management determines fair value using pricing models, quoted prices of
similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited
activity in the market for a particular instrument, assumptions must be made to determine their fair value. Such
instruments are classified as Level 3.
- 138 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be
fair valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The
following tables show the Companys assets and liabilities measured at fair value on a recurring basis at the
dates indicated:
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
December 31, 2021
Significant
Other
Observable
Inputs
(Level 2)
(In thousands)
Significant
Unobservable
Inputs
(Level 3)
Total
5,902 $
6,061
107,462 $
1,920
14,489
14,680
53,728
79,962
60,008
3,071
11,963 $
335,320 $
$ 113,364
1,920
14,489
14,680
59,789
79,962
60,008
3,071
$ 347,283
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
December 31, 2020
Significant
Other
Observable
Inputs
(Level 2)
(In thousands)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
127,862 $
63,820
29,280
18,564
32,970
62,683
20,205
1,260
356,644 $
$ 127,862
63,820
29,280
18,564
35,510
2,540
62,683
26,577
6,372
1,260
8,912 $ 365,556
$
$
$
$
Securities available for sale
Municipal bonds
Agency bonds
ABS corporate
SBA
Corporate debt
MBS agency
MBS corporate
Equity investments
Securities available for sale
Municipal bonds
ABS agency
ABS corporate
SBA
Corporate debt
MBS agency
MBS corporate
Equity investments
- 139 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant unobservable inputs in the fair value measurement of the Company's Level 3 securities are noted
below. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair
value measurement.
The following table presents quantitative information about recurring Level 3 fair value measurements at the
date indicated:
December 31, 2020
Corporate debt
$
Fair Value (In
thousands)
Valuation
Technique
1,540 Consensus pricing
1,000 Consensus pricing
MBS corporate
6,372 Consensus pricing
Unobservable Input
Offered quotes
Comparability
adjustments (%)
Offered quotes
Comparability
adjustments (%)
Offered quotes
Comparability
adjustments (%)
Range (a)
89 - 91
-0.7% - +1.3%
92 - 100
-7.4% - 0%
104 - 107
-1.5% - +1.5%
(a) Unobservable inputs were weighted by the relative fair value of the instruments.
The following table summarizes the changes in Level 3 assets measured at fair value on a recurring basis at the
dates indicated:
December 31, 2021
Securities available for sale
Corporate debt
MBS corporate
Balance at
January 1,
2021
Transfers
Out of
Level 3 (1)
Purchases
(In thousands)
Unrealized
Total
$
$
2,540
6,372
8,912
$
$
(2,540) $
(6,372)
(8,912) $
$
$
$
$
(1) Transferred from Level 3 to Level 2 after obtaining observable market data.
Securities available for sale
Corporate debt
MBS corporate
December 31, 2020
Balance at
January 1,
2020
Transfers
Into Level 3
(1)
Purchases
(In thousands)
Unrealized
Total
$
$
$
$
1,540
1,540
$
$
1,000
6,372
7,372
$
$
$
$
2,540
6,372
8,912
(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no
market activity for the securities.
- 140 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets measured at fair value on a nonrecurring basis - Assets are considered to be fair valued on a
nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the
amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the
application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or
recorded at the lower of cost or fair value.
The following tables present the Companys assets measured at fair value on a nonrecurring basis at the dates
indicated:
Impaired loans
Impaired loans
Real estate owned and repossessed assets
Level 1
December 31, 2021
Level 3
Level 2
Total
$
(In thousands)
$
3,195 $
3,195
Level 1
December 31, 2020
Level 3
Level 2
Total
$
$
(In thousands)
$
$
5,511 $
2
5,513 $
5,511
2
5,513
$
$
$
During the years ended December 31, 2021 and 2020, there were no impaired loans with discounts to appraisal
disposition value. The following table presents the techniques used to value assets measured at fair value on a
nonrecurring basis at the dates indicated:
December 31, 2020
Valuation
Technique
Unobservable
Input
Range (Weighted-
Average) (1)
Fair Value
(In thousands)
Real estate owned and
repossessed assets
$
Market
comparable
2
Discount to
appraisal
0% - 10%(5%)
(1) Discount to appraisal disposition value.
- 141 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the carrying value and estimated fair value of financial instruments at the dates
indicated:
December 31, 2021
Carrying
Amount
Estimated
Fair
Value
Fair Value Measurements Using:
Level 1
Level 3
Level 2
(In thousands)
Financial assets
Cash and cash equivalents
Investment securities available for sale
Loans held for sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Servicing rights on sold loans, net
Equity investments
Financial liabilities
Demand deposits
Time deposits
Borrowings
Subordinated debt, net
Accrued interest payable
$ 126,016 $ 126,016 $ 126,016 $
347,283
760
1,328,589
5,196
5,289
3,820
3,071
344,212
760
1,350,260
5,196
5,289
3,282
3,071
11,963
$
335,320
760
1,328,589
3,820
5,196
5,289
3,071
$1,333,337 $1,333,337 $1,333,337 $
247,217
80,192
39,144
393
247,243
80,000
39,280
393
$
393
247,217
80,192
39,144
December 31, 2020
Carrying
Amount
Estimated
Fair
Value
Fair Value Measurements Using:
Level 1
Level 3
Level 2
(In thousands)
Financial assets
Cash and cash equivalents
Investment securities available for sale
Loans held for sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Servicing rights on sold loans, net
Equity investments
$
65,155 $
364,296
3,753
1,141,969
5,977
6,966
2,120
1,260
65,155 $
365,556
3,753
1,129,570
5,977
6,966
2,189
1,260
65,155 $
356,644
3,753
$
8,912
1,129,570
2,189
5,977
6,966
1,260
Financial liabilities
Demand deposits
Time deposits
Borrowings
Accrued interest payable
$1,024,748 $1,024,748 $1,024,748 $
310,992
111,462
53
308,769
109,977
53
$
310,992
111,462
53
- 142 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 - Earnings per Common Share
The two-class method is used for computing basic and diluted earnings per share. Under the two-class method,
EPS is determined for each class of common stock and participating security according to dividends declared
and participating rights in undistributed earnings. The Company has issued restricted shares under share-based
compensation plans which qualify as participating securities.
The following table presents a reconciliation of the components used to compute basic and diluted earnings per
share for the periods shown.
Net income:
Net income available to common shareholders
Earnings allocated to participating securities
Earnings allocated to common shareholders
Basic:
Weighted average common shares outstanding
Weighted average unvested restricted stock awards
Weighted average unallocated ESOP shares
Total basic weighted average common shares outstanding
Diluted:
Basic weighted average common shares outstanding
Dilutive restricted stock awards
Total diluted weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per common share
For the Year Ended December 31,
2021
2020
(In thousands, except share data)
$
$
$
$
15,418
(505)
14,913
$
$
10,340
(292)
10,048
10,151,946
(310,088)
(707,905)
9,133,953
10,407,042
(270,991)
(765,273)
9,370,778
9,133,953
94,787
9,228,740
9,370,778
31,420
9,402,198
1.63
1.63
$
$
1.07
1.07
Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. For the years
ended December 31, 2021 and 2020, anti-dilutive shares as calculated under the treasury stock method
totaled 115 and 33,208, respectively.
- 143 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Parent Company Only Financial Statements
Presented below are the condensed balance sheet, statement of operations, and statement of cash flows for First
Northwest Bancorp.
FIRST NORTHWEST BANCORP
Condensed Balance Sheets
(In thousands)
December 31, 2021
December 31, 2020
ASSETS
Cash and due from banks
Investment in bank
Investment in equity securities
ESOP loan receivable
Commercial business loan receivable
Accrued interest receivable
Prepaid expenses and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Subordinated debt, net
Interest payable
Payable to subsidiary
Other liabilities
Total liabilities
Shareholders' equity
$
$
$
$
14,087
198,660
2,588
9,576
5,000
300
525
8,655
165,285
1,260
10,164
126
1,069
230,736
$
186,559
$
39,280
375
96
24
39,775
72
104
176
190,961
186,383
Total liabilities and shareholders' equity
$
230,736
$
186,559
- 144 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST NORTHWEST BANCORP
Condensed Statements of Income
(In thousands)
Operating income:
Interest and fees on loans receivable
Interest on mortgage-backed and related securities
Interest on investment securities
Gain (loss) on sale of securities
Unrealized gain (loss) on equity securities
Dividends from Bank
Total operating income
Operating expenses:
Interest paid on subordinated debt, net
Other expenses
Total operating expenses
(Loss) income before benefit for income taxes and equity in
undistributed earnings of subsidiary
Benefit for income taxes
(Loss) income before equity in undistributed earnings of subsidiary
Equity in undistributed earnings of subsidiary
For the Year Ended December 31,
2021
2020
$
$
420
788
1,000
2,208
1,203
1,759
2,962
(754)
(368)
(386)
16,804
254
58
105
250
(140)
2,000
2,527
875
875
1,652
(73)
1,725
10,615
Net income
$
16,418
$
12,340
- 145 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST NORTHWEST BANCORP
Condensed Statement of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed earnings of subsidiary
Amortization of premiums and accretion of discounts on
investments, net
Amortization of debt issuance costs
Gain on sale of securities available for sale
Share-based compensation
Change in payable to subsidiary
Change in other assets
Change in other liabilities
Net cash from operating activities
Cash flows from investing activities:
Proceeds from maturities, calls, and principal repayments of
securities available for sale
Proceeds from sales of securities available for sale
Dividend paid to subsidiary
Loan originations, net of repayments
ESOP loan repayment
Investment in equity securities
For the Year Ended December 31,
2021
2020
$
16,418
$
12,340
(16,804)
(10,615)
57
500
24
(421)
295
69
(20,000)
(5,000)
588
(584)
50
(250)
(105)
(171)
81
1,330
2,065
9,872
576
(1,401)
Net cash from investing activities
(24,996)
11,112
Cash flows from financing activities:
Proceeds from issuance of subordinated debt, net
Repurchase of common stock
Payment of dividends
Net cash from financing activities
Net increase in cash
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for income taxes
Cash paid during the year for interest on borrowings
- 146 -
39,223
(6,331)
(2,533)
30,359
5,432
8,655
14,087
$
(987) $
$
771
(7,591)
(2,185)
(9,776)
2,666
5,989
8,655
360
$
$
$
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Business Combination
On July 23, 2021, the Bank acquired certain assets and assumed liabilities of the Sterling Bank and Trust of
Southfield, Michigan ("Sterling") upon purchasing their sole branch located in Washington State. As a result of
the Sterling transaction, the Bank has established a presence in Bellevue, Washington, and expanded its deposit
base. Total consideration paid under the Sterling transaction consisted of $63.5 million in cash. There were no
transfers of common stock or other equity instruments in connection with the transaction, and the Bank did not
obtain any equity interests in Sterling.
The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their
estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the
fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the
transaction consists largely of a premium paid for the deposit accounts.
In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required
the Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash
flows at the appropriate rate of interest. Differences may arise between contractually required payments and the
expected cash flows at the acquisition date due to items such as prepayments or early withdrawals, and other
factors. Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the
transaction, the Bank purchased certain assets and assumed certain liabilities of Sterling but did not acquire any
equity or other ownership interests.
The following table summarizes the fair value of consideration transferred, the estimated fair values of assets
acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction
(in thousands):
Book Value
At July 23, 2021
Fair Value
Adjustment
(In thousands)
Estimated Fair
Value
$
63,545
$
$
$
459
755
1,214
65,096 $
1,080
66,176
(64,962)
126 $
126
(229) $
(229)
355
$
126
459
755
1,340
64,867
1,080
65,947
(64,607)
1,062
Cash consideration received
Recognized amounts of identifiable assets acquired and
liabilities assumed
Identifiable assets acquired
Core deposit intangible ("CDI")
Premises and equipment
Accrued interest receivable and other assets
Total identifiable assets acquired
Liabilities assumed
Deposits
Accrued expenses and other liabilities
Total liabilities assumed
Total identifiable net liabilities assumed
Goodwill recognized
- 147 -
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as
part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring
core deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to
non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period
of ten years. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for
prospectively over the revised remaining life.
Note 18 - Change in Accumulated Other Comprehensive Income ("AOCI")
Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit
plan prior service cost. The following table presents changes to accumulated other comprehensive income after-
tax for the periods shown:
Unrealized
Gains and
Losses on
Available-for-
Sale Securities
Unrecognized
Defined
Benefit Plan
Prior Service
Cost, Net of
Amortization
(In thousands)
BALANCE, December 31, 2019
Other comprehensive income before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net other comprehensive income
BALANCE, December 31, 2020
BALANCE, December 31, 2020
Other comprehensive loss before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net other comprehensive loss
BALANCE, December 31, 2021
$
$
$
$
(1,539) $
9,467
(2,486)
6,981
5,442 $
5,442 $
(1,398)
(1,904)
(3,302)
2,140 $
$
$
$
(1,852)
(1,852)
(1,852) $
Total
(1,539)
9,467
(2,486)
6,981
5,442
5,442
(3,250)
(1,904)
(5,154)
288
- 148 -
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure controls and procedures
An evaluation of the Companys disclosure controls and procedures (as defined in Section 13a-15(e) of
the Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation
of the Companys Chief Executive Officer, Chief Financial Officer and several other members of the Companys
senior management as of the end of the period covered by this report. The Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures in effect as of
December 31, 2021 were effective in ensuring that the information required to be disclosed by the Company in
the reports it files or submits under the Act was (i) accumulated and communicated to the Companys
management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
Management's report on internal control over financial reporting. First Northwest Bancorp's
management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) of the Act. 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 the Company; 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.
The Company's management assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2021. 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, the Company's management believes that, as of
December 31, 2021, First Northwest Bancorp's internal control over financial reporting is effective based on
those criteria.
- 149 -
Moss Adams LLP, an independent registered public accounting firm, has audited the Company's
consolidated financial statements as of December 31, 2021, which is included in Item 8. Financial Statements
and Supplementary Data.
Changes in Internal Controls. There have been no changes in the Companys internal control over
financial reporting for the year ended December 31, 2021 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding the Company's directors contained under the section captioned "Proposal 1
Election of Directors" in the Companys proxy statement, a copy of which will be filed with the SEC no later
than 120 days after December 31, 2021, (the "Proxy Statement"), is incorporated herein by reference.
For information regarding the executive officers of the Company and the Bank, see the information
contained under the section captioned "Item 1. Business - Information About Our Executive Officers," which is
incorporated by reference.
The Company has an audit committee. The members of the Audit Committee are directors Sherilyn
Anderson (Chairperson), Stephen Oliver, Dana Behar, Cindy Finnie, and Jennifer Zaccardo. Each member of the
Audit Committee is "independent" as defined in the Nasdaq Stock Market listing standards. The Board of
Directors has determined that Ms. Zaccardo meets the definition of "audit committee financial expert," as
defined by the SEC.
The Board of Directors has adopted a Code of Ethics for the Companys officers (including its principal
executive officer and senior financial officers), directors and employees. The Companys Code of Ethics is
posted on the Investor Relations section of our website at www.ourfirstfed.com.
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934
included in the section captioned "Delinquent Section 16(a) Reports" in the Proxy Statement is incorporated
herein by reference.
There have been no material changes to the procedures by which shareholders may recommend
nominees to the Company's Board of Directors.
Item 11. Executive Compensation
The information contained in the sections captioned "Executive Compensation" and
"Director Compensation" in the Proxy Statement is incorporated herein by reference.
- 150 -
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information contained in the sections captioned "Principal Shareholders" and "Beneficial
Ownership by Directors and Named Executive Officers" in the Proxy Statement is incorporated herein by
reference.
The following table summarizes share and exercise price information about First Northwest Bancorp's
equity compensation plans as of December 31, 2021.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
N/A
N/A
N/A
344,537
N/A
344,537
Plan category
Equity compensation plans approved by
security holders:
First Northwest Bancorp 2020 Equity
Incentive Plan (1)
Equity compensation plans not approved by
security holders
Total
(1) Shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan (the '2020 Plan') on May 5,
2020. As of December 31, 2021, 132,912 restricted shares were outstanding under the 2020 Plan and no
stock options have been awarded. The restricted shares will vest in equal annual installments over periods of
up to three years. All of the shares shown in column (c) may be granted under the 2020 Plan in the form of
restricted shares, as well as other types of awards. No additional awards may be made under the First
Northwest Bancorp 2015 Equity Incentive Plan (the '2015 Plan'), which was approved by shareholders on
November 16, 2015. As of December 31, 2021, 103,520 restricted shares and no options remained
outstanding under the 2015 Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information contained in the sections captioned "Corporate Governance and Board Matters
Transactions with Related Persons" and "Corporate Governance and Board Matters Director Independence" in
the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information contained under the section captioned "Proposal 5 Ratification of Appointment of
Independent Auditor" in the Proxy Statement is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)
1. Financial Statements.
For a list of the financial statements filed as part of this report see Part II Item 8.
- 151 -
2. Financial Statement Schedules.
All schedules have been omitted as the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in Part II, Item 8, "Financial Statements and
Supplementary Data," of this Form 10-K.
3. Exhibits required by Item 601 of Regulation S-K:
Exhibit Description
Filed
Herewith Form
Original
Exhibit
No.
Filing
Date
Exhibit
No.
3.1
3.2
4.1
4.2
10.1*
10.2*
Articles of Incorporation of First Northwest Bancorp, as
amended through August 28, 2014
Bylaws of First Northwest Bancorp as amended effective
January 22, 2019
Indenture, Including Forms of 3.75% Fixed-to-Floating
Rate Subordinated Notes due 2031
Description of Common Stock
First Northwest Bancorp 2015 Equity Incentive Plan
Form of First Northwest Bancorp 2015 Equity Incentive
Plan Restricted Stock Award Agreement as amended
effective November 23, 2020
Employment Agreement with Matthew P. Deines dated
December 7, 2021
Form of Executive Employment Agreement with Terry A.
Anderson, Derek J. Brown, Geraldine L. Bullard, Kelly A.
Liske, and Christopher J. Riffle
First Northwest Bancorp 2020 Equity Incentive Plan
Form of First Northwest Bancorp 2020 Equity Incentive
Plan Restricted Share Award Agreement
10.7*
First Federal Fiscal 2021 Cash Incentive Plan
10.8* Non-Employee Director Compensation Policy
10.5*
10.6*
10.3*
10.4*
10-K
3.1
3/15/2019
10-K
3.2
3/15/2019
8-K
10-K
10-K
4.1
4.1
10.1
3/25/2021
3/9/2020
3/15/2019
10-K
10.2
3/15/2021
8-K
10.1
12/9/2021
10-K
10-Q
10-Q
10-Q
10-K
10.4
10.4
10.1
10.3
10.9
3/15/2019
5/11/2020
8/10/2020
5/14/2021
3/9/2020
21
23
31.1
31.2
32
101
104
X
X
X
Subsidiaries of First Northwest Bancorp
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
The following materials from First Northwest Bancorp's Annual Report on Form 10-K for the year
ended December 31, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (1)
Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements
of Comprehensive Income; (4) Consolidated Statements of Changes in Shareholders' Equity; (5)
Consolidated Statements of Cash Flows; and (6) Notes to Consolidated Financial Statements
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101
* Denotes a management contract or compensatory plan or arrangement.
X
X
Item 16. Form 10-K Summary
None.
- 152 -
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 18, 2022
FIRST NORTHWEST BANCORP
By:
/s/Matthew P. Deines
Matthew P. Deines
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
By:
By:
By:
By:
By:
By:
/s/Matthew P. Deines
Matthew P. Deines
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/Geraldine L. Bullard
Geraldine L. Bullard
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/Stephen E. Oliver
Stephen E. Oliver
Chairman of the Board and Director
/s/Sherilyn G. Anderson
Sherilyn G. Anderson
Director
/s/Dana D. Behar
Dana D. Behar
Director
/s/Craig A. Curtis
Craig A. Curtis
Director
/s/Cindy H. Finnie
Cindy H. Finnie
Director
March 18, 2022
March 18, 2022
March 18, 2022
March 18, 2022
March 18, 2022
March 18, 2022
March 18, 2022
- 153 -
By:
By:
By:
/s/ Gabriel S. Galanda
Gabriel Galanda
Director
/s/Norman J. Tonina, Jr.
Norman J. Tonina, Jr.
Director
/s/Jennifer Zaccardo
Jennifer Zaccardo
Director
March 18, 2022
March 18, 2022
March 18, 2022
- 154 -
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Corporate Information
FIRST NORTHWEST BANCORP OFFICERS
Matthew P. Deines - President and Chief Executive Officer
Geraldine L. Bullard - Executive Vice President,
Chief Financial Officer and Treasurer
Allison R. Mahaney - Senior Vice President,
General Counsel / Corporate Secretary
FIRST FED OFFICERS
Matthew P. Deines - President and Chief Executive Officer
Terry A. Anderson - Executive Vice President and
Chief Credit Officer
Derek J. Brown - Executive Vice President and
Chief of Human Resources and Marketing Officer
Geraldine L. Bullard - Executive Vice President,
Chief Financial Officer and Treasurer
Kelly A. Liske - Executive Vice President and
Chief Banking Officer
Christopher J. Riffle - Executive Vice President,
Chief Operating Officer / Chief Digital Officer
Christopher W. Neros - Executive Vice President,
Chief Lending Officer
BOARD OF DIRECTORS
Stephen E. Oliver - Chairperson
Cindy H. Finnie - Vice Chairperson
Sherilyn G. Anderson
Dana D. Behar
Craig A. Curtis
Matthew P. Deines
Gabriel S. Galanda
Norman J. Tonina, Jr.
Jennifer Zaccardo
ANNUAL MEETING
May 24, 2022 at 4:00 p.m. PT
In Person: 7 Cedars Hotel, 270756 Highway 101
Sequim, Washington 98382
or
Virtual: www.proxydocs.com/FNWB
LEGAL COUNSEL
Miller Nash LLP
Pier 70, 2801 Alaskan Way, Suite 300
Seattle, WA 98121
20 21 ANNUAL REPORT
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Moss Adams LLP
2707 Colby Avenue, Suite 801
Everett, WA 98201
TRANSFER AGENT
Computershare
P.O. Box 505000
Louisville, KY 40233
(866) 289-7521
WEBSITE ADDRESS
www.ourfirstfed.com
MARKET INFORMATION
First Northwest Bancorp is traded on the NASDAQ
Global Select Market under the symbol FNWB.
CORPORATE PROFILE
First Northwest Bancorp, a Washington corporation, is the
bank holding company for First Fed Bank. First Fed is a
community-oriented financial institution serving Western
Washington with offices in Clallam, Jefferson, King, Kitsap,
and Whatcom counties. First Fed has twelve full-service
branches and two business centers.
CUSTOMER CONTACT CENTER
(360) 417-3204 / (800) 800-1577 toll-free
Hours:
M-F 7:00 am - 7:00 pm
Sat 9:00 am - 1:00 pm
FINANCIAL INFORMATION
Requests for copies of our Form 10-K and Forms 10-Q filed
with the Securities and Exchange Commission should be
directed in writing to:
Geraldine L. Bullard
Executive Vice President, Chief Financial Officer and Treasurer
First Northwest Bancorp
P.O. Box 351
Port Angeles, WA 98362
FIRST N ORTHWEST BANCORP
105 W. Eighth Street
Port Angeles, Washington
98362