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What changed in First Northwest Bancorp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of First Northwest Bancorp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+546 added−544 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-17)

Top changes in First Northwest Bancorp's 2023 10-K

546 paragraphs added · 544 removed · 435 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

233 edited+57 added−52 removed214 unchanged
Biggest changeThe following tables show our construction commitments by type and geographic concentration at the dates indicated: December 31, 2022 Olympic Peninsula Puget Sound Region Other Washington Oregon Idaho Total (In thousands) Construction Commitment One- to four-family residential $ 39,031 $ 75,745 $ 12,015 $ — $ — $ 126,791 Multi-family residential — 102,429 9,296 415 3,592 115,732 Commercial acquisition-renovation 1,636 18,625 — — — 20,261 Commercial real estate 349 39,845 — 540 — 40,734 Total commitment $ 41,016 $ 236,644 $ 21,311 $ 955 $ 3,592 $ 303,518 Construction Funds Disbursed One- to four-family residential $ 17,557 $ 36,902 $ 4,280 $ — $ — $ 58,739 Multi-family residential — 68,936 5,296 42 2,752 77,026 Commercial acquisition-renovation 1,636 17,687 — — — 19,323 Commercial real estate 212 27,492 — 12 — 27,716 Total disbursed $ 19,405 $ 151,017 $ 9,576 $ 54 $ 2,752 $ 182,804 Undisbursed Commitment One- to four-family residential $ 21,474 $ 38,843 $ 7,735 $ — $ — $ 68,052 Multi-family residential — 33,493 4,000 373 840 38,706 Commercial acquisition-renovation — 938 — — — 938 Commercial real estate 137 12,353 — 528 — 13,018 Total undisbursed $ 21,611 $ 85,627 $ 11,735 $ 901 $ 840 $ 120,714 Land Funds Disbursed One- to four-family residential 3,552 3,370 419 — — $ 7,341 Commercial real estate 372 4,129 — — — 4,501 Total disbursed for land $ 3,924 $ 7,499 $ 419 $ — $ — $ 11,842 17 Table of Contents December 31, 2021 Olympic Peninsula Puget Sound Region Other Washington Oregon Total (In thousands) Construction Commitment One- to four-family residential $ 32,785 $ 57,050 $ 4,430 $ — $ 94,265 Multi-family residential — 182,151 4,095 8,435 194,681 Commercial acquisition-renovation 2,938 36,536 16,638 — 56,112 Commercial real estate 12,489 50,372 2,535 — 65,396 Total commitment $ 48,212 $ 326,109 $ 27,698 $ 8,435 $ 410,454 Construction Funds Disbursed One- to four-family residential $ 10,242 $ 28,929 $ 562 $ — $ 39,733 Multi-family residential — 79,707 2,414 7,534 89,655 Commercial acquisition-renovation 2,449 32,789 15,861 — 51,099 Commercial real estate 3,486 29,484 2,701 — 35,671 Total disbursed $ 16,177 $ 170,909 $ 21,538 $ 7,534 $ 216,158 Undisbursed Commitment One- to four-family residential $ 22,543 $ 28,121 $ 3,868 $ — $ 54,532 Multi-family residential — 102,444 1,681 901 105,026 Commercial acquisition-renovation 489 3,747 777 — 5,013 Commercial real estate 9,003 20,888 (166 ) — 29,725 Total undisbursed $ 32,035 $ 155,200 $ 6,160 $ 901 $ 194,296 Land Funds Disbursed One- to four-family residential 3,502 3,556 191 — $ 7,249 Commercial real estate — 1,302 — — 1,302 Total disbursed for land $ 3,502 $ 4,858 $ 191 $ — $ 8,551 Consumer Lending.
Biggest changeThe following tables show our construction commitments by type and geographic concentration at the dates indicated: December 31, 2023 Olympic Peninsula Puget Sound Region Other Washington Oregon Total (In thousands) Construction Commitment One-to-four family residential $ 10,260 $ 54,320 $ 6,489 $ 540 $ 71,609 Multi-family residential — 78,196 11,076 — 89,272 Commercial real estate — 17,332 1 — 17,333 Total commitment $ 10,260 $ 149,848 $ 17,566 $ 540 $ 178,214 Construction Funds Disbursed One-to-four family residential $ 3,790 $ 34,725 $ 5,065 $ 175 $ 43,755 Multi-family residential — 61,288 5,879 — 67,167 Commercial real estate — 11,849 — — 11,849 Total disbursed $ 3,790 $ 107,862 $ 10,944 $ 175 $ 122,771 Undisbursed Commitment One-to-four family residential $ 6,470 $ 19,595 $ 1,424 $ 365 $ 27,854 Multi-family residential — 16,908 5,197 — 22,105 Commercial real estate — 5,483 1 — 5,484 Total undisbursed $ 6,470 $ 41,986 $ 6,622 $ 365 $ 55,443 Land Funds Disbursed One-to-four family residential 3,310 3,002 272 — $ 6,584 Commercial real estate — 845 — — 845 Total disbursed for land $ 3,310 $ 3,847 $ 272 $ — $ 7,429 17 Table of Contents December 31, 2022 Olympic Peninsula Puget Sound Region Other Washington Oregon Idaho Total (In thousands) Construction Commitment One-to-four family residential $ 39,031 $ 75,745 $ 12,015 $ — $ — $ 126,791 Multi-family residential — 102,429 9,296 415 3,592 115,732 Commercial acquisition-renovation 1,636 18,625 — — — 20,261 Commercial real estate 349 39,845 — 540 — 40,734 Total commitment $ 41,016 $ 236,644 $ 21,311 $ 955 $ 3,592 $ 303,518 Construction Funds Disbursed One-to-four family residential $ 17,557 $ 36,902 $ 4,280 $ — $ — $ 58,739 Multi-family residential — 68,936 5,296 42 2,752 77,026 Commercial acquisition-renovation 1,636 17,687 — — — 19,323 Commercial real estate 212 27,492 — 12 — 27,716 Total disbursed $ 19,405 $ 151,017 $ 9,576 $ 54 $ 2,752 $ 182,804 Undisbursed Commitment One-to-four family residential $ 21,474 $ 38,843 $ 7,735 $ — $ — $ 68,052 Multi-family residential — 33,493 4,000 373 840 38,706 Commercial acquisition-renovation — 938 — — — 938 Commercial real estate 137 12,353 — 528 — 13,018 Total undisbursed $ 21,611 $ 85,627 $ 11,735 $ 901 $ 840 $ 120,714 Land Funds Disbursed One-to-four family residential 3,552 3,370 419 — — $ 7,341 Commercial real estate 372 4,129 — — — 4,501 Total disbursed for land $ 3,924 $ 7,499 $ 419 $ — $ — $ 11,842 Consumer Lending.
Item 1. Business General First Northwest Bancorp, a Washington corporation, is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities.
Item 1. Business General First Northwest Bancorp, a Washington corporation, is a bank holding company and a financial holding company. First Northwest is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities.
("POM") formed in April 2021 to focus on financial wellness and lifestyle protection products for consumers nationwide. In December 2022, in connection with termination of the joint venture agreement, Quin Ventures sold substantially all of its assets, including intellectual property, to Quil Ventures, Inc. (“Quil”).
("POM") formed in April 2021 to focus on financial wellness and lifestyle protection products for consumers nationwide. In December 2022, in connection with termination of the joint venture agreement, Quin Ventures sold substantially all its assets, including intellectual property, to Quil Ventures, Inc. (“Quil”).
The top five trading partners with Washington include China, Canada, Japan, South Korea and Mexico. Tourism has also developed into a major industry, due to the scenic beauty, temperate climate, and incredible food and culture. The maritime industry, supported by the trade and fishing industries, is also an important employment sector.
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. The maritime industry, supported by the trade and fishing industries, is also an important employment sector.
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 financial holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice.
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 financial holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice.
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.
With certain exceptions, the BHCA prohibits a bank holding company 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.
To the extent that legal uncertainty exists in this area, all creditors, including First Fed, that have made loans secured by properties with potentially hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs that often substantially exceed the value of the collateral property. Federal Reserve System.
To the extent that legal uncertainty exists in this area, all creditors, including First Fed, who have made loans secured by properties with potentially hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs that often substantially exceed the value of the collateral property. Federal Reserve System.
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.
These rules apply to bank holding companies with $3.0 billion or more in assets on a consolidated basis, or to bank holding companies with fewer assets but certain risky activities, or to bank-only companies. When applicable, the bank holding company capital adequacy and conservation buffer rules are the same as those imposed by the FDIC.
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.
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. The credit risk on adjustable-rate mortgage loans could increase when interest rates rise.
Significant recent CFPB developments that may affect operations and compliance costs include: • Positions taken by the CFPB on fair lending, most recently expanding its supervisory approach to prevent discrimination by using the unfairness standard under the unfair, deceptive, or abuse acts or practices framework in the Dodd-Frank Act in addition to the historical reliance on regulatory requirements under the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (“FHA”); • The CFPB's Final Rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information shortcomings identified by the CFPB; • Positions taken by the CFPB regarding the Electronic Fund Transfer Act and Federal Reserve Regulation E, which require companies to obtain consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers; • Efforts focused on enforcing certain compliance obligations the CFPB deems a priority, such as automobile and student loan servicing (including certain forbearance requirements related to the COVID-19 pandemic), debt collection, collateral repossession, mortgage origination and servicing, remittances, and fair lending, among others; and • Positions and focused efforts on enforcing compliance obligations related to deposit account fees, including overdraft, non-sufficient funds, and returned deposit fees.
Significant recent CFPB developments that may affect operations and compliance costs include: • Positions taken by the CFPB on fair lending, most recently expanding its supervisory approach to prevent discrimination by using the unfairness standard under the unfair, deceptive, or abuse acts or practices framework in the Dodd-Frank Act in addition to the historical reliance on regulatory requirements under the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (“FHA”); • The CFPB's Final Rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information shortcomings identified by the CFPB; • Positions taken by the CFPB regarding the Electronic Fund Transfer Act and Federal Reserve Regulation E, which require companies to obtain consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers; • Efforts focused on enforcing certain compliance obligations the CFPB deems a priority, such as automobile and student loan servicing, debt collection, collateral repossession, mortgage origination and servicing, remittances, and fair lending, among others; and • Positions and focused efforts on enforcing compliance obligations related to deposit account fees, including overdraft, non-sufficient funds, and returned deposit fees.
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 company’s 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.
Additionally, 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 company’s 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.
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.
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, duration, and tax consequences of the proposed investment.
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.
In over 20 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.
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, 2022, First Fed was categorized as "well capitalized" under the regulatory capital requirements described below.
Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements. At December 31, 2023, First Fed was categorized as "well capitalized" under the regulatory capital requirements described below.
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.
We engage in other general loan restructures and modifications not considered as MLTB 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.
Non-agency MBS securities have no guarantees in the event of default and therefore warrant continued monitoring for credit quality. Our non-agency MBS securities consist of fixed and variable rate mortgages issued by various corporations, which we believe have sufficient subordination to mitigate the risk of loss on these investments, and certain corporate debt securities.
Non-agency MBS securities have no guarantees in the event of default and therefore warrant continued monitoring for credit quality. Our non-agency MBS securities consist of fixed and variable rate mortgages issued by various corporations, which we believe have sufficient credit enhancements to mitigate the risk of loss on these investments, and certain corporate debt securities.
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, 2022, First Fed was in compliance with the reserve requirements in place at that time. Anti-Money Laundering and Anti-Terrorism.
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, 2023, First Fed was in compliance with the reserve requirements in place at that time. Anti-Money Laundering and Anti-Terrorism.
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.
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 strategy, we may purchase loans with different credit and underwriting criteria than those we originate directly. We sell residential first mortgage loans in the secondary market.
An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’ 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. 47 Table of Contents Dividends .
An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’ 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.
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 primary objective of our loan review process is to measure borrower performance and assess risk for the purpose of identifying loan weakness 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.
In general, the modification or restructuring of a debt is considered a TDR if we, for economic or legal reasons related to a borrower’s 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.
In general, the modification or restructuring of a debt is considered a MLTB if we, for economic or legal reasons related to a borrower’s 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.
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.
Executive officers, directors and principal shareholders of the company are generally considered to be affiliates. 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.
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 (including financial holding companies) to meet several minimum capital standards.
For additional information, see Note 12 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 (including financial holding companies) to meet several minimum capital standards.
First Northwest Bancorp and First Fed have established comprehensive compliance programs designed to comply with the requirements of the BSA and Patriot Act. 49 Table of Contents 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.
First Northwest Bancorp and First Fed have established comprehensive compliance programs designed to comply with the requirements of the BSA and Patriot Act. 44 Table of Contents 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.
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.
First Northwest Bancorp's ability to declare and pay dividends is subject to the Federal Reserve limits and Washington law, and may also 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.
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.
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 quadrant 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.
Terry Anderson , age 54, 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.
Terry Anderson , age 55, 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.
At December 31, 2022, 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.
At December 31, 2023, 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.
As of December 31, 2022, 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.
As of December 31, 2023, 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.
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. 51 Table of Contents Interchange Fees.
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. 46 Table of Contents Interchange Fees.
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.
The market area is a mix of urban, suburban and rural areas, with the Seattle metropolitan area representing 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.
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, 2022.
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, 2023.
The composition and contractual maturities of our investment portfolio at December 31, 2022 and December 31, 2021, excluding FHLB stock, are indicated in the following table. The yields on municipal bonds have not been computed on a tax equivalent basis.
The composition and contractual maturities of our investment portfolio at December 31, 2023 and December 31, 2022, excluding FHLB stock, are indicated in the following table. The yields on municipal bonds have not been computed on a tax equivalent basis.
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 .
For additional information, see the section above entitled "- Regulation of First Fed Bank - Capital Regulation" and Note 12 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. Interstate Banking .
First Fed is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before December 31, 2018. 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.
First Fed is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before December 31, 2020. See Note 10 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.
Over 95% of our commercial real estate and multi-family loans are secured by properties located in the state of Washington. 12 Table of Contents 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.
Over 95% of our commercial real estate and multi-family loans are secured by properties located in the state of Washington. 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.
Market Area We operate through twelve full-service branch offices and four 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 two business centers located in Clallam County, one in King County and one in Whatcom County.
Market Area We operate through twelve full-service branch offices, three business centers and three administration 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.
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.
As a result, First Northwest Bancorp is subject to the information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act. 47 Table of Contents 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.
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.
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 pillar in our approach to our employees and the communities we have proudly served for over 100 years.
The recorded investment was $3.1 million at December 31, 2022. In April 2021, First Northwest, the Bank, POM, and Quin Ventures became parties to a joint venture agreement.
The recorded investment was $3.1 million at December 31, 2023. In April 2021, First Northwest, the Bank, POM, and Quin Ventures became parties to a joint venture agreement.
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.
The Federal Reserve may not approve the acquisition of a bank that has not been in existence for a minimum of five years, or longer if specified by the law of the host state.
This commitment to Canapi Ventures 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, 2022, $2.2 million had been contributed to this partnership.
This commitment to Canapi Ventures 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, 2023, $2.4 million had been contributed to this partnership.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be considered in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to a specified concentration level. Privacy Standards .
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be considered in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to a specified concentration level. 43 Table of Contents Privacy Standards .
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.
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.
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.
See Item 1, "Business – Deposit Activities and Other Sources of Funds – Borrowings." 42 Table of Contents 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.
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.
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"). 20 Table of Contents Lending Authority.
Brown , age 52, is Executive Vice President and Chief Human Resources and Marketing Officer of First Fed, a position he has held since March 2020. Mr.
Brown , age 53, is Executive Vice President and Chief Human Resources and Marketing Officer of First Fed, a position he has held since March 2020. Mr.
At December 31, 2022, First Fed held $11.7 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.
At December 31, 2023, First Fed held $13.7 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.
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 SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to First Northwest Bancorp as a company with securities registered under the Exchange Act.
Interest received on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from this tax. 55 Table of Contents
Interest received on loans secured by mortgages or deeds of trust on residential properties and certain investment securities are exempt from this tax. 49 Table of Contents
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.
A secondary source of purchased loans has been 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.
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. Derek J.
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. 39 Table of Contents Derek J.
Deines , age 49, 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.
Deines , age 50, 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.
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.
Our employees are the cornerstone of our success as an organization as they serve our customer base. 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.
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 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.
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.
In general, enforcement actions may be initiated for violations of law and regulations and/or for unsafe or unsound practices. 45 Table of Contents The Bank Holding Company Act. Under the BHCA, First Northwest Bancorp is supervised by the Federal Reserve.
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.
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. 40 Table of Contents Insider Credit Transactions.
In September 2021, the Company entered into a limited partnership with BankTech Ventures, LP ("BankTech") to strategically invest in fintech-related businesses. The commitment to BankTech 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.
In September 2021, the Company invested in BankTech Ventures, LP ("BankTech") as a limited partner to strategically invest in fintech-related businesses. The commitment to BankTech 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.
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. 48 Table of Contents Environmental Issues Associated with Real Estate Lending.
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. Environmental Issues Associated with Real Estate Lending.
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, 2022, 2021, and 2020, our total loan originations were $548.3 million, $780.5 million, and $871.3 million, respectively.
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, 2023, 2022, and 2021, our total loan originations were $221.9 million, $548.3 million, and $780.5 million, respectively.
Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests.
Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests.
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, 2022, First Fed had $234.0 million of outstanding advances from the FHLB of Des Moines.
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, 2023, First Fed had $275.0 million of outstanding advances from the FHLB of Des Moines.
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 Table of Contents 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.
See Note 7 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. 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.
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 Table of Contents Key employment sectors include aerospace, military, information technology, biotechnology, education, logistics, international trade, and tourism.
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). Key employment sectors include aerospace, military, information technology, biotechnology, education, logistics, international trade, and tourism.
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, 2022, the average interest rate on our adjustable-rate mortgage loans was approximately 367 basis points under the fully indexed rate.
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, 2023, the average interest rate on our adjustable-rate mortgage loans was approximately 352 basis points under the fully indexed rate.
For additional information regarding First Northwest Bancorp’s and First Fed’s required and actual capital levels at December 31, 2022, see 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’s and First Fed’s required and actual capital levels at December 31, 2023, see Note 12 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
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 are typically secured by business assets, and loan terms vary from one to seven years with either adjusting or floating rates indexed to similar FHLB advance rates, The Wall Street Journal prime rate, TSOFR or other indices.
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. 54 Table of Contents Taxation Federal Taxation General .
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. Taxation Federal Taxation General .
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 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% of the cost of the vehicle. We receive loan pools each week with complete packages that we underwrite to determine whether to purchase or pass on all loans submitted.
As of December 31, 2022, First Northwest Bancorp and First Fed qualified for the small issuer exemption from the Federal Reserve’s 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 .
As of December 31, 2023, First Northwest Bancorp and First Fed qualified for the small issuer exemption from the Federal Reserve’s 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.
This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks. 44 Table of Contents Regulation of Management.
This additional authority, however, is subject to review and approval by the FDIC if the activity is not permissible for national banks. Regulation of Management.
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.
We also offer a ten-year home equity line of credit to qualifying borrowers, which includes 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 amount that was included in interest income on a cash basis on nonaccrual loans was $28,000, $48,000, and $85,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Other Loans of Concern.
The amount that was included in interest income on a cash basis on nonaccrual loans was $58,000, $28,000, and $48,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Other Loans of Concern.
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.
Our interest rates on home equity loans are priced for risk based on credit score, loan to value and overall payment capacity of the applicant. Home equity loans are made for the improvement of residential properties and other purposes.
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 $2.8 million, $4.8 million, and $4.3 million of net deferred loan fees at December 31, 2022, 2021, and 2020, respectively.
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 $1.9 million, $2.8 million, and $4.8 million of net deferred loan fees at December 31, 2023, 2022, and 2021, respectively.
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.
We offer traditional consumer and business deposit products, including transact ion accounts, savings and money market accounts and certificates of deposit ("CDs") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.
The average outstanding loan in our commercial real estate portfolio, including multi-family loans, was $1.5 million as of December 31, 2022. 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.
The average outstanding loan in our commercial real estate portfolio, including multi-family loans, was $1.7 million as of December 31, 2023. We generally target individual commercial and multi-family real estate loans between $1.0 million and $10.0 million to small and mid-size operators and investors in our market areas as well as other parts of Washington.
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.
Indirect auto loans were previously originated with auto dealerships located throughout our market areas through CRIF Lending Solutions, 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. We ended our relationship with that service provider in 2020, effectively eliminating new production.
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.
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 meet ongoing liquidity needs and to mitigate interest rate risk.
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, 2022, were $888,000.
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, 2023, were $1.4 million.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeWe 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.
Biggest changeWe 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. 57 Table of Contents We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations and the impact of consent orders to which we are subject.
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.
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 third-party vendors and their personnel.
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. "Management’s 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.
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. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk," in this Form 10-K for additional information.
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 our ability to conduct business, especially if our insurance coverage is insufficient to compensate for losses that may occur.
A significant natural disaster, such as a tsunami, earthquake, drought, fire or flood, where we or our customers live and do business, could have a material adverse impact on our local market areas and our ability to conduct business, especially if our insurance coverage is insufficient to compensate for losses that may occur.
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 on a single one- to four-family residential mortgage loan. 58 Table of Contents 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.
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 on a single one-to-four family residential mortgage loan. 51 Table of Contents 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 credit losses on loans and charge-offs will likely be larger on a per loan basis compared to consumer loans.
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.
Significant provisions to our allowance could materially decrease our net income. In addition, bank regulatory agencies periodically review our allowance for credit losses on loans 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.
For these reasons we may experience higher rates of delinquencies, default and losses on loans secured by junior liens. 60 Table of Contents 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.
For these reasons we may experience higher rates of delinquencies, default and losses on loans secured by junior liens. 53 Table of Contents 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.
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.
Our allowance for credit losses on loans 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.
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.
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. 58 Table of Contents 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.
Further, changes in accounting standards and their interpretation may materially impact how we report, potentially retroactively, our financial condition and results of operations. 66 Table of Contents 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.
Further, changes in accounting standards and their interpretation may materially impact how we report, potentially retroactively, our financial condition and results of operations. 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.
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.
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. 52 Table of Contents Our construction and land loans are based upon estimates of costs and the value of the completed project.
Land loans include raw land and land acquisition and development loans. 59 Table of Contents 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.
Land loans include raw land and land acquisition and development loans. 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.
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. 62 Table of Contents We are subject to certain risks in connection with our use of networks and technology systems.
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. We are subject to certain risks in connection with our use of networks and technology systems.
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, if charge-offs in future periods exceed the allowance for credit losses on loans, we will need additional provisions to replenish the allowance for credit losses on loans. 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.
These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, require additional capital, reclassify assets, determine the adequacy of an institution’s allowance for loan losses and determine the level of deposit insurance premiums assessed.
These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, require additional capital, reclassify assets, determine the adequacy of an institution’s allowance for credit losses on loans and determine the level of deposit insurance premiums assessed.
The effects of any of the foregoing factors could have a material adverse effect on our business, operations and financial condition. 56 Table of Contents 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.
The effects of any of the foregoing factors could have a material adverse effect on our business, operations, and financial condition. 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.
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.
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. 55 Table of Contents Our security measures may not protect us from systems failures or interruptions.
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.
Rapidly growing loan portfolios are, by their nature, less seasoned and our experience with these loans may not provide us with a useful payment history pattern.
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 Table of Contents A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on or repossess such loans.
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. A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on or repossess such loans.
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 $34.7 million at December 31, 2022, unless specifically approved by the Senior Loan Committee as an exception to policy.
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 $34.5 million at December 31, 2023, unless specifically approved by the Senior Loan Committee as an exception to policy.
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.
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. Deterioration in the national economy may also have an adverse effect on the region.
A rising interest rate environment may also adversely affect the U.S. economy and, as a result, our business as a whole.
A rising or elevated interest rate environment may also adversely affect the U.S. economy and, as a result, our business as a whole.
First Fed has extended significant amounts of credit to certain borrowers, largely in connection with high-end residential real estate and commercial and multi-family real estate loans. At December 31, 2022, the aggregate amount of loans, including unused commitments, to First Fed's five largest borrowers (including related entities) amounted to approximately $79.4 million.
First Fed has extended significant amounts of credit to certain borrowers, largely in connection with high-end residential real estate and commercial and multi-family real estate loans. At December 31, 2023, the aggregate amount of loans, including unused commitments, to First Fed's five largest borrowers (including related entities) amounted to approximately $95.8 million.
Public health crises, domestic or geopolitical crises, such as the current 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, resulting in potentially adverse operating results.
Public health crises, domestic or geopolitical crises, such as the current wars in Ukraine and the Middle East, 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, resulting in potentially adverse operating results.
As a result, under Washington law, First Fed would be limited to loans to one borrower of $46.3 million at December 31, 2022.
As a result, under Washington law, First Fed would be limited to loans to one borrower of $46.0 million at December 31, 2023.
Our business may be adversely affected by credit risk associated with residential real estate. At December 31, 2022, $396.2 million, or 25.8% of our total loan portfolio, consisted of one- to four-family mortgage loans and home equity loans secured by residential properties.
Our business may be adversely affected by credit risk associated with residential real estate. At December 31, 2023, $447.8 million, or 27.0% of our total loan portfolio, consisted of one-to-four family mortgage loans and home equity loans secured by residential properties.
At December 31, 2022 , $83.4 million of our consumer, $25.3 million of our one- to four-family, and $18.1 million of our comm ercial 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 borrower’s obligation to repay the outstanding indebtedness.
At December 31, 2023 , $105.4 million of our consumer, $38.1 million of our comm ercial real estate , and $19.2 million of our one-to-four family 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 borrower’s obligation to repay the outstanding indebtedness.
Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, as at the end of 2022, 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.
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.
At December 31, 2022, we had $77.0 million, or 5.0% 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.
At December 31, 2023, we had $112.3 million, or 6.8% 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.
Such regulation and supervision govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund.
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.
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.
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.
Outstanding loan balances for the ten largest borrowing relationships at December 31, 2022, totaled $151.9 million, or 9.9% of total loans. Although none of the loans to First Fed's 20 largest borrowers were nonperforming loans as of December 31, 2022, concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio.
Outstanding loan balances for the ten largest borrowing relationships at December 31, 2023, totaled $171.2 million, or 10.3% of total loans. Although only one of the loans to First Fed's 20 largest borrowers was nonperforming as of December 31, 2023, concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio.
First Northwest Bancorp is subject to regulation and supervision by the Federal Reserve (as a financial 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.
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 financial holding company) and regulation by the State of Washington (as a Washington corporation).
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.
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.
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 Table of Contents 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.
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.
Our commercial loan portfolio, which includes loans for commercial and multi-family real estate as well as other business loans, has increased to $720.8 million, or 47.0% of total loans, at December 31, 2022, from $615.6 million, or 45.4% of total loans, at December 31, 2021.
Our commercial loan portfolio, which includes loans for commercial and multi-family real estate as well as other business loans, has increased to $833.4 million, or 50.2% of total loans, at December 31, 2023, from $718.6 million, or 46.4% of total loans, at December 31, 2022.
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 asset’s holding period.
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 asset’s holding period.
In determining the allowance for loan losses, we review our loan portfolios, loss and delinquency trends, and economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover incurred losses, resulting in additions to our allowance for loan losses through the provision for losses on loans which is charged against income.
If our assumptions are incorrect, our allowance for credit losses on loans may not be sufficient to cover incurred losses, resulting in additions to our allowance for credit losses on loans through the provision for credit losses on loans which is charged against income.
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.
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.
Factors that could detrimentally impact our access to liquidity sources include actions by the FRB, 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 liquidity position could be significantly constrained if we were unable to access funds from the FHLB or other wholesale funding sources. 50 Table of Contents Factors that could detrimentally impact our access to liquidity sources include actions by the FRB, 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.
We have increased the amount of our commercial real estate and multi-family loans to $643.8 million, or 42.0% of our total loan portfolio, at December 31, 2022, from $535.7 million, or 39.5%, of our total loan portfolio at December 31, 2021. We intend to continue to increase, subject to market demand, our origination and purchase of commercial real estate loans.
We have increased the amount of our commercial real estate and multi-family loans to $721.1 million, or 43.4%, of our total loan portfolio, at December 31, 2023, from $641.6 million, or 41.5%, of our total loan portfolio at December 31, 2022. We intend to continue to increase, subject to market demand, our origination and purchase of commercial real estate loans.
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.
These factors, among others, could result in an allowance for credit losses on investment securities, 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.
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.
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.
The value of the commercial real estate securing the loan as collateral is a secondary source of repayment in case of default, which can be significantly affected by economic conditions.
The value of the commercial real estate securing the loan as collateral is a secondary source of repayment in case of default, which can be significantly affected by economic conditions. The FDIC has issued pronouncements alerting banks of its concerns about banks with a heavy concentration of commercial real estate loans.
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.
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.
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 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.
Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve.
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 beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve.
Our nonperforming assets adversely affect our net income in various ways. 61 Table of Contents 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.
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.
During the year ended December 31, 2022, our construction and land loans decreased $30.1 million, or 13.4%, to $194.7 million, or 12.7%, of the total loan portfolio at December 31, 2022 and consisted of properties secured by one- to four-family residential of $58.7 million, multi-family of $77.0 million, commercial acquisition-renovation of $19.3 million, commercial real estate of $27.7 million, and land of $11.8 million.
During the year ended December 31, 2023, our construction and land loans decreased $64.0 million, or 33.0%, to $129.7 million, or 7.8%, of the total loan portfolio at December 31, 2023 and consisted of properties secured by multi-family of $66.7 million, one-to-four family residential of $43.7 million, commercial real estate of $11.8 million, and land of $7.5 million.
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 Table of Contents Our expansion strategy will cause our expenses to increase and may negatively affect our earnings.
We may also experience greater than anticipated customer losses even if the integration process is successful; • 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; and • If market or regulatory conditions change, we may be unable to successfully compete for, complete, or integrate potential future acquisitions as anticipated or at all.
We would incur a higher cost of funds to retain these deposits in this 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.
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. 56 Table of Contents Changes in interest rates also affect the value of our interest-earning assets, including our securities portfolio.
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.
As a result of the exceptionally low interest rate environment in the years prior to 2022, a high percentage of our deposits were composed of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets.
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.
Determining an allowance for credit losses on investment securities 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. 54 Table of Contents If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.
Furthermore, the Federal Reserve has communicated that it anticipates ongoing increases until inflationary pressures subside. 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.
The Federal Reserve slowed its increases to the federal funds target rate in 2023, with the most recent increase occurring in July 2023. 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.
At December 31, 2022, our nonperforming assets, which consist of nonaccrual loans, real estate owned and repossessed assets, were $1.8 million, or 0.1% of total assets.
If our nonperforming assets increase, our earnings will be adversely affected. At December 31, 2023, our nonperforming assets, which consist of nonaccrual loans, real estate owned and repossessed assets, were $18.6 million, or 0.8% of total assets. Our nonperforming assets adversely affect our net income in various ways.
One- to four-family loans have increased to $343.8 million, or 22.4% of total loans, at December 31, 2022, from $295.0 million, or 21.7% of total loans, at December 31, 2021. Total consumer loans have increased to $275.1 million, or 17.9% of total loans, at December 31, 2022, from $221.9 million, or 16.4% of total loans, at December 31, 2021.
One-to-four family loans have increased to $378.4 million, or 22.8% of total loans, at December 31, 2023, from $343.6 million, or 22.2% of total loans, at December 31, 2022. Total consumer loans have increased to $318.5 million, or 19.2% of total loans, at December 31, 2023, from $291.8 million, or 18.8% of total loans, at December 31, 2022.
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.
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.
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.
Some of our commercial borrowers have more than one loan outstanding with us.
At December 31, 2022, we had $51,000 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.
At December 31, 2023, we had $28,000 of nonperforming commercial real estate loans and $0 of nonperforming multi-family loans in our portfolio. An increase in unsecured lending exposes us to an increase in loan losses.
Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including the current invasion by Russia of Ukraine, terrorism, or other geopolitical events.
Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including the current wars in Ukraine and the Middle East, terrorism, or other geopolitical events. A need for additional liquidity may also require us to sell investment securities at depressed prices.
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 continued economic effects of the COVID-19 pandemic could adversely impact our financial results and those of our customers.
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. Competition for deposits may limit our ability to grow. Our loan growth is primarily dependent on retaining and attracting additional customer deposits.
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.
Additionally, 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.
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.
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. On November 21, 2023, the Bank entered into a consent order ("Order") with the FDIC, the Bank's primary regulator.
Recently, federal banking regulators highlighted the increased risk associated with commercial real estate loans as a result of the stress COVID-19 created for some industries, and the higher vulnerability of these credits to pressure from the current rising interest rate environment and overall inflationary pressures in the economy.
Moreover, federal bank regulators have highlighted the increased risk associated with commercial real estate loans, including with respect to the higher vulnerability of these credits to pressure as interest rates remain elevated and market conditions in many metropolitan areas continue to show signs of stress. These loans also involve larger balances to a single borrower or groups of related borrowers.
Removed
Deterioration in the national economy as a result of continued inflation, the rising interest rate environment, and recurring supply chain issues may also have an adverse effect on the region.
Added
While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area, including from internet-based banking institutions, which have grown rapidly in recent years.
Removed
Our liquidity position could be significantly constrained if we were unable to access funds from the FHLB or other wholesale funding sources.
Added
Deposit flows are influenced by various factors, including customer relationships, sales and marketing efforts, interest rates paid by competitors, alternative investments such as money market mutual funds, equities and bonds, government stimulus programs, and the overall levels of business and personal income and savings.
Removed
The COVID-19 pandemic and related government actions caused significant economic turmoil in the U.S. and around the world, resulting in a slow-down in economic activity, increased unemployment levels and disruptions in global supply chains and financial markets.
Added
The current elevated interest rate environment has increased competition for deposits across the banking industry, and deposit balances may decrease if customers perceive alternative investments as providing a better risk/return tradeoff.
Removed
The long-term economic effects of the COVID-19 pandemic are difficult to predict due to the ongoing dynamic nature of COVID-19 variants, the possibility of a similar health crisis and potential for additional government action.
Added
Our failure to grow or retain deposits may result in a loss of market share and slower or negative loan growth, which likely would have an adverse effect on our financial condition and results of operations.
Removed
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. 57 Table of Contents Although the Company estimates 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 long-term impact of the pandemic on the credit quality of our loan portfolio.
Added
We have increased our commercial business loan portfolio by purchasing unsecured loans to small businesses and professionals and our consumer loan portfolio through purchases from Splash Financial. Our exposure on these purchased loan portfolios was $21.1 million and $7.3 million, respectively, at December 31, 2023.
Removed
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 recover and make full payments on their loans.
Added
Unsecured loans present additional risks to us because if a borrower defaults on an unsecured loan, there is no collateral to repossess and liquidate in order to satisfy the outstanding loan balance.
Removed
Any increases in the allowance for credit losses will result in a decrease in net income and may have a material negative effect on our financial condition and results of operations.
Added
Also, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on an unsecured loan in default. Our efforts to mitigate this risk include carefully assessing a borrower’s creditworthiness, including their income, employment history, and debt-to-income ratio.
Removed
Although the U.S. and global economies have started recovering as governments lift or reduce health-related restrictions and as demand for goods and services increases, some adverse consequences including labor shortages, disruptions of global supply chains, and increasing inflation, continue to negatively impact the international, national, and local economies. As a result, our business may be materially and adversely affected.
Added
In 2022, we began purchasing unsecured consumer loans through a partnership with Splash Financial, a private lender that underwrites and funds personal loans. First Fed has experienced losses of $3.4 million on the Splash Financial loans to date. We made changes to the program participation criteria for these loans in 2023 with the goal of reducing additional losses.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAdditional 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."
Biggest changeAdditional information is presented in Note 5 - Premises and Equipment, Note 6 - Leases, and Note 20 - Subsequent Event (relating to a potential sale and leaseback of six of the Company's owned properties) of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data."
As of December 31, 2022, 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.
As of December 31, 2023, we conducted our business through twelve branch offices located in Clallam, Jefferson, King, Kitsap, and Whatcom Counties, Washington; two business centers and a support service center located in King County, Washington; one business center in Whatcom County, 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 Company’s properties totaled $15.9 million at December 31, 2022.
The Company currently owns seven branch offices, the main administrative office and the Clallam County support services center. The remaining five branch offices, three business centers and King County support service center are leased. The net book value of the Company’s properties totaled $16.0 million at December 31, 2023.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePeriod Total Number of Shares Purchased (1), (3) Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Repurchased Under the Plan (2) October 1, 2022 - October 31, 2022 12,409 $ 15.46 12,409 514,289 November 1, 2022 - November 30, 2022 200,146 14.59 198,030 316,259 December 1, 2022 - December 31, 2022 47,307 14.51 14,232 302,027 Total 259,862 $ 14.64 224,671 (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, 2,116 shares, and 3,356 shares, respectively, for the periods indicated.
Biggest changePeriod Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Repurchased Under the Plan (2) October 1, 2023 - October 31, 2023 3,921 $ 12.98 3,921 222,416 November 1, 2023 - November 30, 2023 10,350 12.86 8,284 214,132 December 1, 2023 - December 31, 2023 3,188 — — 214,132 Total 17,459 $ 12.90 12,205 (1) Shares repurchased by the Company during the quarter include shares acquired from restricted stock award participants in connection with the cancellation of restricted stock to pay withholding taxes upon vesting totaling 0 shares, 2,066 shares, and 3,188 shares, respectively, for the periods indicated.
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, 2022.
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, 2023.
Our common stock is listed on The Nasdaq Stock Market LLC’s Global Market, under the symbol "FNWB." As of the close of business on March 10, 2023, there were 9,674,055 shares of common stock issued and outstanding and we had approximately 530 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers.
Our common stock is listed on The Nasdaq Stock Market LLC’s Global Market, under the symbol "FNWB." As of the close of business on March 8, 2024, there were 9,443,271 shares of common stock issued and outstanding and we had approximately 511 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers.
As of December 31, 2022, a total of 721,393 shares, or 70.5% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $16.16 per share, leaving 302,027 shares available for future purchases.
As of December 31, 2023, a total of 809,288 shares, or 79.1% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $15.81 per share, leaving 214,132 shares available for future purchases.
Removed
(3) On December 30, 2022, the other 50% owners of Quin Ventures returned 29,719 shares to FNWB in conjunction with the asset sale to Quil Ventures, Inc.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeAt December 31, Year Ended December 31, 2022 2022 2021 Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Interest-earning assets: (Dollars in thousands) Loans receivable, net (1) 5.69 % $ 1,448,777 $ 68,635 4.74 % $ 1,239,919 $ 55,029 4.44 % Total investment securities 3.22 350,521 10,866 3.10 365,000 8,369 2.29 FHLB dividends 6.41 8,540 502 5.88 4,058 190 4.68 Interest-earning deposits in banks 2.72 34,807 375 1.08 52,242 83 0.16 Total interest-earning assets (2) 5.23 1,842,645 80,378 4.36 1,661,219 63,671 3.83 Noninterest-earning assets 132,588 104,011 Total average assets $ 1,975,233 $ 1,765,230 Interest-bearing liabilities: Interest-bearing demand deposits 0.01 $ 193,064 $ 137 0.07 $ 175,608 $ 43 0.02 Money market accounts 0.58 555,038 1,698 0.31 525,986 1,165 0.22 Savings accounts 0.26 197,707 165 0.08 185,315 128 0.07 Certificates of deposit 2.19 282,477 3,198 1.13 267,521 2,060 0.77 Total interest-bearing deposits (3) 0.74 1,228,286 5,198 0.42 1,154,430 3,396 0.29 Advances 3.02 163,198 3,740 2.29 54,033 774 1.43 Subordinated debt, net 3.93 39,312 1,577 4.01 30,370 1,203 3.96 Total interest-bearing liabilities 1.18 1,430,796 10,515 0.73 1,238,833 5,373 0.43 Noninterest-bearing deposits (3) 335,646 308,467 Other noninterest-bearing liabilities 36,666 39,432 Average equity 172,125 178,498 Total average liabilities and equity $ 1,975,233 $ 1,765,230 Net interest income $ 69,863 $ 58,298 Net interest rate spread 4.05 3.63 3.40 Net earning assets $ 411,849 $ 422,386 Net interest margin (4) 3.79 3.51 Average interest-earning assets to average interest-bearing liabilities 128.8 % 134.1 % (1) The average loans receivable, net balances include nonaccrual loans.
Biggest changeYear Ended December 31, 2023 2022 Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Average Balance Outstanding Interest Earned/ Paid Yield/ Rate Interest-earning assets: (Dollars in thousands) Loans receivable, net (1), (2) $ 1,594,268 $ 84,614 5.31 % $ 1,448,777 $ 68,635 4.74 % Total investment securities 317,924 13,279 4.18 350,521 10,866 3.10 FHLB dividends 12,035 880 7.31 8,540 502 5.88 Interest-earning deposits in banks 40,832 2,126 5.21 34,807 375 1.08 Total interest-earning assets (3) 1,965,059 100,899 5.13 1,842,645 80,378 4.36 Noninterest-earning assets 144,141 132,588 Total average assets $ 2,109,200 $ 1,975,233 Interest-bearing liabilities: Interest-bearing demand deposits $ 178,577 $ 796 0.45 $ 193,064 $ 137 0.07 Money market accounts 388,287 4,217 1.09 555,038 1,698 0.31 Savings accounts 243,300 3,019 1.24 197,707 165 0.08 Certificates of deposit, retail 369,480 12,520 3.39 194,743 2,090 1.07 Certificates of deposit, brokered 165,486 6,467 3.91 87,734 1,108 1.26 Total interest-bearing deposits (4) 1,345,130 27,019 2.01 1,228,286 5,198 0.42 FHLB and other advances 249,172 10,870 4.36 163,198 3,740 2.29 Subordinated debt, net 39,395 1,578 4.01 39,312 1,577 4.01 Total interest-bearing liabilities 1,633,697 39,467 2.42 1,430,796 10,515 0.73 Noninterest-bearing deposits (4) 278,123 335,646 Other noninterest-bearing liabilities 37,967 36,666 Total average liabilities 1,949,787 1,803,108 Average equity 159,413 172,125 Total average liabilities and equity $ 2,109,200 $ 1,975,233 Net interest income $ 61,432 $ 69,863 Net interest rate spread 2.71 3.63 Net earning assets $ 331,362 $ 411,849 Net interest margin (5) 3.13 3.79 Average interest-earning assets to average interest-bearing liabilities 120.3 % 128.8 % (1) The average loans receivable, net balances include nonaccrual loans.
This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 300 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.
This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 400 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.
For small-to-medium sized businesses, we believe there are multiple payment opportunities for ACH processing, check processing, wire transfers, international payments and debit card interchange. In addition, we intend to build out our capabilities for accounts payable and receivable, payroll, merchant card acquisition and corporate card spend management.
For small-to-medium sized businesses, we believe there are multiple opportunities in payment processing for ACH, check, wire transfers, international payments and debit card interchange. In addition, we intend to build out our capabilities for accounts payable and receivable, payroll, merchant card acquisition and corporate card spend management solutions.
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.
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 both regional and national economic cycles. Our primary source of pre-tax income is net interest income.
We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures. • Attracting core deposits and other deposit products. We emphasize relationship banking with our customers to obtain a greater share of their deposits, with specific emphasis on primary transaction accounts.
We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures. 64 Table of Contents • Attracting core deposits and other deposit products. We emphasize relationship banking with our customers to obtain a greater share of their deposits, with specific emphasis on primary transaction accounts.
The following table presents the change in the present value of First Fed’s equity at December 31, 2022, that would occur in the event of an immediate change in interest rates based on management's assumptions.
The following table presents the change in the present value of First Fed’s equity at December 31, 2023, that would occur in the event of an immediate change in interest rates based on management's assumptions.
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, 2022, the conservation buffer was 2.5%.
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, 2023, the conservation buffer was 2.5%.
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.
We may purchase investment securities as a source of additional interest income and in lieu of carrying higher cash balances. 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.
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.
Management regularly adjusts our holdings of 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.
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 Term Secured Overnight Financing Rate ("TSOFR") will also reprice higher when market interest rates increase.
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, or the Term Secured Overnight Financing Rate ("TSOFR") will also reprice higher when market interest rates increase.
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.
We also 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.
In addition to our retail branches, we offer digital delivery solutions, such as personal financial management, business online banking, business remote deposit products, mobile remote deposit services through smartphones and tablets, consumer credit score access, account-to-account transfer services between First Fed and other banks, and person-to-person funds transfer, enabling us to compete effectively with banks of all sizes.
In addition to our retail branches, we offer digital delivery solutions, such as personal financial management, business online banking, business remote deposit products, mobile remote deposit services through personal devices, consumer credit score access, real-time account-to-account transfer services between First Fed and other banks, and real-time person-to-person funds transfer, enabling us to compete effectively with banks of all sizes.
Another priority for the Company is expanding offerings for small-to-medium sized business with a focus on entrepreneurs. We intend to accomplish this through the commercial team, with a focus on systems and support, the further development of treasury management and our partnership with The Meriwether Group, LLC.
Another priority for the Company is expanding offerings for small-to-medium sized business with a focus on entrepreneurs. We intend to accomplish this through the commercial team, with a focus on systems and support, the further development of treasury management and our partnership with MWG.
If these maturing deposits are not renewed or rolled into other deposit products, we will be required to seek other sources of funds, which may include borrowings and brokered deposits.
If these maturing deposits are not renewed or rolled into other deposit products, we will seek other sources of funds, which may include borrowings and brokered deposits.
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 Table of Contents
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.
Interest and fees on loans receivable increased $13.6 million during the year, in part, as the Bank grew the loan portfolio through single-family, multi-family and commercial real estate lending as well as purchased auto and manufactured home loans.
Interest and fees on loans receivable increased $16.0 million during the year, in part, as the Bank grew the loan portfolio through single-family, multi-family and commercial real estate lending as well as purchased auto and manufactured home loans.
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, 2022 and December 31, 2021 Assets .
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. 66 Table of Contents Comparison of Financial Condition at December 31, 2023 and December 31, 2022 Assets .
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.
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 impact 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 loans and securities.
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, earnings from equity and partnership investments, and gains and losses from the sale of loans and securities.
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.
As with any method of measuring interest rate risk, certain shortcomings are inherent in our analysis. 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.
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 Table of Contents Our Business and Operating Strategy Our operating strategy is focused on diversifying our loan portfolio, expanding our deposit product offerings, and enhancing our infrastructure.
The noninterest expenses incurred in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, professional fees, 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. 63 Table of Contents Our Business and Operating Strategy Our operating strategy is focused on growing and diversifying our loan portfolio, expanding our deposit product offerings, and enhancing our digital infrastructure.
For additional information, see the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. First Fed has a diversified deposit base with approximately 62% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 9% in brokered deposits.
For additional information, see the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. First Fed has a diversified deposit base with approximately 60% of deposit account balances held by consumers, 28% held by business and public fund depositors, and 12% in brokered deposits.
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 four business centers. We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve.
First Fed is a community-oriented commercial bank serving Clallam, Jefferson, King, Kitsap, and Whatcom counties in Washington State, through its twelve full-service branches, three business centers and three administration centers. We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve.
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.
First Fed is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal policy, including fiscal stimulus, interest rate policy and open market operations, housing, and consumer protection.
The effective tax rate decreased over prior periods as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit. 80 Table of Contents 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.
The effective tax rate increased over the prior year as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit, in 2022. 72 Table of Contents Average Balances, Interest and Average Yields/Cost The following table sets 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.
Loan yields also increased due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices. 77 Table of Contents Interest income on investment securities increased $2.5 million to $10.9 million for the year ended December 31, 2022 compared to $8.4 million for the year ended December 31, 2021.
Loan yields also increased due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices. 69 Table of Contents Interest income on investment securities increased $2.4 million to $13.3 million for the year ended December 31, 2023, compared to $10.9 million for the year ended December 31, 2022.
The increase resulted in part from adding talented leaders to the commercial team; developing relationships with loan referral sources, including our Board of Directors and loan brokers; pursuing loan purchase and participation opportunities; and competing successfully in new and existing markets. • Increasing noninterest income.
The increase resulted in part from adding talented leaders to the commercial team, developing relationships with loan referral sources, pursuing loan purchase and participation opportunities, and competing successfully in new and existing markets. • Increasing noninterest income.
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.
We believe relationships 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 sufficient short- and long-term liquidity.
The Canapi Ventures relationship allows us early access to companies producing technology and apps that may be of interest as we grow in the fintech sector. We also have ten-year commitments to invest in BankTech Ventures and JAM FINTOP, two fintech-focused venture capital funds designed for community banks. • Enhancing the loan portfolio .
The Canapi Ventures relationship allows us early access to companies producing technology and apps that may be of interest as we grow in the fintech sector. We also have eight years remaining in commitments to invest in BankTech Ventures and JAM FINTOP, two fintech-focused venture capital funds designed for community banks.
(4) Net interest income divided by average interest-earning assets. 81 Table of Contents 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.
(5) Net interest income divided by average interest-earning assets. 73 Table of Contents Rate/Volume Analysis The following table presents 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.
As noted above, loans receivable was the main contributor to the increase in net interest income with $9.3 million due to an increase in average volume and $4.3 million due higher rates.
As noted above, loans receivable was the main contributor to the increase in interest income with $6.9 million due to an increase in average volume and $9.1 million due higher rates.
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 .
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. 65 Table of Contents The following represent our critical accounting policies: Allowance for Credit Losses on Loans .
The provision for income tax for the year ended December 31, 2022, was $2.9 million compared to $3.2 million for the year ended December 31, 2021, reflecting differences in pre-tax income.
The provision for income tax for the year ended December 31, 2023, was $549,000 compared to $2.9 million for the year ended December 31, 2022, reflecting differences in pre-tax income.
Nonperforming loans to total loans was 0.12% at December 31, 2022, an increase from 0.10% at December 31, 2021. 75 Table of Contents At December 31, 2022, substantially all restructured loans were performing in accordance with their modified payment terms and returned to accrual status.
Nonperforming loans to total loans was 1.12% at December 31, 2023, an increase from 0.12% at December 31, 2022. At December 31, 2023, substantially all restructured loans were performing in accordance with their modified payment terms and returned to accrual status.
The increase in interest income on investment securities was driven by an increase in the average yield during the year of 81 basis points due to the repricing of variable rate securities as slowing prepayment activity reduced the amount of premium amortization during the period.
The increase in interest income on investment securities was driven by an increase in the average yield during the year of 108 basis points due to the repricing of variable rate securities and slower prepayment activity reducing the amount of premium amortization during the period.
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.
An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations required to adequately provide for probable losses inherent in our loan, unfunded commitments and investment portfolios through our allowance for credit losses.
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. We implemented interactive teller machines, allowing our customers to conduct business with a teller through an interactive screen, at several locations. • Enhancing our infrastructure .
In addition to traditional consumer and business deposit products, the Bank offers remote deposit capture, consumer and small business digital banking, treasury cash management capabilities, and commercial digital banking capabilities. We implemented interactive teller machines, allowing our customers to conduct business with a teller through an interactive screen, at several locations.
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 and bond markets, account maturities, government stimulus and unemployment programs, and the overall level of personal income and savings.
Deposit flows are influenced by various factors, including changes in market rates; sales and marketing efforts; interest rates paid by competitors; available alternative investments such as money market mutual funds, the stock and bond markets; account maturities; government stimulus and unemployment programs; and the overall level of personal income and savings.
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.
Although we believe that we use the best information available to establish the allowance for credit losses on loans, future economic or other conditions may differ substantially from the assumptions used in making the evaluation.
The increase to the cost of average interest-bearing liabilities for the year ended December 31, 2022 was due primarily to increased average balances and higher rates paid on advances, certificates of deposit and money market accounts. Interest Income.
The increase to the cost of average interest-bearing liabilities for the year ended December 31, 2023 was due primarily to costs from higher rates paid of $24.6 million and increased average balances of $4.3 million on advances, certificates of deposit and money market accounts. Interest Income.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations General First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities, including a controlling interest in Quin Ventures, Inc. and several limited partnership investments.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations General First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities.
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.
The FDIC and the DFI, as an i ntegral part of their examination process, periodically review our ACLL and may require us to recognize adjustments to the allowance based on their judgment about information available at the time of their examination.
The Company also purchased loans totaling $96.1 million with the largest concentration of personal property located in California.
The Company also purchased loans totaling $83.1 million with the largest concentration of these loans located in California.
Total interest expense increased $5.1 million, or 95.7%, for the year ended December 31, 2022, compared to the prior year, with increases in borrowing costs of $3.3 million and deposit costs of $1.8 million.
Total interest expense increased $29.0 million, or 275.3%, for the year ended December 31, 2023, compared to the prior year, with increases in borrowing costs and deposit costs of $7.1 million and $21.8 million, respectively.
Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2022 and 2021. 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.
Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2023 and 2022. Income and all average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield.
The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2022, cash and cash equivalents totaled $45.6 million, and securities classified as available-for-sale, which provide additional potential sources of liquidity, had a market value of $326.6 million.
The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2023, cash and cash equivalents totaled $123.2 million and securities classified as available-for-sale had a market value of $295.6 million.
First Northwest has a $20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
First Northwest maintains a $20.0 million line of credit with NexBank, with an available borrowing capacity of $13.5 million at year end, which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
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 each component, 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).
We will continue to look for ways to improve operational efficiency. We realigned positions in 2022 to better meet organizational objectives, resulting in some workforce reductions. We believe that recent investments in technology may also provide opportunities to build efficiencies.
We will continue to look for ways to improve operational efficiency. We realigned staff positions in 2022 to better meet organizational objectives, resulting in some workforce reductions. We believe that recent investments in technology may also provide opportunities to build efficiencies. Net interest income decreased substantially in 2023 as a result of accelerated funding costs.
We increased our net interest income in 2022, however, we experienced a decrease in non-interest income, specifically in areas which are impacted by interest rates. We remain focused on improving current noninterest income product lines, such as SBA and swap fees, and are pursuing new revenue channels related to payments and banking-as-a-service. • Expanding offerings to small-to-medium sized business .
We also experienced a decrease in noninterest income, specifically in areas which are impacted by interest rates. We remain focused on building core noninterest income product lines, such as SBA and swap fees, and are pursuing new revenue channels related to payments while continuing to control noninterest expense. • Expanding offerings to small-to-medium sized business .
Actual Minimum Capital Requirements Minimum Required to be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets) Bank only $ 215,037 10.4 % $ 82,607 4.0 % $ 103,259 5.0 % Common equity tier I (to risk-weighted assets) Bank only 215,037 13.4 72,230 4.5 104,332 6.5 Tier I risk-based capital (to risk-weighted assets) Bank only 215,037 13.4 96,306 6.0 128,408 8.0 Total risk-based capital (to risk-weighted assets) Bank only 231,405 14.4 128,408 8.0 160,510 10.0 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.
Actual Minimum Capital Requirements Minimum Required to be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets) Bank only $ 214,049 9.9 % $ 86,508 4.0 % $ 108,135 5.0 % Common equity tier I (to risk-weighted assets) Bank only 214,049 13.1 73,407 4.5 106,032 6.5 Tier I risk-based capital (to risk-weighted assets) Bank only 214,049 13.1 97,876 6.0 130,501 8.0 Total risk-based capital (to risk-weighted assets) Bank only 230,163 14.1 130,501 8.0 163,127 10.0 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.
Construction and land loans decreased $30.1 million, or 13.4%, with draws on new and existing loans partially offset by $79.3 million converting into fully amortizing loans. Undisbursed construction commitments totaled $120.7 million at December 31, 2022 compared to $194.3 million at December 31, 2021.
Construction and land loans decreased $64.0 million, or 33.0%, with $118.2 million converting into fully amortizing loans partially offset by draws on new and existing commitments. Undisbursed construction commitments totaled $55.4 million at December 31, 2023 compared to $120.7 million at December 31, 2022.
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 million in Canapi Ventures to identify and infuse capital into certain promising fintech companies.
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. The Company has six years remaining in its commitment to Canapi Ventures to identify and infuse capital into early stage fintech companies.
At December 31, 2022, the Company (on an unconsolidated basis) had liquid assets of $1.0 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.
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.
Mortgage-backed securities represent the largest portion of our investment portfolio and totaled $169.0 million at December 31, 2022, an increase of $29.0 million, or 20.7% from $140.0 million at December 31, 2021. Municipal bonds are the second largest segment, totaling $98.1 million at December 31, 2022, a decrease of $15.3 million, or 13.5%, from $113.4 million at December 31, 2021.
Mortgage-backed securities represent the largest portion of our investment portfolio and totaled $139.3 million at December 31, 2023, a decrease of $29.6 million, or 17.5% from $169.0 million at December 31, 2022. Municipal bonds are the second largest segment, totaling $87.8 million at December 31, 2023, a decrease of $10.3 million, or 10.5%, from $98.1 million at December 31, 2022.
The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed and Quin Ventures. The Company has also entered into partnerships to strategically invest in fintech-related businesses, which may result in the development of additional investment opportunities.
Non-banking investments include several limited partnership investments, including a 33% interest in The Meriwether Group, LLC ("MWG"). The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed. The Company has also entered into partnerships to strategically invest in fintech-related businesses, which may result in the development of additional investment opportunities.
Multi-family and commercial real estate loans increased $108.1 million, or 20.2%, consisting mainly of an increase in multi-family real estate loans of $81.1 million as a result of new originations and $17.6 million of construction loans converting into permanent amortizing loans.
Multi-family and commercial real estate loans increased $79.5 million, or 12.4%, consisting mainly of an increase in multi-family real estate loans of $80.4 million as a result of new originations and $38.4 million of construction loans converting into permanent amortizing loans.
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.
Depending on market conditions, we may pay higher rates on borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate offerings. However, rates on these sources of funds may also be less than what the market demands for customer deposits.
We offer 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 swap program to generate additional fee income.
The Bank offers 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.
One- to four-family residential loans increased $48.9 million, or 16.6%, with $40.5 million in construction loans converting to permanent amortizing loans during the year.
One-to-four family residential loans increased $34.9 million, or 10.2%, with $64.7 million in construction loans converting to permanent amortizing loans during the year.
The average deposit account balance, excluding brokered and public fund accounts, was $29,000 at December 31, 2022. We estimate that 20-25% of our retail customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of depositors.
The average deposit account balance, excluding brokered and public fund accounts, was $27,000 at December 31, 2023. We estimate that 20-25% of our retail customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers. Management believes that maintaining a diversified deposit base is an important factor in managing liquidity.
Interest income increased $16.7 million, or 26.2%, to $80.4 million for the year ended December 31, 2022 from $63.7 million for the comparable period in 2021, primarily due to an increase in the average balance of loans receivable.
Interest income increased $20.5 million, or 25.5%, to $100.9 million for the year ended December 31, 2023 from $80.4 million for the comparable period in 2022, primarily due to an increase in the average balance of and higher yields on loans receivable.
Total assets increased $121.0 million, or 6.3%, to $2.04 billion at December 31, 2022, from $1.92 billion at December 31, 2021. Total loans, excluding loans held for sale, increased $177.2 million, or 13.1%, during the year ended December 31, 2022.
Total assets increased $159.7 million, or 7.8%, to $2.2 billion at December 31, 2023, from $2.04 billion at December 31, 2022. Total loans, excluding loans held for sale, increased $112.5 million, or 7.3%, during the year ended December 31, 2023.
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 investment security principal and interest payments, deposit inflows, brokered deposits, loan repayments, maturities and sales of securities and borrowings from the FHLB.
Our primary sources of funds consist of investment security principal and interest payments, deposit inflows, brokered deposits, loan repayments, maturities, sales of securities, and borrowings from the FHLB.
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.
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.
The allowance for loan losses as a percentage of total loans was 1.05% at December 31, 2022 and 1.11% at December 31, 2021. We believe our allowance for loan losses is adequate to cover inherent losses in the loan portfolio. Nonperforming loans increased $409,000, or 29.6%, during the year ended December 31, 2022 to $1.8 million.
The allowance for credit losses on loans as a percentage of total loans was 1.05% at December 31, 2023 and 1.04% at December 31, 2022. We believe our allowance for credit losses on loans is adequate to cover inherent losses in the loan portfolio.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown: Year Ended December 31, 2022 2021 Average Balance Outstanding Yield Average Balance Outstanding Yield Increase/ (Decrease) in Interest Income (Dollars in thousands) Loans receivable, net $ 1,448,777 4.74 % $ 1,239,919 4.44 % $ 13,606 Investment securities 350,521 3.10 365,000 2.29 2,497 FHLB stock 8,540 5.88 4,058 4.68 312 Interest-earning deposits in banks 34,807 1.08 52,242 0.16 292 Total interest-earning assets $ 1,842,645 4.36 % $ 1,661,219 3.83 % $ 16,707 Interest Expense.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown: Year Ended December 31, 2023 2022 Average Balance Outstanding Yield Average Balance Outstanding Yield Increase/ (Decrease) in Interest Income (Dollars in thousands) Loans receivable, net $ 1,594,268 5.31 % $ 1,448,777 4.74 % $ 15,979 Investment securities 317,924 4.18 350,521 3.10 2,413 FHLB stock 12,035 7.31 8,540 5.88 378 Interest-earning deposits in banks 40,832 5.21 34,807 1.08 1,751 Total interest-earning assets $ 1,965,059 5.13 % $ 1,842,645 4.36 % $ 20,521 Interest Expense.
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 Fed’s regulatory capital requirements. 85 Table of Contents 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.
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.
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.
To diversify our portfolio and increase interest income, we increased our origination of commercial real estate, multi-family real estate, and commercial business loans. We also increased our auto and consumer loans through originations, purchased auto loan programs, and purchased manufactured homes.
The commercial real estate loans increase was due to new loan originations in addition to $12.2 million from construction loans converting into permanent amortizing loans. Auto and other consumer loans increased $40.0 million, or 21.9%, with the purchase of a pool of manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans.
Commercial real estate loans decreased $901,000 as payment activity exceeded new loan originations of $39.7 million and $10.1 million from construction loans converting into permanent amortizing loans. Auto and other consumer loans increased $10.2 million, or 4.3%, with the purchase of a pool of manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans.
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, 2022, the Bank and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" under FDIC regulatory capital guidelines.
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.
We have pledged loan collateral to support borrowings from the FHLB of $234.0 million. We have also pledged collateral to the Federal Reserve Bank of San Francisco to secure discount window advances; the Company has performed periodic borrowing tests, however, no funds were borrowed as of December 31, 2022 .
We have also pledged collateral of $6.6 million and $15.2 million, respectively, to the Federal Reserve Bank of San Francisco to secure discount window and Bank Term Funding Program advances; the Company has performed periodic borrowing tests on these lines with the Federal Reserve; however, no such funds were borrowed as of December 31, 2023 .
We have focused on upgrading our infrastructure, in terms of technology, equipment and personnel, in order to support our changing lending and deposit capabilities and position ourselves for growth.
The Bank focused on upgrading its infrastructure, in terms of technology, equipment and personnel, to support its changing lending and deposit capabilities and position the Bank for growth. • Expanding small-to-medium size business relationships .
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.
(2) Includes interest-bearing deposits 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.
Classified loans, consisting solely of substandard loans, increased by $4.3 million, or 34.3%, to $16.9 million at December 31, 2022, from $12.6 million at December 31, 2021.
Classified loans, consisting solely of substandard loans, increased by $18.2 million, or 107.7%, to $35.1 million at December 31, 2023, from $16.9 million at December 31, 2022.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown: Year Ended December 31, Increase (Decrease) 2022 2021 Amount Percent (Dollars in thousands) Loan and deposit service fees $ 4,729 $ 3,860 $ 869 22.5 % Sold loan servicing fees 867 946 (79 ) (8.4 ) Net gain on sale of loans 824 5,278 (4,454 ) (84.4 ) Net gain on sale of investment securities 118 2,410 (2,292 ) (95.1 ) Increase in cash surrender value of bank-owned life insurance, net 916 965 (49 ) (5.1 ) Income from death benefit on bank-owned life insurance, net 1,489 — 1,489 100.0 Other income 1,384 2,179 (795 ) (36.5 ) Total noninterest income $ 10,327 $ 15,638 $ (5,311 ) (34.0 )% Noninterest Expense.
The following table provides an analysis of the changes in the components of noninterest income for the periods shown: Year Ended December 31, Increase (Decrease) 2023 2022 Amount Percent (Dollars in thousands) Loan and deposit fees $ 4,341 $ 4,729 $ (388 ) (8.2 )% Sold loan servicing fees and servicing rights mark-to-market 676 867 (191 ) (22.0 ) Net gain on sale of loans 438 824 (386 ) (46.8 ) Net (loss) gain on sale of investment securities (5,397 ) 118 (5,515 ) (4,673.7 ) Increase in cash surrender value of bank-owned life insurance, net 928 916 12 1.3 Income from death benefit on bank-owned life insurance, net — 1,489 (1,489 ) (100.0 ) Other income 3,034 1,384 1,650 119.2 Total noninterest income $ 4,020 $ 10,327 $ (6,307 ) (61.1 )% Noninterest Expense.
(2) Includes interest-bearing deposits at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.33% and 0.23% for the years ended December 31, 2022 and 2021.
(4) Cost of all deposits, including noninterest-bearing demand deposits, was 1.66% and 0.33% for the years ended December 31, 2023 and 2022.
Net interest income increased $11.6 million, or 19.8%, to $69.9 million for the year ended December 31, 2022, from $58.3 million for the year ended December 31, 2021, mainly as the result of additional interest income related to an increase in the average balances of loans receivable as well higher yields earned on both loans receivable and investment securities.
Net interest income decreased $8.4 million, or 12.1%, to $61.4 million for the year ended December 31, 2023, from $69.9 million for the year ended December 31, 2022, mainly as the result of additional interest expense related to higher costs on both deposit and advance balances as well as an increase in the average balances of CDs and advances.
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.
All of the factors used in these methodologies are susceptible to significant change. Management reviews and approves, at least quarterly, the level of the allowance and the provision for credit losses on loans based on anticipated future economic conditions and other factors related to the collectability of the loan portfolio.
This increase was mainly the result of increases in nonperforming one- to four-family of $463,000 and auto and other consumer of $60,000, partially offset by a decrease in home equity loans of $88,000.
This increase was mainly the result of increases in nonperforming commercial construction of $15.0 million, one-to-four family of $890,000, commercial business of $877,000 and auto and other consumer of $211,000, partially offset by decreases in home equity loans of $73,000 and commercial real estate of $25,000.

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