10-K 1 fnwb20231231_10k.htm FORM 10-K fnwb20231231_10k.htm
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The surrendered shares are canceled and are unavailable for reissue. Loans individually evaluated for specific reserves. Represents changes due to collection/realization of expected cash flows and curtailments. These amounts include the amortized cost basis of a closed portfolio of AFS securities used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023, the amortized cost basis of the closed portfolio used in this hedging relationship was $57.4 million, the cumulative basis adjustments associated with this hedging relationship was $1.1 million, and the amount of the designated hedged items was $50.0 million. 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2023

or

   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 001-36741

 

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)

 

Washington

 

46-1259100

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer I.D. Number)

 

 

 

105 West 8th Street, Port Angeles, Washington

 

98362

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant's telephone number, including area code:

 

(360) 457-0461

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

FNWB

 

The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes  No ☒

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒

 

At March 8, 2024, the registrant had 9,443,271 shares of common stock issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of such stock as quoted on The Nasdaq Stock Market, LLC as of June 30, 2023, was $104,963,726.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the registrant's Proxy Statement for the 2024 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

 
 

FIRST NORTHWEST BANCORP

2023 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

Forward-Looking Statements

4

Available Information

5

PART I

 

Item 1. Business

6

General

6

Market Area

7

Lending Activities

8

Asset Quality

24

Investment Activities

30

Deposit Activities and Other Sources of Funds

33

Subsidiary and Other Activities

37

Competition

38

Employees and Human Capital Resources

38

How We Are Regulated

40

Taxation

49

Item 1A. Risk Factors

50

Item 1B. Unresolved Staff Comments

59

Item 1C. Cybersecurity 60

Item 2. Properties

61

Item 3. Legal Proceedings

61

Item 4. Mine Safety Disclosures

61

PART II

 

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

62

Item 6. [Reserved]

62

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

63

General

63

Our Business and Operating Strategy

64

Critical Accounting Policies

65

New Accounting Pronouncements

66

Comparison of Financial Condition at December 31, 2023 and December 31, 2022

67

Comparison of Results of Operations for the Years Ended December 31, 2023 and December 31, 2022

69

Average Balances, Interest and Average Yields/Cost

73

Rate/Volume Analysis

74

Asset and Liability Management and Market Risk

74

Liquidity Management

76

Off-Balance Sheet Activities

76

Commitments and Off-Balance Sheet Arrangements

77

Capital Resources

77

Effect of Inflation and Changing Prices

78

Recent Accounting Pronouncements

78

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 78
Item 8. Financial Statements and Supplementary Data 78

 

 

 

 

FIRST NORTHWEST BANCORP

2023 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS (Continued)

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

138

Item 9A. Controls and Procedures

138

Item 9B. Other Information

139

Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections 139

PART III.

 

Item 10. Directors, Executive Officers and Corporate Governance

139

Item 11. Executive Compensation

139

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

139

Item 13. Certain Relationships and Related Transactions, and Director Independence

140

Item 14. Principal Accountant Fees and Services

140

PART IV.

 

Item 15. Exhibits and Financial Statement Schedules

140

Item 16. Form 10-K Summary

141

Signatures

142

 

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First Northwest") and its consolidated subsidiary unless the context indicates otherwise. For periods prior to June 30, 2023, such terms also include its former joint venture controlling interest, unless the context indicates otherwise. When we refer to “First Fed” or the “Bank” in this report, we are referring to First Fed Bank, the wholly owned subsidiary of First Northwest Bancorp. When we refer to "Quin" or "Quin Ventures" in this report, we are referring to Quin Ventures, Inc., a former First Northwest joint venture. First Northwest and the Bank are collectively referred to as the "Company." For periods prior to June 30, 2023, Company references also include Quin Ventures.

 

 

 

Forward-Looking Statements

 

Certain matters in this Annual Report on Form 10-K ("Form 10-K"), including information included or incorporated by reference, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions that are not historical facts, and other statements often identified by words such as "believes," "expects," "anticipates," "estimates," or similar expressions.

 

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

  risks associated with lending and potential adverse changes in the credit quality of our loan portfolio;
  legislative or regulatory changes, including increased insurance rates and assessments or expanded consumer protection regulations, responses to recent events in the banking industry, interest rates along the yield curve, and inflation, which could adversely affect the Company's business;
 

continued depressed market demand for mortgage and Small Business Administration loans that we originate for sale;

  changes in monetary and fiscal policies including interest rate policies of the Federal Reserve and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
 

our ability to control operating costs and expenses;

 

whether our management team can succeed in implementing our operational strategy, including but not limited to our efforts to achieve higher net interest income and noninterest revenue growth;

 

our ability to successfully execute on growth strategies related to our entry into new markets and delivery channels, including banking as a service;

  our ability to develop user-friendly digital applications to serve existing customers and attract new customers;
 

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

  pressures on liquidity as a result of withdrawals of customer deposits or declines in the value of our investment portfolio;
 

increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;

 

our ability to attract and retain deposits at a reasonable cost relative to the market;

 

changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;

 

results of examinations by our primary or other regulatory authorities, as well as the Consent Order we entered into with the Federal Deposit Insurance Corporation, could have an adverse impact on our business and operations;

 

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

  risks related to overall economic conditions, including the impact on the economy of an elevated interest rate environment and geopolitical instability, including the wars in Ukraine and the Middle East;
 

any failure of key third-party vendors to perform their obligations to us;

  risks related to natural disasters, including droughts, fires, floods, earthquakes, pandemics, and other unexpected events;
  the effects of any reputational damage to the Company resulting from any of the foregoing; and
 

other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including risks discussed under "Item 1.A. -- Risk Factors" in this Form 10-K.

 

 

 

Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

 

Available Information

 

The Company provides an Investor Relations link on its website (www.ourfirstfed.com) to the Securities and Exchange Commission’s ("SEC") website (www.sec.gov) for purposes of providing copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements. Other than an investor’s own internet access charges, these filings are available free of charge. The information contained on our website is not included as part of, or incorporated by reference into, this Form 10-K.

 

 

PART I

 

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. Non-financial investments include several limited partnership investments, including a 33% interest in The Meriwether Group, LLC ("MWG"), a boutique investment bank focusing on providing entrepreneurs with resources to help them succeed, including equity and debt raising services along with strategic positioning of business through the United States.

 

At December 31, 2023, the Company had total assets of $2.2 billion, net loans of $1.64 billion, total deposits of $1.68 billion, and total shareholders' equity of $163.3 million. The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed. The Company has entered into numerous partnerships to strategically invest in financial technology-related businesses, which may result in the development of additional investment opportunities. Aside from these investments, the information set forth in this report, including consolidated financial statements and related data, relates primarily to First Fed.

 

First Northwest is subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve"). A financial holding company is a bank holding company that is permitted to engage in specified types of non-banking financial services. First Fed is examined and regulated by the Washington State Department of Financial Institutions, Division of Banks ("DFI") and by the Federal Deposit Insurance Corporation ("FDIC"). First Fed is required to have certain reserves set by the Federal Reserve and is a member of the Federal Home Loan Bank of Des Moines ("FHLB"), which is one of the 11 regional banks in the Federal Home Loan Bank System ("FHLB System").

 

First Fed Bank is a community-oriented financial institution founded in 1923 in Port Angeles, Washington. The Bank operates in 18 locations including twelve full-service branches, three business centers, and three administration centers located in Clallam, Jefferson, King, Kitsap, and Whatcom counties. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a full array of financial products and services for individuals, small business, and commercial customers. Lending activities include loan originations generated through organic production and loan referrals as well as purchasing loans to augment our loan portfolios. Internal production is focused on originations of first lien one-to-four family mortgage loans, commercial and multi-family real estate loans, residential and commercial construction and land loans, commercial business loans, Small Business Administration ("SBA") loans, and consumer loans, consisting primarily of home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans. Loans are purchased from experienced third-party lenders with a current focus on unsecured loans to small businesses and professionals, manufactured home loans and high-end auto loans to increase our commercial business and consumer loan portfolios. We offer traditional consumer and business deposit products, including transaction 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. Additionally, First Fed developed a strategic partnership with a financial technology ("fintech") company, Splash Financial, to develop and deploy digitally focused financial solutions to meet customers’ needs on a broader scale.

 

Quin Ventures, Inc. was a fintech joint venture between First Northwest and Peace of Mind, Inc. ("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”). Quil was created by the founders of POM, in partnership with a third-party financing source, to pursue a new business model with another sponsor bank. As part of the transaction, First Northwest received a 5% ownership stake in Quil. First Northwest retained a 50% equity interest in Quin Ventures and recorded a commitment receivable under "Other Assets" which was to be repaid from Quil subscription fee income through a revenue share agreement. In June 2023, First Northwest determined that Quin Ventures was no longer a going concern. The Company wrote off its remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods, with no change to total shareholders' equity as a result of the transaction. In December 2023, the Company determined that Quil was no longer a going concern, therefore making the collectability of the receivable from and investment in Quil unlikely. As result, the related investment of $225,000 and commitment receivable of $1.5 million were written off, impacting other noninterest income and other noninterest expense, respectively.

 

 

 

First Northwest's limited partnership investments include Canapi Ventures Fund, LP; BankTech Ventures, LP; and JAM FINTOP Blockchain, LP. These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focusing on providing entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Meriwether Group Capital Hero Fund LP ("Hero Fund"). The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. First Northwest also has a limited partnership investment in the Hero Fund. MWG also holds a 20% general partner interest in MWGC.

 

The executive office of the Company is located at 105 West 8th Street, Port Angeles, Washington 98362, and its telephone number is (360) 457-0461.

 

Market Area

 

We operate through twelve full-service branch offices, 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. We have two administration centers located in Clallam County, one administration and two business centers in King County and one business center in Whatcom County. All population and income data below is derived from the U.S. Census Bureau website.

 

Clallam County has a population of approximately 77,805 and estimated median family income of $66,108. The economic base in Clallam County is dependent on government, healthcare, education, tourism, marine services, forest products, agriculture, and technology industries. The primary employers in Clallam County include the Olympic Medical Center, Peninsula College, the Port Angeles School District, Clallam County government, Jamestown S'Klallam Tribe, Clallam Bay Corrections Center, and the Westport Shipyard. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Clallam County was 6.3% at December 31, 2023, compared to 6.1% at December 31, 2022. By comparison, the unemployment rate for the state of Washington was 4.2%, and the national average was 3.7% at December 31, 2023.

 

Jefferson County has a population of approximately 33,589 and estimated median family income of $64,796. The economic base in Jefferson County is dependent on government, healthcare, education, tourism, arts and culture, maritime and boat building, and small-scale manufacturing. The primary employers in Jefferson County include Port Townsend Paper, Jefferson Healthcare, Port Townsend School District, the Port Authority of Port Townsend and related marine trade, Amazon, and the Jefferson County government. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Jefferson County was 5.8% at December 31, 2023, compared to 5.4% at December 31, 2022.

 

Kitsap County has a population of approximately 277,673 and estimated median family income of $93,675. The economic base of Kitsap County is largely supported by the United States Navy through personnel stationed at Kitsap Naval Base along with other employers supporting the military. Private industries that support the economic base are healthcare, retail and tourism. Other primary employers in Kitsap County include the Department of Defense, Amazon, Walmart, St. Michael Medical Center, Catholic Health Initiatives, and Port Madison Enterprises, which owns and operates the Clearwater Casino and Resort, gas stations and other retail operations. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Kitsap County was 4.7% at December 31, 2023, compared to 4.3% at December 31, 2022.

 

Whatcom County has a population of approximately 230,677 and estimated median family income of $77,581. The economic base of Whatcom County is largely supported by healthcare, education and crude oil refinery industries. There is some niche manufacturing and a large variety of other small businesses that create a well-rounded economy with a close proximity to the Canadian border bringing in shoppers seeking retail products and services. The primary employers in Whatcom County include PeaceHealth Medical Center, Western Washington University, Bellingham School District, Avamere Living, and BP Cherry Point Refinery. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Whatcom County was 5.1% at December 31, 2023, compared to 5.0% at December 31, 2022.

 

King County, which includes the City of Seattle, has a population of approximately 2.3 million and estimated median family income of $116,340. The economic base of King County is largely supported by technology, services, and manufacturing industries. The primary employers in King County include Microsoft, Amazon, Boeing, University of Washington, Starbucks, Salesforce, and the King County government. According to the U.S. Bureau of Labor Statistics, the unemployment rate for King County was 3.5% at December 31, 2023, compared to 2.8% at December 31, 2022.

 

 

 

As a part of our business plan, we intend to extend our traditional and digital operations throughout the Puget Sound Region and beyond. This region dominates the economy of the Pacific Northwest and is broadly defined as the area surrounding the Puget Sound that extends into the northwestern 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. 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. 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. The region is well known for the long-term presence of The Boeing Company and Microsoft, two major industry leaders, and since the turn of the century, Amazon.com. The military presence includes a number of large installations serving the U.S. Air Force, Army and Navy. Given the employment profile and the presence of the University of Washington and other universities, the region's workforce is highly educated. Washington's geographic proximity to the Pacific Rim along with a deep-water port makes it a center for international trade, which contributes significantly to the regional economy. The local ports make Washington the ninth largest exporting state in the nation. The top five trading partners with Washington include China, Canada, Japan, Mexico and South Korea. Tourism has also developed into a major industry, due to the scenic beauty, temperate climate, and incredible food and culture. The maritime industry, supported by the trade and fishing industries, is also an important employment sector.

 

For a discussion regarding the competition in our primary market area, see "Competition."

 

Lending Activities

 

General. First Fed’s principal lending activities are concentrated in real estate secured loans with first lien one-to-four family mortgage, commercial, and multi-family loans. First Fed also makes construction and land loans (including lot loans and multi-family acquisition-renovation loans), commercial business loans, and consumer loans, consisting primarily of home-equity loans and lines of credit. The Bank also purchases automobile and manufactured home loans from known, experienced third-party originators.

 

Loan Portfolio Analysis

 

The following table represents information concerning the composition of our loan portfolio, excluding loans held for sale, by the type of loan at the dates indicated:

   

December 31,

 
   

2023

   

2022

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Real estate:

                               

One-to-four family

  $ 378,432       22.8 %   $ 343,559       22.2 %

Multi-family

    333,094       20.1       252,745       16.3  

Commercial real estate

    387,983       23.3       388,884       25.2  

Construction and land

    129,691       7.8       193,646       12.5  

Total real estate loans

    1,229,200       74.0       1,178,834       76.2  

Consumer:

                               

Home equity

    69,403       4.2       52,877       3.4  

Auto and other consumer

    249,130       15.0       238,913       15.4  

Total consumer loans

    318,533       19.2       291,790       18.8  

Commercial business loans

    112,295       6.8       76,927       5.0  

Total loans

    1,660,028       100.0 %     1,547,551       100.0 %

Less:

                               

Allowance for credit losses on loans

    17,510               16,116          

Total loans, net

  $ 1,642,518             $ 1,531,435          

 

 

Fixed-Rate and Adjustable-Rate Loans

 

The following table shows the composition of our loan portfolio, excluding loans held for sale, in dollar amounts and in percentages by fixed rates and adjustable rates at the dates indicated:

 

   

December 31,

 
   

2023

   

2022

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Fixed-rate loans:

                               

Real estate:

                               

One-to-four family

  $ 287,864       17.2 %   $ 252,960       16.4 %

Multi-family

    121,809       7.3       99,761       6.4  

Commercial real estate

    152,744       9.2       147,886       9.6  

Construction and land

    55,687       3.4       102,742       6.6  

Total real estate loans

    618,104       37.1       603,349       39.0  

Consumer:

                               

Home equity

    26,951       1.6       23,733       1.5  

Auto and other consumer

    248,741       15.0       238,573       15.4  

Total consumer loans

    275,692       16.6       262,306       16.9  

Commercial business loans

    46,576       2.8       23,745       1.5  

Total fixed-rate loans

    940,372       56.5       889,400       57.4  
                                 

Adjustable-rate loans:

                               

Real estate:

                               

One-to-four family

    90,568       5.5       90,599       5.9  

Multi-family

    211,285       12.7       152,984       9.9  

Commercial real estate

    235,239       14.2       240,998       15.6  

Construction and land

    74,004       4.5       90,904       5.9  

Total real estate loans

    611,096       36.9       575,485       37.3  

Consumer:

                               

Home equity

    42,452       2.6       29,144       1.9  

Auto and other consumer

    389             340        

Total consumer loans

    42,841       2.6       29,484       1.9  

Commercial business loans

    65,719       4.0       53,182       3.4  

Total adjustable-rate loans

    719,656       43.5       658,151       42.6  
                                 

Total loans

    1,660,028       100.0 %     1,547,551       100.0 %

Less:

                               

Allowance for credit losses on loans

    17,510               16,116          

Total loans, net

  $ 1,642,518             $ 1,531,435          

 

 

Loan Maturity

 

The following table illustrates the contractual maturity of our loan portfolio at December 31, 2023. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The total amount of loans due after December 31, 2024, that have fixed interest rates is $898.0 million, while the total amount of loans due after such date that have adjustable interest rates is $661.9 million. The table does not reflect the effects of unscheduled principal prepayments.

 

   

Within One Year (1)

   

After One Year Through Three Years

   

After Three Years Through Five Years

   

After Five Years Through Fifteen Years

   

Beyond Fifteen Years

   

Total

 
   

Amount

   

Weighted Average Rate

   

Amount

   

Weighted Average Rate

   

Amount

   

Weighted Average Rate

   

Amount

   

Weighted Average Rate

   

Amount

   

Weighted Average Rate

   

Amount

   

Weighted Average Rate

 
   

(Dollars in thousands)

 

Real estate:

                                                                                               

One-to-four family

  $ 6       5.29 %   $ 1,726       3.56 %   $ 1,637       3.33 %   $ 32,603       4.16 %   $ 342,460       3.83 %   $ 378,432       3.85 %

Multi-family

    16,815       3.87       44,693       4.13       72,676       4.04       186,627       5.14       12,283       7.26       333,094       4.78  

Commercial real estate

    1,280       5.79       42,866       4.83       71,803       5.60       268,722       6.18       3,312       5.29       387,983       5.92  

Construction and land

    41,817       9.05       11,944       7.08       12,185       5.06       28,373       5.38       35,372       4.53       129,691       6.46  

Consumer:

                                                                                               

Home equity

    4       5.12       200       8.40       876       7.92       30,228       5.39       38,095       8.05       69,403       6.89  

Auto and other consumer

    903       10.43       6,869       10.13       12,955       13.84       125,327       7.05       103,076       6.28       249,130       7.22  

Commercial business loans

    39,338       6.54       13,351       8.86       4,541       6.03       55,065       7.08                   112,295       7.08  
                                                                                                 

Total loans receivable

  $ 100,163       7.19 %   $ 121,649       5.52 %   $ 176,673       5.52 %   $ 726,945       5.98 %   $ 534,598       4.70 %   $ 1,660,028       5.56 %

_______________

(1) Includes demand loans, loans having no stated maturity, and overdraft loans.

 

 

Geographic Distribution of our Loans

 

The following table shows at December 31, 2023, the geographic distribution of our loan portfolio in dollar amounts and percentages.

 

    North Olympic Peninsula (1)     Puget Sound Region (2)    

Other Washington

   

Total in Washington State

   

All Other States (3)

   

Total

 
   

Amount

   

% of Total in Category

   

Amount

   

% of Total in Category

   

Amount

   

% of Total in Category

   

Amount

   

% of Total in Category

   

Amount

   

% of Total in Category

   

Amount

   

% of Total in Category

 
   

(Dollars in thousands)

 

Real estate loans:

                                                                                               

One-to-four family

  $ 130,982       34.6 %   $ 218,095       57.6 %   $ 10,062       2.7 %   $ 359,139       94.9 %   $ 19,293       5.1 %   $ 378,432       22.8 %

Multi-family

    7,684       2.3       272,548       81.8       36,354       10.9       316,586       95.0       16,508       5.0       333,094       20.1  

Commercial real estate

    74,997       19.3       280,236       72.3       24,064       6.2       379,297       97.8       8,686       2.2       387,983       23.3  

Construction and land

    7,139       5.5       110,542       85.3       11,834       9.1       129,515       99.9       176       0.1       129,691       7.8  

Total real estate loans

    220,802       18.0       881,421       71.7       82,314       6.7       1,184,537       96.4       44,663       3.6       1,229,200       74.0  
                                                                                                 

Consumer loans:

                                                                                               

Home equity

    42,717       61.5       25,493       36.8       1,193       1.7       69,403       100.0                   69,403       4.2  

Auto and other consumer

    4,694       1.9       8,245       3.3       2,431       1.0       15,370       6.2       233,760       93.8       249,130       15.0  

Total consumer loans

    47,411       14.9       33,738       10.6       3,624       1.1       84,773       26.6       233,760       73.4       318,533       19.2  
                                                                                                 

Commercial business loans

    28,549       25.4       30,032       26.8       5,199       4.6       63,780       56.8       48,515       43.2       112,295       6.8  
                                                                                                 

Total loans receivable

  $ 296,762       17.9 %   $ 945,191       56.9 %   $ 91,137       5.5 %   $ 1,333,090       80.3 %   $ 326,938       19.7 %   $ 1,660,028       100.0 %

____________

(1) Includes Clallam and Jefferson counties.

(2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.

(3) Includes loans located primarily in California, Oregon, and Florida.

 

 

One-to-Four Family Real Estate Lending. At December 31, 2023, one-to-four family residential mortgage loans (excluding loans held for sale) totaled $378.4 million, or 22.8%, of our total loan portfolio, including $19.3 million, or 5.1%, of loans secured by properties outside the state of Washington, primarily purchased loans in the state of California. We originate both fixed and adjustable-rate residential loans, which can be sold in the secondary market or retained in our portfolio, and supplement those originations with loan purchases, from time to time, depending on our balance sheet objectives. Residential loans are underwritten to either secondary market standards for sale or to internal underwriting standards, which may not meet Federal Home Loan Mortgage Corporation ("Freddie Mac") or Federal National Mortgage Association ("Fannie Mae") eligibility requirements.

 

Fixed-rate residential mortgages are offered with repayment terms between 10 and 30 years, priced from Freddie Mac posted daily pricing indications adjusted for economic and competitive considerations. Adjustable-rate residential mortgage products with similar amortization terms are also offered, with an interest rate that is typically fixed for an initial period ranging from one to seven years with annual adjustments thereafter. Future interest rate adjustments include periodic caps of no more than 2% and lifetime caps of 5% to 6% above the initial interest rate, with no borrower prepayment restrictions.

 

The credit risk on adjustable-rate mortgage loans could increase when interest rates rise. An increase to the borrower's loan payment may affect the borrower's ability to repay and could increase the probability of default. To mitigate this risk to both the borrower and First Fed, adjustable-rate loans contain both periodic and lifetime interest rate caps, limiting the amount of payment changes. In addition, depending on market conditions, we may underwrite the borrower at a higher interest rate and payment amount than the initial rate. At December 31, 2023, the average interest rate on our adjustable-rate mortgage loans was approximately 352 basis points under the fully indexed rate. As of December 31, 2023, we had $90.6 million, or 23.9%, of adjustable-rate residential mortgage loans in our residential loan portfolio.

 

The underwriting process considers a variety of factors including credit history, debt to income ratios, property type, loan to value ratio, and occupancy. For loans with over 80% loan to value ratios, we typically require private mortgage insurance, which reduces our exposure to loss in the event of a loan default. Credit risk is also mitigated by obtaining title insurance, hazard insurance, and flood insurance. Residential mortgage loans which require appraisals are appraised by independent fee-based appraisers.

 

In connection with rules and regulations issued by the Consumer Financial Protection Bureau ("CFPB"), we are required to make a reasonable, good-faith determination before or when we consummate a mortgage loan that the borrower has a reasonable ability to repay the loan, and in some cases involving qualified mortgages, we are presumed to have complied with this requirement. We believe that mortgage loans originated by the bank meet these standards.

 

First Fed does not actively engage in subprime mortgage lending, either through advertising, marketing, underwriting and/or risk selection, and has no established program to originate or purchase subprime mortgage loans.

 

Commercial and Multi-Family Real Estate Lending. At December 31, 2023, $388.0 million, or 23.3%, and $333.1 million, or 20.1%, of our total loan portfolio was secured by commercial and multi-family real estate property, respectively. At December 31, 2023, we have identified $95.6 million, or 13.2%, of our commercial and multi-family real estate portfolio as owner-occupied commercial real estate and $625.5 million, or 86.8%, is secured by income producing, or non-owner-occupied, commercial and multi-family real estate. 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. Repayment on loans secured by commercial or multi-family properties is dependent on successful management by the property owner to create sufficient net operating income to meet debt service requirements. Changes in economic and real estate market conditions can affect net operating income, capitalization rates, and ultimately the valuation and marketability of the collateral. As a result, we analyze market data including vacancy rates, absorption percentages, leasing rates, and competing projects under development. Interest rate, occupancy and capitalization rate stress testing are required as part of our underwriting analysis. If the borrower is a corporation, we generally require and obtain personal guarantees from principals, which include underwriting of their personal financial statements, tax returns, cash flows and individual credit reports, to provide us with additional support and a secondary source for repayment of the debt.

 

 

 

We offer both fixed- and adjustable-rate loans on commercial and multi-family real estate, which may include balloon payments. As of December 31, 2023, we had $235.2 million in adjustable-rate commercial real estate loans and $211.3 million in adjustable-rate multi-family loans. Commercial and multi-family real estate loans with adjustable rates generally adjust after an initial period of three to five years and have maturity dates of three to ten years. Amortization terms are generally limited to terms up to 25 years on commercial real estate loans and up to 30 years on multi-family loans. Adjustable-rate multi-family residential and commercial real estate loans are generally priced to market indices with appropriate margins, which may include The Wall Street Journal prime rate, the U.S. Constant Maturity Treasury Rate, or a similar term FHLB borrowing rate. Adjustable-rate loans could increase credit risk when interest rates rise. An increase to the borrower's loan payment may affect the borrower's ability to repay and could increase the probability of default. To mitigate this risk to both the borrower and First Fed, adjustable-rate loans may contain both periodic and lifetime interest rate caps, limiting the amount of payment changes.

 

During 2023, the Bank successfully migrated away from the London Interbank Offered Rate ("LIBOR") as an index for all new and existing loans. Commercial loans previously tied to LIBOR converted to a similar termed Term Secured Overnight Financing Rate ("TSOFR") product with the recommended spread adjustment set by the Alternative Reference Rate Committee. Of the adjustable-rate commercial and multi-family real estate loans, 66.01% are subject to a floor rate and the weighted average floor rate on these loans was 3.66% at December 31, 2023. Of the adjustable-rate commercial loans, 72.14% are subject to a ceiling rate and the weighted average ceiling rate on those loans was 17.05% at December 31, 2023.

 

The maximum loan to value ratio for commercial and multi-family real estate loans is typically limited to 75% of an appraiser opinion of market value. The minimum debt service coverage ratio is 1.25 for non-owner-occupied and owner-occupied properties. We require independent appraisals or evaluations on all loans secured by commercial or multi-family real estate from an approved appraisers list.

 

Once commercial real estate or multi-family loans are originated, we review most relationships at least annually to assure the borrower continues to meet certain loan requirements as set forth at origination, which may include an annual inspection of the property. The scope of the review is based on relationship size, with those $1.5 million or greater subject to a full credit review at least annually, which includes detailed financial and cash flow analysis, property inspection, covenant compliance and annual risk rating certification. Relationships $750,000 or greater are subject to brief financial and cash flow analysis, covenant compliance and annual risk rating certification. While we cannot prevent loans from becoming delinquent, we believe our monitoring and formal review processes provide us with the opportunity to better identify problem loans in a timely manner and to work with the borrower prior to the loan becoming delinquent.

 

 

The following table provides information on multi-family and commercial real estate loans by type at the dates indicated:

 

   

December 31,

 
   

2023

   

2022

   

2021

 
   

Amount

   

Percent

   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Non-owner occupied

                                               

Multi-family

  $ 333,094       46.2 %   $ 253,551       39.4 %   $ 172,409       32.2 %

Hospitality

    69,076       9.6       48,387       7.5       44,385       8.3  

Office building

    54,743       7.6       60,541       9.4       63,209       11.8  

Retail

    53,368       7.5       56,701       8.8       47,710       8.9  

Condominium

    20,800       2.9       22,846       3.5       19,781       3.7  

Mixed use

    18,180       2.5       19,022       3.0       20,938       3.9  

Health care

    11,972       1.7       12,208       1.9       8,374       1.6  

Warehouse

    8,262       1.1       8,954       1.4       15,374       2.8  

Self-storage

    4,671       0.6       5,997       0.9       13,246       2.5  

Vehicle dealership

    1,033       0.1       1,114       0.2       1,152       0.2  

Other non-owner occupied

    50,294       7.0       52,434       8.1       38,705       7.2  

Total non-owner occupied

    625,493       86.8       541,755       84.1       445,283       83.1  
                                                 

Owner occupied

                                               

Health care

    22,523       3.1       23,547       3.7       24,123       4.5  

Office building

    17,274       2.4       21,365       3.3       20,769       3.9  

Warehouse

    13,869       1.9       19,434       3.0       16,266       3.0  

Vehicle dealership

    11,005       1.5       8,820       1.4       4,289       0.8  

Retail

    9,792       1.4       11,031       1.7       8,777       1.6  

Mixed use

    4,013       0.6       4,412       0.7       4,458       0.8  

Condominium

    870       0.1       938       0.1       372       0.1  

Hospitality

    853       0.1       1,011       0.2       374       0.1  

Other owner-occupied

    15,385       2.1       11,484       1.8       10,997       2.1  

Total owner occupied

    95,584       13.2       102,042       15.9       90,425       16.9  
                                                 

Summary by type

                                               

Multi-family

    333,094       46.2       253,551       39.4       172,409       32.2  

Office building

    72,017       10.0       81,906       12.7       83,978       15.7  

Hospitality

    69,929       9.7       49,398       7.7       44,759       8.4  

Retail

    63,160       8.9       67,732       10.5       56,487       10.5  

Health care

    34,495       4.8       35,755       5.6       32,497       6.1  

Mixed use

    22,193       3.1       23,434       3.7       25,396       4.7  

Warehouse

    22,131       3.0       28,388