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Loans collectively evaluated for general reserves. 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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, 2021

or

   

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

 

For the transition period from _____ to _____

 

Commission File Number: 001-36741

 

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)

   

Washington

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

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

 

At March 10, 2022, the registrant had 10,006,022 shares of common stock issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of such stock as quoted on The Nasdaq Stock Market, LLC as of June 30, 2021, was $170,874,610.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the registrant's Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

1

 

 
 

FIRST NORTHWEST BANCORP

2021 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

6

Lending Activities

8

Asset Quality

25

Investment Activities

33

Deposit Activities and Other Sources of Funds

36

Subsidiary and Other Activities

41

Competition

42

Employees

42

How We Are Regulated

44

Taxation

55

Item 1A. Risk Factors

56

Item 1B. Unresolved Staff Comments

68

Item 2. Properties

68

Item 3. Legal Proceedings

68

Item 4. Mine Safety Disclosures

68

PART II

 

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

69

Item 6. [Reserved]

69

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

70

General

70

Our Business and Operating Strategy

71

Critical Accounting Policies

73

New Accounting Pronouncements

74

Comparison of Financial Condition at December 31, 2021 and December 31, 2020

74

Comparison of Results of Operations for the Years Ended December 31, 2021 and December 31, 2020

77

Average Balances, Interest and Average Yields/Cost

81

Rate/Volume Analysis

82

Asset and Liability Management and Market Risk

82

Liquidity Management

84

Off-Balance Sheet Activities

85

Commitments and Off-Balance Sheet Arrangements

85

Capital Resources

85

Effect of Inflation and Changing Prices

86

Recent Accounting Pronouncements

86

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 87
Item 8. Financial Statements and Supplementary Data 87

 

 

 

2

 

FIRST NORTHWEST BANCORP

2021 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS (Continued)

 

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

149

Item 9A. Controls and Procedures

149

Item 9B. Other Information

150

Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections 150

PART III.

 

Item 10. Directors, Executive Officers and Corporate Governance

150

Item 11. Executive Compensation

150

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

151

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

151

Item 14. Principal Accountant Fees and Services

151

PART IV.

 

Item 15. Exhibits and Financial Statement Schedules

151

Item 16. Form 10-K Summary

152

Signatures

153

 

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

 

3

 

 

Forward-Looking Statements

 

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

 

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

 

  the effects of the COVID-19 pandemic, including on our credit quality and operations, as well as its impact on general economic conditions;
  legislative or regulatory changes, including actions taken by governmental authorities in response to inflationary pressures, the COVID-19 pandemic, and climate change;
 

the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, particularly with respect to borrowers affected by the COVID-19 pandemic, natural disasters, or climate change;

 

a decrease in the market demand for loans that we originate for sale;

 

our ability to control operating costs and expenses;

 

whether our management team can implement our operational strategy, including but not limited to our efforts to achieve loan and revenue growth;

 

our ability to successfully execute on acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related cost savings within expected time frames;

 

our ability to successfully execute on growth strategies related to our entry into new markets;

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

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

 

changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

 

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

 

our ability to attract and retain deposits;

 

changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services;

 

results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;

 

legislative or regulatory changes that adversely affect our business;

 

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

 

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

 

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

 

 

4

 

Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the direct and indirect impact of the ongoing pandemic on the Bank, its customers and third parties. These developments could have an adverse impact on our financial position and our results of operations.

 

Any forward-looking statements are based upon 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, we cannot assure that the forward-looking statements discussed in this report will occur, and you should not put undue reliance on any forward-looking statements.

 

Available Information

 

The Company provides an Investor Relations link on its website (www.ourfirstfed.com) to the Securities and Exchange 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.

 

5

 

PART I

 

Item 1. Business

 

General

 

First Northwest Bancorp, a Washington corporation, is the bank holding company for First Fed Bank. In addition to the Bank, the Company has a controlling interest in Quin Ventures, Inc., which operates a digital financial wellness platform nationwide.

 

At December 31, 2021, the Company had total assets of $1.92 billion, net loans of $1.35 billion, total deposits of $1.58 billion, and total shareholders' equity of $190.5 million. The Company's business activities are generally limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures. The Company also entered into partnerships to strategically invest into fintech-related businesses, which may result in the development of additional investment opportunities. Aside from these investments, the information set forth in this report, including consolidated financial statements and related data, relates primarily to First Fed.

 

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

 

First Fed Bank is a community-oriented financial institution serving Western Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We have twelve full-service branches and two business centers.

 

We offer a wide range of products and services focused on the financial needs of the communities we serve. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and more recently have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.

 

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

 

 

Market Area

 

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

 

 

6

 

Clallam County has a population of approximately 77,331 and estimated median family income of $57,126. The economic base in Clallam County is dependent on government, healthcare, education, tourism, marine services, forest products, agriculture, and technology industries. The primary employers in Clallam County include the Olympic Medical Center, Peninsula College, the Port Angeles School District, Clallam County government, Jamestown S'Klallam Tribe, Clallam Bay Corrections Center, and the Westport Shipyard. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Clallam County was 4.5% at December 31, 2021, compared to 7.8% at December 31, 2020. By comparison, the unemployment rate for the state of Washington was 4.5%, and the national average was 3.9% at December 31, 2021.

 

Jefferson County has a population of approximately 31,729 and estimated median family income of $54,471. The economic base in Jefferson County is dependent on government, healthcare, education, tourism, arts and culture, maritime and boat building, and small-scale manufacturing. The primary employers in Jefferson County include Port Townsend Paper, Jefferson Healthcare, Port Townsend School District, the Port Authority of Port Townsend and related marine trade, and the Jefferson County government. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Jefferson County was 4.1% at December 31, 2021, compared to 7.4% at December 31, 2020.

 

Kitsap County has a population of approximately 271,473 and estimated median family income of $79,624. The economic base of Kitsap County is largely supported by the United States Navy through personnel stationed at Kitsap Naval Base along with other employers supporting the military. Private industries that support the economic base are healthcare, retail and tourism. Other primary employers in Kitsap County include the Department of Defense, Harrison Medical Center, Walmart, and Port Madison Enterprises, which owns and operates the Clearwater Casino and Resort, gas stations and other retail operations. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Kitsap County was 3.3% at December 31, 2021, compared to 6.0% at December 31, 2020.

 

Whatcom County has a population of approximately 229,247 and estimated median family income of $69,372. The economic base of Whatcom County is largely supported by healthcare, education and crude oil refinery industries. There is some niche manufacturing and a large variety of other small businesses that create a well-rounded economy with a close proximity to the Canadian border bringing in shoppers seeking retail products and services. The primary employers in Whatcom County include PeaceHealth Medical Center, Western Washington University, Bellingham School District, and BP Cherry Point Refinery. According to the U.S. Bureau of Labor Statistics, the unemployment rate for Whatcom County was 4.0% at December 31, 2021, compared to 7.0% at December 31, 2020.

 

King County, which includes the City of Seattle, has a population of approximately 2.3 million and estimated median family income of $102,594. The economic base of King County is largely supported by technology, services, and manufacturing industries. The primary employers in King County include Microsoft, Amazon, Boeing, Starbucks, and the King County government. According to the U.S. Bureau of Labor Statistics, the unemployment rate for King County was 3.2% at December 31, 2021, compared to 4.3% at December 31, 2020.

 

As a part of our business plan, we intend to extend our operations throughout the Puget Sound Region and beyond. This region dominates the economy of the Pacific Northwest and is broadly defined as the area surrounding the Puget Sound that extends into the northwestern section of the state of Washington. The population of this additional region (beyond our current market area) is approximately 2.3 million, or 29.5% of the state's population. The market area is a mix of urban, suburban and rural areas, with the Seattle metropolitan area as a well-developed urban center. The region extends from Whatcom County in the north on the Canadian border to Thurston and Pierce counties to the south. Other key metropolitan areas within the Puget Sound region include Bellingham (Whatcom County), Mount Vernon (Skagit County), Everett (Snohomish County), Tacoma (Pierce County) and Olympia (Thurston County).

 

7

 

Key employment sectors include aerospace, military, information technology, biotechnology, education, logistics, international trade, and tourism. The region is well known for the long-term presence of The Boeing Corporation and Microsoft, two major industry leaders, and since the turn of the century, Amazon.com. The military presence includes a number of large installations serving the U.S. Air Force, Army and Navy. Given the employment profile and the presence of the University of Washington and other universities, the region's workforce is highly educated. Washington's geographic proximity to the Pacific Rim along with a deep-water port makes it a center for international trade, which contributes significantly to the regional economy. The local ports make Washington the ninth largest exporting state in the nation. The top five trading partners with Washington include China, Canada, Japan, Mexico and South Korea. Tourism has also developed into a major industry, due to the scenic beauty, temperate climate, and incredible food and culture. Maritime industry employment, supported by the trade and fishing industries, is also an important employment sector.

 

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

 

Lending Activities

 

General. First 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 automobile loans, manufactured home loans, and home-equity loans and lines of credit.

 

Loan Portfolio Analysis

 

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

   

December 31,

 
   

2021

   

2020

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 
                                 

Real estate:

                               

One- to four-family

  $ 294,965       21.7 %   $ 309,828       26.8 %

Multi-family

    172,409       12.7       162,467       14.1  

Commercial real estate

    363,299       26.8       296,574       25.7  

Construction and land

    224,709       16.5       123,627       10.7  

Total real estate loans

    1,055,382       77.7       892,496       77.3  
                                 

Consumer:

                               

Home equity

    39,172       2.9       33,103       2.9  

Auto and other consumer

    182,769       13.5       128,233       11.1  

Total consumer loans

    221,941       16.4       161,336       14.0  
                                 

Commercial business loans

    79,838       5.9       100,201       8.7  
                                 

Total loans

    1,357,161       100.0 %     1,154,033       100.0 %
                                 

Less:

                               

Net deferred loan fees

    4,772               4,346          

Premium on purchased loans, net

    (12,995 )             (6,129 )        

Allowance for loan losses

    15,124               13,847          

Total loans, net

  $ 1,350,260             $ 1,141,969          

 

8

 

Fixed-Rate and Adjustable-Rate Loans

 

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

 

   

December 31,

 
   

2021

   

2020

 
   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Fixed-rate loans:

                               

Real estate:

                               

One- to four-family

  $ 203,746       15.0 %   $ 202,399       17.5 %

Multi-family

    65,331       4.8       77,788       6.7  

Commercial real estate

    127,522       9.4       118,610       10.3  

Construction and land

    73,104       5.4       38,732       3.4  

Total real estate loans

    469,703       34.6       437,529       37.9  

Consumer:

                               

Home equity

    18,910       1.4       18,479       1.6  

Auto and other consumer

    182,412       13.4       127,813       11.1  

Total consumer loans

    201,322       14.8       146,292       12.7  

Commercial business loans

    52,406       3.9       89,126       7.7  

Total fixed-rate loans

    723,431       53.3       672,947       58.3  
                                 

Adjustable-rate loans:

                               

Real estate:

                               

One- to four-family

    91,219       6.7       107,429       9.3  

Multi-family

    107,078       7.9       84,679       7.3  

Commercial real estate

    235,777       17.4       177,964       15.4  

Construction and land

    151,605       11.2       84,895       7.4  

Total real estate loans

    585,679       43.2       454,967       39.4  

Consumer:

                               

Home equity

    20,262       1.5       14,624       1.3  

Auto and other consumer

    357             420        

Total consumer loans

    20,619       1.5       15,044       1.3  

Commercial business loans

    27,432       2.0       11,075       1.0  

Total adjustable-rate loans

    633,730       46.7       481,086       41.7  
                                 

Total loans

    1,357,161       100.0 %     1,154,033       100.0 %

Less:

                               

Net deferred loan fees

    4,772               4,346          

Premium on purchased loans, net

    (12,995 )             (6,129 )        

Allowance for loan losses

    15,124               13,847          

Total loans, net

  $ 1,350,260             $ 1,141,969          

 

9

 

Loan Maturity

 

The following table illustrates the contractual maturity of our loan portfolio at December 31, 2021. 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, 2022 that have fixed interest rates is $691.4 million, while the total amount of loans due after such date that have adjustable interest rates is $556.9 million. The table does not reflect the effects of unpredictable 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

  $ 15       4.87 %   $ 165       4.22 %   $ 4,695       3.58 %   $ 38,598       3.71 %   $ 251,492       3.70 %   $ 294,965       3.70 %

Multi-family

                16,832       4.01       20,618       3.82       118,035       3.65       16,924       4.51       172,409       3.79  

Commercial real estate

    10,866       4.29       19,081       4.21       48,399       3.95       284,583       3.91       370       5.33       363,299       3.94  

Construction and land

    58,428       5.00       36,851       4.26       24,831       4.42       72,458       4.26       32,141       3.70       224,709       4.40  

Consumer:

                                                                                               

Home equity

    358       4.12       175       5.07       332       5.02       23,568       3.98       14,739       4.28       39,172       4.11  

Auto and other consumer

    723       9.08       5,715       6.88       12,531       7.35       106,865       7.01       56,935       5.95       182,769       6.71  
                                                                                                 

Commercial business loans

    38,517       4.39       2,044       4.73       24,878       2.10       14,399       5.47                   79,838       3.64  
                                                                                                 

Total loans

  $ 108,907       4.84 %   $ 80,863       4.40 %   $ 136,284       3.98 %   $ 658,506       4.43 %   $ 372,601       4.10 %   $ 1,357,161       4.32 %

_______________

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

 

10

 

Geographic Distribution of our Loans

 

The following table shows at December 31, 2021 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

  $ 100,084       34.0 %   $ 157,767       53.5 %   $ 5,731       1.9 %   $ 263,582       89.4 %   $ 31,383       10.6 %   $ 294,965       21.7 %

Multi-family

    4,907       2.8       131,919       76.6       22,463       13.0       159,289       92.4       13,120       7.6       172,409       12.7  

Commercial real estate

    59,817       16.5       273,700       75.3       20,937       5.8       354,454       97.6       8,845       2.4       363,299       26.8  

Construction and land

    17,983       8.0       175,872       78.2       21,713       9.7       215,568       95.9       9,141       4.1       224,709       16.5  

Total real estate loans

    182,791       17.3       739,258       70.1       70,844       6.7       992,893       94.1       62,489       5.9       1,055,382       77.7  
                                                                                                 

Consumer loans:

                                                                                               

Home equity

    29,930       76.4       8,802       22.5       440       1.1       39,172       100.0                   39,172       2.9  

Auto and other consumer

    8,335       4.6       12,631       6.9       2,275       1.2       23,241       12.7       159,528       87.3       182,769       13.5  

Total consumer loans

    38,265       17.2       21,433       9.7       2,715       1.2       62,413       28.1       159,528       71.9       221,941       16.4  
                                                                                                 

Commercial business loans

    20,166       25.3       22,751       28.5       171       0.2       43,088       54.0       36,750       46.0       79,838       5.9  
                                                                                                 

Total loans

  $ 241,222       17.8 %   $ 783,442       57.7 %   $ 73,730       5.4 %   $ 1,098,394       80.9 %   $ 258,767       19.1 %   $ 1,357,161       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.

 

11

 

One- to Four-Family Real Estate Lending. At December 31, 2021, one- to four-family residential mortgage loans (excluding loans held for sale) totaled $295.0 million, or 21.7%, of our total loan portfolio, including $31.4 million, or 10.6%, of loans secured by properties outside the state of Washington, primarily purchased loans in the state of California. We originate both fixed and adjustable-rate residential loans, which can be sold in the secondary market or retained in our portfolio, and supplement those originations with loan purchases from time to time, depending on our balance sheet objectives. Residential loans are underwritten to either secondary market standards for sale or to internal underwriting standards, which may not meet Federal Home Loan Mortgage Corporation ("Freddie Mac") or Federal National Mortgage Association ("Fannie Mae") eligibility requirements.

 

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

 

Adjustable-rate mortgage loans could increase credit risk when interest rates rise. An increase to the borrower's loan payment may affect the borrower's ability to repay and could increase the probability of default. To mitigate this risk to both the borrower and First Fed, adjustable-rate loans contain both periodic and lifetime interest rate caps, limiting the amount of payment changes. In addition, depending on market conditions, we may underwrite the borrower at a higher interest rate and payment amount than the initial rate. At December 31, 2021, the average interest rate on our adjustable-rate mortgage loans was approximately 30 basis points over the fully indexed rate. As of December 31, 2021, we had $91.2 million, or 6.7%, of adjustable-rate residential mortgage loans in our residential loan portfolio.

 

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

 

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

 

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

 

Commercial and Multi-Family Real Estate Lending. At December 31, 2021, $363.3 million, or 26.8%, and $172.4 million, or 12.7%, of our total loan portfolio was secured by commercial and multi-family real estate property, respectively. At December 31, 2021, we have identified $90.4 million, or 16.9%, of our commercial real estate portfolio as owner-occupied commercial real estate and $445.3 million, 83.1%, is secured by income producing, or non-owner-occupied, commercial and multi-family real estate. Substantially all of our commercial real estate and multi-family loans are secured by properties located in the state of Washington.

 

 

12

 

Commercial and multi-family real estate loans are generally priced at a higher rate of interest than one- to four-family residential loans, to compensate for the greater risk associated with higher loan balances and the complexity of underwriting and monitoring these loans. Repayment on loans secured by commercial or multi-family properties is dependent on successful management by the property owner to create sufficient net operating income to meet debt service requirements. Changes in economic and real estate market conditions can affect net operating income, capitalization rates, and ultimately the valuation and marketability of the collateral. As a result, we analyze market data including vacancy rates, absorption percentages, leasing rates, and competing projects under development. Interest rate, occupancy and capitalization rate stress testing are required as part of our underwriting analysis. If the borrower is a corporation, we generally require and obtain personal guarantees from principals, which include underwriting of their personal financial statements, tax returns, cash flows and individual credit reports, to provide us with additional support and a secondary source for repayment of the debt.

 

We offer both fixed- and adjustable-rate loans on commercial and multi-family real estate, which may include balloon payments. As of December 31, 2021, we had $235.8 million in adjustable-rate commercial real estate loans and $107.1 million in adjustable-rate multi-family loans. Commercial and multi-family real estate loans with adjustable rates generally adjust after an initial period of three to five years and have maturity dates of three to ten years. Amortization terms are generally limited to terms up to 25 years on commercial real estate loans and up to 30 years on multi-family loans. Adjustable-rate multi-family residential and commercial real estate loans are generally priced to market indices with appropriate margins, which may include the U.S. Constant Maturity Treasury Rate, The Wall Street Journal prime rate, or a similar term FHLB borrowing rate.

 

During 2019, the Bank moved away from the London Interbank Offered Rate ("LIBOR") as a market index in anticipation of its complete sunset in 2023 and in order to mitigate the transition of existing loans tied to LIBOR to the Secured Overnight Financing Rate ("SOFR") index. We currently utilize LIBOR on floating rate adjustable-rate conversion ("ARC") loan and Main Street Lending contracts; however, these contracts stipulate that we can use a different index upon the sunset of LIBOR. Substantially all adjustable-rate commercial and multi-family real estate loans are subject to a floor rate, and the weighted average floor rate on these loans was 2.98% at December 31, 2021. Of the adjustable-rate commercial loans, 74.35% are subject to a ceiling rate, and the weighted average ceiling rate on those loans was 15.07% at December 31, 2021.

 

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

 

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

 

13

 

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

   

December 31,

 
   

2021

   

2020

   

2019

 
   

Amount

   

Percent

   

Amount

   

Percent

   

Amount

   

Percent

 
   

(Dollars in thousands)

 

Non-owner occupied

                                               

Multi-family

  $ 172,409       32.2 %   $ 158,964       34.6 %   $ 96,098       27.3 %

Office building

    63,209       11.8       58,715       12.8       52,420       14.9  

Retail

    47,710       8.9       45,645       9.9       48,487       13.8  

Hospitality

    44,385       8.3       50,243       10.9       51,055       14.5  

Mixed use

    20,938       3.9       19,920       4.3       16,589       4.7  

Condominium

    19,781       3.7       3,923       0.9       113        

Warehouse

    15,374       2.8       7,193       1.5       6,263       1.7  

Self-storage

    13,246       2.5       12,290       2.7       10,269       2.9  

Health care

    8,374       1.6       16,365       3.6       12,390       3.5  

Vehicle dealership

    1,152       0.2       1,169       0.2       2,451       0.7  

Other non-owner occupied

    38,705       7.2       21,198       4.6       12,115       3.5  
                                                 

Total non-owner occupied

    445,283       83.1       395,625       86.0       308,250       87.5  
                                                 

Owner occupied

                                               

Health care

    24,123       4.5       21,595       4.7       14,091       4.0  

Office building

    20,769       3.9       10,455       2.3       6,873       2.0  

Warehouse

    16,266       3.0       4,444       1.0       3,351       1.0  

Retail

    8,777       1.6       7,713       1.7       2,631       0.7  

Mixed use

    4,458       0.8       4,487       1.0       1,370       0.4  

Vehicle dealership

    4,289       0.8       6,716       1.5       7,249       2.1  

Manufacturing

    1,987       0.4       2,103       0.5       2,138       0.6  

Hospitality

    374       0.1       346       0.1       361       0.1  

Condominium

    372       0.1       376       0.1              

Other owner-occupied

    9,010       1.7       5,181       1.1       5,506       1.6  
                                                 

Total owner occupied

    90,425       16.9       63,416       14.0       43,570       12.5  
                                                 

Summary by type

                                               

Multi-family

    172,409       32.2       158,964       34.6       96,098       27.3  

Office building

    83,978       15.7       69,170       15.1       59,293       16.9  

Retail

    56,487       10.5       53,358       11.6       51,118       14.5  

Hospitality

    44,759       8.4       50,589       11.0       51,416       14.6  

Health care

    32,497       6.1       37,960       8.3       26,481       7.5  

Warehouse

    31,640       5.8       11,637       2.5       9,614       2.7  

Mixed use

    25,396       4.7       24,407       5.3       17,959       5.1  

Condominium

    20,153       3.8       4,299       1.0       113        

Self-storage

    13,246       2.5       12,290       2.7       10,269       2.9  

Vehicle dealership

    5,441       1.0       7,885       1.7       9,700       2.8  

Manufacturing

    1,987       0.4       2,103       0.5       2,138       0.6  

Other non-owner occupied

    38,705       7.2       21,198       4.6       12,115       3.5  

Other owner-occupied

    9,010       1.7       5,181       1.1       5,506       1.6  
                                                 

Total multi-family and commercial real estate

  $ 535,708       100.0 %   $ 459,041       100.0 %   $ 351,820       100.0 %

 

14

 

If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period can be a lengthy process with substantial holding costs. Vacancies, deferred maintenance, repairs and market factors can result in losses during the time it takes to stabilize a property. Depending on the individual circumstances, initial charge-offs and subsequent losses relating to multi-family and commercial loans can be substantial and unpredictable.

 

The average outstanding loan in our commercial real estate portfolio, including multi-family loans, was $1.4 million as of December 31, 2021. We generally target individual commercial and multi-family real estate loans between $1.0 million and $10.0 million to small and mid-size owners and investors in our market areas as well as other parts of Washington. We will also make commercial and multi-family real estate loans in other states if we have a pre-existing relationship with the borrower.

 

Our three largest commercial and multi-family borrowing relationships, including current loan balances and unused commitments, at December 31, 2021 consisted of a $31.2 million relationship secured by multi-family real estate and multi-family construction in Chelan County, Washington and Kootenai County, Idaho; a $23.7 million relationship secured by multi-family residential and multi-family construction in King, Pierce, and Kitsap Counties; and a $22.2 million relationship secured by multi-family and business construction in Pierce and Kitsap Counties.

 

Construction and Land Lending. Our construction and land loans increased $101.1 million, or 81.8%, to $224.7 million, or 16.5% of the total loan portfolio at December 31, 2021, compared to $123.6 million, or 10.7%, at December 31, 2020. At December 31, 2021, the undisbursed portion of construction loans in process totaled $194.3 million compared to $155.1 million at December 31, 2020.

 

First Fed offers an "all-in-one" residential custom construction loan product, which upon completion of construction will be held in our loan portfolio. We also originate construction loans for certain commercial real estate projects. These projects include, but are not limited to, subdivisions, multi-family, retail, office, warehouse, hotel, and office buildings. We also offer commercial acquisition-renovation loans that have a small construction component combined with a traditional real estate loan. Underwriting criteria on construction loans include, but are not limited to, minimum debt service coverage requirements of 1.25 or better, loan to value limitations, pre-leasing requirements, construction cost over-run contingency reserves, interest and absorption period reserves, occupancy, capitalization rates and interest rate stress testing, as well as other underwriting criteria. Underwriting criteria on commercial acquisition-renovation loans during the interest-only period include, but are not limited to, loan to value limitations and debt service coverage requirements of 1.00 or better, based on in-place rents and amortization of full commitment. These loans begin amortizing once renovations have been completed.

 

Construction loan applications generally require architectural and working plans, a material specifications list, a detailed cost breakdown and a construction contract. Construction loan advances are based on progress payments for "work in place" based on detailed line-item construction budgets. Independent construction inspectors are used to evaluate the construction draw request relative to the progress. Our construction administrator reviews all construction projects, inspection reports, and construction loan advance requests to ensure they are appropriate and in compliance with all loan conditions. Other risk management tools include title insurance, date down endorsements or periodic lien inspections prior to the payment of construction loan advances. In some cases, general contractors may be required to provide sub-contractor lien releases for any work performed prior to the filing of our deed of trust or prior to each construction loan advance.

 

Custom and speculative construction valuations are based on the assumption that the project will be built in accordance with plans and specifications submitted to us at the time of the loan application. The appraiser takes into consideration the proposed design and market appeal of the improvements, based on current market conditions and demand for homes, although the improvements may not be completed for twelve months or longer, depending on the complexity of the plans and specifications and market conditions.

 

 

 

15

 

Land acquisition, development and construction loans are available to local contractors and developers for the purpose of holding and/or developing residential building sites and homes when market conditions warrant such activity. Land acquisition loans are secured by a first lien on the property and are generally limited to 65% of the acquisition price or the appraised value, whichever is less. Development land loans are generally limited to 75% of the discounted appraised value based on the projected lot sale absorption rate and associated carry and liquidation costs of the developed lots and homes. Underwriting criteria for acquisition and development loans include evidence of preliminary plat approval, and a review of compliance with state and Federal environmental protection and disclosure laws, engineering plans, detailed cost breakdowns and marketing plans. Other risk management tools include acquisition of title insurance and review of feasibility and market absorption reports. These loans have been limited to projects within the state of Washington.

 

At December 31, 2021, the average construction commitment for single-family residential construction was $724,000, $6.0 million for multi-family construction, $4.7 million for acquisition-renovation loans, and $3.4 million for commercial real estate construction. The largest construction commitments for multi-family, acquisition-renovation, and commercial real estate were $18.6 million, $16.6 million, and $14.3 million, respectively, at December 31, 2021.

 

Substantially all of our land acquisition, development and construction lending have adjustable rates of interest based on The Wall Street Journal prime rate. During the term of construction, the accumulated interest on the loan is either added to the principal of the loan through an interest reserve or billed monthly, as is the case for acquisition and development loans. When original interest reserves set up at origination are exhausted, no additional reserves are permitted unless the loan is re-analyzed and it is determined that the additional reserves are appropriate.

 

The success of land acquisition, development and construction lending is dependent upon completion of the project and the sale or leasing of the property for repayment of the loan. Because of the uncertainties inherent in the estimates related to construction costs, the market value of the completed project, the demand for the property at completion, market conditions, the rates of interest paid, and other factors, actual results are difficult to predict and variations from expectations can have a significant adverse effect on a borrower's ability to repay loans and the value and marketability of the underlying collateral. In addition, because an incomplete construction project is difficult to sell in the event of default, we may be required to advance additional funds and/or contract with another builder in order to complete construction. There is a risk that we may not fully recover unpaid loan funds and associated construction and liquidation costs under these circumstances. Speculative construction loans carry additional risk associated with identifying an end-purchaser for the finished project. In 2020, we implemented an extension fee matrix to entice commercial borrowers to finish projects on time, which we believe mitigates risk in this area.

 

We also originate individual lot loans, which are secured by a first lien on the property, for borrowers who are planning to build on the lot within the next five years. Generally, these loans have a maximum loan to value ratio of 75% for improved lands (legal access, water and power). The interest rate on these loans is fixed with a 20-year amortization and a five-year term.

 

At the dates indicated, the composition of our construction and land portfolio was as follows:

   

December 31,

 
   

2021

   

2020

   

2019

 
   

(In thousands)

 
                         

One- to four-family residential

  $ 39,733     $ 24,029     $ 16,127  

Multi-family residential

    89,655       34,513       10,465  

Commercial acquisition-renovation

    51,099       39,346        

Commercial real estate

    35,671       16,918       3,325  

Land

    8,551       8,821       7,270  

Total construction and land

  $ 224,709     $ 123,627     $ 37,187  

 

16

 

Our construction and land loans are geographically disbursed primarily throughout the state of Washington and, as a result, these loans are susceptible to risks that may be different depending on the location of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our higher-risk construction projects while lower-risk projects are monitored by internal staff.

 

The following tables show our construction commitments by type and geographic concentration at the dates indicated:

 

December 31, 2021

 

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