Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities. Non-banking investments include several limited partnership investments, including a 33% interest in The Meriwether Group, LLC ("MWG"). The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed. The Company has also entered into partnerships to strategically invest in fintech-related businesses.
First Fed is a community-oriented commercial bank serving Clallam, Jefferson, King, Kitsap, Snohomish, and Whatcom counties in Washington State, through its twelve full-service branches and six business centers, including our headquarters. We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve. To diversify our portfolio and increase interest income, we increased our origination of commercial real estate, multi-family real estate, and commercial business loans. We also increased our auto and consumer loans through purchased auto loan programs and purchased manufactured homes. We continue to originate one-to-four family residential mortgage loans, primarily for sale into the secondary market to generate noninterest gain on sale and servicing fee revenue and manage interest rate risk or retain select loans in our portfolio to enhance interest income. Home equity, residential construction and commercial construction loans are also originated primarily in Western Washington. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals, businesses and nonprofit organizations. Deposits are our primary source of funding for our lending and investing activities. First Fed has a limited partnership investment in the Canapi Ventures SBIC Fund II, LP. First Fed also has a limited partnership investment in the Meriwether Group Capital Hero Fund LP ("Hero Fund") which was previously held by First Northwest. The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.
First Fed is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal policy, including fiscal stimulus, interest rate policy and open market operations, housing, and consumer protection. Deposit flows are influenced by various factors, including changes in market rates; sales and marketing efforts; interest rates paid by competitors; available alternative investments such as money market mutual funds, the stock and bond markets; account maturities; government stimulus and unemployment programs; and the overall level of personal income and savings. Lending activities are influenced by prevailing interest rates and property values in our markets, the demand for funds, the number and quality of lenders employed by First Fed, and both regional and national economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments less interest expense paid on our deposits and borrowings. Changes in levels of interest rates impact our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, earnings from equity and partnership investments, and gains and losses from the sale of loans and securities.
An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations required to adequately provide for probable losses inherent in our loan, unfunded commitments and investment portfolios through our allowance for credit losses. A recapture of previously recognized provision for credit losses may be added to net interest income if forecasted macroeconomic factors improve, underlying balances decrease, or recoveries of amounts previously charged off are received.
The noninterest expenses incurred in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, professional fees, deposit insurance premiums and regulatory assessments, digital delivery and data processing expenses, marketing and other customer acquisition expenses, expenses related to real estate and personal property owned, state and local taxes, federal income tax, and other miscellaneous expenses.
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Our Business and Operating Strategy
Our operating strategy is focused on growing and diversifying our loan portfolio, expanding our deposit product offerings, and enhancing our digital infrastructure. Certain highlights of our operations in the last three years include:
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Repositioning the loan portfolio . The Bank has significantly increased the origination of commercial real estate, multi-family real estate, and construction and land loans, as well as our portfolio of commercial business loans. The Bank has also utilized wholesale lending programs to add auto, manufactured home, and commercial business loans to our portfolio. This has helped to increase overall interest income and improved interest rate risk.
•
Adding new products and servicing capabilities . In addition to traditional consumer and business deposit products, the Bank offers remote deposit capture, consumer and small business digital banking, treasury cash management capabilities, and commercial digital banking capabilities. We implemented interactive teller machines, allowing our customers to conduct business with a teller through an interactive screen, at several locations. In 2023, we further enhanced our offerings for earnest money payment solutions, real-time person-to-person and account-to-account transfers and online business account opening.
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Enhancing our infrastructure . The Bank focused on upgrading its infrastructure, in terms of technology, equipment and personnel, to support its changing lending and deposit capabilities and position the Bank for growth.
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Expanding small-to-medium size business relationships . Our Treasury Management and Commercial Relationship teams have deepened relationships with new and existing customers through acquiring operating accounts and increasing SBA and other commercial business lending.
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Investing in financial technology ("fintech") companies. The Company has four years remaining in a commitment to invest in Canapi Ventures, which provides funding to fintech start-ups. The Canapi Ventures relationship allows us early access to companies producing technology and apps that may be of interest as we grow in the fintech sector. We also have seven years remaining in commitments to invest in BankTech Ventures and JAM FINTOP, two fintech-focused venture capital funds designed for community banks. The Bank has an additional Canapi Small Business Investment Company commitment with eight years remaining.
Our objective is to be an independent, high performing bank focused on meeting the needs of individuals, small businesses and community organizations throughout our market areas with exceptional service and competitive products. Below are strategies we have implemented, or intend to implement, to achieve our objectives:
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Remixing our loan portfolio. Through loan originations, we intend to increase the percentage of our loan portfolio consisting of higher-yielding commercial real estate and commercial business loans. These loan categories offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than traditional fixed-rate, one-to-four family residential loans. Our commercial and multi-family real estate and commercial business loans have increased to $874.5 million, or 51.6% of total loans, at December 31, 2024, from $833.4 million, or 50.2% of total loans, at December 31, 2023. The increase resulted in part from adding talented leaders to the commercial team, developing relationships with loan referral sources, pursuing loan purchase and participation opportunities, and competing successfully in new and existing markets.
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Increasing noninterest income. The Bank offers SBA loan products, which provide the opportunity to sell the guaranteed portion of loans originated, adding to our gain on sale of loans while also generating servicing fee income. We will continue our participation in an assumable rate conversion ("ARC") program, whereby a commercial loan customer enters into a contract to pay a fixed rate on their First Fed loan to the third-party program while the Bank receives the variable rate interest stated in the note, which generates referral fee income for the Bank at the time of placement. We remain committed to our mortgage line of business to serve our customers and add to noninterest income from both sale and servicing fees. We may also sell commercial loans to manage concentrations and risk, which would generate gain and possibly additional servicing income. We anticipate that future revenue will be generated through treasury management products and merchant services, which would add income and increased interchange fee income. Our new consumer rewards products are also expected to generate additional interchange fee income. Noninterest income will also be affected through changes in the value of our partnership investments and our share of MWG profitability.
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Maintaining our focus on asset quality. Maintaining strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans and resolving nonperforming loans. Nonperforming assets were $30.5 million at December 31, 2024 and $18.6 million at December 31, 2023. The current year increase was primarily due to an $8.2 million commercial construction project, which the Bank believes does not represent significant exposure to loss based on a recent property appraisal. Two additional loans totaling $5.6 million in a commercial relationship we have been monitoring were also placed on nonaccrual. We take proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate. We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures.
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Attracting core deposits and other deposit products. We emphasize relationship banking with our customers to obtain a greater share of their deposits, with specific emphasis on primary transaction accounts. We believe this emphasis will help to increase our level of core deposits. In addition to our retail branches, we offer digital delivery solutions, such as personal financial management, business online banking, business remote deposit products, mobile remote deposit services through personal devices, consumer credit score access, real-time account-to-account transfer services between First Fed and other banks, and real-time person-to-person funds transfer, enabling us to compete effectively with banks of all sizes. We enhanced our mobile banking platform, online account opening solutions, foreign exchange capabilities and upgraded our business on-line banking platform.
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Expanding our market presence and capturing business opportunities resulting from changes in the competitive environment. By delivering high quality, customer-focused products and services, we believe we can attract additional borrowers and depositors and thus increase our market share and revenue generation in our market areas. We intend to continue our franchise growth. We expect that community bank consolidation will continue to take place and may consider acquiring additional individual branches or other banks. Our primary focus for expansion will be in Western Washington; however, we offer digital delivery in other markets.
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Hiring experienced employees with a customer sales and service focus. Our goal is to compete by relying on the strength of our customer service and relationship building. We believe that our ability to continue to attract and retain banking professionals who have significant knowledge of existing and new market areas, possess strong commercial banking sales and service skills, and maintain a focus on community relationships will enhance our success. We intend to hire community bankers, lenders and treasury management officers who are established in their communities to enhance our market position and add profitable growth opportunities as needed.
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Improving our digital presence and streamlining the customer experience. By investing in and improving on the interfaces that connect customers to our products and services, we believe we will be in a better position to compete and grow in an environment that is becoming increasingly technology driven. We intend to invest in our online presence and engage in digital strategies that will help us to successfully compete in an ever-changing digital marketplace. The Company has five years remaining in its commitment to Canapi Ventures to identify and infuse capital into early stage fintech companies. This commitment includes management participation in meetings and events that inform us when making decisions regarding banking-as-a-service, digital services offerings and customer engagement. In 2022, the Company implemented a customer relationship management software to improve business and consumer relationships.
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Exploring alternative lending opportunities to improve interest income . We strive to grow the balance sheet and leverage capital in a safe and sound manner and believe that lending opportunities outside of organic originations may be a valuable source of interest income. We increased our auto loan portfolio through our partnerships with Woodside and First Help. We continue to purchase manufactured home loans in pools and on a flow basis from Triad Financial Services. We also purchase loans to small businesses and professionals from Banker's Healthcare Group. We will continue to explore other opportunities such as these as a means to improve net income and supplement organic loan originations.
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Creating operating leverage . We will continue to look for ways to improve operational efficiency. We realigned staff positions in 2022 to better meet organizational objectives, resulting in some workforce reductions. Additional workforce reductions were made in 2024. We believe that recent investments in technology may also provide opportunities to build efficiencies. Net interest income decreased substantially in 2023 as a result of accelerated funding costs. We also experienced a decrease in noninterest income, specifically in areas which are impacted by interest rates. We remain focused on building core noninterest income product lines, such as SBA and swap fees, and are pursuing new revenue channels related to payments while continuing to control noninterest expense.
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Expanding offerings to small-to-medium sized business . Another priority for the Company is expanding offerings for small-to-medium sized business with a focus on entrepreneurs. We intend to accomplish this through the commercial team, with a focus on systems and support, the further development of treasury management and our partnership with MWG. For small-to-medium sized businesses, we believe there are multiple opportunities in payment processing for ACH, check, wire transfers, international payments and debit card interchange. In addition, we intend to build out our capabilities for accounts payable and receivable, payroll, merchant card acquisition and corporate card spend management solutions.
Critical Accounting Policies
We have certain accounting policies that are important to the assessment of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
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The following represent our critical accounting policies:
Allowance for Credit Losses on Loans . The allowance for credit losses on loans ("ACLL") is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. The allowance is established through the provision for credit losses on loans, which is charged to income. Determining the amount of the ACLL necessarily involves a high degree of judgment. Management has adopted a discounted cash flow ("DCF") methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a remaining life methodology. The Company also uses established metrics to estimate qualitative risk factors by segment based on the identified risk. The Company evaluates individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis using either a collateral value or cash flow method. All of the factors used in these methodologies are susceptible to significant change. Management reviews and approves, at least quarterly, the level of the allowance and the provision for credit losses on loans based on anticipated future economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for credit losses on loans, future economic or other conditions may differ substantially from the assumptions used in making the evaluation. The FDIC and the DFI, as an i ntegral part of their examination process, periodically review our ACLL and may require us to recognize adjustments to the allowance based on their judgment about information available at the time of their examination. A large loss could deplete the allowance and require increased provisions for credit losses on loans to replenish the allowance, which would adversely affect earnings. Management considers the ACLL to be a critical accounting estimate. Our accounting policies are discussed in detail in Notes 1 and 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Mortgage Servicing Rights. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected. See Notes 1, 7 and 15 to the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
Income Taxes . Management makes estimates and judgments to calculate certain tax liabilities and to determine the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a valuation allowance for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. In evaluating the recoverability of deferred tax assets, management considers all available positive and negative evidence, including past operating results, recent cumulative losses - both capital and operating - and the forecast of future taxable income, both capital gains and operating. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require judgments about future taxable income and are consistent with the plans and estimates to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Fair Value. Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services.
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
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Comparison of Financial Condition at December 31, 2024 and December 31, 2023
Assets . Total assets increased $30.2 million, or 1.4%, to $2.23 billion at December 31, 2024, from $2.2 billion at December 31, 2023.
Cash and cash equivalents decreased by $50.7 million, or 41.2%, to $72.5 million as of December 31, 2024, compared to $123.2 million at December 31, 2023, as proceeds from the sale of investment securities in the fourth quarter of 2023 were deployed into interest-earning assets.
Total investment securities increased $44.7 million, or 15.1%, to $340.3 million at December 31, 2024, from $295.6 million at December 31, 2023. The year-over-year increase was the result of purchases and an improvement in the portfolio market value, partially offset by sales and normal amortization during the year. During 2024, we repositioned the investment portfolio by selling $22.8 million of available-for-sale securities yielding 3.1% for a total loss of $2.1 million during the period, and purchased $100.4 million of available-for-sale securities yielding 6.5%. The increase in the portfolio market value of $2.4 million relates mainly to the recognition of $1.9 million in realized losses related to the securities sale and a $458,000 improvement in the remaining portfolio driven by changes in long-term interest rates.
The estimated average life of the total investment securities portfolio was 6.9 years as of December 31, 2024, compared to 7.7 years as of December 31, 2023 , and the average repricing term was approximate ly 5.3 years as of December 31, 2024, compared to 6.3 years as of December 31, 2023 , based on the interest rate environments at those times. Expected duration of the portfolio has decreased to 3.9 years as of December 31, 2024, compared to 4.8 years as of December 31, 2023. If prevailing market interest rates fall, we expect prepayments will accelerate due to the current coupons of fixed rate bonds. We anticipate the investment portfolio will continue to provide additional interest income and act as a source of liquidity.
MBS represent the largest portion of our investment portfolio and totaled $170.3 million at December 31, 2024, an increase of $31.0 million, or 22.2%, from $139.3 million at December 31, 2023. Municipal bonds are the second largest segment, totaling $77.9 million at December 31, 2024, a decrease of $9.9 million, or 11.3%, from $87.8 million at December 31, 2023. The purchase of investment securities during 2024 resulted in a shift in the investment mix from municipal bonds toward more mortgage-backed, corporate asset-backed and SBA securities. Other investment securities totaled $92.2 million at December 31, 2024, an increase of $23.6 million, or 34.5%, from $68.5 million at December 31, 2023. Included in MBS non-agency were $44.4 million of commercial mortgage-backed securities ("CMBS"), of which 93.4% were in "A" tranches with the remaining 6.6% in "B" tranches. Our largest exposure in the CMBS portfolio was to long-term care facilities, which comprised 76.8%, or $34.1 million, of our private label CMBS securities. All of the CMBS had credit enhancements ranging from 28.8% to 93.1%, with a weighted-average credit enhancement of 58.9%, that further reduced the risk of loss on these investments.
At December 31, 2024, the investment portfolio contained 60.2% of amortizing securities, compared to 52.0% at December 31, 2023. The projected average life of our securities may vary due to prepayment activity, which, particularly in the MBS portfolio, is generally affected by changing interest rates. We may purchase investment securities as a source of additional interest income. For additional information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
Total loans, excluding loans held for sale, increased $35.8 million, or 2.2%, during the year ended December 31, 2024. Commercial business loans increased $39.2 million primarily due to an increase in the Northpointe MPP of $26.7 million, $15.2 million of equipment loan originations and purchases of $8.5 million of unsecured Bankers Healthcare Group loans in addition to advances on new and existing lines of credit and originations of amortizing commercial loans. Auto and other consumer loans increased $19.8 million, or 7.9%, with the purchase of a pool of manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans. Multi-family and commercial real estate loans increased $1.9 million, or 0.3%, consisting mainly of an increase in commercial real estate loans of $2.4 million as new loan originations of $34.6 million and $1.1 million from construction loans converting into permanent amortizing loans exceeded payment activity. Multi-family real estate loans decreased $498,000 as a result of payoffs and regular payments exceeding $36.5 million of construction loans converting into permanent amortizing loans and $13.6 million of new originations.
One-to-four family residential loans increased $16.9 million, or 4.5%, with $42.5 million in construction loans converting to permanent amortizing loans during the year, partially offset by payoffs and regular payments. We continue to focus on the origination of one-to-four family mortgage loans with the intention of selling the majority of our saleable production to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other investors, while retaining certain adjustable-rate loans that may not be readily sold in the secondary market.
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Construction and land loans decreased $51.6 million, or 39.8%, with $80.1 million converting into fully amortizing loans partially offset by draws on new and existing commitments. Undisbursed construction commitments totaled $51.7 million at December 31, 2024 compared to $55.4 million at December 31, 2023. Undisbursed construction commitments at December 31, 2024 included $27.5 million of commercial real estate construction, $15.4 million of mainly custom one-to-four family residential construction, and $8.9 million of multi-family construction. Our construction loans are geographically disbursed throughout the state of Washington. All construction projects are monitored by either a third-party firm or our internal construction administration team. Projects with larger loan commitments have more robust monitoring by firms with more services and expertise.
During the year ended December 31, 2024, the Company originated $232.4 million of loans, of which $156.0 million, or 67.2%, were originated in the Puget Sound region; $55.8 million, or 24.0%, in the Olympic Peninsula region; $8.7 million, or 3.7%, in other areas in Washington; and $11.8 million, or 5.1%, in other states. The Company also purchased loans totaling $88.9 million with the largest concentration of these loans located in California. We will continue to strategically assess our lending strategies across all product lines and markets where we do business as well as evaluate opportunities to supplement organic originations through wholesale acquisitions with a goal of improving earnings while also prudently managing credit risk.
Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated:
December 31, 2024
December 31, 2023
(In thousands)
Real Estate:
One-to-four family
$
395,315
$
378,432
Multi-family
332,596
333,094
Commercial real estate
390,379
387,983
Construction and land
78,110
129,691
Total real estate loans
1,196,400
1,229,200
Consumer:
Home equity
79,054
69,403
Auto and other consumer
268,876
249,130
Total consumer loans
347,930
318,533
Commercial business loans
151,493
112,295
Total loans
1,695,823
1,660,028
Less:
Derivative basis adjustment
188
—
Allowance for credit losses on loans
20,449
17,510
Total loans receivable, net
$
1,675,186
$
1,642,518
Our allowance for credit losses on loans ("ACLL") increased $2.9 million, or 16.8%, during the year ended December 31, 2024, primarily due to increased loss factors applied to commercial business, one-to-four family and multi-family loan pools and additional reserves on individually evaluated commercial business loans. Asset quality declined with increases in past due, nonaccrual and classified assets compared to the total loan portfolio. Management continues to closely monitor economic conditions for potential weaknesses that could expose the loan portfolio to losses. The ACLL as a percentage of total loans was 1.21% at December 31, 2024 and 1.05% at December 31, 2023. We believe our ACLL is adequate to cover current expected credit losses in the loan portfolio.
Nonperforming loans increased $11.9 million, or 63.7%, during the year ended December 31, 2024 to $30.5 million. This increase was mainly the result of increases in nonperforming commercial real estate of $5.6 million, commercial construction of $4.6 million and commercial business of $2.3 million, partially offset by decreases in one-to-four family of $367,000, auto and other consumer of $86,000 and home equity loans of $68,000. Nonperforming loans to total loans was 1.80% at December 31, 2024, an increase from 1.12% at December 31, 2023.
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At December 31, 2024, substantially all restructured loans were performing in accordance with their modified payment terms and returned to accrual status. Classified loans, consisting solely of substandard loans, increased by $7.4 million, or 21.1%, to $42.5 million at December 31, 2024, from $35.1 million at December 31, 2023. The change in classified loans was mainly the result of downgrades of an $8.2 million commercial construction loan and a $6.4 million commercial real estate loan along with downgrades of six commercial business loans totaling $2.2 million during 2024. These downgrades were partially offset by a $3.6 million net charge off on one commercial construction relationship and payments received on previously identified classified loans. An $11.4 million construction loan relationship, which became a classified loan in the fourth quarter of 2022; an $8.1 million commercial construction loan relationship, which became classified in the second quarter of 2024; and a $6.2 million commercial loan relationship, which became classified in the fourth quarter of 2023, account for 61% of the classified loan balance at December 31, 2024. The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in two of these three collateral-dependent relationships. The Bank is also closely monitoring a group of commercial business loans that have similar collateral, with 15 loans totaling $2.2 million included in classified loans at December 31, 2024, and an additional eight loans totaling $2.8 million included in the special mention risk grading category. The Bank continues to work with its borrowers to facilitate satisfactory repayment.
In the second quarter of 2024, the Bank completed the sale and leaseback of six branch properties to Mountainseed Real Estate Services, LLC ("Mountainseed"), reducing premises and equipment by $6.8 million. The Bank received the full sales price of $14.7 million. The proceeds of the sale transaction were used to pay down borrowings. First Fed is leasing back the six properties sold to Mountainseed under agreements with initial terms of 15 years with one 15-year renewal option each. The leases, recorded in the second quarter of 2024, resulted in an increase of $12.2 million to both other assets and other liabilities for the related right-of-use assets and lease liabilities created by the contracts, respectively.
Also in the second quarter of 2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed. First Northwest utilized the cash received to pay down the NexBank line of credit. Equity and partnership investments decreased to $13.2 million at December 31, 2024, compared to $14.8 million at December 31, 2023, due to a $1.8 million write down in the fourth quarter of 2024 on an equity investment in an organization that is involved in a lawsuit.
Liabilities. Total liabilities increased $39.7 million, or 1.9%, to $2.08 billion at December 31, 2024, from $2.04 billion at December 31, 2023, with increases in deposits and borrowings used mainly to purchase investment securities and fund loan growth.
Deposit account balances increased $11.1 million, or 0.7%, to $1.69 billion at December 31, 2024 from $1.68 billion at December 31, 2023. Money market accounts increased $51.6 million, while savings accounts decreased $37.1 million and transaction accounts decreased $194,000. Customer CDs increased $21.5 million, or 4.9%, to $464.9 million and Brokered CDs decreased $24.7 million, or 11.9%, to $182.9 million at December 31, 2024. The current rate environment continued to contribute to greater competition for deposits across the industry during 2024. As a result, the Bank continues offering deposit rate specials to attract new funds. Our focus continues to be on increasing core customer deposits, with an emphasis on small-to-medium sized business deposits, digital accounts and maintaining a stable source of funding to reduce interest expense as a percentage of liabilities.
Borrowings increased $15.1 million, or 4.7%, to $336.0 million at December 31, 2024, from $320.9 million at December 31, 2023. The Bank increased long-term FHLB advances by $80.0 million during 2024 to take advantage of lower rates compared to those offered on FHLB overnight advances. FHLB overnight advances decreased $65.0 million compared to the prior year end.
Equity . Total shareholders' equity decreased $9.5 million, or 5.8%, to $153.9 million at December 31, 2024, from $163.3 million at December 31, 2023. The decrease during the year resulted from a net loss of $6.6 million, share repurchases of $4.1 million and $2.6 million in dividends paid in 2024. These decreases were partially offset by a $2.5 million reduction in accumulated other comprehensive loss related to an improved unrealized market value of available for sale securities, net of tax, and an increase of $1.6 million related to share-based compensation plans. During the year ended December 31, 2024, we repurchased 214,132 shares of common stock at an average cost of $14.03 per share, pursuant to the Company's 2020 stock repurchase plan, closing out the 2020 plan. An additional 98,156 shares of common stock were repurchased during 2024 at an average cost of $10.19 per share, pursuant to the Company's new 2024 stock repurchase plan, for a total of 312,288 shares repurchased during 2024.
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Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023
General. The Company generated a loss on average assets of -0.30%, and a loss on average equity of -4.09%, for the year ended December 31, 2024, compared to a return on average assets of 0.11% and a return on average equity of 1.43% for the year ended December 31, 2023. Net income decreased $8.9 million compared to 2023. Net interest income declined as increases to interest expense outpaced increases to interest income. The provision for credit losses increased as the Bank charged-off several large commercial loan balances during 2024. Noninterest income increased over the prior year primarily due to the gain on sale of premises, lower loss on sale of investment securities and a BOLI death benefit received. Noninterest expense was lower due to decreased advertising and professional fees and did not include the one-time write-off expenses recorded in December 2023 for the investment in QUIL. We recorded a loss of $0.75 per common and diluted share for the year ended December 31, 2024, compared to earnings of $0.26 per common and diluted share for the year ended December 31, 2023.
Net Interest Income. Net interest income decreased $5.1 million, or 8.3%, to $56.3 million for the year ended December 31, 2024, from $61.4 million for the year ended December 31, 2023, mainly as the result of additional interest expense related to higher costs on both deposit and advance balances as well as an increase in the average balances of CDs and advances.
The increase in interest income was largely attributable to changes in loans receivable with an average balance increase of $92.7 million, at an average yield of 5.56%, for the year ended December 31, 2024 compared to an average yield of 5.31%, for the year ended December 31, 2023. The interest income earned from higher yields was offset by higher interest-bearing liability costs which increased to 3.22% for the year ended December 31, 2024 compared to 2.42% for the year ended December 31, 2023. This resulted in a 39-basis point decrease in our net interest margin to 2.74% for the year ended December 31, 2024, from 3.13% for the year ended December 31, 2023.
The $11.4 million increase in interest income was offset by the net increase in interest costs of $16.6 million as changes in rates outpaced increases in yields. As noted above, loans receivable was the main contributor to the increase in interest income with $4.9 million due to an increase in average volume and $4.2 million due to higher rates. The increase to the cost of average interest-bearing liabilities for the year ended December 31, 2024 was due primarily to costs from higher rates paid of $12.3 million on all interest-bearing deposits and advances and increased average balances of $3.6 million on certificates of deposit.
Interest Income. Interest income increased $11.4 million, or 11.3%, to $112.3 million for the year ended December 31, 2024 from $100.9 million for the comparable period in 2023, primarily due to an increase in the average balance of and higher yields on loans receivable. Interest and fees on loans receivable increased $9.1 million during the year, in part, as the Bank grew the loan portfolio through participation in the Northpointe MPP and purchased auto and manufactured home loans. Loan yields also increased due to higher rates on new originations. The fair value hedge on loans added $1.1 million to interest income for the year ended December 31, 2024.
Interest income on investment securities increased $1.8 million to $15.0 million for the year ended December 31, 2024, compared to $13.3 million for the year ended December 31, 2023. The increase in interest income on investment securities was driven by an increase in the average yield during the year of 64-basis points due to the investment securities portfolio restructure in the first half of 2024. The higher rate environment in the first part of the year also contributed to increased interest income as slower prepayment activity reduced the amount of premium amortization during the period. The fair value hedge on investments added $621,000 and $449,000 to interest income for the years ended December 31, 2024 and 2023, respectively.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Year Ended December 31,
2024
2023
Average Balance Outstanding
Yield
Average Balance Outstanding
Yield
Increase/ (Decrease) in Interest Income
(Dollars in thousands)
Loans receivable, net
$
1,686,972
5.56
%
$
1,594,268
5.31
%
$
9,138
Investment securities
311,434
4.82
317,924
4.18
1,746
FHLB stock
12,986
9.36
12,035
7.31
335
Interest-earning deposits in banks
43,934
5.34
40,832
5.21
222
Total interest-earning assets
$
2,055,326
5.47
%
$
1,965,059
5.13
%
$
11,441
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Interest Expense. Total interest expense increased $16.6 million, or 41.9%, for the year ended December 31, 2024, compared to the prior year, with increases in deposit costs and borrowing costs of $15.4 million and $1.2 million, respectively. Deposit costs increased due to higher funding costs and an increase of $92.0 million in the average balance of interest-bearing deposits. The average cost of all interest-bearing deposit products increased 94-basis points to 2.95% for the year ended December 31, 2024 from 2.01% for the year ended December 31, 2023. The average balances of money market and CD accounts increased year-over-year, while lower cost transaction and savings average account balances declined. Borrowing costs increased 16-basis points, due to higher rates paid combined with an increase of $15.8 million in the average balance outstanding.
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Year Ended December 31,
2024
2023
Average Balance Outstanding
Rate
Average Balance Outstanding
Rate
Increase/ (Decrease) in Interest Expense
(Dollars in thousands)
Interest-bearing transaction
$
165,097
0.47
%
$
178,577
0.45
%
$
(19
)
Money market accounts
414,305
2.42
388,287
1.09
5,800
Savings accounts
223,505
1.57
243,300
1.24
493
Certificates of deposit, customer
428,630
4.16
369,480
3.39
5,318
Certificates of deposit, brokered
205,619
5.00
165,486
3.91
3,816
FHLB and other advances
264,948
4.53
249,172
4.36
1,145
Subordinated debt, net
39,475
4.00
39,395
4.01
—
Total interest-bearing liabilities
$
1,741,579
3.22
%
$
1,633,697
2.42
%
$
16,553
Provision for Credit Losses. The total provision for credit losses increased $15.2 million to $16.5 million during the year ended December 31, 2024, compared to $1.3 million for 2023. The higher provision for credit losses on loans compared to 2023 is mainly the result of loan balances charged-off during the year, an increase in reserve for individually evaluated loans and an increase in loss factors applied to one-to-four family, multi-family and commercial business pooled loans. The unfunded commitments recapture is due to a decrease in the loss factor applied to this pool.
The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:
Year Ended December 31,
2024
2023
(Dollars in thousands)
Provision for credit losses on loans
$
16,716
$
2,357
Charge offs net of recoveries
(13,777
)
(3,172
)
Allowance for credit losses on loans
20,449
17,510
Allowance for credit losses on loans as a percentage of total gross loans receivable at the end of this period
1.21
%
1.05
%
Total nonaccrual loans
30,515
18,644
Allowance for credit losses on loans as a percentage of nonaccrual loans at end of period
67
%
94
%
Nonaccrual and 90 days or more past due loans as a percentage of total loans
1.80
%
1.12
%
Total loans receivable
$
1,695,823
$
1,660,028
Recapture of provision for credit losses on unfunded commitments
$
(218
)
$
(1,034
)
Reserve for unfunded commitments
599
817
Unfunded loan commitments
163,827
149,631
Noninterest Income. Noninterest income increased to $12.6 million for the year ended December 31, 2024, from $4.0 million for the year ended December 31, 2023. The increase compared to the prior year was primarily due to one-time transactions in 2024, including the gain on sale of six branch properties in the sale-leaseback transaction and a BOLI death benefit payment, partially offset by the loss on sale of securities. First Northwest also recorded a $1.8 million write down on an equity investment in an organization that is involved in a lawsuit, included in Other (loss) income below. Saleable mortgage loan production and related gains continued to be impacted by higher market rates on mortgage loans. The BOLI exchange and reinvestment transactions during 2024 resulted in an increase in the cash surrender value recorded for the year.
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The following table provides an analysis of the changes in the components of noninterest income for the periods shown:
Year Ended December 31,
Increase (Decrease)
2024
2023
Amount
Percent
(Dollars in thousands)
Loan and deposit fees
$
4,291
$
4,341
$
(50
)
(1.2
)%
Sold loan servicing fees and servicing rights mark-to-market
188
676
(488
)
(72.2
)
Net gain on sale of loans
312
438
(126
)
(28.8
)
Net loss on sale of investment securities
(2,117
)
(5,397
)
3,280
(60.8
)
Net gain on sale of premises and equipment
7,919
—
7,919
100.0
Increase in cash surrender value of bank-owned life insurance, net
1,179
928
251
27.0
Income from death benefit on bank-owned life insurance, net
1,536
—
1,536
100.0
Other (loss) income
(694
)
3,034
(3,728
)
(122.9
)
Total noninterest income
$
12,614
$
4,020
$
8,594
213.8
%
Noninterest Expense. Noninterest expense decreased to $60.0 million for the year ended December 31, 2024, from $61.5 million for the year ended December 31, 2023. The decrease from the prior year is primarily related to one-time noninterest expenses recorded during 2023, including the QUIL commitment receivable write-off of $1.5 million, a write-off of Fannie Mae and Freddie Mac investor accounting related items totaling $725,000, and an accrual for a civil money penalty proposed by the FDIC of $718,000. The FDIC proposed assessing a civil money penalty in connection with the concerns detailed in the consent order entered into by the Bank during 2023 which was lifted in 2024 and the penalty reduced by $218,000. Compensation expense increased compared to the prior year as a result of nonrecurring payments related to the July 2024 reduction-in-force and increases in incentives and commissions. Other year-over-year changes include increased lease expense included in occupancy as a result additional lease expense after the sale-leaseback transaction, partially offset by lower advertising and professional fees.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Year Ended December 31,
Increase (Decrease)
2024
2023
Amount
Percent
(Dollars in thousands)
Compensation and benefits
$
32,665
$
31,209
$
1,456
4.7
%
Data processing
8,102
8,170
(68
)
(0.8
)
Occupancy and equipment
6,151
4,858
1,293
26.6
Supplies, postage, and telephone
1,266
1,433
(167
)
(11.7
)
Regulatory assessments and state taxes
1,978
1,635
343
21.0
Advertising
1,457
2,706
(1,249
)
(46.2
)
Professional fees
3,105
3,738
(633
)
(16.9
)
FDIC insurance premium
1,883
1,357
526
38.8
Other expense
3,386
6,348
(2,962
)
(46.7
)
Total noninterest expense
$
59,993
$
61,454
$
(1,461
)
(2.4
)%
Provision for Income Tax. The Company recorded an income tax benefit for the year ended December 31, 2024, of $944,000 compared to expense of $549,000 for the year ended December 31, 2023, reflecting differences in pre-tax income. The effective tax rate decreased over the prior year as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit, in 2024, partially offset by an estimate for the penalty on the early surrender of the BOLI contracts. The provision includes accruals for both federal and state income taxes.
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Average Balances, Interest and Average Yields/Cost
The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at December 31, 2024 and 2023. Income and all average balances are daily average balances. Nonaccrual loans have been included in the table as loans carrying a zero yield.
Year Ended December 31,
2024
2023
Average Balance Outstanding
Interest Earned/ Paid
Yield/ Rate
Average Balance Outstanding
Interest Earned/ Paid
Yield/ Rate
Interest-earning assets:
(Dollars in thousands)
Loans receivable, net (1), (2)
$
1,686,972
$
93,752
5.56
%
$
1,594,268
$
84,614
5.31
%
Total investment securities
311,434
15,025
4.82
317,924
13,279
4.18
FHLB dividends
12,986
1,215
9.36
12,035
880
7.31
Interest-earning deposits in banks
43,934
2,348
5.34
40,832
2,126
5.21
Total interest-earning assets (3)
2,055,326
112,340
5.47
1,965,059
100,899
5.13
Noninterest-earning assets
144,812
144,141
Total average assets
$
2,200,138
$
2,109,200
Interest-bearing liabilities:
Interest-bearing demand deposits
$
165,097
$
777
0.47
$
178,577
$
796
0.45
Money market accounts
414,305
10,017
2.42
388,287
4,217
1.09
Savings accounts
223,505
3,512
1.57
243,300
3,019
1.24
Certificates of deposit, customer
428,630
17,838
4.16
369,480
12,520
3.39
Certificates of deposit, brokered
205,619
10,283
5.00
165,486
6,467
3.91
Total interest-bearing deposits (4)
1,437,156
42,427
2.95
1,345,130
27,019
2.01
FHLB and other advances
264,948
12,015
4.53
249,172
10,870
4.36
Subordinated debt, net
39,475
1,578
4.00
39,395
1,578
4.01
Total interest-bearing liabilities
1,741,579
56,020
3.22
1,633,697
39,467
2.42
Noninterest-bearing deposits (4)
252,600
278,123
Other noninterest-bearing liabilities
44,217
37,967
Total average liabilities
2,038,396
1,949,787
Average equity
161,742
159,413
Total average liabilities and equity
$
2,200,138
$
2,109,200
Net interest income
$
56,320
$
61,432
Net interest rate spread
2.25
2.71
Net earning assets
$
313,747
$
331,362
Net interest margin (5)
2.74
3.13
Average interest-earning assets to average interest-bearing liabilities
118.0
%
120.3
%
(1) The average loans receivable, net balances include nonaccrual loans.
(2) Interest earned on loans receivable includes net deferred costs of $12,000 and $561,000 for the years ended December 31, 2024 and 2023, respectively.
(3) Includes interest-bearing deposits at other financial institutions.
(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.51% and 1.66% for the years ended December 31, 2024 and 2023, respectively.
(5) Net interest income divided by average interest-earning assets.
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Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The presentation distinguishes between the changes related to outstanding balances and the changes in interest rates. For each component, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2024 vs. 2023
Increase (Decrease) Due to
Total Increase
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans receivable (1)
$
4,922
$
4,216
$
9,138
Investment securities
(259
)
2,005
1,746
FHLB stock
70
265
335
Other (2)
164
58
222
Total interest-earning assets
$
4,897
$
6,544
$
11,441
Interest-bearing liabilities:
Interest-bearing demand deposits
$
(56
)
$
37
$
(19
)
Money market accounts
287
5,513
5,800
Savings accounts
(245
)
738
493
Certificates of deposit, customer
2,011
3,307
5,318
Certificates of deposit, brokered
1,572
2,244
3,816
FHLB and other advances
692
453
1,145
Subordinated debt, net
3
(3
)
—
Total interest-bearing liabilities
$
4,264
$
12,289
$
16,553
Net change in interest income
$
633
$
(5,745
)
$
(5,112
)
(1) Includes net deferred fee income.
(2) Includes interest-bearing deposits at other financial institutions.
Asset and Liability Management and Market Risk
Risk Management Overview. Managing risk is an essential part of successfully managing a financial institution. Our Enterprise Risk Management Committee reports key risk indicators to the Board of Directors through the Audit Committee. The most prominent risk exposures management monitors are strategic, credit, interest rate, liquidity, operational, compliance, reputational, cybersecurity, and legal risk.
Interest Rate Risk Management. We manage the interest rate sensitivity of interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts may reprice more quickly in response to changes in market interest rates because of their shorter maturities. Certain adjustable-rate investment securities, home equity lines of credit, and commercial real estate loans that are tied to the prime rate, the twelve-month constant maturity treasury, or the Term Secured Overnight Financing Rate ("TSOFR") will also reprice higher when market interest rates increase. Increases in interest rates should beneficially affect our earnings when variable or adjustable interest-earning assets reprice at higher interest rates faster than it takes for deposit and borrowing costs to reprice higher. Decreases in interest rates may adversely affect earnings as variable and adjustable assets will reprice lower which will reduce interest income.
Additionally, lower rates may result in increased prepayments and refinancing associated with loans and investment securities, particularly consumer and one-to-four family residential loans and MBS securities with no prepayment restrictions, which are then reinvested into lower yielding assets, further reducing interest income.
The Bank employs the services of outside firms to assist us in our asset and liability management and our analysis of market and interest rate risk.
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Table of Contents
Interest Rate Sensitivity Analysis. Management uses an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 400 basis point decrease in market interest rates with no effect given to any future steps that management might take to counter the impact of that interest rate movement. The Bank's balance sheet remains more liability sensitive due to slower loan prepayment speeds, driven by higher interest rates during the first nine months of 2024, and deposit migration from non-maturity deposits to certificates of deposits with shorter average lives.
The following table presents the change in the present value of First Fed’s equity at December 31, 2024, that would occur in the event of an immediate change in interest rates based on management's assumptions.
December 31, 2024
Economic Value of Equity
Basis Point Change in Interest Rates
$ Amount
$ Change
% Change
EVE Ratio %
(Dollars in thousands)
+ 400
$
126,255
$
(99,521
)
(44.1
)%
6.6
%
+ 300
152,786
(72,990
)
(32.3
)
7.8
+ 200
178,362
(47,414
)
(21.0
)
8.9
+ 100
205,063
(20,713
)
(9.2
)
10.0
0
225,776
—
—
10.8
-100
256,598
30,822
13.7
11.9
-200
268,254
42,478
18.8
12.2
-300
263,536
37,760
16.7
11.8
-400
238,052
12,276
5.4
10.5
Using the same assumptions as above, the sensitivity of our projected net interest income over a one-year period for the year ended December 31, 2024, is as follows:
December 31, 2024
Basis Point Change
Projected Net Interest Income
in Interest Rates
$ Amount
$ Change
% Change
(Dollars in thousands)
+ 400
$
68,623
$
2,873
4.4
%
+ 300
68,366
2,616
4.0
+ 200
67,718
1,968
3.0
+ 100
66,970
1,220
1.9
0
65,750
—
—
-100
64,297
(1,453
)
(2.2
)
-200
63,267
(2,483
)
(3.8
)
-300
61,825
(3,925
)
(6.0
)
-400
59,151
(6,599
)
(10.0
)
Management makes assumptions about interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in our analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may take longer to adjust to changes in market rates. Additionally, certain assets have features, such as rate caps or floors, which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating forgoing the table.
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Table of Contents
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of investment security principal and interest payments, deposit inflows, brokered deposits, loan repayments, maturities, sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our holdings of liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and objectives of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2024, cash and cash equivalents totaled $72.5 million and securities classified as available-for-sale had a market value of $340.3 million. We have pledged loan collateral with principal balances totaling $951.8 million to support borrowings from the FHLB of $290.0 million, with a remaining borrowing capacity of $207.3 million. We have also pledged collateral of $17.9 million to the Federal Reserve Bank of San Francisco to secure discount window advances; the Company has performed periodic borrowing tests on this line with the Federal Reserve; however, no such funds were borrowed as of December 31, 2024 . First Northwest maintains a $20.0 million line of credit with NexBank, with an available borrowing capacity of $13.5 million at year end, which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
At December 31, 2024, we had $165.8 million in undisbursed loans, including undisbursed construction commitments, and standby letters of credit. The Company also had unfunded partnership commitments totaling $3.2 million.
Customer CDs due within one year as of December 31, 2024, totaled $426.6 million, or 65.9% of total CDs. Brokered CDs due within one year as of December 31, 2024, totaled $100.9 million, or 15.6% of total CDs. Management believes a significant portion of our customer CDs will be renewed or rolled into new certificates of deposit given the current rate environment. If these maturing deposits are not renewed or rolled into other deposit products, we will seek other sources of funds, which may include borrowings and brokered deposits. We also attract and retain deposits by adjusting the interest rates offered, including the offering of promotional rates on certificates of deposit to encourage the renewal or rollover of maturing certificates of deposit and mitigate the risk of loss of these deposits. Depending on market conditions, we may pay higher rates on borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate offerings. However, rates on these sources of funds may also be less than what the market demands for customer deposits. We believe relationships developed by our sales teams, including our commercial relationship managers, branch managers and members of our branch network, and the general cash flows from our existing lending and investment activities, will afford us sufficient short- and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
First Fed has a diversified deposit base with approximately 61% of deposit account balances held by consumers, 28% held by business and public fund depositors, and 11% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at December 31, 2024. We estimate that 20-25% of our customer deposit balances, or $390.5 million, are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers. Management believes that maintaining a diversified deposit base is an important factor in managing liquidity.
The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First Fed Bank, the NexBank line of credit and future investment redemptions for liquidity to pay its operating expenses and other financial obligations. At December 31, 2024, the Company (on an unconsolidated basis) had liquid assets of $441,000.
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the year ended December 31, 2024, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.
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Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of December 31, 2024:
Amount of Commitment Expiration
Within 1 Year
After 1 Year Through 3 Years
After 3 Years Through 5 Years
Beyond 5 Years
Total Amounts Committed
(In thousands)
Unfunded commitments under lines of credit
$
18,030
$
17,615
$
5,789
$
69,077
$
110,511
Unfunded commitments under existing construction loans
19,079
8,975
—
23,662
51,716
Unfunded commitments under existing maritime loans
—
—
—
1,600
1,600
Standby letters of credit
1,817
—
—
200
2,017
Unfunded commitments under partnership agreements
3,158
—
—
—
3,158
Total
$
42,084
$
26,590
$
5,789
$
94,539
$
169,002
Capital Resources
First Northwest Bancorp is a financial holding company (a type of bank holding company) subject to regulation by the Federal Reserve. As a bank holding company, we are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Our subsidiary, First Fed, is subject to minimum capital requirements imposed by the FDIC. Capital adequacy requirements are quantitative measures established by regulation that require us to maintain minimum amounts and ratios of capital.
First Fed is subject to meeting minimum capital adequacy requirements for common equity Tier 1 ("CET1") capital, Tier 1 risk-based capital, total risk-based capital, and tier 1 capital ("leverage"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
First Fed is subject to capital requirements adopted by the Federal Reserve and the FDIC. See Item 1, "Business-How We Are Regulated," and Note 12 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K for additional information regarding First Northwest Bancorp and First Fed’s regulatory capital requirements.
In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions, First Northwest Bancorp and First Fed must maintain CET1 capital at an amount greater than the required minimum levels plus a capital conservation buffer. This new capital conservation buffer requirement was phased in starting in January 2016 until fully implemented in the amount of 2.5% of risk-weighted assets in January 2019. As of December 31, 2024, the conservation buffer was 2.5%.
Consistent with our goals to operate a sound and profitable organization, our policy for First Fed is to maintain its "well-capitalized" status in accordance with regulatory standards. At December 31, 2024, the Bank and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" under FDIC regulatory capital guidelines.
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Table of Contents
The following table provides the capital requirements and actual results at December 31, 2024.
Actual
Minimum Capital Requirements
Minimum Required to be Well-Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Tier I leverage capital (to average assets)
Bank only
$
208,836
9.4
%
$
88,930
4.0
%
$
111,163
5.0
%
Common equity tier I (to risk-weighted assets)
Bank only
208,836
12.4
75,515
4.5
109,077
6.5
Tier I risk-based capital (to risk-weighted assets)
Bank only
208,836
12.4
100,686
6.0
134,248
8.0
Total risk-based capital (to risk-weighted assets)
Bank only
228,409
13.6
134,248
8.0
167,810
10.0
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk and Asset and Liability Management" of this Form 10-K is incorporated herein by reference.