FIRST NORTHWEST BANCORP General
First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary,First Fed Bank , as well as certain non-banking financial activities, including a controlling interest inQuin Ventures, Inc. and several limited partnership investments. The Company's business activities are generally focused on passive investment activities and oversight of the activities ofFirst Fed and Quin Ventures . The Company has also entered into partnerships to strategically invest in fintech-related businesses, which may result in the development of additional investment opportunities. First Fed is a community-oriented financial institution servingClallam ,Jefferson ,King ,Kitsap , andWhatcom counties inWashington State , through its twelve full-service branches and four business centers. We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve. While we have a concentration of first lien one- to four-family mortgage loans, in order to diversify our portfolio and increase interest income, we have increased our origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and have increased our auto and consumer loans through originations, indirect auto lending, and purchased auto loan programs. We continue to originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase noninterest income and manage interest rate risk or retain select loans in our portfolio to enhance interest income. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals, businesses and nonprofit organizations. Deposits are our primary source of funding for our lending and investing activities. First Fed is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, including fiscal stimulus, interest rate policy and open market operations, housing and financial institutions. Deposit flows are influenced by various factors, including sales and marketing efforts, interest rates paid on competing deposits, available alternative investments such as the stock 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 regional economic cycles. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates can affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, and gains and losses from sales of loans and securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations required to adequately provide for probable losses inherent in our loan portfolio through our allowance for loan losses. As a loan's risk rating improves, property values increase, or recoveries of amounts previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest income. The noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, digital delivery and data processing expenses, advertising and promotion expenses, expenses related to real estate and personal property owned, state and local taxes, federal income tax, and other miscellaneous expenses. 70
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Our Business and Operating Strategy
Our operating strategy is focused on diversifying our loan portfolio, expanding our deposit product offerings, and enhancing our infrastructure. Certain highlights of our operations in the last three years include:
• Expanding our market presence. We hired several experienced and talented
bankers with connections throughout
full-service branch in
in deposits and expanded our ability to secure customer relationships and
lending opportunities outside of our market areas in the North Olympic
Peninsula;
technology to expand our market presence and to service new and existing
businesses and consumers in
• Investing in financial technology ("fintech") companies. We have a ten-year
commitment to invest in
start-ups.
companies producing technology and apps that may be of interest as we grow
in the fintech sector. We also have ten-year commitments to invest in
designed for community banks.
• Enhancing the loan portfolio. We have significantly increased the
origination of commercial real estate, multi-family real estate, and
construction and land loans, as well as our portfolio of commercial business
loans. This helped to increase overall net interest income.
• Adding new servicing capabilities. In addition to traditional consumer and
business deposit products, we offer remote deposit capture, consumer and
small business digital banking, and commercial digital banking capabilities.
We implemented interactive teller machines, allowing our customers to
conduct business with a teller through an interactive screen, at several
locations.
• Enhancing our infrastructure. We have focused on upgrading our
infrastructure, in terms of technology, equipment and personnel, in order to
support our changing lending and deposit capabilities and position ourselves
for growth.
Our objective is to be an independent, high performing bank focused on meeting
the needs of individuals, small businesses and community organizations
throughout our market areas with exceptional service and competitive products.
We intend to implement these strategies to achieve our objectives:
• Increasing our portfolio of higher yielding commercial loans. Through
increased loan originations, we intend to increase the percentage of our
loan portfolio consisting of higher-yielding commercial real estate andcommercial business loans. These loan categories offer higher risk-adjusted
returns, shorter maturities and more sensitivity to interest rate
fluctuations than traditional fixed-rate, one- to four-family residential
loans. Our commercial and multifamily real estate and commercial business
loans have increased to
31, 2022, from $615.6 million , or 45.4% of total loans, at December 31,
2021 . The increase resulted in part from adding talented leaders to the
commercial team; developing relationships with loan referral sources,including our Board of Directors and loan brokers; pursuing loan purchase
and participation opportunities; and competing successfully in new and
existing markets.
• Increasing noninterest income. We offer SBA loan products, which provide the
opportunity to sell the guaranteed portion of loans originated, adding to
our gain on sale of loans while also generating servicing fee income. We
will continue our participation in the ARC swap program togenerate additional fee income. We will maintain our focus on mortgage loan
sales to increase income from both sale and servicing fees. We may also sell
loans in order to manage concentrations and risk, which would generate gain
and possibly additional servicing income. We anticipate that future revenue
will be generated through treasury management products, merchant services,
fintech partnerships and banking-as-a-service, which would add income and
increased interchange fee income.
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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, resolving nonperforming loans, and selling
foreclosed assets. Nonperforming assets were $1.8 million at December 31 ,
2022 and
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.
• 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 smartphones and
tablets, consumer credit score access, account-to-account transfer services
between First Fed and other banks, and person-to-person funds transfer,
enabling us to compete effectively with banks of all sizes. We enhanced our
mobile banking platform, upgraded our business on-line banking platform, and
extended banking hours through our interactive teller machines and secure
chat solutions.
• 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
digital delivery in other markets.
• Hiring experienced employees with a customer sales and service focus. Our
goal is to compete by relying on the strength of our customer service and
relationship building. We believe that our ability to continue to attract
and retain banking professionals who have significant knowledge of existing
and new market areas, possess strong commercial banking sales and service
skills, and maintain a focus on community relationships will enhance our
success. We intend to hire additional retail bankers, lenders and treasury
management officers who are established in their communities to enhance our
market position and add profitable growth opportunities.
• Improving our digital presence and streamlining the customer experience. By
investing in and improving on the interfaces that connect customers to our
products and services, we believe we will be in a better position to compete
and grow in an environment that is becoming increasingly technology driven.
We intend to invest in our online presence and engage in digital strategies
that will help us to successfully compete in an ever-changing digital
marketplace. In 2019, the Company committed to fund
Ventures to identify and infuse capital into certain promising 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. We introduced a new
online mortgage application with a leading fintech partner in 2020 and
launched new digital deposit application and consumer loan originationplatforms in 2021. In 2022, the Company implemented a customer relationship
management software to improve business and consumer relationships.
• 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 have increased
our auto loan portfolio as a result of our partnership involving the
purchase of loans made to borrowers purchasing high-end automobiles and
classic cars. We also engaged with Triad Financial Services in 2020 to
purchase manufactured home loans in pools and on a flow basis. We also
purchase loans from Banker's
other opportunities such as these as a means to improve net income and
supplement organic loan originations.
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• Expanding into digital and fintech markets. Banking-as-a-service offers
significant growth opportunities. The fintech and digital banking markets
offer innovation and expansion that First Fed can support through servicing
products offered. We announced our partnership with Splash in
to collaborate on developing and deploying consumer loan products and
solutions throughout the country. We continue to explore additional
opportunities to partner with fintech and digital banking partners in order
to expand this part of our digital strategy.
• Creating operating leverage. We will continue to look for ways to improve
operational efficiency. We realigned positions in 2022 to better meet
organizational objectives, resulting in some workforce reductions. We
believe that recent investments in technology may also provide opportunities
to build efficiencies. We increased our net interest income in 2022,
however, we experienced a decrease in non-interest income, specifically in
areas which are impacted by interest rates. We remain focused on improving
current noninterest income product lines, such as SBA and swap fees, and are
pursuing new revenue channels related to payments and banking-as-a-service.
• Expanding offerings to small-to-medium sized business. 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
small-to-medium sized businesses, we believe there are multiple payment
opportunities for ACH processing, check processing, wire transfers,
international payments and debit card interchange. In addition, we intend to
build out our capabilities for accounts payable and receivable, payroll,
merchant card acquisition and corporate card spend management.
Critical Accounting Policies
We have certain accounting policies that are important to the assessment of our
financial condition, since they require management to make difficult, complex or
subjective judgments, some of which may relate to matters that are inherently
uncertain. Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, but are not limited
to, changes in interest rates, changes in the performance of the economy and
changes in the financial condition of borrowers. Our accounting policies are
discussed in detail in Note 1 of the Notes to Consolidated Financial Statements
included in Item 8, "Financial Statements and Supplementary Data" of this Form
10-K.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio as of the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews, and the Board of Directors approves, at least quarterly, the level of the allowance and the provision for loan losses based on past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, theFDIC and the DFI, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgment about information available at the time of their examination. A large loss could deplete the allowance and require increased provisions for loan losses to replenish the allowance, which would adversely affect earnings. See Note 3 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. Mortgage Servicing Rights. We record 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. EffectiveJanuary 1, 2022 , the Bank elected to measure servicing rights using the fair value method of accounting. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. Prior to 2022, the amortization method was applied with servicing rights initially recognized at fair value and subsequent changes in value amortized over the estimated remaining life of the loans. 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, 6 and 14 to the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. 73
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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.
Comparison of Financial Condition at
Assets. Total assets increased
Total loans, excluding loans held for sale, increased$177.2 million , or 13.1%, during the year endedDecember 31, 2022 . Multi-family and commercial real estate loans increased$108.1 million , or 20.2%, consisting mainly of an increase in multi-family real estate loans of$81.1 million as a result of new originations and$17.6 million of construction loans converting into permanent amortizing loans. The commercial real estate loans increase was due to new loan originations in addition to$12.2 million from construction loans converting into permanent amortizing loans. Auto and other consumer loans increased$40.0 million , or 21.9%, with the purchase of a pool of manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans. Commercial business loans decreased$2.8 million due to a decrease in the Northpointe Bank Mortgage Participation Program of$26.3 million as our participation in the program ended and$14.5 million in payoffs of SBA Paycheck Protection Program loans, partially offset by purchases of$8.1 million in secured equipment loans and$6.3 million of unsecuredBankers Healthcare Group loans in addition to advances on new and existing lines of credit. One- to four-family residential loans increased$48.9 million , or 16.6%, with$40.5 million in construction loans converting to permanent amortizing loans during the year. We continue to focus on the origination of one- to four-family mortgage loans with the intention of retaining certain adjustable-rate loans that may not be readily sold in the secondary market, while selling the majority of our saleable production to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other investors. Construction and land loans decreased$30.1 million , or 13.4%, with draws on new and existing loans partially offset by$79.3 million converting into fully amortizing loans. Undisbursed construction commitments totaled$120.7 million atDecember 31, 2022 compared to$194.3 million atDecember 31, 2021 . Undisbursed construction commitments atDecember 31, 2022 included$68.1 million of mainly custom one- to four-family residential construction,$38.7 million of multi-family construction,$13.0 million of commercial real estate construction, and$1.0 million of commercial acquisition-renovation construction. Our construction loans are geographically disbursed throughout the state ofWashington with two commitments for properties inIdaho and one commitment for a property inOregon . We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. Internal staff monitor certain projects, which enhances fee income related to these loans. 74
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During the year endedDecember 31, 2022 , the Company originated$548.3 million of loans, of which$122.8 million , or 22.4%, were originated in theOlympic Peninsula region;$356.7 million , or 65.1%, in thePuget Sound region;$46.4 million , or 8.5%, in other areas inWashington ; and$22.2 million , or 4.1%, in other states. The Company also purchased loans totaling$96.1 million with the largest concentration of personal property located inCalifornia . Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated: December 31, 2022 December 31, 2021 (In thousands) Real Estate: One- to four-family $ 343,825 $ 294,965 Multi-family 253,551 172,409 Commercial real estate 390,246 363,299 Construction and land 194,646 224,709 Total real estate loans 1,182,268 1,055,382 Consumer: Home equity 52,322 39,172 Auto and other consumer 222,794 182,769 Total consumer loans 275,116 221,941 Commercial business loans 76,996 79,838 Total loans 1,534,380 1,357,161 Less: Net deferred loan fees 2,786 4,772 Premium on purchased loans, net (15,957 ) (12,995 ) Allowance for loan losses 16,116
15,124
Total loans receivable, net $ 1,531,435 $ 1,350,260
Our allowance for loan losses increased$1.0 million , or 6.6%, during the year endedDecember 31, 2022 , as a result of loan growth. Asset quality has remained stable year over year despite the uncertain economic conditions as theFederal Reserve Board has attempted to curb inflation by increasing the Federal Funds Rate. Management continues to closely monitor these and other economic conditions. The allowance for loan losses as a percentage of total loans was 1.05% atDecember 31, 2022 and 1.11% atDecember 31, 2021 . We believe our allowance for loan losses is adequate to cover inherent losses in the loan portfolio. Nonperforming loans increased$409,000 , or 29.6%, during the year endedDecember 31, 2022 to$1.8 million . This increase was mainly the result of increases in nonperforming one- to four-family of$463,000 and auto and other consumer of$60,000 , partially offset by a decrease in home equity loans of$88,000 . Nonperforming loans to total loans was 0.12% atDecember 31, 2022 , an increase from 0.10% atDecember 31, 2021 . 75
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AtDecember 31, 2022 , 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$4.3 million , or 34.3%, to$16.9 million atDecember 31, 2022 , from$12.6 million atDecember 31, 2021 . The change in classified loans was mainly the result of one$14.0 million commercial multifamily construction loan being downgraded during the fourth quarter due to additional liens being placed on the property, and was partially offset by commercial real estate loan upgrades and payoffs. The Bank continued to work with its borrowers to facilitate satisfactory repayment.
Cash and cash equivalents decreased by
Total investment securities decreased$17.6 million , or 5.1%, to$326.6 million atDecember 31, 2022 , from$344.2 million atDecember 31, 2021 . The year-over-year decrease was the result of a decline in the market value of the portfolio, sales and normal amortization during the year, partially offset by purchases. During 2022, we purchased$78.7 million of available-for-sale securities. We also took advantage of market opportunities to manage duration by selling$11.9 million of available-for-sale securities for a total gain of$118,000 during the same period. The decline in market value of$51.3 million relates mainly to changes in interest rates and market liquidity, not to changes in credit quality. The estimated average life of the total investment securities portfolio was 8.2 years, and the average repricing term was approximately 5.7 years as ofDecember 31, 2022 , based on the interest rate environment at that time. We anticipate the investment portfolio will continue to provide additional interest income and act as a source of liquidity. Mortgage-backed securities represent the largest portion of our investment portfolio and totaled$169.0 million atDecember 31, 2022 , an increase of$29.0 million , or 20.7% from$140.0 million atDecember 31, 2021 . Municipal bonds are the second largest segment, totaling$98.1 million atDecember 31, 2022 , a decrease of$15.3 million , or 13.5%, from$113.4 million atDecember 31, 2021 . Other investment securities, includingU.S. and international government agencies and corporate debt securities, were$59.6 million atDecember 31, 2022 , a decrease of$31.3 million , or 34.5% from$90.9 million atDecember 31, 2021 . AtDecember 31, 2022 , the investment portfolio contained 50.8% of amortizing securities, compared to 49.8% atDecember 31, 2021 . The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is generally affected by changing interest rates. We continue to focus on growing our loan portfolio and improving our earning asset mix over the long term, as evidenced by net loan growth exceeding the rate of investments during the year. We may purchase investment securities as a source of additional interest income and in lieu of carrying higher cash balances at nominal interest rates. For additional information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. Equity and partnership investments increased$10.7 million to$14.3 million atDecember 31, 2022 , compared to$3.6 million atDecember 31, 2021 , as we expanded partnership and equity relationships to include the threeMeriwether Group investments and JAM FINTOP. Prepaid expenses and other assets increased$20.2 million to$42.4 million atDecember 31, 2022 , compared to$22.2 million one year ago. The increase was mainly due to an increase in deferred tax assets of$11.2 million resulting from the fair market value decrease in the investment portfolio, an increase in other prepaid expenses of$3.9 million , which includes long-term sponsorship agreements with two local not-for-profit organizations, and a receivable for a bank-owned life insurance ("BOLI") death benefit payment related to the passing of a former employee. InDecember 2022 ,Quin Ventures sold substantially all of its assets toQuil Ventures . As part of the sale transaction, the Company received a 5% ownership stake inQuil Ventures valued at$225,000 and recorded a$1.5 million commitment receivable. Liabilities. Total liabilities increased$153.2 million , or 8.9%, to$1.88 billion atDecember 31, 2022 , from$1.73 billion atDecember 31, 2021 , mainly due to an increase in borrowings of$166.1 million , or 139.2%, to$285.4 million atDecember 31, 2022 , from$119.3 million atDecember 31, 2021 , used to fund loan growth. Deposit account balances decreased$16.3 million , or 1.0%, to$1.56 billion atDecember 31, 2022 from$1.58 billion atDecember 31, 2021 . Money market accounts decreased$124.8 million and transaction accounts decreased$32.3 million , while savings accounts increased$6.3 million . Certificates of deposit increased$134.4 million , or 54.4%, to$381.7 million atDecember 31, 2022 . Included in certificates of deposit balances at year end were$133.9 million in brokered certificates of deposit. We believe the current rate environment has contributed to greater competition for deposits with higher rate products being offered to attract new funds. Additionally, the significant deposit balance increases in 2020 and 2021 from stimulus payments and PPP loans began to run off in 2022 as business and consumer post-pandemic spending increased, fueled in part by inflation. Our focus will continue to be on increasing core customer deposits, with an emphasis on small-to-medium sized business deposits, and maintaining a stable source of funding for our continued growth. 76
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Equity. Total shareholders' equity decreased$29.4 million , or 15.4%, to$161.6 million atDecember 31, 2022 , from$191.0 million atDecember 31, 2021 . The decrease during the year resulted from a$40.8 million change in accumulated other comprehensive loss related to the change in unrealized market value of available for sale securities, net of tax. Share repurchases of$5.9 million and$2.8 million in dividends paid in 2022 also contributed to the decrease in equity. These decreases were partially offset by net income of$15.7 million , an increase of$2.6 million related to share-based compensation plans and$1.9 million related to the issuance of common stock as consideration for the acquisition of 33% ofThe Meriwether Group, LLC . During the year endedDecember 31, 2022 , we repurchased 356,343 shares of common stock at an average cost of$15.26 per share, pursuant to the Company's 2020 stock repurchase plan.
Comparison of Results of Operations for the Years Ended
General. The Company generated a return on average assets of 0.79%, and a return on average equity of 9.09%, for the year endedDecember 31, 2022 , compared to 0.87% and 8.19%, respectively, for the year endedDecember 31, 2021 . Net income increased$227,000 , or 1.5%, compared to 2021. An increase in net interest income was offset by a decrease in noninterest income and increase in noninterest expense. Noninterest income was down due to significant declines in gain on sale of loans and gains on partnership investments. Noninterest expense was higher due to increased compensation, advertising, data processing, and occupancy expenses. The increases in expense were primarily related to Quin and expansion of the Bank's staffing levels and locations. We earned$1.71 per common and diluted share for the year endedDecember 31, 2022 , compared to$1.63 per common and diluted share for the year endedDecember 31, 2021 . The increase in earnings per share was the result of an increase in net income combined with lower weighted-average common shares outstanding of 9,082,032 in 2022, compared to 9,133,953 shares for the same period in 2021. The decrease in average shares year-over-year is due to our share repurchase program and restricted stock award forfeitures offset by restricted stock award grants. Net Interest Income. Net interest income increased$11.6 million , or 19.8%, to$69.9 million for the year endedDecember 31, 2022 , from$58.3 million for the year endedDecember 31, 2021 , mainly as the result of additional interest income related to an increase in the average balances of loans receivable as well higher yields earned on both loans receivable and investment securities. The average balance of loans receivable increased$208.9 million , at an average yield of 4.74%, for the year endedDecember 31, 2022 compared to an average yield of 4.44%, for the year endedDecember 31, 2021 . The cost of interest-bearing liabilities increased to 0.73% for the year endedDecember 31, 2022 compared to 0.43% for the year endedDecember 31, 2021 . The combination of increased loan receivable balances and higher rates resulted in a 28 basis point increase in our net interest margin to 3.79% atDecember 31, 2022 , from 3.51% atDecember 31, 2021 , as loans repriced faster than deposit costs. Net interest income increased$11.6 million during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , of which$7.0 million was the result of an increase in volume and$4.6 million due to changes in yields. As noted above, loans receivable was the main contributor to the increase in net interest income with$9.3 million due to an increase in average volume and$4.3 million due higher rates. The increase to the cost of average interest-bearing liabilities for the year endedDecember 31, 2022 was due primarily to increased average balances and higher rates paid on advances, certificates of deposit and money market accounts. Interest Income. Interest income increased$16.7 million , or 26.2%, to$80.4 million for the year endedDecember 31, 2022 from$63.7 million for the comparable period in 2021, primarily due to an increase in the average balance of loans receivable. Interest and fees on loans receivable increased$13.6 million during the year, in part, as the Bank grew the loan portfolio through single-family, multi-family and commercial real estate lending as well as purchased auto and manufactured home loans. Loan yields also increased due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices. 77
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Interest income on investment securities increased$2.5 million to$10.9 million for the year endedDecember 31, 2022 compared to$8.4 million for the year endedDecember 31, 2021 . The increase in interest income on investment securities was driven by an increase in the average yield during the year of 81 basis points due to the repricing of variable rate securities as slowing prepayment activity reduced the amount of premium amortization during the period.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Year Ended December 31,
2022 2021
Average Average Increase/
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,448,777 4.74 % $ 1,239,919 4.44 % $ 13,606
Investment securities 350,521 3.10 365,000 2.29 2,497
FHLB stock 8,540 5.88 4,058 4.68 312
Interest-earning deposits in banks 34,807 1.08 52,242 0.16 292
Total interest-earning assets $ 1,842,645 4.36 % $ 1,661,219 3.83 % $ 16,707
Interest Expense. Total interest expense increased $5.1 million , or 95.7%, for
the year ended December 31, 2022 , compared to the prior year, with increases in
borrowing costs of $3.3 million and deposit costs of $1.8 million . Borrowing
rates increased 12.4%, or 29 basis points, mainly due to higher rates paid on
overnight and short-term borrowings, combined with an increase of $118.1 million
in the average balance outstanding. Deposit costs increased due to higher rates
paid and an increase of $73.9 million , or 6.4%, in the average balance of
interest-bearing deposits, as we utilized brokered certificates of deposits to
offset the decline in customer balances. The average cost of all
interest-bearing deposit products increased 13 basis points to 0.42% for the
year ended December 31, 2022 from 0.29% for the year ended December 31, 2021 .
While the average balances of all deposit categories increased year-over-year,
growth in lower costing transaction, savings and money market accounts outpaced
higher costing certificates of deposit accounts.
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The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Year Ended December 31,
2022 2021
Average Average Increase/
Balance Balance (Decrease) in
Outstanding Rate Outstanding Rate Interest Expense
(Dollars in thousands)
Interest-bearing transaction $ 193,064 0.07 % $ 175,608 0.02 % $ 94
Money market accounts 555,038 0.31 525,986 0.22 533
Savings accounts 197,707 0.08 185,315 0.07 37
Certificates of deposit 282,477 1.13 267,521 0.77 1,138
Advances 163,198 2.29 54,033 1.43 2,966
Subordinated debt, net 39,312 4.01 30,370 3.96 374
Total interest-bearing liabilities
5,142
Provision for Loan Losses. The provision for loan losses increased during the
year ended December 31, 2022 , compared to 2021. The higher provision is
reflective of loan growth and an increase in net charge-offs. Credit quality
metrics improved slightly resulting in a lower allowance to total gross loans
compared to the prior year.
The following table details activity and information related to the allowance for loan losses for the periods shown:
Year Ended December 31,
2022 2021
(Dollars in thousands)
Provision for loan losses $ 1,535 $ 1,350
Charge offs net of recoveries (543 ) (73 )
Allowance for loan losses 16,116 15,124Allowance for losses as a percentage of total gross loans receivable at the end of this period
1.05 % 1.11 %
Total nonaccrual loans 1,790 1,796
Allowance for loan losses as a percentage of nonaccrual loans at end of period
900 % 842 %
Nonaccrual and 90 days or more past due loans as a
percentage of total loans 0.12 % 0.13 %
Total loans $ 1,534,380 $ 1,357,161
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Noninterest Income. Noninterest income decreased 34.0% to$10.3 million for the year endedDecember 31, 2022 , from$15.6 million for the year endedDecember 31, 2021 . Decreases compared to the prior year were primarily due to lower gain on sale of mortgage loans, lower gains on investment security sales, a$1.1 million decrease to the change in market value of our limited partnership fintech investments included in "other income" and a decline in the value of the loan servicing rights asset. These decreases were partially offset by additional service fee income and the BOLI death benefit payment.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Year Ended December 31, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 4,729 $ 3,860 $ 869 22.5 %
Sold loan servicing fees 867 946 (79 ) (8.4 )
Net gain on sale of loans 824 5,278 (4,454 ) (84.4 )
Net gain on sale of investment
securities 118 2,410 (2,292 ) (95.1 )
Increase in cash surrender value of
bank-owned life insurance, net 916 965 (49 ) (5.1 )
Income from death benefit on bank-owned
life insurance, net 1,489 - 1,489 100.0
Other income 1,384 2,179 (795 ) (36.5 )
Total noninterest income $ 10,327 $ 15,638 $ (5,311 ) (34.0 )%
Noninterest Expense. Noninterest expense increased to $62.3 million for the year
ended December 31, 2022 , from $54.4 million for the year ended December 31,
2021 . The year-over-year increase reflects higher data processing and occupancy
expenses associated with expanding our footprint with additional branch
locations as well as higher professional fees, including legal and technology
consulting fees.
Additional Quin expenses resulted in significant increases to advertising,
compensation, depreciation and data processing expenses during the year ended
December 31, 2022 , totaling approximately $3.5 million . The full amount of Quin
Ventures activity is reported in noninterest income and noninterest expense
under the controlling interest method of accounting. The proportional
noncontrolling interest amount is later subtracted from net income. This
resulted in a noncontrolling interest net loss of $2.1 million being added back
to net income for the year ended December 31, 2022 . As of December 31, 2022 ,
future additional expenses related to Quin are expected to be immaterial.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Year Ended December 31, Increase (Decrease)
2022 2021 Amount Percent
(Dollars inthousands)
Compensation and benefits$ 35,940 $ 33,515 $ 2,425 7.2 % Data processing 7,539 6,244 1,295 20.7 Occupancy and equipment 5,398 4,312 1,086 25.2 Supplies, postage, and telephone 1,376 1,189 187 15.7 Regulatory assessments and state taxes 1,539 1,213 326 26.9 Advertising 3,288 2,040 1,248 61.2 Professional fees 2,645 1,997 648 32.4 FDIC insurance premium 888 752 136 18.1 Other 3,699 3,151 548 17.4 Total$ 62,312 $ 54,413 $ 7,899 14.5 % Provision for Income Tax. The provision for income tax for the year endedDecember 31, 2022 , was$2.9 million compared to$3.2 million for the year endedDecember 31, 2021 , reflecting differences in pre-tax income. The effective tax rate decreased over prior periods as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit. 80
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Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread atDecember 31, 2022 and 2021. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield. At December 31, Year Ended December 31, 2022 2022 2021 Average Interest Average Interest Balance Earned/ Balance Earned/ Yield/ Rate Outstanding Paid Yield/ Rate Outstanding Paid Yield/ Rate Interest-earning assets: (Dollars in thousands) Loans receivable, net (1) 5.69 %$ 1,448,777 $ 68,635 4.74 %$ 1,239,919 $ 55,029 4.44 % Total investment securities 3.22 350,521 10,866 3.10 365,000 8,369 2.29 FHLB dividends 6.41 8,540 502 5.88 4,058 190 4.68 Interest-earning deposits in banks 2.72 34,807 375 1.08 52,242 83 0.16 Total interest-earning assets (2) 5.23 1,842,645 80,378 4.36 1,661,219 63,671 3.83 Noninterest-earning assets 132,588 104,011 Total average assets$ 1,975,233 $ 1,765,230 Interest-bearing liabilities: Interest-bearing demand deposits 0.01$ 193,064 $ 137 0.07$ 175,608 $ 43 0.02 Money market accounts 0.58 555,038 1,698 0.31 525,986 1,165 0.22 Savings accounts 0.26 197,707 165 0.08 185,315 128 0.07 Certificates of deposit 2.19 282,477 3,198 1.13 267,521 2,060 0.77 Total interest-bearing deposits (3) 0.74 1,228,286 5,198 0.42 1,154,430 3,396 0.29 Advances 3.02 163,198 3,740 2.29 54,033 774 1.43 Subordinated debt, net 3.93 39,312 1,577 4.01 30,370 1,203 3.96 Total interest-bearing liabilities 1.18 1,430,796 10,515 0.73 1,238,833 5,373 0.43 Noninterest-bearing deposits (3) 335,646 308,467 Other noninterest-bearing liabilities 36,666 39,432 Average equity 172,125 178,498 Total average liabilities and equity$ 1,975,233 $ 1,765,230 Net interest income$ 69,863 $ 58,298 Net interest rate spread 4.05 3.63 3.40 Net earning assets$ 411,849 $ 422,386 Net interest margin (4) 3.79 3.51 Average interest-earning assets to average interest-bearing liabilities 128.8 % 134.1 %
(1) The average loans receivable, net balances include nonaccrual loans.
(2) Includes interest-bearing deposits at other financial institutions.
(3) Cost of all deposits, including noninterest-bearing demand deposits, was
0.33% and 0.23% for the years ended
(4) Net interest income divided by average interest-earning assets.
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Rate/Volume Analysis
The following tables present the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The presentation distinguishes between the changes
related to outstanding balances and the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended
December 31, 2022 vs. 2021
Increase (Decrease) Due to Total Increase
Volume Rate (Decrease)
(In thousands)
Interest-earning assets:
Loans receivable $ 9,266 $ 4,340 $ 13,606
Investment securities (332 ) 2,829 2,497
FHLB stock 210 102 312
Other (1) (28 ) 320 292
Total interest-earning assets $ 9,116 $ 7,591 $ 16,707
Interest-bearing liabilities:
Interest-bearing demand deposits $ 4 $ 90 $ 94
Money market accounts 64 469 533
Savings accounts 9 28 37
Certificates of deposit 115 1,023 1,138
Advances 1,564 1,402 2,966
Subordinated debt 354 20 374
Total interest-bearing liabilities $ 2,110
5,142
Net change in interest income $ 7,006
11,565
(1) 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. We utilize the services of outside firms to
assist us in our asset and liability management and our analysis of market risk.
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Interest Rate Risk Management. We manage the interest rate sensitivity of
interest-earning assets and interest-bearing liabilities in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts may reprice more quickly in response to changes in market
interest rates because of their shorter maturities. Certain adjustable-rate
investment securities, home equity lines of credit, and commercial real estate
loans that are tied to the prime rate, the twelve-month constant maturity
treasury, the London Interbank Offered Rate ("LIBOR"), or the 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. Given the current low cost of funding there is little ability to reduce
funding costs to offset the decrease in interest income. Additionally, lower
rates may result in increased prepayments and refinancing associated with loans
and investment securities, particularly consumer and one- to four-family
residential loans and MBS securities with no prepayment restrictions, which are
then reinvested into lower yielding assets, further reducing interest income.
We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments to manage interest rate risk.
Interest Rate Sensitivity Analysis. Management uses an interest rate sensitivity analysis to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 300 basis point decrease in market interest rates with no effect given to any future steps that management might take to counter the impact of that interest rate movement. The following table presents the change in the present value of First Fed's equity atDecember 31, 2022 , that would occur in the event of an immediate change in interest rates based on management's assumptions. December 31, 2022 Economic Value of Equity Basis Point Change in Interest Rates $ Amount $ Change % Change EVE Ratio % (Dollars in thousands) + 400$ 339,363 $ (55,878 ) (14.1 )% 19.2 % + 300 353,363 (41,878 ) (10.6 ) 19.5 + 200 367,228 (28,013 ) (7.1 ) 19.8 + 100 380,088 (15,153 ) (3.8 ) 20.0 0 395,241 - - 20.3 -100 394,065 (1,176) (0.3) 19.7 -200 382,328 (12,913) (3.3) 18.7 -300 366,724 (28,517) (7.2) 17.5 Using the same assumptions as above, the sensitivity of our projected net interest income over a one-year period for the year endedDecember 31, 2022 , is as follows: December 31, 2022 Basis Point Change Projected Net Interest Income in Interest Rates $ Amount $ Change % Change (Dollars in thousands) + 400$ 63,944 $ (8,527 ) (11.8 )% + 300 66,168 (6,303 ) (8.7 ) + 200 68,279 (4,192 ) (5.8 ) + 100 70,206 (2,265 ) (3.1 ) 0 72,471 - - -100 71,406 (1,065) (1.5) -200 68,949 (3,522) (4.9) -300 66,655 (5,816) (8.0) 83
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Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may take longer to adjust to changes in market rates. Additionally, certain assets have features, such as rate caps or floors, which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Liquidity Management Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of investment security principal and interest payments, deposit inflows, brokered deposits, loan repayments, maturities and sales of securities and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate. Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and objectives of our interest-rate risk and investment policies. Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. AtDecember 31, 2022 , cash and cash equivalents totaled$45.6 million , and securities classified as available-for-sale, which provide additional potential sources of liquidity, had a market value of$326.6 million . We have pledged loan collateral to support borrowings from the FHLB of$234.0 million . We have also pledged collateral to theFederal Reserve Bank of San Francisco to secure discount window advances; the Company has performed periodic borrowing tests, however, no funds were borrowed as ofDecember 31, 2022 . First Northwest has a$20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
At
Certificates of deposit due within one year ofDecember 31, 2022 totaled$262.2 million , or 68.7% of certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods in this changing rate environment. Management believes that a significant portion of our certificates of deposit 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 be required to seek other sources of funds, which may include borrowings and brokered deposits. We also can attract and retain deposits by adjusting the interest rates offered, including the offering of promotional rates on certificates of deposit to encourage the renewal or rollover of maturing certificates of deposit and mitigate the risk of loss of these deposits to our competitors. Depending on market conditions, we may also be required to pay higher rates on borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate offerings. We believe that business developed by our sales teams, including our commercial relationship managers, branch managers and members of our branch network, and the general cash flows from our existing lending and investment activities, will afford us enough long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. First Fed has a diversified deposit base with approximately 62% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 9% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was$29,000 atDecember 31, 2022 . We estimate that 20-25% of our retail customer deposit balances are over the$250,000 FDIC insurance limit, representing less than 5% of depositors. Management believes that maintaining a diversified deposit base is an important factor in managing liquidity. 84
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The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First Fed, and cash received from the issuance of subordinated debt for liquidity to pay its operating expenses and other financial obligations. AtDecember 31, 2022 , the Company (on an unconsolidated basis) had liquid assets of$1.0 million . Off-Balance Sheet Activities In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. 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 endedDecember 31, 2022 , we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with
off-balance sheet risks as of
Amount of Commitment Expiration
After 1 Year
Through 3 After 3 Years Total Amounts
Within 1 Year Years Through 5 Years Beyond 5 Years Committed
(In
thousands)
Commitments to
originate loans:
Variable-rate loans $ 25 $ - $ - $ - $ 25
Unfunded commitments
under lines of
credit 33,918 14,000 1,168 56,036 105,122
Unfunded commitments
under existing
construction loans 58,673 14,129 4,984 42,928 120,714
Standby letters of
credit 558 - - 200 758
Unfunded commitments
under partnership
agreements 4,268 - - - 4,268
Total $ 97,442 $ 28,129 $ 6,152 $ 99,164 $ 230,887
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 theFederal Reserve and theFDIC . See Item 1, "Business-How We Are Regulated," and Note 11 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K for additional information regardingFirst Northwest Bancorp and First Fed's regulatory capital requirements. 85
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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 inJanuary 2016 until fully implemented in the amount of 2.5% of risk-weighted assets inJanuary 2019 . As ofDecember 31, 2022 , 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. AtDecember 31, 2022 , the Bank and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" underFDIC regulatory capital guidelines. The following table provides the capital requirements and actual results atDecember 31, 2022 . Minimum Capital Minimum Required to be Actual Requirements Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets) Bank only$ 215,037 10.4 %$ 82,607 4.0 %$ 103,259 5.0 % Common equity tier I (to risk-weighted assets) Bank only 215,037 13.4 72,230 4.5 104,332 6.5 Tier I risk-based capital (to risk-weighted assets) Bank only 215,037 13.4 96,306 6.0 128,408 8.0 Total risk-based capital (to risk-weighted assets) Bank only 231,405 14.4 128,408 8.0 160,510 10.0
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles inthe 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.
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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.
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