FIRST FINANCIAL NORTHWEST, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: •potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 (COVID-19) and any governmental or societal responses thereto; •the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our allowance for loan and lease losses; •changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; •uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the transition away from LIBOR toward new interest rate benchmarks; •fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; •results of examinations of us by the
Federal Reserve Bank of San Francisco("FRB") and our bank subsidiary by the Federal Deposit Insurance Corporation("FDIC"), the Washington State Department of Financial Institutions, Division of Banks("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our allowance for loan and lease losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; •our ability to pay dividends on our common stock; •our ability to attract and retain deposits; •our ability to control operating costs and expenses; •the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; •difficulties in reducing risk associated with the loans on our balance sheet; •staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; •disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; •our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; •our ability to implement a branch expansion strategy; •our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; •our ability to manage loan delinquency rates; •costs and effects of litigation, including settlements and judgments; •increased competitive pressures among financial services companies; •changes in consumer spending, borrowing and savings habits; 34 -------------------------------------------------------------------------------- •legislative or regulatory changes that adversely affect our business as a result of COVID-19; •the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and the implementing regulations; •the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; •adverse changes in the securities markets; •inability of key third-party providers to perform their obligations to us; •changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and •other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and other risks detailed in our Form 10-K for the year ended December 31, 2021("2021 Form 10-K") and our other reports filed with the U.S. Securities and Exchange Commission("SEC"). Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements. As used throughout this report, the terms "Company", "we", "our", or "us" refer to First Financial Northwest, Inc.and its consolidated subsidiaries, including First Financial Northwest Bankand First Financial Diversified Corporation.
First Financial Northwest Bank("the Bank") is a wholly-owned subsidiary of First Financial Northwest, Inc.("the Company") and, as such, comprises substantially all of the activity for the Company. First Financial Northwest Bankwas a community-based savings bank until February 4, 2016, when the Bank converted to a Washingtonchartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsapcounties, Washington, through its full-service banking office and headquarters in Renton, Washington, as well as seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington. The Bank's business consists predominantly of attracting deposits from the general public, combined with borrowing from the FHLB and raising funds in the wholesale market (which may include brokered deposits), then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. The Bank's strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in 12 to 24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans and consumer classic car loans that are outside of our primary market area. Through our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 43 other states and the District of Columbia, with the largest concentrations at March 31, 2022, in California, Oregon, Texas, Floridaand Alabamaof $35.8 million, $15.3 million, $11.2 million, $10.1 millionand $8.1 million, respectively. The Bank has also created an SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans or equipment financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well. 35
-------------------------------------------------------------------------------- Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income.
First Financial Northwest Bankis currently slightly asset-sensitive, meaning our interest-earning assets reprice at a faster rate than our interest-bearing liabilities. The Bank had a modest improvement in the net interest margin over the last year. The cost of funds has declined substantially due to the higher levels of noninterest-bearing deposits and the repricing of retail certificates of deposit at much lower market rates. During the quarter ended March 31, 2022, loan yields decreased compared to the same quarter last year, primarily due to the decrease in recognition of unamortized deferred fee income on Paycheck Protection Program ("PPP") loans forgiven and repaid by the SBA. An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth or an increase in probable loan losses. Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of BOLI, and revenue earned on our wealth management services. This income is increased or partially offset by any net gain or loss on sales of investment securities. Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits. Professional fees include legal services, auditing and accounting services, computer support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities. Also included in noninterest expense is the change to the Company's unfunded commitment reserve which is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.
Information related to COVID-19
The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of
March 31, 2022, all Bank branches are open with normal hours. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Critical accounting policies
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern the ALLL, the valuation of OREO, and the calculation of deferred taxes, the right-of-use asset and lease liability on our operating leases, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies in the 2021 Form 10-K. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the 2021 Form 10-K. 36 --------------------------------------------------------------------------------
Comparison of the financial situation at
Total assets were
$1.42 billionat March 31, 2022, a decrease of 0.8%, from $1.43 billionat December 31, 2021. The following table details the $11.3 millionnet change in the composition of our assets at March 31, 2022from December 31, 2021. Balance at Balance at March 31, December 31, Change from 2022 2021 December 31, 2021 Percent Change (Dollars in thousands) Cash on hand and in banks $ 7,979 $ 7,246$ 733 10.1 % Interest-earning deposits 19,633 66,145 (46,512) (70.3) Investments available-for-sale, at fair value 180,212 168,948 11,264 6.7 Investments held-to-maturity, at amortized cost 2,426 2,432 (6) (0.2) Loans receivable, net 1,121,382 1,103,461 17,921 1.6 FHLB stock, at cost 5,512 5,465 47 0.9 Accrued interest receivable 5,590 5,285 305 5.8 Deferred tax assets, net 1,069 850 219 25.8 Premises and equipment, net 22,254 22,440 (186) (0.8) BOLI, net 35,552 35,210 342 1.0 Prepaid expenses and other assets 8,451 3,628 4,823 132.9 ROU, net 3,455 3,646 (191) (5.2) Goodwill 889 889 - - Core deposit intangible, net 650 684 (34) (5.0) Total assets $ 1,415,054 $ 1,426,329 $ (11,275)(0.8) % Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco("FRB"), decreased by $46.5 millionduring the three months ended March 31, 2022. Growth in both loans receivable and investments available-for-sale was achieved by investing idle cash into these higher yielding assets. Investments available-for-sale. Our investments available-for-sale portfolio increased by $11.3 millionduring the three months ended March 31, 2022. During this period, the Bank purchased available-for-sale investment securities that included $20.0 millionof fixed rate U.S. Treasurybonds. In addition, the Bank purchased $4.0 millionof fixed rate mortgage backed securities and $2.0 millionin variable rate bonds. These purchases have an expected weighted average yield of 2.20%. During the three months ended March 31, 2022, $30,000of investments were called or paid-off early and one $2.4 millioninvestment matured. The effective duration of the investments available-for-sale at March 31, 2022, was 3.65% as compared to 3.54% at December 31, 2021. Effective duration measures the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank's portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank's investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change. Loans receivable. Net loans receivable increased $17.9 millionduring the three months ended March 31, 2022, primarily due to growth in one-to-four family residential loans, multifamily loans, and consumer loans of $27.1 million, $22.7 million, and $4.6 million, respectively. Partially offsetting these increases, business loans decreased $16.0 milliondue to a $5.7 milliondecrease in PPP loans, an $8.9 millionreduction in other business loans, and a $1.4 milliondecrease in aircraft loans. In addition, construction/land loans decreased $18.8 million, of which $20.7 millionconverted to permanent multi-family loans, and commercial real estate loans decreased $2.4 million. 37 -------------------------------------------------------------------------------- At March 31, 2022and December 31, 2021, the Bank's construction/land loans totaled 51.9% and 59.7% of total capital plus surplus, respectively, and total non-owner occupied commercial real estate was 379.6% and 384.0% of total capital plus surplus, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and construction/land loans, should not exceed 550% of total capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total capital plus surplus. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review. The following table presents a breakdown of our multifamily, commercial and construction loans by collateral type at March 31, 2022and December 31, 2021. Total commercial real estate loans and construction/land loans are net of $5,000and $39.0 millionof LIP, respectively, at March 31, 2022, as compared to $89,000and $43.3 millionLIP, respectively, at December 31, 2021. March 31, 2022 December 31, 2021 % of Total in % of Total in Amount Portfolio Amount Portfolio (In thousands) Multifamily residential $ 152,855
$ 130,146100.0 % Non-residential: Retail 142,725 34.2 % 138,463 33.0 % Office 87,394 21.0 90,727 21.6 Hotel / motel 58,406 14.0 64,854 15.5 Storage 34,442 8.3 32,990 7.9 Mobile home park 20,409 4.9 20,636 4.9 Warehouse 21,103 5.0 17,724 4.2 Nursing home 12,622 3.0 12,713 3.0 Other non-residential 39,887 9.6 41,310 9.9 Total non-residential 416,988 100.0 % 419,417 100.0 % Construction/land: One-to-four family residential 35,953 48.1 % 34,677 37.1 % Multifamily 17,196 23.0 37,194 39.8 Commercial 6,189 8.3 6,189 6.6 Land 15,359 20.6 15,395 16.5 Total construction/land 74,697 100.0 % 93,455 100.0 % Total multifamily residential, non-residential and construction/land loans $ 644,540 $ 643,018Included in total construction/land loans at March 31, 2022, are $17.2 millionof multifamily loans and $6.2 millionof commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. At December 31, 2021, construction/land loans included $37.2 millionof multifamily loans and $6.2 millionof commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. 38
-------------------------------------------------------------------------------- To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank originates and purchases loans and utilize loan participations with the underlying collateral located within areas of
Washington Stateoutside our primary market area or in other states. The Bank's goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank's underwriting and risk guidelines. During the three months ended March 31, 2022, the Bank purchased $9.5 millionof loans and loan participations to borrowers located in Washingtonand other states, including $3.7 millionof commercial real estate loans and $5.8 millionof consumer loans secured by classic/collectible automobiles. The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas of Washington, in California, and in other states. At March 31, 2022, total loans secured by collateral located in Californiarepresented 3.1% of our total loans, and total loans secured by collateral located outside the states of Californiaand Washingtonrepresented 9.7% of our total loans. The following table details geographic concentrations in our loan portfolio: At March 31, 2022 One-to-Four Family Commercial Residential Multifamily Real Estate Construction/Land Business Consumer Total (In thousands) King County $ 316,638 $ 84,630 $ 254,176$ 70,961 $ 18,418 $ 10,145 $ 754,968Pierce County 37,655 13,239 28,159 - 293 576 79,922 Snohomish County 31,936 8,454 14,740 849 6,205 1,325 63,509 Kitsap County 4,718 5 740 2,253 209 - 7,925 Other Washington Counties 16,014 31,324 35,879 634 417 563 84,831 California - 9,639 18,209 - 187 7,752 35,787 Outside Washingtonand California (1) 5,270 5,564 65,085 - 4,817 29,070 109,806 Total loans $ 412,231 $ 152,855 $ 416,988$ 74,697 $ 30,546 $ 49,431 $ 1,136,748_______________ (1) Includes loans in Oregon, Texas, Floridaand Alabamaof $15.3 million, $11.2 million, $10.1 millionand $8.1 million, respectively, and loans in 38 other states and the District of Columbia. The ALLL decreased to $15.2 millionat March 31, 2022, from $15.7 millionat December 31, 2021, and represented 1.33% and 1.40% of total loans receivable at March 31, 2022, and December 31, 2021, respectively. The ALLL consists of two components, the general allowance and the specific allowance. The ALLL general allowance decreased as a partial result of $8.1 millionof loans downgraded to substandard, where the individual analysis on these loans indicated no additional specific reserve was needed and these loans were omitted from the general allowance calculations used to calculate the ALLL and provision for loan losses. The downgrades included a $6.4 millionparticipation interest in commercial loans secured by medical rehabilitation facilities that were impacted unfavorably by the limitations on elective medical procedures during the COVID-19 pandemic. In addition, a $1.7 millionmultifamily property loan was downgraded to substandard subsequent to an overall financial analysis on one of our borrowing relationships with multiple other loans that were previously downgraded to substandard. Further, balances of lower risk one-to-four family loans and multifamily residential loans increased and balances of higher risk construction/land loans and business loans decreased, thereby reducing the related general allowance. Partially offsetting these decreases in the general allowance, a $6.3 millionparticipation interest in a loan secured by a nursing home facility was downgraded to special mention due to continued reduced occupancy as a result of the COVID-19 pandemic. The $5.2 millionbalance of PPP loans was omitted from the ALLL calculation at March 31, 2022, as these loans are fully guaranteed by the SBA. Management expects that the majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven. 39 --------------------------------------------------------------------------------
We believe that the ALLL at
March 31, 2022, was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss allowances or the charge-off of specific loans against established loss allowances based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Part 1, Item 1A of our 2021 Form 10-K. As we work with our borrowers that face difficult financial circumstances, we explore various options available to minimize our risk of loss. At times, the best option for our customers and the Bank is to modify the loan for a period of time, usually one year or less. Certain loan modifications are accounted for as TDRs. These modifications have included a reduction in interest rate on the loan for a period of time, advancing the maturity date of the loan, or allowing interest-only payments for a specific time frame. These modifications are granted only when there is a reasonable and attainable restructured loan plan that has been agreed to by the borrower and is considered to be in the Bank's best interest.
The following table presents a breakdown of our TDRs on the dates indicated, which were all efficient and in a situation of regularization:
March 31, 2022 December 31, 2021 Three Month Change (Dollars in thousands) Performing TDRs: One-to-four family residential $ 2,095 $ 2,107 $ (12) Total TDRs $ 2,095 $ 2,107 $ (12) % TDRs classified as performing 100.0 %
Our TDRs decreased
$12,000at March 31, 2022, compared to December 31, 2021as a result of principal repayments. At March 31, 2022, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at March 31, 2022, totaled $907,000and was secured by non-owner occupied one-to-four family properties located in Pierce County. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At March 31, 2022, total past due loans were $208,000, representing 0.02% of total loans receivable, and at December 31, 2021, were 255,000, representing 0.02% of total loans receivable. Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. At March 31, 2022, the Bank had a $179,000classic car loan on nonaccrual status. There were no nonaccrual loans at December 31, 2021. The Bank has initiated repossession of the collateralized vehicle on this loan and does not expect to incur a loss. We continue to focus our efforts on working with borrowers to bring their past due loans current. By taking ownership of the underlying collateral if needed, we can generally convert non-earning assets into earning assets on a more timely basis than which may otherwise be the case. Our success in this area is reflected by continued low balance of nonperforming assets. OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At March 31, 2022, and December 31, 2021, the Bank had no OREO properties and no real estate secured loans in the foreclosure process. 40 -------------------------------------------------------------------------------- Intangible assets. The balance of goodwill was $889,000at both March 31, 2022and December 31, 2021. Goodwillwas calculated as the excess purchase price of the branches acquired in August 2017(the "Branch Acquisition") over the fair value of the assets acquired and liabilities assumed. The core deposit intangible ("CDI") recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing demand, interest-bearing demand, savings, and money market accounts. The CDI balance was $650,000at March 31, 2022and $684,000at December 31, 2021. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. The CDI amortizes into noninterest expense on an accelerated basis over ten years.
Deposits. In the first three months of 2022, deposits fell
Balance at Balance at December 31, Change from March 31, 2022 2021 December 31, 2021 Percent Change (Dollars in thousands) Noninterest-bearing
$ 130,596 $ 117,751 $ 12,84510.9 % Interest-bearing demand 99,794 97,907 1,887 1.9 Savings 23,441 23,146 295 1.3 Money market 609,080 624,543 (15,463) (2.5) Certificates of deposit, retail 277,190 294,127 (16,937) (5.8) $ 1,140,101 $ 1,157,474 $ (17,373)(1.5) Decreases in money market accounts and retail certificates of deposit of $15.5 millionand $16.9 million, respectively, were partially offset by increases in noninterest-bearing demand accounts and interest-bearing demand accounts of $12.8 millionand $1.9 million, respectively. The Bank continued its strategy to shift the deposit composition to lower cost transaction accounts. At March 31, 2022and December 31, 2021, we held $58.5 millionand $60.6 millionin public funds, respectively, primarily in retail certificates of deposit and money market accounts. Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, to leverage our balance sheet and to supplement our deposits. Total FHLB advances were $95.0 millionat both March 31, 2022, and December 31, 2021. At March 31, 2022, the Bank's advances included $35.0 millionof fixed-rate three-month advances that renew quarterly, and $60.0 millionof fixed-rate one-month advances that renew monthly, all of which are utilized in cash flow hedge agreements, as described below. At March 31, 2022, all of our FHLB advances were due to reprice in less than two months. At that date, there were no FHLB Fed Funds short-term borrowings. Cash Flow Hedge. To assist in our interest rate risk management efforts, the Bank has entered into multiple interest rate swap agreements with qualified institutions. Each interest rate swap agreement qualifies as a cash flow hedge of the variability of future interest payments attributable to the changes in one-month or three-month LIBOR rates. The objective of the cash flow hedge is to offset the variability of cash flows due to the rollover of the Bank's FHLB, or other fixed rate advances, for one-month or three-months, respectively, for the term of the agreement. The agreements allow for a substitute index to be used if LIBOR is unavailable. The following table presents details of the Bank's interest rate swap agreements as of March 31, 2022. For each interest rate swap agreement listed, the Bank has secured a fixed-rate FHLB advance for the notional amount that reprices at the same frequency as the corresponding interest rate swap. The Bank pays a fixed interest rate to the counterparty and in return, receives a floating interest rate based on the index noted in the below table. The original term of these interest rate swap agreements range from four to eight years. 41 --------------------------------------------------------------------------------
Fixed rate paid to Index rate received Notional amount Start Date Maturity Date counterparty from counterparty Repricing Frequency (Dollars in thousands) $ 15,000 9/27/2019 9/27/2024 1.440 % 1-month LIBOR monthly 10,000 11/20/2019 11/20/2023 1.585 3-month LIBOR quarterly 15,000 3/2/2020 3/2/2026 0.911 1-month LIBOR monthly 15,000 3/2/2020 3/2/2027 0.937 1-month LIBOR monthly 15,000 3/2/2020 3/2/2028 0.984 1-month LIBOR monthly 15,000 10/25/2021 10/25/2028 0.793 3-month LIBOR quarterly 10,000 10/25/2021 10/25/2029 0.800 3-month LIBOR quarterly A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At
March 31, 2022and December 31, 2021, we recognized fair value assets of $6.0 millionand $1.5 million, respectively, as a result of the increase in market value of the interest rate swap agreements. The Bank has confirmed our adherence to the International Swaps and Derivatives Association("ISDA") 2020 LIBOR Fallbacks Protocol ("Protocol") to prepare for the cessation of LIBOR by June 30, 2023. The Protocol provides a mechanism for parties to bilaterally amend their existing derivative transaction to incorporate ISDA's fallback terms, providing for a clear transition from LIBOR to SOFR. Stockholders' Equity. Total stockholders' equity had a slight decrease of $122,000during the first three months of 2022, to $157.8 millionat March 31, 2022, from $157.9 millionat December 31, 2021. Stockholders' equity decreased $2.1 million, net of tax, following an increase in market interest rates during the quarter which negatively impacted the fair value of our available-for-sale investments, outpacing the improvement in market values of our cash flow hedges. In addition, stockholders' equity decreased by $694,000from the repurchase of 40,784 shares of common stock, $1.1 millionin cash dividends paid, and $226,000from canceled restricted stock awards. As part of the strategy to increase shareholder value, the Company's Board of Directors authorized a stock repurchase plan that began on August 16, 2021, for the repurchase of up to 476,000 shares of the Company's stock. At this repurchase plan's expiration on February 15, 2022, the Company had repurchased 459,732 shares at an average price of $16.83per share. The Board of Directors has authorized another stock repurchase plan that began on February 18, 2022, and which expires on August 17, 2022. This plan authorizes the repurchase of up to 455,000 shares. At March 31, 2022, the Company had repurchased 17,716 shares under this repurchase plan at an average price of $17.00per share. At that date, 437,284 shares were available for purchase under this repurchase plan. These decreases to stockholders' equity were partially offset by a $763,000increase in net income and $663,000increase in stock based compensation.
The following table shows the cash dividends paid per share and the corresponding payout ratio for the periods indicated:
Three Months Ended
March 31, 20222021
Dividend declared per common share
Dividend payout ratio (1) 33.2 %
(1) Dividends paid per common share divided by basic earnings per common share.
Comparison of operating results for the three months ended
General. Net income for the three months ended
March 31, 2022, was $3.3 million, or $0.36per diluted share compared to $2.5 million, or $0.26per diluted share for the three months ended March 31, 2021. Contributing to the $763,000increase in net income during the three months ended March 31, 2022, was a $1.2 milliondecrease in interest expense that more 42 --------------------------------------------------------------------------------
than to compensate for
the recovery of loan loss allowance was recorded for the three months ended
Net Interest Income. Net interest income for the three months ended
March 31, 2022, increased $622,000to $11.4 millionfrom $10.7 millionfor the three months ended March 31, 2021, due to the decrease in interest expense outpacing the decrease in interest income. Interest income decreased by $538,000for the three months ended March 31, 2022, as compared to the same period in 2021, primarily as a result of a $623,000decrease in loan interest income due to a reduction in average loan yields partially offset by an increase in the average loan balance. Our average loan yield declined to 4.36% for the three months ended March 31, 2022, from 4.66% for the three months ended March 31, 2021. The average loan yield for the three months ended March 31, 2021, was favorably impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling $718,000as compared to $172,000in the quarter ended March 31, 2022. The average balance of loans receivable increased $16.1 millionto $1.1 billionfor the three months ended March 31, 2022. Interest income from investment securities increased $83,000, as a combined result of a $13.5 millioncombined increase in the average balance of taxable and non-taxable investment securities. The yield of taxable securities increased five basis points to 1.96% while the yield on non-taxable securities decreased three basis points to 1.96% for the three months ended March 31, 2022, as compared to the same period in 2021. Interest income from interest-earning deposits remained relatively unchanged with a $7,000increase for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. During these comparative periods, the average yield increased to 0.15% for the three months ended March 31, 2022, from 0.09% for the three months ended March 31, 2021. Excess cash was invested in higher earning assets, resulting in a $2.5 milliondecrease in the average balance of interest-earning deposits for the three months ended March 31, 2022, as compared to the same period in 2021. The decrease in interest income was more than offset by a $1.0 milliondecrease in deposit interest expense for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The average rate paid on interest-bearing deposits decreased to 0.50% for the three months ended March 31, 2022, as compared to 0.94% for the three months ended March 31, 2021. Although the average balance of interest-bearing deposits increased $31.2 millionfor the three months ended March 31, 2022, as compared to the same period in 2021, a $107.7 milliondecrease in the average balance of higher cost retail certificates of deposit was replaced by a $138.7 millionincrease in lower cost money market accounts, resulting in a net decrease in cost. Interest expense from borrowings decreased $118,000as a combined result of a $25.0 milliondecrease in the average balance and a 13 basis point decrease in cost for the three months ended March 31, 2022, as compared to the same period in 2021. Our borrowings are comprised of FHLB advances matched to fixed-rate interest rate swap agreements. Reductions in both the average balance and cost of borrowings was the result of the repayment of $25.0 millionin FHLB advances due to a $50.0 millionmaturing interest rate swap agreement, and the $25.0 millionof fixed rate FHLB advances secured at lower rates upon the onset of $25.0 millionof previously contracted forward-starting interest rate swap agreements in October 2021. The Company's net interest margin increased to 3.43% for the three months ended March 31, 2022, from 3.31% for the three months ended March 31, 2021. This increase was primarily due to the 43 basis point reduction in our average cost of interest bearing liabilities outpacing the 25 basis point reduction in our average yield on interest earning assets between periods. For more information on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of this report. 43 -------------------------------------------------------------------------------- The following table presents the effects of changing rates and volumes on our net interest income during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume are allocated proportionately to the changes in rate and volume. Three Months Ended March 31, 2022 Compared to March 31, 2021 Net Change in Interest Rate Volume Total (In thousands) Interest-earning assets: Loans receivable, net $ (807) $ 184 $ (623)Investment securities, taxable 21 37 58 Investment securities, non-taxable (2) 27 25 Interest-earning deposits with banks 8 (1) 7 FHLB stock 7 (12) (5) Total net change in income on interest-earning assets (773) 235 (538) Interest-bearing liabilities: Interest-bearing demand (8) (1) (9) Statement savings - - - Money market (127) 114 (13) Certificates of deposit, retail (508) (512) (1,020) Borrowings (31) (87) (118) Total net change in expense on interest-bearing liabilities (674) (486) (1,160) Total net change in net interest income $ (99) $ 721 $ 62244
-------------------------------------------------------------------------------- The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended
March 31, 2022and 2021. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield. Three Months Ended March 31, 2022 2021 Average Interest Yield / Average Interest Yield / Balance Earned / Paid Cost Balance Earned / Paid Cost (Dollars in thousands) Assets Loans receivable, net $ 1,115,428 $ 12,0014.36 % $ 1,099,364 $ 12,6244.66 % Investment securities, taxable 147,048 712 1.96 139,086 654
Investment securities, non-taxable 24,637 119 1.96 19,122 94
Interest-earning deposits with banks 49,857 19 0.15 52,336 12 0.09 FHLB stock 5,467 74 5.49 6,412 79 5.00 Total interest-earning assets 1,342,437 12,925 3.90 1,316,320 13,463 4.15 Noninterest earning assets 81,617 77,893 Total average assets
$ 1,424,054 $ 1,394,213Liabilities and Stockholders' Equity Interest-bearing demand $ 99,862 $ 180.07 % $ 103,540 $ 270.11 % Statement savings 23,699 2 0.03 19,754 2 0.04 Money market 616,401 378 0.25 477,710 391 0.33 Certificates of deposit, retail 287,545 859 1.21 395,291 1,879
Total interest-bearing deposits 1,027,507 1,257 0.50 996,295 2,299 0.94 Borrowings 95,000 300 1.28 120,000 418 1.41 Total interest-bearing liabilities 1,122,507 1,557 0.56 1,116,295 2,717
Noninterest bearing liabilities 142,791 120,062 Average equity 158,756 157,856 Total average liabilities and equity
$ 1,424,054 $ 1,394,213Net interest income $ 11,368 $ 10,746Net interest margin 3.43 % 3.31 % Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, management's experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. Specific allowances result when management performs an impairment analysis on a loan when management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this impairment analysis, if the recorded investment in the loan is less than the market value of the collateral less costs to sell ("market value"), a specific allowance is established in the ALLL for the loan. The amount of the specific allowance is computed using current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This analysis is inherently 45 -------------------------------------------------------------------------------- subjective as it relies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from predictions. Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Loans classified as a TDR due to the borrower being granted a rate concession are analyzed by discounted cash flow analysis. The amount of the specific allowance on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the recorded investment in the loan. During the three months ended March 31, 2022, management evaluated the adequacy of the ALLL and concluded that a $500,000recapture of provision for loan losses was appropriate. This recapture was primarily attributed to the downgrade to substandard and impaired status of a $6.4 millionparticipation interest in a commercial loan secured by medical rehabilitation facilities and a $1.7 millionmultifamily loan subsequent to an overall financial analysis of a single borrowing relationship with multiple other loans that were previously downgraded to substandard and impaired status. These downgrades removed the loans from the calculation of the general allowance to an individual analysis for a specific allowance, however, the analysis concluded that no losses are anticipated from these loans. By omitting these loans from the general allowance calculations, the general allowance was reduced, contributing to the recapture. Partially offsetting these decreases in the general allowance, a $6.3 millionparticipation interest in a loan secured by a nursing home facility was downgraded to special mention due to continued reduced occupancy as a result of the COVID-19 pandemic. In addition, changes in the composition of our loan portfolio, with growth in lower risk one-to-four family residential and multifamily loans, and reduced balances in higher risk construction/land development and business loans contributed to the recapture of provision for the three months ended March 31, 2022. In comparison, a $300,000provision for loan losses was recognized for the three months ended March 31, 2021, primarily the result of downgrades on $10.5 millionof loans to the single lending relationship discussed above. These loans, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were adversely impacted by the COVID-19 pandemic. For more information, see Note 5 - Loans Receivable--ALLL. 46
The following table presents certain credit ratios at the periods indicated and for each of the components of the calculation of the ratios.
For the three months ended
2022 2021 (Dollars in thousands) ALLL as a percent of total loans 1.33 % 1.39 % ALLL at period end $ 15,159 $ 15,502 Total loans outstanding 1,136,748 1,116,391 Non-accrual loans as a percentage of total loans outstanding at period end 0.02 % 0.18 % Total non-accrual loans $ 179 $ 2,036 Total loans outstanding 1,136,748 1,116,391 ALLL as a percent of non-accrual loans at period end 8,468.72 % 761.39 % ALLL at period end $ 15,159 $ 15,502 Total non-accrual loans 179 2,036
Net collections over the period to average outstanding loans: Residential one-family to four-family:
- % 0.01 % Net recoveries during period $ 2 $ 28 Average loans receivable, net (1) 390,236 374,851 Multifamily: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 131,373 137,419 Commercial: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 415,173 383,399 Construction/land development: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 94,387 90,409 Business: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 37,786 73,604 Consumer: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 46,473 39,682 Total loans: - % - % Net recoveries during period $ 2 $ 28 Average loans receivable, net (1) 1,115,428 1,099,364
(1) Average loans receivable, net balances, includes unearned loans and deferred charges.
Non-interest income. Non-interest income increased
The following table presents a detailed analysis of the variations in the components of non-interest revenue:
Change from Three Months Three Months Ended Three Months Ended Ended March 31, 2022 March 31, 2021 March 31, 2021 Percent Change (Dollars in thousands) BOLI income $ 288 $ 269 $ 19 7.1 % Wealth management revenue 82 160 (78) (48.8) Deposit related fees 215 200 15 7.5 Loan related fees 199 132 67 50.8 Other 5 3 2 66.7 Total noninterest income $ 789 $ 764 $ 25 3.3 During the three months ended
March 31, 2022, as compared to the three months ended March 31, 2021, loan related fee income increased $67,000, primarily due to a $60,000increase in loan prepayment fees. BOLI income increased $19,000as a result of additional policies purchased in 2021. Wealth management revenue decreased $78,000during the three months ended March 31, 2022, as compared to the same period in 2021, primarily due to a reduction in sales personnel.
Non-interest expenses. Non-interest expenses increased
for the three months ended
The following table presents a detailed analysis of the variations of the components of non-interest expenses:
Change from Three Three Months Ended Three Months Ended Months Ended March 31, 2022 March 31, 2021 March 31, 2021 Percent Change (Dollars in thousands) Salaries and employee benefits $ 5,261 $ 4,945 $ 316 6.4 % Occupancy and equipment 1,228 1,100 128 11.6 Professional fees 452 532 (80) (15.0) Data processing 677 697 (20) (2.9) Regulatory assessments 101 121 (20) (16.5) Insurance and bond premiums 129 124 5 4.0 Marketing 37 29 8 27.6 Other general and administrative 741 581 160 27.5 Total noninterest expense $ 8,626 $ 8,129 $ 497 6.1 During the three months ended
March 31, 2022, salaries and employee benefits increased $316,000as compared to the three months ended March 31, 2021, primarily due to higher than normal vacancies in staffing in the year ago quarter. In addition, occupancy and equipment expense increased $128,000as a result of the opening of our fifteenth branch in March 2021. Other general and administrative expenses increased $160,000, primarily due to conference attendance and business entertainment related expenses as business generating opportunities increased this quarter. Partially offsetting these increases, professional fees decreased $80,000, and data processing and regulatory assessments each decreased by $20,000. Federal Income Tax Expense. The federal income tax provision increased to $771,000for the three months ended March 31, 2022, as compared to $584,000for the same period in 2021, primarily due to a $950,000increase in income before federal income taxes. 48
Cash and capital resources
We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained. Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used to fund loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis, we maintain a strategy of investing in various lending products. At
March 31, 2022, the undisbursed portion of construction LIP totaled $39.0 millionand unused lines of credit were also $39.0 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. Certificates of deposit scheduled to mature in one year or less at March 31, 2022, totaled $142.0 million. Management's policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial Northwest Bank. As further funding sources, we had the ability at March 31, 2022to borrow an additional $297.5 millionfrom the FHLB, based on our collateral capacity, $97.9 millionfrom the FRB, and $75.0 millionfrom unused lines of credit with other financial institutions to meet commitments and for liquidity purposes. See the Consolidated Statements of Cash Flows in Item 1 of this report for further details on our cash flow activities. We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements. Our primary source of funds is our retail deposits. When retail deposits are not sufficient to provide the funds for our assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs.
On a monthly basis, we estimate our liquidity sources and needs for the next twelve months. We also determine funding concentrations and our needs for funding sources other than deposits. This information is used by our Asset/Liability Management Committee to forecast funding needs and investment opportunities.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings , enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on our current capital allocation objectives, during the remainder of fiscal 2022 we expect cash expenditures of
$1.3 millionfor capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12per share, our average total dividend paid each quarter would be approximately $1.1 million, based on the number of our current outstanding shares (which assumes no 49 --------------------------------------------------------------------------------
increases or decreases in the number of shares, except in connection with the early vesting of share awards currently outstanding).
March 31, 2022, we project that our fixed commitments for the remainder of the fiscal year ending December 31, 2022, will include (i) $627,000of operating lease payments and (ii) other future obligations and accrued expenses of $18.2 million. At March 31, 2022, our $95.0 millionin FHLB borrowings are all short-term and tied to interest rate swap agreements and are expected to be renewed as they mature during 2022. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months. Our total stockholders' equity was $157.8 millionat March 31, 2022. Consistent with our goal to operate a sound and profitable financial organization we will actively seek to maintain the Bank as a "well capitalized" institution in accordance with regulatory standards. As of March 31, 2022, First Financial Northwest Bankexceeded all regulatory capital requirements. Regulatory capital ratios for First Financial Northwest Bankwere as follows as of March 31, 2022: Total capital to risk-weighted assets was 15.33%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 14.08%; and Tier 1 capital to total assets was 10.51%. At March 31, 2022, First Financial Northwest Bankmet the financial ratios to be considered well-capitalized under the regulatory guidelines. In addition, the Bank is required to maintain a capital conservation buffer consisting of additional Common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum regulatory capital levels 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. At March 31, 2022, the Bank's capital conservation buffer was 7.33%. See Item 1. "Business - How We Are Regulated - Regulation and Supervision of First Financial Northwest Bank- Capital Requirements" included in the 2021 Form 10-K for additional information regarding regulatory capital requirements for the Bank. The Accumulated Other Comprehensive Income ("AOCI") component of capital includes a variety of items, including the value of our available-for-sale investment securities portfolio and the value of our derivative instruments, net of tax. We model various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to withstand the estimated potential fluctuations in a variety of interest rate environments.
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