First Northwest Bancorp 10-Q

Item 1. Financial Statements (Unaudited)   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) (Unaudited)       March 31, 2022     December 31, 2021   ASSETS                                   Cash and due from banks   $ 16,271     $ 13,868   Interest-earning deposits in banks     66,257       112,148   Investment securities available for sale, at fair value     377,695       344,212   Loans held for sale     1,334       760   Loans receivable (net of allowance for loan losses of $15,127 and $15,124 )     1,370,589       1,350,260   Federal Home Loan Bank (FHLB) stock, at cost     8,122       5,196   Accrued interest receivable     5,696       5,289   Premises and equipment, net     21,050       19,830   Servicing rights on sold loans, net     —       3,282   Servicing rights on sold loans, at fair value     4,046       —   Bank-owned life insurance, net     39,570       39,318   Goodwill and other intangible assets, net     1,180       1,183   Prepaid expenses and other assets     32,472       25,735                     Total assets   $ 1,944,282     $ 1,921,081                                       LIABILITIES AND SHAREHOLDERS' EQUITY                                   Deposits   $ 1,549,414     $ 1,580,580   FHLB advances     145,000       80,000   Subordinated debt, net     39,250       39,280   Accrued interest payable     13       393   Accrued expenses and other liabilities     30,691       29,240   Advances from borrowers for taxes and insurance     2,138       1,108                     Total liabilities     1,766,506       1,730,601                     Shareholders' Equity                 Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding     —       —   Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,003,622 shares at March 31, 2022, and 9,972,698 shares at December 31, 2021     100       100   Additional paid-in capital     96,473       96,131   Retained earnings     105,546       103,014   Accumulated other comprehensive (loss) income, net of tax     ( 15,153 )     288   Unearned employee stock ownership plan (ESOP) shares     ( 8,407 )     ( 8,572 )                   Total parent's shareholders' equity     178,559       190,961   Noncontrolling interest in Quin Ventures, Inc.     ( 783 )     ( 481 )                   Total shareholders' equity     177,776       190,480                     Total liabilities and shareholders' equity   $ 1,944,282     $ 1,921,081     See selected notes to the consolidated financial statements.   3 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited)       Three Months Ended       March 31,       2022     2021   INTEREST INCOME                 Interest and fees on loans receivable   $ 14,536     $ 12,541   Interest on investment securities     2,275       2,034   Interest on deposits and other     38       13   FHLB dividends     52       45                     Total interest income     16,901       14,633   INTEREST EXPENSE                 Deposits     717       934   Borrowings     304       191   Subordinated debt     394       25                     Total interest expense     1,415       1,150                     Net interest income     15,486       13,483   PROVISION FOR LOAN LOSSES     —       500                     Net interest income after provision for loan losses     15,486       12,983   NONINTEREST INCOME                 Loan and deposit service fees     1,173       837   Sold loan servicing fees     432       30   Net gain on sale of loans     253       1,337   Net gain on sale of investment securities     126       —   Increase in cash surrender value of bank-owned life insurance     252       244   Other income     167       256                     Total noninterest income     2,403       2,704                     NONINTEREST EXPENSE                 Compensation and benefits     8,803       7,295   Data processing     1,772       1,333   Occupancy and equipment     1,167       1,029   Supplies, postage, and telephone     313       242   Regulatory assessments and state taxes     361       261   Advertising     752       445   Professional fees     559       522   FDIC insurance premium     223       148   Other expense     881       819                     Total noninterest expense     14,831       12,094                     INCOME BEFORE PROVISION FOR INCOME TAXES     3,058       3,593                     PROVISION FOR INCOME TAXES     554       473                     NET INCOME     2,504       3,120   Net loss attributable to noncontrolling interest in Quin Ventures, Inc.     302       —                     NET INCOME ATTRIBUTABLE TO PARENT   $ 2,806     $ 3,120                     Basic and diluted earnings per common share   $ 0.30     $ 0.33                       See selected notes to the consolidated financial statements.   4 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (Unaudited)         Three Months Ended       March 31,       2022     2021                     NET INCOME   $ 2,504     $ 3,120                     Other comprehensive loss:                 Unrealized holding losses on investments available for sale arising during the period     ( 19,454 )     ( 4,428 ) Income tax benefit related to unrealized holding losses     4,084       930   Unrecognized defined benefit ("DB") plan prior service cost, net of amortization     37       ( 2,210 ) Income tax benefit (provision) related to DB plan prior service cost, net of amortization     ( 8 )     465   Reclassification adjustment for net (gains) losses on sales of securities realized in income     ( 126 )     —   Income tax benefit related to reclassification adjustment on sales of securities     26       —                     Other comprehensive loss, net of tax     ( 15,441 )     ( 5,243 )                   COMPREHENSIVE LOSS     ( 12,937 )     ( 2,123 )                   Comprehensive loss attributable to noncontrolling interest     ( 302 )     —                     COMPREHENSIVE LOSS ATTRIBUTABLE TO PARENT   $ ( 12,635 )   $ ( 2,123 )   See selected notes to the consolidated financial statements.   5 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 2022 and 2021 (Dollars in thousands, except share information) (Unaudited)       Common Stock     Additional Paid-in     Retained     Unearned ESOP     Accumulated Other Comprehensive Income (Loss),     Noncontrolling     Total Shareholders'       Shares     Amount     Capital     Earnings     Shares     Net of Tax     Interest     Equity                                                                     BALANCE, December 31, 2020     10,247,185     $ 102     $ 97,412     $ 92,657     $ ( 9,230 )   $ 5,442     $ —     $ 186,383                                                                     Net income                         3,120                   —       3,120   Common stock repurchased     ( 135,837 )     —       ( 1,358 )     ( 805 )                       ( 2,163 ) Restricted stock award grants net of forfeitures     84,896       —       —                               —   Restricted stock awards canceled     ( 600 )     —       ( 11 )                             ( 11 ) Other comprehensive loss, net of tax                                     ( 5,243 )           ( 5,243 ) Share-based compensation expense                   404                               404   ESOP shares committed to be released                   52             165                   217   Cash dividends declared and paid ( $0.06 per share)                         ( 609 )                       ( 609 )                                                                   BALANCE, March 31, 2021     10,195,644     $ 102     $ 96,499     $ 94,363     $ ( 9,065 )   $ 199     $ —     $ 182,098                                                                                                                                       BALANCE, December 31, 2021     9,972,698     $ 100     $ 96,131     $ 103,014     $ ( 8,572 )   $ 288     $ ( 481 )   $ 190,480                                                                     Net income                         2,806                   ( 302 )     2,504   Restricted stock award grants net of forfeitures     39,843       —       —                               —   Restricted stock awards canceled     ( 8,919 )     —       ( 195 )                             ( 195 ) Other comprehensive loss, net of tax                                     ( 15,441 )           ( 15,441 ) Reclassification resulting from change in accounting method                         424                         424   Share-based compensation expense                   411                               411   ESOP shares committed to be released                   126             165                   291   Cash dividends declared and paid ( $0.07 per share)                         ( 698 )                       ( 698 )                                                                   BALANCE, March 31, 2022     10,003,622     $ 100     $ 96,473     $ 105,546     $ ( 8,407 )   $ ( 15,153 )   $ ( 783 )   $ 177,776         See selected notes to the consolidated financial statements.   6 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Three Months Ended March 31,       2022     2021   CASH FLOWS FROM OPERATING ACTIVITIES                 Net income before noncontrolling interest   $ 2,504     $ 3,120   Adjustments to reconcile net income to net cash from operating activities:                 Depreciation and amortization     372       338   Amortization of core deposit intangible     3       —   Amortization and accretion of premiums and discounts on investments, net     472       270   Accretion of deferred loan fees and purchased premiums, net     279       160   Amortization of debt issuance costs     20       —   Change in fair value of sold loan servicing rights     ( 170 )     —   Additions to servicing rights on sold loans, net     ( 169 )     ( 332 ) Amortization of servicing rights on sold loans, net     —       124   Net increase in the valuation allowance on servicing rights on sold loans     —       19   Provision for loan losses     —       500   Allocation of ESOP shares     217       154   Share-based compensation expense     411       404   Gain on sale of loans, net     ( 253 )     ( 1,337 ) Gain on sale of securities available for sale, net     ( 126 )     —   Increase in cash surrender value of life insurance, net     ( 252 )     ( 244 ) Origination of loans held for sale     ( 10,878 )     ( 37,287 ) Proceeds from loans held for sale     10,557       38,340   Change in assets and liabilities:                 (Increase) decrease in accrued interest receivable     ( 407 )     715   Increase in prepaid expenses and other assets     ( 400 )     ( 8,326 ) (Decrease) increase in accrued interest payable     ( 380 )     31   Increase in accrued expenses and other liabilities     1,451       6,138                     Net cash from operating activities     3,251       2,787                     CASH FLOWS FROM INVESTING ACTIVITIES                 Purchase of securities available for sale     ( 74,655 )     ( 53,290 ) Proceeds from maturities, calls, and principal repayments of securities available for sale     10,718       19,393   Proceeds from sales of securities available for sale     10,452       —   (Purchase) redemption of FHLB stock     ( 2,926 )     1,980   Net increase in loans receivable     ( 20,608 )     ( 15,130 ) Purchase of premises and equipment, net     ( 1,590 )     ( 348 ) Capital contributions to equity investments     ( 272 )     —   Capital contributions to historic tax credit partnerships     ( 1,829 )     —                     Net cash from investing activities     ( 80,710 )     ( 47,395 )   See selected notes to the consolidated financial statements.   7 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Three Months Ended March 31,       2022     2021   CASH FLOWS FROM FINANCING ACTIVITIES                 Net (decrease) increase in deposits   $ ( 31,166 )   $ 101,290   Proceeds from long-term FHLB advances     —       10,000   Repayment of long-term FHLB advances     —       ( 10,000 ) Net increase (decrease) in short-term FHLB advances     65,000       ( 59,977 ) Proceeds from issuance of subordinated debt, net     —       39,310   Net increase in advances from borrowers for taxes and insurance     1,030       884   Dividends paid     ( 698 )     ( 609 ) Restricted stock awards canceled     ( 195 )     ( 11 ) Repurchase of common stock     —       ( 2,163 )                   Net cash from financing activities     33,971       78,724                     NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     ( 43,488 )     34,116                     CASH AND CASH EQUIVALENTS, beginning of period     126,016       65,155                     CASH AND CASH EQUIVALENTS, end of period   $ 82,528     $ 99,271                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                 Cash paid during the year for:                 Interest on deposits and borrowings   $ 1,795     $ 1,119   Prior unrecognized service cost of defined benefit plan transferred to single-employer plan   $ —     $ 2,718                     NONCASH INVESTING ACTIVITIES                 Change in unrealized loss on securities available for sale   $ ( 19,580 )   $ ( 4,428 ) Lease liabilities arising from obtaining right-of-use assets   $ —     $ 672                       See selected notes to the consolidated financial statements.   8 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 1 - Basis of Presentation and Critical Accounting Policies   Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").   In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $ 10.00 per share for gross proceeds of $ 121.7 million. An additional 933,360 shares of Company common stock and $ 400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $ 117.6 million in net proceeds from the stock offering of which $ 58.4 million were contributed to the Bank upon Conversion.   Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8 % of the common stock issued in the Conversion for a total of 1,048,029 shares.   In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "Quin Ventures"). First Northwest has partially fulfilled its commitment to extend $ 15.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of $ 500,000 .   On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.   First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."   First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank.   The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in Western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with bor rowing and investing activities.   Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10 -K for the year ended December 31, 2021 . In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for the three months ended March 31, 2022 , are not necessarily indicative of the results that may be expected for future periods.   In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for loan losses ("ALLL"), fair value of financial instruments, and deferred tax assets and liabilities.   Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. While First Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest for financial reporting purposes under Accounting Standards Codification  810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.   Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate.   Recently adopted accounting pronouncements   In November 2019, the FASB issued Accounting Standards Update ("ASU") 2019 - 10, which defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs 2016 - 13, 2019 - 04, and 2019 - 05.  The effective date for smaller reporting companies was changed from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company adopted this ASU and anticipates implementing CECL effective January 1, 2023.   9 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   In January 2021, the FASB issued ASU No. 2021 - 01, Reference Rate Reform (Topic 848 ): Scope . ASU No. 2021 - 01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021 - 01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. This ASU was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021 - 01 did not have a material impact on the Company’s financial statements.   Recently issued accounting pronouncements not yet adopted   Credit Losses In June 2016, the FASB issued ASU No. 2016 - 13, Financial Instruments - Credit Loss , which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016 - 13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company will change processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach.   Additional updates were issued in ASU No. 2019 - 04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825 ), Financial Instruments . This ASU clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition and measurement of financial instruments. The amendments provide entities with various measurement alternatives and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables that were previously written off and expected to be written off. The amendments also allow entities to use projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments.   In addition, new updates were issued through ASU No. 2019 - 05, Financial Instruments - Credit Losses (Topic 326 ): Targeted Transition Relief . This amendment allows entities to elect the fair value option on certain financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326 - 20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment. The Company is evaluating the provisions of ASU No. 2016 - 13, ASU No. 2019 - 04 and ASU No. 2019 - 05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third -party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date, which is anticipated to be January  1, 2023.   Other Pronouncements In March 2020, the FASB issued ASU No. 2020 - 04 Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020 - 04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and other financial instruments that are either directly or indirectly influenced by LIBOR. The Company is in the process of evaluating ASU No. 2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, with no material expected impact on the Company's financial statements.   In March 2022, the FASB issued ASU No. 2022 - 01, Derivatives and Hedging (Topic 815 ): Fair Value Hedging—Portfolio Layer Method . ASU 2022 - 01 expands the portfolio layer method of hedge accounting prescribed in ASU No. 2017 - 12 to allow multiple hedged layers of a single closed portfolio and to include portfolios of both prepayable and non-prepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same accounting method to similar hedging strategies. The ASU also specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on accounting and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered in determining credit losses for assets in the designated closed portfolio. This ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2022. The Company is evaluating the effect that ASU 2022 - 01 will have on its consolidated financial statements.     10 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   In March 2022, the FASB issued ASU No. 2022 - 02,   Financial Instruments—Credit Losses (Topic 326 ): Troubled Debt Restructurings and Vintage Disclosures . ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310 - 40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments”. ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". ASU 2022 - 02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 02 will have on its consolidated financial statements and related disclosures.   Reclassifications - Certain amounts in the unaudited interim consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation with no effect on net income or shareholders' equity.     Note 2 - Securities   The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at March 31, 2022 are summarized as follows:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 118,135     $ 40     $ ( 7,927 )   $ 110,248   U.S. Treasury notes     2,458       —       ( 8 )     2,450   International agency issued bonds (Agency bonds)     1,948       —       ( 137 )     1,811   Corporate issued debt securities (Corporate debt)     60,857       669       ( 1,622 )     59,904   U.S. Small Business Administration securities (SBA)     2,695       82       —       2,777   Mortgage-backed securities:                                 U.S. government agency issued mortgage-backed securities (MBS agency)     101,227       13       ( 5,176 )     96,064   Corporate issued mortgage-backed securities (MBS corporate)     107,247       3       ( 2,809 )     104,441                                     Total securities available for sale   $ 394,567     $ 807     $ ( 17,679 )   $ 377,695     The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 2021 , are summarized as follows:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 110,497     $ 3,207     $ ( 340 )   $ 113,364   Agency bonds     1,947       —       ( 27 )     1,920   Corporate issued asset-backed securities (ABS corporate)     14,556       —       ( 67 )     14,489   Corporate debt     58,906       1,450       ( 567 )     59,789   SBA     14,404       276       —       14,680   Mortgage-backed securities:                                 MBS agency     80,877       248       ( 1,163 )     79,962   MBS corporate     60,317       71       ( 380 )     60,008                                     Total securities available for sale   $ 341,504     $ 5,252     $ ( 2,544 )   $ 344,212       There were no securities classified as held-to-maturity at  March 31, 2022  and  December 31, 2021 .   11 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of March 31, 2022 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 3,612 )   $ 63,789     $ ( 4,315 )   $ 43,267     $ ( 7,927 )   $ 107,056   U.S. Treasury notes     ( 8 )     2,450       —       —       ( 8 )     2,450   Agency bonds     —       —       ( 137 )     1,811       ( 137 )     1,811   Corporate debt     ( 778 )     16,465       ( 844 )     18,150       ( 1,622 )     34,615   Mortgage-backed securities:                                                 MBS agency     ( 2,445 )     59,762       ( 2,731 )     26,783       ( 5,176 )     86,545   MBS corporate     ( 1,733 )     68,013       ( 1,076 )     22,035       ( 2,809 )     90,048                                                     Total available for sale   $ ( 8,576 )   $ 210,479     $ ( 9,103 )   $ 112,046     $ ( 17,679 )   $ 322,525     The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2021 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 306 )   $ 23,125     $ ( 34 )   $ 1,475     $ ( 340 )   $ 24,600   Agency bonds     ( 27 )     1,920       —       —       ( 27 )     1,920   ABS corporate     ( 67 )     10,976       —       —       ( 67 )     10,976   Corporate debt     ( 333 )     18,890       ( 234 )     9,752       ( 567 )     28,642   SBA     —       —       —       69       —       69   Mortgage-backed securities:                                                 MBS agency     ( 713 )     39,029       ( 450 )     12,802       ( 1,163 )     51,831   MBS corporate     ( 374 )     32,849       ( 6 )     5,505       ( 380 )     38,354                                                     Total available for sale   $ ( 1,820 )   $ 126,789     $ ( 724 )   $ 29,603     $ ( 2,544 )   $ 156,392     The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At March 31, 2022 and December 31, 2021 , there were  155 and  76 investment securities in an unrealized loss position, respectively.   We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates, market demand, and related volatility that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. We do not believe the unrealized losses on our securities are related to deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company does not intend to sell the securities in an unrealized loss position and believes that it is unlikely that we will be required to sell these investments prior to a market price recovery or maturity.   There were no OTTI losses during the three months ended March 31, 2022 and 2021 .   12 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.       March 31, 2022       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 7,821     $ 7,746   Due after one through five years     37,379       36,935   Due after five through ten years     17,995       17,332   Due after ten years     145,279       138,492                     Total mortgage-backed securities     208,474       200,505                     All other investment securities:                 Due within one year     —       —   Due after one through five years     8,749       8,329   Due after five through ten years     66,822       65,562   Due after ten years     110,522       103,299                     Total all other investment securities     186,093       177,190                     Total investment securities   $ 394,567     $ 377,695         December 31, 2021       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 7,827     $ 7,832   Due after one through five years     24,347       24,371   Due after five through ten years     8,466       8,391   Due after ten years     100,554       99,376                     Total mortgage-backed securities     141,194       139,970                     All other investment securities:                 Due within one year     —       —   Due after one through five years     6,391       6,289   Due after five through ten years     79,679       80,807   Due after ten years     114,240       117,146                     Total all other investment securities     200,310       204,242                     Total investment securities   $ 341,504     $ 344,212     13 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Sales of securities available-for-sale for the periods shown are summarized as follows:       Three Months Ended March 31,       2022     2021       (In thousands)   Proceeds from sales   $ 10,452     $ —   Gross realized gains     128       —   Gross realized losses     ( 2 )     —         Note 3 - Loans Receivable   Loans receivable consisted of the following at the dates indicated:       March 31, 2022     December 31, 2021       (In thousands)   Real Estate:                 One-to-four family   $ 291,053     $ 294,965   Multi-family     203,746       172,409   Commercial real estate     370,346       363,299   Construction and land     209,395       224,709   Total real estate loans     1,074,540       1,055,382                     Consumer:                 Home equity     39,858       39,172   Auto and other consumer     206,140       182,769   Total consumer loans     245,998       221,941                     Commercial business loans     54,506       79,838                     Total loans     1,375,044       1,357,161                     Less:                 Net deferred loan fees     4,144       4,772   Premium on purchased loans, net     ( 14,816 )     ( 12,995 ) Allowance for loan losses     15,127       15,124                     Total loans receivable, net   $ 1,370,589     $ 1,350,260     Allowance for Loan Losses. The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.   14 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following tables summarize changes in the ALLL and loan portfolio by segment and impairment method for the periods shown:       At or For the Three Months Ended March 31, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,184     $ 1,816     $ 3,996     $ 2,672     $ 407     $ 2,221     $ 470     $ 358     $ 15,124   (Recapture of) provision for loan losses     ( 177 )     276       42       ( 193 )     ( 19 )     56       56       ( 41 )     —   Charge-offs     —       —       —       —       —       ( 137 )     —       —       ( 137 ) Recoveries     32       —       —       2       17       89       —       —       140   Ending balance   $ 3,039     $ 2,092     $ 4,038     $ 2,481     $ 405     $ 2,229     $ 526     $ 317     $ 15,127         At March 31, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   Total ALLL   $ 3,039     $ 2,092     $ 4,038     $ 2,481     $ 405     $ 2,229     $ 526     $ 317     $ 15,127   General reserve     3,015       2,092       4,038       2,481       401       2,181       526       317       15,051   Specific reserve     24       —       —       —       4       48       —       —       76                                                                             Total loans   $ 291,053     $ 203,746     $ 370,346     $ 209,395     $ 39,858     $ 206,140     $ 54,506     $ —     $ 1,375,044   Loans collectively evaluated (1)     288,822       203,746       370,278       209,373       39,557       205,734       54,506       —       1,372,016   Loans individually evaluated (2)     2,231       —       68       22       301       406       —       —       3,028     ( 1 )  Loans collectively evaluated for general reserves. ( 2 )  Loans individually evaluated for specific reserves.   15 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)         At or For the Three Months Ended March 31, 2021       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,469     $ 1,764     $ 3,420     $ 1,461     $ 368     $ 2,642     $ 429     $ 294     $ 13,847   (Recapture of) provision for loan losses     ( 59 )     58       209       426       ( 6 )     ( 197 )     54       15       500   Charge-offs     —       —       —       —       —       ( 229 )     —       —       ( 229 ) Recoveries     6       —       —       3       17       121       —       —       147   Ending balance   $ 3,416     $ 1,822     $ 3,629     $ 1,890     $ 379     $ 2,337     $ 483     $ 309     $ 14,265         At December 31, 2021       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   Total ALLL   $ 3,184     $ 1,816     $ 3,996     $ 2,672     $ 407     $ 2,221     $ 470     $ 358     $ 15,124   General reserve     3,159       1,816       3,996       2,672       402       2,138       470       358       15,011   Specific reserve     25       —       —       —       5       83       —       —       113                                                                             Total loans   $ 294,965     $ 172,409     $ 363,299     $ 224,709     $ 39,172     $ 182,769     $ 79,838     $ —     $ 1,357,161   Loans collectively evaluated (1)     292,708       172,409       363,228       224,687       38,839       182,257       79,838       —       1,353,966   Loans individually evaluated (2)     2,257       —       71       22       333       512       —       —       3,195     ( 1 )  Loans collectively evaluated for general reserves. ( 2 )  Loans individually evaluated for specific reserves.   Impaired loans. A loan is considered impaired when the Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.   16 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:       March 31, 2022     December 31, 2021       Recorded Investment     Unpaid Principal Balance     Related Allowance     Recorded Investment     Unpaid Principal Balance     Related Allowance       (In thousands)   With no allowance recorded:                                                 One-to-four family   $ 209     $ 244     $ —     $ 212     $ 247     $ —   Commercial real estate     68       176       —       71       177       —   Construction and land     —       23       —       —       24       —   Home equity     —       —       —       26       59       —   Auto and other consumer     250       302       —       —       77       —   Total     527       745       —       309       584       —                                                     With an allowance recorded:                                                 One-to-four family     2,022       2,219       24       2,045       2,245       25   Construction and land     22       22       —       22       22       —   Home equity     301       323       4       307       329       5   Auto and other consumer     156       164       48       512       512       83   Total     2,501       2,728       76       2,886       3,108       113                                                     Total impaired loans:                                                 One-to-four family     2,231       2,463       24       2,257       2,492       25   Commercial real estate     68       176       —       71       177       —   Construction and land     22       45       —       22       46       —   Home equity     301       323       4       333       388       5   Auto and other consumer     406       466       48       512       589       83   Total   $ 3,028     $ 3,473     $ 76     $ 3,195     $ 3,692     $ 113     17 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periods shown:       Three Months Ended     Three Months Ended       March 31, 2022     March 31, 2021       Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized       (In thousands)   With no allowance recorded:                                 One-to-four family   $ 210     $ 4     $ 226     $ 4   Multi-family     —       —       282       5   Commercial real estate     69       —       1,212       18   Construction and land     —       1       —       —   Home equity     9       17       36       —   Auto and other consumer     252       7       35       8   Total     540       29       1,791       35                                     With an allowance recorded:                                 One-to-four family     2,030       41       2,507       51   Commercial real estate     —       —       58       1   Construction and land     22       1       26       2   Home equity     303       4       111       3   Auto and other consumer     217       3       865       12   Total     2,572       49       3,567       69                                     Total impaired loans:                                 One-to-four family     2,240       45       2,733       55   Multi-family     —       —       282       5   Commercial real estate     69       —       1,270       19   Construction and land     22       2       26       2   Home equity     312       21       147       3   Auto and other consumer     469       10       900       20   Total   $ 3,112     $ 78     $ 5,358     $ 104     Interest income recognized on a cash basis on impaired loans for the three months ended March 31, 2022  and  2021 , was $ 66,000 and $ 76,000 , respectively.   18 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:       March 31, 2022     December 31, 2021       (In thousands)   One-to-four family   $ 484     $ 494   Commercial real estate     68       71   Construction and land     22       22   Home equity     253       282   Auto and other consumer     406       512                     Total nonaccrual loans   $ 1,233     $ 1,381     Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at March 31, 2022 and December 31, 2021 .   The following table presents the recorded investment in past due loans, by class, as of March 31, 2022 :       30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ 240     $ —     $ —     $ 240     $ 290,813     $ 291,053   Multi-family     —       —       —       —       203,746       203,746   Commercial real estate     —       —       —       —       370,346       370,346   Construction and land     2       22       —       24       209,371       209,395   Total real estate loans     242       22       —       264       1,074,276       1,074,540                                                     Consumer:                                                 Home equity     3       —       —       3       39,855       39,858   Auto and other consumer     334       —       30       364       205,776       206,140   Total consumer loans     337       —       30       367       245,631       245,998                                                     Commercial business loans     —       —       —       —       54,506       54,506                                                     Total loans   $ 579     $ 22     $ 30     $ 631     $ 1,374,413     $ 1,375,044     19 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the recorded investment in past due loans, by class, as of December 31, 2021 :       30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ 786     $ —     $ —     $ 786     $ 294,179     $ 294,965   Multi-family     —       —       —       —       172,409       172,409   Commercial real estate     —       —       —       —       363,299       363,299   Construction and land     293       —       —       293       224,416       224,709   Total real estate loans     1,079       —       —       1,079       1,054,303       1,055,382                                                     Consumer:                                                 Home equity     83       —       —       83       39,089       39,172   Auto and other consumer     469       369       99       937       181,832       182,769   Total consumer loans     552       369       99       1,020       220,921       221,941                                                     Commercial business loans     7       —       —       7       79,831       79,838                                                     Total loans   $ 1,638     $ 369     $ 99     $ 2,106     $ 1,355,055     $ 1,357,161     Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8 -point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.   When the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1 - 3 in our risk rating system.   Additionally, the Bank categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90 days past due and nonaccrual loans are considered nonperforming.   20 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table represents the internally assigned grade as of  March 31, 2022 , by class of loans:       Pass     Watch     Special Mention     Substandard     Total       (In thousands)   Real Estate:                                         One-to-four family   $ 287,218     $ 3,033     $ 49     $ 753     $ 291,053   Multi-family     185,137       18,609       —       —       203,746   Commercial real estate     342,009       16,339       925       11,073       370,346   Construction and land     181,873       16,844       8,878       1,800       209,395   Total real estate loans     996,237       54,825       9,852       13,626       1,074,540                                             Consumer:                                         Home equity     39,322       243       —       293       39,858   Auto and other consumer     205,040       670       48       382       206,140   Total consumer loans     244,362       913       48       675       245,998                                             Commercial business loans     53,708       798       —       —       54,506                                             Total loans   $ 1,294,307     $ 56,536     $ 9,900     $ 14,301     $ 1,375,044     The following table represents the internally assigned grade as of December 31, 2021 , by class of loans:       Pass     Watch     Special Mention     Substandard     Total       (In thousands)   Real Estate:                                         One-to-four family   $ 291,421     $ 2,727     $ 53     $ 764     $ 294,965   Multi-family     153,704       18,705       —       —       172,409   Commercial real estate     326,444       22,850       3,057       10,948       363,299   Construction and land     215,262       295       9,130       22       224,709   Total real estate loans     986,831       44,577       12,240       11,734       1,055,382                                             Consumer:                                         Home equity     38,739       83       —       350       39,172   Auto and other consumer     181,356       835       65       513       182,769   Total consumer loans     220,095       918       65       863       221,941                                             Commercial business loans     79,616       222       —       —       79,838                                             Total loans   $ 1,286,542     $ 45,717     $ 12,305     $ 12,597     $ 1,357,161     21 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table represents the credit risk profile based on payment activity as of March 31, 2022 , by class of loans:       Nonperforming     Performing     Total       (In thousands)   Real Estate:                         One-to-four family   $ 484     $ 290,569     $ 291,053   Multi-family     —       203,746       203,746   Commercial real estate     68       370,278       370,346   Construction and land     22       209,373       209,395                             Consumer:                         Home equity     253       39,605       39,858   Auto and other consumer     406       205,734       206,140                             Commercial business     —       54,506       54,506                             Total loans   $ 1,233     $ 1,373,811     $ 1,375,044     The following table represents the credit risk profile based on payment activity as of December 31, 2021 , by class of loans:       Nonperforming     Performing     Total       (In thousands)   Real Estate:                         One-to-four family   $ 494     $ 294,471     $ 294,965   Multi-family     —       172,409       172,409   Commercial real estate     71       363,228       363,299   Construction and land     22       224,687       224,709                             Consumer:                         Home equity     282       38,890       39,172   Auto and other consumer     512       182,257       182,769                             Commercial business     —       79,838       79,838                             Total loans   $ 1,381     $ 1,355,780     $ 1,357,161       22 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Troubled debt restructuring. A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Bank is granting the borrower a concession of some kind. First Fed has granted a variety of concessions to borrowers in the form of loan modifications. The modifications are generally related to the loan's interest rate, term and payment amount or a combination thereof.   The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ( "CARES Act"), provided guidance around the modification of loans as a result of the COVID- 19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (i.e., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. This relief was extended under the Consolidated Appropriations Act 2021, to the earlier of 60 days after the COVID- 19 pandemic national emergency termination date or January 1, 2022.  Through  March 31, 2022 , the Company had granted COVID- 19 pandemic related temporary loan modifications on  357 loans totaling $ 177.6 million, or  12.9 % of total loans. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation to determine whether or not a loan is deemed to be impaired. As of March 31, 2022 , no loans modified in accordance with the CARES Act remained on deferral.     The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:       March 31, 2022     December 31, 2021       (In thousands)   Total TDR loans   $ 1,824     $ 1,843   Allowance for loan losses related to TDR loans     20       21   Total nonaccrual TDR loans     29       29     There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three months ended March 31, 2022 or 2021 .   There were no TDR loans that incurred a payment default within 12 months of the restructure date during the  three months ended March 31, 2022  or  2021 .   No additional funds were committed to be advanced in connection with TDR loans at March 31, 2022 .   The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status:       March 31, 2022       Accrual     Nonaccrual     Total       (In thousands)   One-to-four family   $ 1,747     $ 29     $ 1,776   Home equity     48       —       48                             Total TDR loans   $ 1,795     $ 29     $ 1,824       23 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Note 4 - Deposits   The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at March 31, 2022 and December 31, 2021 , were $ 63.8 million and $ 75.1 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:       March 31, 2022     December 31, 2021       Amount     Weighted-Average Interest Rate     Amount     Weighted-Average Interest Rate       (Dollars in thousands)   Noninterest-bearing demand deposits   $ 326,289       0.00 %   $ 343,932       0.00 % Interest-bearing demand deposits     204,949       0.01 %     196,970       0.01 % Money market accounts     581,804       0.20 %     597,815       0.21 % Savings accounts     197,351       0.05 %     194,620       0.05 % Certificates of deposit     239,021       0.52 %     247,243       0.62 %                                   Total deposits   $ 1,549,414       0.16 %   $ 1,580,580       0.19 %   Maturities of certificates at the dates indicated are as follows:     March 31, 2022     December 31, 2021       (In thousands)   Within one year or less   $ 147,258     $ 153,472   After one year through two years     53,927       54,970   After two years through three years     17,164       17,620   After three years through four years     13,404       14,358   After four years through five years     7,268       6,823                     Total certificates of deposit   $ 239,021     $ 247,243     Brokered certificates of deposits of $ 65.7 million and $ 65.7 million are included in the March 31, 2022 and December 31, 2021 certificate of deposits totals above, respectively.   At  March 31, 2022 and December 31, 2021 , deposits included $ 106.7 million and $ 134.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $ 61.3 million and $ 67.9 million were pledged as collateral for these deposits at  March 31, 2022 and December 31, 2021 , respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.   Interest on deposits by type for the periods shown was as follows:     Three Months Ended       March 31,       2022     2021       (In thousands)   Demand deposits   $ 17     $ 7   Money market accounts     298       286   Savings accounts     26       40   Certificates of deposit     376       601                     Total interest expense on deposits   $ 717     $ 934       24 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 5 - Federal Taxes on Income   Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.   The effective tax rates were 18.1 % and  13.2 % for the three months ended March 31, 2022 and 2021 , respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2022  and  2021 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. Additionally, a tax accrual true-up was recorded in the first quarter of 2021, which reduced the prior year provision and resulted in a lower effective tax rate.     Note 6 - Earnings per Common Share   The two -class method is used for computing basic and diluted earnings per share. Under the two -class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.   The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three months ended March 31, 2022 and 2021 .       Three Months Ended       March 31,       2022     2021                     Net income:                 Net income available to common shareholders   $ 2,806     $ 3,120   Earnings allocated to participating securities     ( 70 )     ( 102 ) Earnings allocated to common shareholders   $ 2,736     $ 3,018                     Basic:                 Weighted average common shares outstanding     10,040,090       10,241,823   Weighted average unvested restricted stock awards     ( 234,953 )     ( 357,213 ) Weighted average unallocated ESOP shares     ( 674,969 )     ( 727,786 ) Total basic weighted average common shares outstanding     9,130,168       9,156,824                     Diluted:                 Basic weighted average common shares outstanding     9,130,168       9,156,824   Dilutive restricted stock awards     95,200       91,371   Total diluted weighted average common shares outstanding     9,225,368       9,248,195                     Basic earnings per common share   $ 0.30     $ 0.33                     Diluted earnings per common share   $ 0.30     $ 0.33     Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At  March 31, 2022  and  December 31, 2021 , antidilutive shares as calculated under the treasury stock method totaled  17 and 115 , respectively.     25 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 7 - Employee Benefits   Employee Stock Ownership Plan   In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12 -month period are eligible to participate in the ESOP.   Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46 %. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. No  principal and interest payment was made by the ESOP during the three months ended March 31, 2022 .   As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.   Compensation expense related to the ESOP for the three months ended March 31, 2022 and 2021 , was $ 291,000  and $ 217,000 , respectively.   Shares issued to the ESOP as of the dates indicated are as follows:     March 31, 2022     December 31, 2021       (Dollars in thousands)   Allocated shares     333,396       333,396   Committed to be released shares     39,663       26,442   Unallocated shares     674,970       688,191                     Total ESOP shares issued     1,048,029       1,048,029                     Fair value of unallocated shares   $ 14,910     $ 13,901       26 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 8 - Stock-based Compensation   In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ( "2020  EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 . As of  March 31, 2022 , there were  302,294  total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.   As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made. As of  March 31, 2022 , there were no shares available for grant under the 2015 EIP. At this date, there are  94,900  shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.   There were  42,243  and  84,896  shares of restricted stock awarded, respectively, during the three months ended March 31, 2022 and 2021 . Awarded shares of restricted stock vest ratably over periods ranging from one to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period.   For the three months ended March 31, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 411,000  and $ 404,000 , respectively.   Included in the above compensation expense for the  three months ended March 31, 2022 and 2021 , was directors' compensation of $ 55,000  and $ 91,000 , respectively.   The following tables provide a summary of changes in non-vested restricted stock awards for the period shown:       For the Three Months Ended       March 31, 2022       Shares     Weighted-Average Grant Date Fair Value   Non-vested at January 1, 2022     236,432     $ 16.19   Granted     42,243       22.35   Vested     ( 22,727 )     18.17   Canceled (1)     ( 8,919 )     18.17   Forfeited     ( 2,400 )     17.28                     Non-vested at March 31, 2022     244,629     $ 16.99                     (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue.           27 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)       As of March 31, 2022 , there was $ 3.5 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately  2.19  years.       Note 9 - Fair Value Accounting and Measurement   Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. 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, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.   Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.   A three -level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:   Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.   Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.   Level 3 - Unobservable inputs.   The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.   The Company used the following methods to measure fair value on a recurring and nonrecurring basis.   Securities available for sale and Equity investments : where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.   Sold loan servicing rights, at fair value : The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation.   28 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:       March 31, 2022       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total       (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 5,337     $ 104,911     $ —     $ 110,248   U.S. Treasury notes     2,450       —       —       2,450   Agency bonds     —       1,811       —       1,811   Corporate debt     5,685       54,219       —       59,904   SBA     —       2,777       —       2,777   MBS agency     —       96,064       —       96,064   MBS corporate     —       104,441       —       104,441   Sold loan servicing rights     —       —       4,046       4,046   Equity investments     —       3,276       —       3,276       $ 13,472     $ 367,499     $ 4,046     $ 385,017         December 31, 2021       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total       (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 5,902     $ 107,462     $ —     $ 113,364   Agency bonds     —       1,920       —       1,920   ABS corporate     —       14,489       —       14,489   Corporate debt     6,061       53,728       —       59,789   SBA     —       14,680       —       14,680   MBS agency     —       79,962       —       79,962   MBS corporate     —       60,008       —       60,008   Equity investments     —       3,071       —       3,071       $ 11,963     $ 335,320     $ —     $ 347,283       29 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the date indicated:   March 31, 2022   Fair Value (In thousands)   Valuation Technique   Unobservable Input   Range (Weighted Average)   Sold loan servicing rights   $ 4,046   Discounted cash flow   Constant prepayment rate     2.15%-10.55% (7.54%)                 Discount rate     9.75%-14.25% (11.45%)     The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates indicated:       March 31, 2022       Election of Fair Value Option for Servicing Rights at January 1, 2022     Servicing rights that result from transfers and sale of financial assets     Changes in fair value due to changes in model inputs or assumptions (1)     Total       (In thousands)                                     Sold loan servicing rights   $ 3,820     $ 56     $ 170     $ 4,046                                     (1) Represents changes due to collection/realization of expected cash flows and curtailments.         December 31, 2021       Balance at January 1, 2021     Transfers Out of Level 3 (1)     Purchases     Unrealized     Total       (In thousands)   Securities available for sale                                         Corporate debt   $ 2,540     $ ( 2,540 )   $ —     $ —     $ —   MBS corporate     6,372       ( 6,372 )     —       —       —       $ 8,912     $ ( 8,912 )   $ —     $ —     $ —   (1) Transferred from Level 3 to Level 2 after obtaining observable market data.     Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.   30 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:       March 31, 2022       Level 1     Level 2     Level 3     Total       (In thousands)   Impaired loans   $ —     $ —     $ 3,028     $ 3,028         December 31, 2021       Level 1     Level 2     Level 3     Total       (In thousands)   Impaired loans   $ —     $ —     $ 3,195     $ 3,195     At  March 31, 2022 and December 31, 2021 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.   The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:       March 31, 2022                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 82,528     $ 82,528     $ 82,528     $ —     $ —   Investment securities available for sale     377,695       377,695       13,472       364,223       —   Loans held for sale     1,334       1,334       —       1,334       —   Loans receivable, net     1,370,589       1,344,070       —       —       1,344,070   FHLB stock     8,122       8,122       —       8,122       —   Accrued interest receivable     5,696       5,696       —       5,696       —   Sold loan servicing rights, at fair value     4,046       4,046       —       —       4,046   Equity investments     3,276       3,276       —       3,276       —                                             Financial liabilities                                         Demand deposits   $ 1,310,393     $ 1,310,393     $ 1,310,393     $ —     $ —   Time deposits     239,021       235,609       —       —       235,609   FHLB Borrowings     145,000       141,962       —       —       141,962   Subordinated debt     39,250       37,670       —       —       37,670   Accrued interest payable     13       13       —       13       —     31 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)       December 31, 2021                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 126,016     $ 126,016     $ 126,016     $ —     $ —   Investment securities available for sale     344,212       344,212       11,963       332,249       —   Loans held for sale     760       760       —       760       —   Loans receivable, net     1,350,260       1,328,589       —       —       1,328,589   FHLB stock     5,196       5,196       —       5,196       —   Accrued interest receivable     5,289       5,289       —       5,289       —   Sold loan servicing rights, net     3,282       3,820       —       —       3,820   Equity investments     3,071       3,071       —       3,071       —                                             Financial liabilities                                         Demand deposits     1,333,337     $ 1,333,337     $ 1,333,337     $ —     $ —   Time deposits     247,243       247,217       —       —       247,217   FHLB Borrowings     80,000       80,192       —       —       80,192   Subordinated debt     39,280       39,144       —       —       39,144   Accrued interest payable     393       393       —       393       —     Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. The methods and assumptions used by the Company in estimating fair values of financial instruments as set forth below in accordance with ASC Topic 825, Financial Instruments , as amended by ASU 2016 - 01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:   Securities - Fair values for investment securities are primarily measured using information from a third -party pricing service. The pricing service uses pricing models based on market data. In the event that limited or less transparent information is provided by the third -party pricing service, fair value is estimated using secondary pricing services or non-binding third -party broker quotes.   Loans receivable, net - At March 31, 2022 , the fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.   Sold loan servicing rights, net - The estimated fair value of servicing rights on sold loans is based on market prices for comparable loan servicing contracts when available. If no comparable contract is available, the estimated fair value is based on a valuation model that calculates the present value of estimated future net servicing income.   32 Table of Contents     Note 10 - Change in Accumulated Other Comprehensive Income ("AOCI")   Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:       Unrealized Gains and Losses on Available-for-Sale Securities     Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization     Total         (In thousands)                             BALANCE, December 31, 2020   $ 5,442     $ —     $ 5,442   Other comprehensive loss before reclassification     ( 3,498 )     ( 1,745 )     ( 5,243 ) Net other comprehensive loss     ( 3,498 )     ( 1,745 )     ( 5,243 ) BALANCE, March 31, 2021   $ 1,944     $ ( 1,745 )   $ 199                             BALANCE, December 31, 2021   $ 2,140     $ ( 1,852 )   $ 288   Other comprehensive loss before reclassification     ( 15,370 )     —       ( 15,370 ) Amounts reclassified from accumulated other comprehensive income     ( 100 )     29       ( 71 ) Net other comprehensive (loss) income     ( 15,470 )     29       ( 15,441 ) BALANCE, March 31, 2022   $ ( 13,330 )   $ ( 1,823 )   $ ( 15,153 )     33 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   N ote 11 - Business Combination   On July 23, 2021, the Bank acquired certain assets and assumed liabilities of the Sterling  Bank and Trust of Southfield, Michigan  ("Sterling") upon purchasing their sole branch located in Washington State. As a result of the Sterling transaction, the Bank has established a presence in Bellevue, Washington, and expanded its deposit base. Total consideration paid under the Sterling transaction consisted of $ 63.5  million in cash. There were no transfers of common stock or other equity instruments in connection with the transaction, and the Bank did not obtain any equity interests in Sterling.   The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction consists largely of a premium paid for the deposit accounts.   In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required the Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as prepayments or early withdrawals, and other factors. Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the transaction, the Bank purchased certain assets and assumed certain liabilities of Sterling but did not acquire any equity or other ownership interests.   The following table summarizes the fair value of consideration transferred, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction (in thousands):     At July 23, 2021       Book Value     Fair Value Adjustment     Estimated Fair Value       (In thousands)                             Cash consideration transferred                   $ 63,545                             Recognized amounts of identifiable assets acquired and liabilities assumed                         Identifiable assets acquired                         Core deposit intangible ("CDI")   $ —     $ 126     $ 126   Premises and equipment     459       —       459   Accrued interest receivable and other assets     755       —       755   Total identifiable assets acquired     1,214       126       1,340                             Liabilities assumed                         Deposits   $ 65,096     $ ( 229 )   $ 64,867   Accrued expenses and other liabilities     1,080       —       1,080   Total liabilities assumed     66,176       ( 229 )     65,947   Total identifiable net liabilities assumed     ( 64,962 )     355       ( 64,607 ) Goodwill recognized                   $ 1,062     CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period o f ten yea rs. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.   34 Table of Contents     ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements   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. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:     • statements of our goals, intentions and expectations;   • statements regarding our business plans, prospects, growth and operating strategies;   • statements regarding the quality of our loan and investment portfolios;   • estimates of our risks and future costs and benefits; and   • statements concerning the continuing effects of the COVID-19 pandemic on the Bank's business and financial results and conditions.   These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:     • the effects of the COVID-19 pandemic, including on our credit quality and operations, as well as its impact on general economic conditions;   • legislative or regulatory changes, including actions taken by governmental authorities in response to inflationary pressures, the COVID-19 pandemic, and climate change;   • the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, particularly with respect to borrowers affected by the COVID-19 pandemic, natural disasters, or climate change;   • a decrease in the market demand for loans that we originate for sale;   • our ability to control operating costs and expenses;   • whether our management team can implement our operational strategy, including but not limited to our efforts to achieve loan and revenue growth;   • our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related cost savings within expected time frames;   • our ability to successfully execute on growth strategies related to our entry into new markets;   • our ability to develop user-friendly digital applications to serve existing customers and attract new customers;   • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;   • changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;   • increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;   • our ability to attract and retain deposits;   • changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services;   • results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;   • legislative or regulatory changes that adversely affect our business;   • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;   • any failure of key third-party vendors to perform their obligations to us; and   • other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021.   Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the direct and indirect impact of the ongoing pandemic on the Bank, its customers and third parties. These developments could have an adverse impact on our financial position and our results of operations.   Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.   35 Table of Contents   General   First Northwest Bancorp, a Washington corporation, is the bank holding company for First Fed Bank. The Company also has a controlling interest in Quin Ventures, Inc. and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures.   First Fed Bank is a community-oriented financial institution serving Western Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We have twelve full-service branches and two business centers. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a fully array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology (“fintech”) companies to develop and deploy digitally focused financial solutions to meet customers’ needs on a broader scale. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and more recently have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.   Quin Ventures is a fintech focused on financial wellness and lifestyle protection for consumers nationwide. First Northwest's limited partnership investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM FINTOP Blockchain, L.P., which invest in fintech-related business with a focus on developing digital solutions applicable to the banking industry.   First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, 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 and cash flows from existing assets and liabilities 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, mortgage banking income, loan sales, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.   An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our allowance for loan losses. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off.   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, data processing expenses, marketing and customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.   Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. We anticipate continued improvements in commercial and consumer activity and the U.S. economy. As of September 30, 2021, the governor of Washington removed restrictions initially set in place, allowing businesses to return to full capacity.   We recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue through the remainder of 2022, as new COVID-19 variant infections increase and new restrictions are mandated. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which have been significantly impacted by the COVID-19 pandemic. At March 31, 2022, the Company’s exposure as a percent of the total loan portfolio to these industries was 4.0%, 0.3%, and 4.0%, r e spectively. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.     36 Table of Contents   We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, and the impact on our customers, employees, vendors and the economy. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.   We continue to provide banking and financial services to our customers, having returned to regular lobby and drive-thru access at all our branch locations in May 2021. In addition, we continue to provide access to banking and financial services through online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone. We continue to take additional precautions within all our locations, including providing personal protection equipment and enhanced cleaning procedures, to ensure the safety of our customers and our employees.   We provided assistance to many small businesses applying for the SBA's Paycheck Protection Program ("PPP") funding. We processed $32.2 million of loans for 515 customers through the initial round of SBA PPP funding during 2020 with an average loan amount of $63,000. W e processed $35.0 million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of $82,000.  Payments by borrowers on these loans can be deferred up to sixteen months after the note date, and interest, at 1%, will continue to accrue during the deferment period. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As of March 31, 2022, $32.1 million, or 99.7%, of the first-round loans were forgiven and $27.9 million, or 79.7%, of second-round loans were forgiven.   Critical Accounting Policies   Effective January 1, 2022, the Bank elected to measure servicing rights using the fair value method of accounting. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.   There were no other material changes to the critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.       Comparison of Financial Condition at March 31, 2022 and December 31, 2021   Assets . Total assets increased to $1.94 billion at March 31, 2022 from $1.92 billion at December 31, 2021.   Cash and cash equivalents decreased by $43.5 million, or 34.5%, to $82.5 million as of March 31, 2022, compared to $126.0 million as of December 31, 2021. Excess cash was deployed into the investment and loan portfolios as the Bank continued to build earning assets.   Net loans, excluding loans held for sale, increased $20.3 million to $1.37 billion at March 31, 2022, from $1.35 billion at December 31, 2021. During the three months ended March 31, 2022, multi-family loans increased $31.3 million as $16.6 million of acquisition-renovation construction and $13.6 million of commercial construction loans transitioned into amortizing loans. Auto and other consumer loans increased $23.4 million, as a result of a $16.0 million purchase of a pool of manufactured home loans, $5.9 million in individual manufactured home loan purchases, and a net increase in auto loans of $2.4 million offset by payment activity. One- to four-family residential loans decreased $3.9 million as payment of loans exceeded originations during the current quarter. Commercial business loans decreased $25.3 million, mainly as the result of a decrease in Northpointe Mortgage Participation Program of $26.3 million and Paycheck Protection Program (“PPP”) loans paid off during the quarter totaling $7.3 million, offset by a $1.9 million SBA loan origination and draws on existing loans. Our participation in the Northpointe program is based on current funding needs of the program. Given the slowdown in the mortgage market, as well as recent funding raises by Northpointe, we do not anticipate significant activity in the near term.   Construction and land loans decreased $15.3 million, or 6.8%, to $209.4 million at March 31, 2022, from $224.7 million at December 31, 2021. Our construction loans are geographically dispersed throughout Western Washington with one loan in Oregon and two loans in Idaho. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of COVID-19 on completion. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. At March 31, 2022, acquisition-renovation loans of $31.2 million were included in the construction loan total compared to $51.1 million at December 31, 2021. These commercial acquisition-renovation loans represent financing primarily for the acquisition of multi-family properties with a construction component used for the renovation of common areas and specific units of the building. Given the construction component of these loans we are required to report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects.   We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets within which we do business to improve earnings while also prudently managing credit risk.   37 Table of Contents   The following tables show our construction commitments by type and geographic concentrations at the dates indicated:   March 31, 2022   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Idaho     Total       (In thousands)   Construction Commitment                                                 One- to four-family residential   $ 36,886     $ 65,326     $ 4,983     $ —     $ —     $ 107,195   Multi-family residential     —       154,503       5,798       415       3,592       164,308   Commercial acquisition-renovation     2,934       31,304       —       —       —       34,238   Commercial real estate     9,078       45,054       —       —       —       54,132   Total commitment   $ 48,898     $ 296,187     $ 10,781     $ 415     $ 3,592     $ 359,873                                                     Construction Funds Disbursed                                                 One- to four-family residential   $ 13,600     $ 31,015     $ 1,052     $ —     $ —     $ 45,667   Multi-family residential     —       80,953       2,438       8       1,805       85,204   Commercial acquisition-renovation     2,445       28,742       —       —       —       31,187   Commercial real estate     5,883       30,682       —       —       —       36,565   Total disbursed   $ 21,928     $ 171,392     $ 3,490     $ 8     $ 1,805     $ 198,623                                                     Undisbursed Commitment                                                 One- to four-family residential   $ 23,286     $ 34,311     $ 3,931     $ —     $ —     $ 61,528   Multi-family residential     —       73,550       3,360       407       1,787       79,104   Commercial acquisition-renovation     489       2,562       —       —       —       3,051   Commercial real estate     3,195       14,372       —       —       —       17,567   Total undisbursed   $ 26,970     $ 124,795     $ 7,291     $ 407     $ 1,787     $ 161,250                                                     Land Funds Disbursed                                                 One- to four-family residential   $ 3,870     $ 3,609     $ 190     $ —     $ —     $ 7,669   Commercial real estate     —       3,103       —       —       —       3,103   Total disbursed for land   $ 3,870     $ 6,712     $ 190     $ —     $ —     $ 10,772     (1) Includes Clallam and Jefferson counties. (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.   December 31, 2021   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Total       (In thousands)   Construction Commitment                                         One- to four-family residential   $ 32,785     $ 57,050     $ 4,430     $ —     $ 94,265   Multi-family residential     —       182,151       4,095       8,435       194,681   Commercial acquisition-renovation     2,938       36,536       16,638       —       56,112   Commercial real estate     12,489       50,372       2,535       —       65,396   Total commitment   $ 48,212     $ 326,109     $ 27,698     $ 8,435     $ 410,454                                             Construction Funds Disbursed                                         One- to four-family residential   $ 10,242     $ 28,929     $ 562     $ —     $ 39,733   Multi-family residential     —       79,707       2,414       7,534       89,655   Commercial acquisition-renovation     2,449       32,789       15,861       —       51,099   Commercial real estate     3,486       29,484       2,701       —       35,671   Total disbursed   $ 16,177     $ 170,909     $ 21,538     $ 7,534     $ 216,158                                             Undisbursed Commitment                                         One- to four-family residential   $ 22,543     $ 28,121     $ 3,868     $ —     $ 54,532   Multi-family residential     —       102,444       1,681       901       105,026   Commercial acquisition-renovation     489       3,747       777       —       5,013   Commercial real estate     9,003       20,888       (166 )     —       29,725   Total undisbursed   $ 32,035     $ 155,200     $ 6,160     $ 901     $ 194,296                                             Land Funds Disbursed                                         One- to four-family residential   $ 3,502     $ 3,556     $ 191     $ —     $ 7,249   Commercial real estate     —       1,302       —       —       1,302   Total disbursed for land   $ 3,502     $ 4,858     $ 191     $ —     $ 8,551     38 Table of Contents   During the three months ended March 31, 2022, the Company originated $139.8 million of loans, of which $92.3 million, or 66.1%, were originated in the Puget Sound region, $27.2 million, or 19.4%, in the North Olympic Peninsula, $9.4 million, or 6.7%, in other areas throughout Washington State, and $10.9 million, or 7.8%, in other states. The Company purchased an additional $16.0 million in auto loans and $21.5 million in manufactured home loans during the three months ended March 31, 2022. We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.   Our allowance for loan losses remained $15.1 million at March 31, 2022, as no loan loss provision was recorded for the three months ended March 31, 2022. Net recoveries were $3,000 for the three-month period. The loan loss provision is made to account for growth in the loan portfolio adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic, which is reflected in the qualitative factor adjustments. The allowance for loan losses as a percentage of total loans was 1.1% at both March 31, 2022 and December 31, 2021.   Nonperforming loans decreased $148,000, or 10.7%, to $1.2 million at March 31, 2022, from $1.4 million at December 31, 2021, reflecting improvements in nonperforming auto and other consumer loans of $106,000, home equity loans of $29,000, one- to four-family loans of $10,000, and commercial real estate loans of $3,000. Nonperforming loans to total loans was 0.1% at both March 31, 2022 and December 31, 2021. The allowance for loan losses as a percentage of nonperforming loans increased to 1227% at March 31, 2022, from 1095% at December 31, 2021.   At March 31, 2022, there were $1.8 million in restructured loans, of which $1.79 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans increased $1.7 million to $14.3 million at March 31, 2022, from $12.6 million at December 31, 2021, due to the addition of a single residential real estate loan that was downgraded in 2022.   Loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 to reduce credit risk and future charge-off activity. We continue to monitor the program in order to prudently manage risk within the portfolio. The balance of indirect auto loans decreased to $8.8 million at March 31, 2022 from $10.6 million at December 31, 2021. We believe our allowance for loan losses is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of March 31, 2022.   Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated :                       Increase (Decrease)       March 31, 2022     December 31, 2021     Amount     Percent       (In thousands)                   Real Estate:                                 One-to-four family   $ 291,053     $ 294,965     $ (3,912 )     (1.3 )% Multi-family     203,746       172,409       31,337       18.2   Commercial real estate     370,346       363,299       7,047       1.9   Construction and land     209,395       224,709       (15,314 )     (6.8 ) Total real estate loans     1,074,540       1,055,382       19,158       1.8                                     Consumer:                                 Home equity     39,858       39,172       686       1.8   Auto and other consumer     206,140       182,769       23,371       12.8   Total consumer loans     245,998       221,941       24,057       10.8                                     Commercial business loans     54,506       79,838       (25,332 )     (31.7 )                                   Total loans     1,375,044       1,357,161       17,883       1.3   Less:                                 Net deferred loan fees     4,144       4,772       (628 )     (13.2 ) Premium on purchased loans, net     (14,816 )     (12,995 )     (1,821 )     14.0   Allowance for loan losses     15,127       15,124       3       —   Loans receivable, net   $ 1,370,589     $ 1,350,260     $ 20,329       1.5     39 Table of Contents   The following table represents nonperforming assets at the dates indicated.                     Increase (Decrease)       March 31, 2022     December 31, 2021     Amount     Percent       (In thousands)                   Nonperforming loans:                                 Real estate loans:                                 One- to four-family   $ 484     $ 494     $ (10 )     (2.0 )% Commercial real estate     68       71       (3 )     (4.2 ) Construction and land     22       22       —       —   Total real estate loans     574       587       (13 )     (2.2 )                                   Consumer loans:                                 Home equity     253       282       (29 )     (10.3 ) Auto and other consumer     406       512       (106 )     (20.7 ) Total consumer loans     659       794       (135 )     (17.0 )                                   Total nonperforming assets   $ 1,233     $ 1,381     $ (148 )     (10.7 )                                   Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.1 %     0.1 %     0.0 %     —     Investment securities increased $33.5 million, or 9.7%, to $377.7 million at March 31, 2022, from $344.2 million at December 31, 2021, due to the purchase of securities, partially offset by sales, normal payments and prepayment activity. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.0 years as of March 31, 2022, and 5.7 years as of December 31, 2021, and had an estimated average repricing term of 7.0 years as of March 31, 2022, and 5.4 years as of December 31, 2021, based on the interest rate environment at those times.   The investment portfolio was composed of 45.0% in amortizing securities at March 31, 2022 and 43.0% at December 31, 2021. The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is impacted by prevailing mortgage interest rates. Management maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets; however, we continue to purchase investment securities as a source of additional interest income. Securities are sold to provide liquidity, improve long-term portfolio yields, reduce LIBOR risk, and manage duration in the portfolio. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.   40 Table of Contents   Liabilities. Total liabilities increased to $1.77 billion at March 31, 2022, from $1.73 billion at December 31, 2021, primarily due to an increase in borrowing of $65.0 million, offset by a decrease in deposits of $31.2 million.   Deposit balances decreased 2.0%, to $1.55 billion at March 31, 2022, from $1.58 billion at December 31, 2021. There was a $2.7 million increase in savings accounts offset by a $16.0 million decrease in money market accounts and a $9.7 million decrease in demand deposit accounts, and certificates of deposits decreased $8.2 million during the period. A runoff in commercial and public fund account balances of $44.1 million was partially offset by an increase in consumer account balances of $13.0 million. We also utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and manage interest rate risk. Brokered CDs totaling $65.7 million were included in the $239.0 million balance of certificates of deposit at March 31, 2022.   FHLB advances increased 81.3% to $145.0 million at March 31, 2022, from $80.0 million at December 31, 2021. We increased short-term advances to replace liquidity lost with deposit outflow.   Equity . Total shareholders' equity decreased $12.4 million to $177.8 million for the three months ended March 31, 2022. The Company recorded year-to-date net income of $2.8 million. The net income increase was offset by an after-tax decrease in unrealized gain on available-for-sale investments of $15.3 million. All categories of the investment portfolio have been significantly impacted by the rising rate environment.       Comparison of Results of Operations for the Three Months Ended March 31, 2022 and 2021   General. Net income was $2.8 million for the three months ended March 31, 2022, and compared to $3.1 million for the three months ended March 31, 2021. A $2.5 million increase in net interest income after provision for loan loss was offset by a $301,000 decrease in noninterest income and a $2.7 million increase in noninterest expense.   Net Interest Income. Net interest income increased $2.0 million to $15.5 million for the three months ended March 31, 2022, from $13.5 million for the three months ended March 31, 2021. This increase was mainly the result of an increase in average earning assets of $228.4 million. The yield on average interest-earning assets increased 8 basis points to 3.86% for the three months ended March 31, 2022, compared to 3.78% for the same period in the prior year, due to an increase in yields earned on investment securities.   The average cost of interest-bearing liabilities increased to 0.43% for the three months ended March 31, 2022, compared to 0.40% for the same period last year, due primarily to an increase in borrowing rates of 85 basis points related to the issuance of subordinated debt offset by a decrease in rates on interest-bearing deposits of 10 basis points. Total cost of funds increased 2 basis points to 0.34% for the three months ended March 31, 2022, from 0.32% for the same period in 2021. The net interest margin increased 5 basis points to 3.53% for the three months ended March 31, 2022, from 3.48% for the same period in 2021.   Interest Income. Total interest income increased $2.3 million, or 15.5%, to $16.9 million for the three months ended March 31, 2022, from $14.6 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased $2.0 million, to $14.5 million for the three months ended March 31, 2022, from $12.5 million for the three months ended March 31, 2021, related to an increase in the average balance of net loans receivable of $198.0 million compared to the prior year. Average loan yields were 4.43% for each of the three months ended March 31, 2022 and 2021.     41 Table of Contents   The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:       Three Months Ended March 31,               2022     2021               Average Balance Outstanding     Yield     Average Balance Outstanding     Yield     Increase (Decrease) in Interest Income       (Dollars in thousands)   Loans receivable, net   $ 1,330,177       4.43 %   $ 1,132,194       4.43 %   $ 1,995   Investment securities     359,436       2.57       368,737       2.21       241   FHLB stock     5,311       3.97       3,809       4.73       7   Interest-earning deposits in banks     82,780       0.19       44,576       0.12       25   Total interest-earning assets   $ 1,777,704       3.86 %   $ 1,549,316       3.78 %   $ 2,268     Interest Expense. Total interest expense increased $265,000, or 23.0%, to $1.4 million for the three months ended March 31, 2022, compared to $1.2 million for the three months ended March 31, 2021, due to an increase in borrowing costs of $428,000 primarily related to the subordinated debt issued in 2021, offset by a decrease in interest expense on deposits of $217,000 resulting from a 10 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $129.2 million, or 11.8%, to $1.22 billion for the three months ended March 31, 2022, from $1.09 billion for the three months ended March 31, 2021, due to core deposit growth in new and existing market areas as well as purchasing the Bellevue branch in July of 2021.   During the three months ended March 31, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $53.4 million, along with a decrease in the average rates paid of 18 basis points, compared to the three months ended March 31, 2021. During the same period, the average balances of money market and savings accounts increased $126.7 million and $21.1 million, respectively, while the average rate paid decreased 4 basis points for both categories, resulting in comparatively minor changes to interest expense. Interest-bearing demand account average balances increased $34.8 million and the average rate paid increased 2 basis points, resulting in a minor increase to interest expense. The average cost of interest-bearing deposit products decreased to 0.24% for the three months ended March 31, 2022, from 0.34% for the three months ended March 31, 2021, due in large part to the expiration of promotional rates and a shift in deposit mix to higher levels of transaction accounts. Borrowing costs increased due to the issuance of subordinated debt in March 2021 and increases in both the average balance and cost of FHLB advances compared to the same period in 2021.   The following table details average balances, cost of funds and the change in interest expense for the periods shown:       Three Months Ended March 31,               2022     2021               Average Balance Outstanding     Rate     Average Balance Outstanding     Rate     Increase (Decrease) in Interest Expense       (Dollars in thousands)   Transaction accounts   $ 196,154       0.04 %   $ 161,398       0.02 %   $ 10   Money market accounts     587,806       0.21       461,080       0.25       12   Savings accounts     194,721       0.05       173,647       0.09       (14 ) Certificates of deposit     242,642       0.63       295,989       0.81       (225 ) FHLB advances     82,611       1.49       55,437       1.38       113   Subordinated debt     39,282       4.07       3,192       3.13       369   Total interest-bearing liabilities   $ 1,343,216       0.43 %   $ 1,150,743       0.40 %   $ 265     Provision for Loan Losses. The Company recorded no loan loss provision during the first quarter of 2022. This compares to a provision for loan losses of $500,000 for the three months ended March 31, 2021. The lack of provision reflects improvement in economic conditions, less uncertainty regarding the impact of COVID-19, and stable credit quality metrics compared to the prior year.       42 Table of Contents   The following table details activity and information related to the allowance for loan losses for the periods shown:       Three Months Ended March 31,       2022     2021       (Dollars in thousands)   Provision for loan losses   $ —     $ 500   Net recoveries (charge-offs)     3       (82 ) Allowance for loan losses     15,127       14,265   Allowance for losses as a percentage of total gross loans receivable at period end     1.1 %     1.2 % Total nonaccrual loans     1,233       2,135   Allowance for loan losses as a percentage of nonaccrual loans at period end     1226.8 %     668.1 % Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.1 %     0.2 % Total loans   $ 1,375,044     $ 1,168,340     Noninterest Income. Noninterest income decreased $301,000, or 11.1%, to $2.4 million for the three months ended March 31, 2022, from $2.7 million for the three months ended March 31, 2021. Loan and deposit service fees increased over the same period in 2021 due to $120,000 of commercial loan late fees received during the quarter. Servicing fee income on sold loans increased $200,000 due to the fair value accounting election and a $63,000 increase in Main Street Lending Program servicing fee income. Investment securities with low yields driven by high levels of prepayment activity were sold for a gain of $126,000 during the quarter, allowing the Company to reallocate funds into higher yielding assets. Other income decreased due to a valuation decrease of $67,000 recorded on our joint venture fintech investments compared to a gain of $208,000 in the same period in 2021, offset by adjustable-rate conversion ("ARC") loan fee income of $149,000 in the current period compared to no ARC fee income during the same period in 2021. These increases were offset by a decline in gain on sales of mortgage loans of $1.1 million over the same period in 2021 as rising mortgage loan rates and lack of single family home inventory have resulted in a decline in mortgage loan production.   The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:       Three Months Ended March 31,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Loan and deposit service fees   $ 1,173     $ 837     $ 336       40.1 % Sold loan servicing fees     432       30       402       1,340.0   Net gain on sale of loans     253       1,337       (1,084 )     (81.1 ) Net gain on sale of investment securities     126       —       126       100.0   Increase in cash surrender value of bank-owned life insurance     252       244       8       3.3   Other income     167       256       (89 )     (34.8 ) Total noninterest income   $ 2,403     $ 2,704     $ (301 )     (11.1 )%   Noninterest Expense. Noninterest expense increased $2.7 million, or 22.6%, to $14.8 million for the three months ended March 31, 2022, compared to $12.1 million for the three months ended March 31, 2021, primarily as a result of an increase in compensation and benefits as we added staff to manage the company and build up data and fintech infrastructures. Costs related to software increased $423,000 as we implemented more robust systems to support digital initiatives and implement customer relationship management tools. Increases in advertising were related to Quin Ventures and online initiatives. The increase in regulatory assessments and state taxes was due to an increase in taxable income compared to the same period in 2021 combined with an accrual for regulatory exams in the current year.   The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:       Three Months Ended March 31,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Compensation and benefits   $ 8,803     $ 7,295     $ 1,508       20.7 % Data processing     1,772       1,333       439       32.9   Occupancy and equipment     1,167       1,029       138       13.4   Supplies, postage, and telephone     313       242       71       29.3   Regulatory assessments and state taxes     361       261       100       38.3   Advertising     752       445       307       69.0   Professional fees     559       522       37       7.1   FDIC insurance premium     223       148       75       50.7   Other expense     881       819       62       7.6   Total noninterest expense   $ 14,831     $ 12,094     $ 2,737       22.6 %   Provision for Income Tax. An income tax expense of $554,000 was recorded for the three months ended March 31, 2022, compared to $473,000 for the three months ended March 31, 2021. There was a year-over-year decrease in income before taxes of $535,000; however, the expense recorded for the three months ended March 31, 2021, included a tax accrual true-up. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.   43 Table of Contents     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 net spread as of March 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.         Three Months Ended March 31,       2022     2021       Average     Interest             Average     Interest               Balance     Earned/     Yield/     Balance     Earned/     Yield/       Outstanding     Paid     Rate     Outstanding     Paid     Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans receivable, net (1)   $ 1,330,177     $ 14,536       4.43 %   $ 1,132,194     $ 12,541       4.43 % Investment securities     359,436       2,275       2.57       368,737       2,034       2.21   FHLB dividends     5,311       52       3.97       3,809       45       4.73   Interest-earning deposits in banks     82,780       38       0.19       44,576       13       0.12   Total interest-earning assets (2)     1,777,704       16,901       3.86       1,549,316       14,633       3.78   Noninterest-earning assets     122,013                       96,490                   Total average assets   $ 1,899,717                     $ 1,645,806                                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 196,154     $ 17       0.04     $ 161,398     $ 7       0.02   Money market accounts     587,806       298       0.21       461,080       286       0.25   Savings accounts     194,721       26       0.05       173,647       40       0.09   Certificates of deposit     242,642       376       0.63       295,989       601       0.81   Total deposits     1,221,323       717       0.24       1,092,114       934       0.34   FHLB borrowings     82,611       304       1.49       55,437       191       1.38   Subordinated debt     39,282       394       4.07       3,192       25       3.13   Total interest-bearing liabilities     1,343,216       1,415       0.43       1,150,743       1,150       0.40   Noninterest-bearing deposits     328,304                       283,204                   Other noninterest-bearing liabilities     38,742                       25,688                   Total average liabilities     1,710,262                       1,459,635                   Average equity     189,455                       186,171                   Total average liabilities and equity   $ 1,899,717                     $ 1,645,806                                                                     Net interest income           $ 15,486                     $ 13,483           Net interest rate spread                     3.43                       3.38   Net earning assets   $ 434,488                     $ 398,573                   Net interest margin (3)                     3.53                       3.48   Average interest-earning assets to average interest-bearing liabilities     132.3 %                     134.6 %                   (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.       44 Table of Contents   Rate/Volume Analysis   The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and 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.         Three Months Ended               March 31, 2022 vs. 2021               Increase (Decrease) Due to               Volume     Rate     Total Increase (Decrease)       (In thousands)   Interest-earning assets:                         Loans receivable, net   $ 1,995     $ —     $ 1,995   Investments     (64 )     305       241   FHLB stock     17       (10 )     7   Other (1)     11       14       25   Total interest-earning assets   $ 1,959     $ 309     $ 2,268                             Interest-bearing liabilities:                         Interest-bearing demand deposits   $ 1     $ 9     $ 10   Money market accounts     76       (64 )     12   Savings accounts     4       (18 )     (14 ) Certificates of deposit     (111 )     (114 )     (225 ) FHLB advances     91       22       113   Subordinated debt     278       91       369   Total interest-bearing liabilities   $ 339     $ (74 )   $ 265                             Net change in interest income   $ 1,620     $ 383     $ 2,003     (1) Includes interest-earning deposits (cash) at other financial institutions.         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 three months ended March 31, 2022 and the year ended December 31, 2021, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.   45 Table of Contents   Contractual Obligations   At March 31, 2022, our scheduled maturities of contractual obligations were as follows:       Within     After 1 Year Through     After 3 Years Through     Beyond     Total       1 Year     3 Years     5 Years     5 Years     Balance       (In thousands)                                             Certificates of deposit   $ 147,258     $ 71,091     $ 20,672     $ —     $ 239,021   FHLB advances     75,000       35,000       25,000       10,000       145,000   Subordinated debt obligation     —       —       —       39,250       39,250   Operating leases     803       1,691       1,777       4,601       8,872   Borrower taxes and insurance     2,138       —       —       —       2,138   Deferred compensation     123       383       78       497       1,081   Total contractual obligations   $ 225,322     $ 108,165     $ 47,527     $ 54,348     $ 435,362     Commitments and Off-Balance Sheet Arrangements   The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2022:       Amount of Commitment Expiration       Within     After 1 Year Through     After 3 Years Through     Beyond     Total Amounts       1 Year     3 Years     5 Years     5 Years     Committed       (In thousands)   Commitments to originate loans:                                         Fixed-rate   $ 3,028     $ —     $ —     $ —     $ 3,028   Variable-rate     9,795       —       —       —       9,795   Unfunded commitments under lines of credit or existing loans     95,067       30,986       10,666       123,672       260,391   Standby letters of credit     212       —       —       —       212   Total commitments   $ 108,102     $ 30,986     $ 10,666     $ 123,672     $ 273,426       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 deposit inflows, 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 the objectives of our interest-rate risk and investment policies.   Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2022, cash and cash equivalents totaled $82.5 million, and unpledged securities classified as available-for-sale with a market value of $272.0 million provided additional sources of liquidity. We pledged collateral of $475.7 million to support borrowings from the FHLB and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $9.7 million were pledged as of March 31, 2022.   At March 31, 2022, we had $12.8 million in loan commitments outstanding and $260.6 million in undisbursed loans and standby letters of credit, including $161.3 million in undisbursed construction loan commitments.   46 Table of Contents   Certificates of deposit due within one year as of March 31, 2022 totaled $147.3 million, or 61.6% of certificates of deposit with a weighted-average rate of 0.40%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates were in decline. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.   The Company is a separate legal entity from the Bank and provides for its own liquidity. At March 31, 2022, the Company, on an unconsolidated basis, had liquid assets of $7.8 million. In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, payments on subordinated notes held at the Company level, and commitments to joint ventures. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.  First Northwest has partially fulfilled its commitment to extend $15.0 million to Quin Ventures, Inc. under a capital financing agreement and related promissory note.   Capital Resources   At March 31, 2022, shareholders' equity totaled $177.8 million, or 9.1% of total assets. Our book value per share of common stock was $17.77 at March 31, 2022, compared to $19.10 at December 31, 2021.   At March 31, 2022, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.   The following table provides the capital requirements and actual results for First Fed at March 31, 2022.       Actual     Minimum Capital Requirements     Minimum Required to be Well-Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio                       (Dollars in thousands)                   Tier I leverage capital (to average assets)   $ 200,865       10.6 %   $ 75,735       4.0 %   $ 94,669       5.0 % Common equity tier I (to risk-weighted assets)     200,865       13.1       69,014       4.5       99,687       6.5   Tier I risk-based capital (to risk-weighted assets)     200,865       13.1       92,019       6.0       122,692       8.0   Total risk-based capital (to risk-weighted assets)     216,321       14.1       122,692       8.0       153,365       10.0     In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.   Effect of Inflation and Changing Prices   The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, 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.   47 Table of Contents     Item 3. Quantitative and Qualitative Disclosures about Market Risk   There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021.