What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-12 compared with 2022-05-13 · 814 added, 256 removed, 1871 unchanged (36% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share information) (Unaudited)

March 31, 2022

June 30, 2022

December 31, 2021

13 unchanged sentences

Federal Home Loan Bank (FHLB) stock, at cost

10,402  

Accrued interest receivable

16 unchanged sentences

$ 1,580,580  

FHLB advances

249,319  

119,280  

Subordinated debt, net

39,250  

39,280  

Accrued interest payable

9 unchanged sentences

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

issued and outstanding 9,950,172 shares at June 30, 2022, and 9,972,698 shares at December 31, 2021

Additional paid-in capital

24 unchanged sentences

Three Months Ended

Six Months Ended

INTEREST INCOME

2 unchanged sentences

$ 12,866  

$ 30,617  

$ 25,407  

Interest on investment securities

4 unchanged sentences

15,051  

35,862  

29,684  

INTEREST EXPENSE

Subordinated debt

Total interest expense

2 unchanged sentences

13,649  

32,729  

27,132  

PROVISION FOR LOAN LOSSES

2 unchanged sentences

13,349  

32,229  

26,332  

NONINTEREST INCOME

2 unchanged sentences

Net gain on sale of loans

Net gain on sale of investment securities

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

2 unchanged sentences

Compensation and benefits

18,538  

15,854  

Data processing

8 unchanged sentences

13,707  

31,794  

25,801  

INCOME BEFORE PROVISION FOR INCOME TAXES

4 unchanged sentences

$ 2,996  

$ 5,294  

$ 6,116  

Basic and diluted earnings per common share

1 unchanged sentence

$ 0.32  

$ 0.58  

$ 0.64  

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands) (Unaudited)

Three Months Ended

Six Months Ended

$ 1,535  

$ 2,851  

Other comprehensive loss:

Unrealized holding losses on investments available for sale arising during the period

$ 4,039  

Income tax benefit related to unrealized holding losses

Unrecognized defined benefit ("DB") plan prior service cost, net of amortization

Income tax benefit (provision) related to DB plan prior service cost, net of amortization

Reclassification adjustment for net (gains) losses on sales of securities realized in income

$ 5,971  

Income tax benefit related to reclassification adjustment on sales of securities

Other comprehensive loss, net of tax

Other comprehensive (loss) income:

Unrealized holding (losses) gains on investments available for sale arising during the period

( 16,875 )  

COMPREHENSIVE LOSS

( 36,329 )  

Income tax benefit (provision) related to unrealized holding (losses) gains

( 1,117 )  

Unrecognized defined benefit ("DB") plan prior service cost

Income tax benefit related to DB plan prior service cost

Amortization of unrecognized DB plan prior service cost

Income tax provision related to amortization of DB plan prior service cost

( 11 )  

( 15 )  

Reclassification adjustment for net losses (gains) on sales of securities realized in income

( 1,124 )  

( 118 )  

Income tax benefit (provision) related to reclassification adjustment on sales of securities

Other comprehensive (loss) income, net of tax

( 13,294 )  

( 28,735 )  

COMPREHENSIVE (LOSS) INCOME

( 11,759 )  

( 24,696 )  

Comprehensive loss attributable to noncontrolling interest

( 953 )  

COMPREHENSIVE LOSS ATTRIBUTABLE TO PARENT

( 145 )  

( 1,255 )  

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT

$ ( 10,806 )  

$ 6,343  

$ ( 23,441 )  

$ 4,220  

See selected notes to the consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended March 31, 2022 and 2021

For the Three Months Ended June 30, 2022 and 2021

(Dollars in thousands, except share information) (Unaudited)

4 unchanged sentences

Total Shareholders'

BALANCE, March 31, 2021

10,195,644  

$ 96,499  

$ 94,363  

$ ( 9,065 )  

$ 182,098  

( 145 )  

Common stock issued and initial investment in Quin Ventures

29,719  

( 44 )  

( 45 )  

Common stock repurchased

( 18,142 )  

( 180 )  

( 129 )  

Restricted stock award grants net of forfeitures

Restricted stock awards canceled

( 1,354 )  

( 22 )  

Other comprehensive income, net of tax

Share-based compensation expense

ESOP shares committed to be released

Cash dividends declared ($ 0.06 per share)

( 613 )  

BALANCE, June 30, 2021

10,205,867  

$ 97,463  

$ 96,573  

$ ( 8,901 )  

$ 3,546  

$ ( 190 )  

$ 188,593  

BALANCE, March 31, 2022

10,003,622  

$ 96,473  

$ 105,546  

$ ( 8,407 )  

$ ( 15,153 )  

$ ( 783 )  

$ 177,776  

( 953 )  

Common stock repurchased

( 52,618 )  

( 525 )  

( 333 )  

Restricted stock award grants net of forfeitures

Restricted stock awards canceled

( 1,407 )  

( 27 )  

Other comprehensive loss, net of tax

( 13,294 )  

Share-based compensation expense

ESOP shares committed to be released

Cash dividends declared ($ 0.07 per share)

( 701 )  

BALANCE, June 30, 2022

9,950,172  

$ 96,479  

$ 107,000  

$ ( 8,242 )  

$ ( 28,447 )  

$ ( 1,736 )  

$ 165,154  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2022 and 2021

(Dollars in thousands, except share information) (Unaudited)

Additional Paid-in

Unearned ESOP

Accumulated Other Comprehensive Income (Loss),

Noncontrolling

Total Shareholders'

BALANCE, December 31, 2020

5 unchanged sentences

$ 186,383  

( 145 )  

Common stock issued and initial investment in Quin Ventures

29,719  

( 44 )  

( 45 )  

Common stock repurchased

11 unchanged sentences

ESOP shares committed to be released

Cash dividends declared and paid ( $0.06 per share)

Cash dividends declared ($ 0.12 per share)

( 1,222 )  

BALANCE, March 31, 2021

BALANCE, June 30, 2021

10,205,867  

3 unchanged sentences

$ 3,546  

$ ( 190 )  

$ 188,593  

BALANCE, December 31, 2021

6 unchanged sentences

( 1,255 )  

Common stock repurchased

( 52,618 )  

( 525 )  

( 333 )  

Restricted stock award grants net of forfeitures

8 unchanged sentences

ESOP shares committed to be released

Cash dividends declared and paid ( $0.07 per share)

Cash dividends declared ($ 0.14 per share)

( 1,399 )  

BALANCE, March 31, 2022

BALANCE, June 30, 2022

9,950,172  

9 unchanged sentences

(In thousands) (Unaudited)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net income before noncontrolling interest

$ 4,039  

$ 5,971  

Adjustments to reconcile net income to net cash from operating activities:

6 unchanged sentences

Additions to servicing rights on sold loans, net

( 98 )  

Amortization of servicing rights on sold loans, net

4 unchanged sentences

Gain on sale of loans, net

( 484 )  

Gain on sale of securities available for sale, net

( 118 )  

Increase in cash surrender value of life insurance, net

( 465 )  

Origination of loans held for sale

( 16,487 )  

Proceeds from loans held for sale

17,035  

67,927  

Change in assets and liabilities:

(Increase) decrease in accrued interest receivable

( 513 )  

Increase in prepaid expenses and other assets

(Decrease) increase in accrued interest payable

( 3,854 )  

Increase in accrued interest payable

Increase in accrued expenses and other liabilities

2 unchanged sentences

Purchase of securities available for sale

( 78,409 )  

Proceeds from maturities, calls, and principal repayments of securities available for sale

19,565  

42,612  

Proceeds from sales of securities available for sale

12,685  

45,435  

(Purchase) redemption of FHLB stock

( 5,206 )  

Net increase in loans receivable

( 112,363 )  

Purchase of premises and equipment, net

( 2,442 )  

Capital contributions to equity investments

( 6,979 )  

Capital contributions to historic tax credit partnerships

( 1,829 )  

Net cash from investing activities

( 174,978 )  

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM FINANCING ACTIVITIES

Net (decrease) increase in deposits

Net increase in deposits

$ 108,221  

Proceeds from long-term FHLB advances

10,000  

Repayment of long-term FHLB advances

Net increase (decrease) in short-term FHLB advances

112,000  

Proceeds from issuance of subordinated debt, net

Net increase in advances from borrowers for taxes and insurance

39,223  

Net increase (decrease) in line of credit

Net (decrease) increase in advances from borrowers for taxes and insurance

( 174 )  

Dividends paid

( 1,388 )  

Restricted stock awards canceled

( 222 )  

Repurchase of common stock

( 859 )  

Net cash from financing activities

127,501  

123,765  

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

( 38,221 )  

15,567  

CASH AND CASH EQUIVALENTS, beginning of period

126,016  

65,155  

CASH AND CASH EQUIVALENTS, end of period

$ 87,795  

$ 80,722  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

1 unchanged sentence

Interest on deposits and borrowings

$ 3,065  

$ 2,150  

$ 1,110  

$ 2,640  

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

$ ( 36,447 )  

Cumulative adjustment to servicing right asset due to election of fair value option

Lease liabilities arising from obtaining right-of-use assets

16 unchanged sentences

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.

Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures.

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.

2 unchanged sentences

Securities and Exchange Commission ("SEC").

Accordingly, they do not include all of the information and footnotes required by U.S.

Accordingly, they do not include all the information and footnotes required by U.S.

Generally Accepted Accounting Principles ("GAAP") for complete financial statements.

1 unchanged sentence

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.

Operating results for the three and six months ended June 30, 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.

1 unchanged sentence

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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

4 unchanged sentences

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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2021, the FASB issued ASU No.

November 2019, the FASB issued Accounting Standards Update ("ASU")

10, which defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs

 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.

January 2021, the FASB issued ASU

Reference Rate Reform (Topic 848 ):

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.

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.

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.

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

not have a material impact on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted

4 unchanged sentences

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.

Upon adoption, the Company will change processes and procedures to calculate the allowance for credit 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.

19 unchanged sentences

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 

As of June 30, 2022, the Bank has been running a parallel analysis comparing actual ALLL results to potential CECL results.

Initial results indicate a modest increase to the reserve;

however, the modeling effort is ongoing with final decisions regarding valuation criteria for each segment yet to be made.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Pronouncements

18 unchanged sentences

The Company is evaluating the effect that ASU 2022 - 01 will have on its consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In March 2022, the FASB issued ASU No.

8 unchanged sentences

The Company is evaluating the effect that ASU 2022 - 02 will have on its consolidated financial statements and related disclosures.

In June 2022, the FASB issued ASU No.

2022 - 03, Fair Value Measurement (Topic 820 )—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions .

ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately.

Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s).

ASU 2022 - 03  is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted.

The Company is evaluating the effect that ASU 2022 - 03  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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at June 30, 2022 are summarized as follows:

Amortized Cost

9 unchanged sentences

Treasury notes

( 42 )  

International agency issued bonds (Agency bonds)

4 unchanged sentences

57,977  

Small Business Administration securities (SBA)

Mortgage-backed securities:

3 unchanged sentences

85,796  

Corporate issued mortgage-backed securities (MBS corporate)

Non-agency issued mortgage-backed securities (MBS non-agency)

107,086  

26 unchanged sentences

59,789  

Small Business Administration securities (SBA)

14,404  

4 unchanged sentences

79,962  

MBS corporate

MBS non-agency

60,317  

7 unchanged sentences

There were no securities classified as held-to-maturity at 

March 31, 2022  and 

June 30, 2022  and 

December 31, 2021 .

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

15 unchanged sentences

( 42 )  

( 189 )  

Corporate debt

12 unchanged sentences

82,715  

MBS corporate

MBS non-agency

( 4,502 )  

46 unchanged sentences

51,831  

MBS corporate

MBS non-agency

( 374 )  

10 unchanged sentences

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 

At June 30, 2022 and December 31, 2021 , there were 

179 and 

3 unchanged sentences

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 .

There were no OTTI losses during the three and six months ended June 30, 2022 and 2021 .

FIRST NORTHWEST BANCORP AND SUBSIDIARY

3 unchanged sentences

therefore, these securities are shown separately.

March 31, 2022

June 30, 2022

Available-for-Sale

70 unchanged sentences

Sales of securities available-for-sale for the periods shown are summarized as follows:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

1 unchanged sentence

$ 2,233  

$ 45,435  

$ 12,685  

$ 45,435  

Gross realized gains

Gross realized losses

( 76 )  

( 10 )  

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:

March 31, 2022

June 30, 2022

December 31, 2021

37 unchanged sentences

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.

The Company maintains a general ALLL 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.

3 unchanged sentences

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

At or For the Three Months Ended June 30, 2022

One-to-four family

14 unchanged sentences

( 73 )  

Ending balance

$ 3,026  

1 unchanged sentence

$ 4,154  

$ 2,550  

$ 2,367  

$ 15,747  

At or For the Six Months Ended June 30, 2022

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

(In thousands)

Beginning balance

$ 3,184  

$ 1,816  

$ 3,996  

$ 2,672  

$ 2,221  

$ 15,124  

(Recapture of) provision for loan losses

( 190 )  

( 124 )  

( 42 )  

( 210 )  

Ending balance

5 unchanged sentences

$ 15,747  

At March 31, 2022

At June 30, 2022

One-to-four family

35 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At or For the Three Months Ended March 31, 2021

At or For the Three Months Ended June 30, 2021

One-to-four family

15 unchanged sentences

( 13 )  

( 12 )  

( 151 )  

Ending balance

5 unchanged sentences

$ 14,588  

At or For the Six Months Ended June 30, 2021

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

(In thousands)

Beginning balance

$ 3,469  

$ 1,764  

$ 3,420  

$ 1,461  

$ 2,642  

$ 13,847  

(Recapture of) provision for loan losses

( 119 )  

( 200 )  

( 12 )  

( 380 )  

Ending balance

$ 3,356  

$ 1,816  

$ 3,674  

$ 2,221  

$ 2,368  

$ 14,588  

At December 31, 2021

40 unchanged sentences

The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:

March 31, 2022

June 30, 2022

December 31, 2021

28 unchanged sentences

Three Months Ended

March 31, 2022

March 31, 2021

Six Months Ended

June 30, 2022

Average Recorded Investment

20 unchanged sentences

$ 3,146  

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.

Interest income recognized on a cash basis on impaired loans for the three and six months ended June 30, 2022 , was $ 41,000 and $ 100,000 , respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Six Months Ended

June 30, 2021

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

(In thousands)

With no allowance recorded:

One-to-four family

Commercial real estate

Auto and other consumer

With an allowance recorded:

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Total impaired loans:

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

$ 4,949  

$ 5,153  

Interest income recognized on a cash basis on impaired loans for the 

three and six months ended June 30, 2021 , was $ 74,000  and $ 142,000 , respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:

March 31, 2022

June 30, 2022

December 31, 2021

9 unchanged sentences

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 :

There were no loans past due 90 days or more and still accruing interest at June 30, 2022 and December 31, 2021 .

The following table presents the recorded investment in past due loans, by class, as of June 30, 2022 :

90 Days or More

27 unchanged sentences

$ 1,893  

$ 3,621  

$ 1,461,656  

$ 1,465,277  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

50 unchanged sentences

The following table represents the internally assigned grade as of 

March 31, 2022 , by class of loans:

June 30, 2022 , by class of loans:

Special Mention

11 unchanged sentences

381,279  

370,346  

Construction and land

65 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table represents the credit risk profile based on payment activity as of March 31, 2022 , by class of loans:

The following table represents the credit risk profile based on payment activity as of June 30, 2022 , by class of loans:

Nonperforming

53 unchanged sentences

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

June 30, 2022

December 31, 2021

5 unchanged sentences

Total nonaccrual TDR loans

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 newly restructured, renewals, or modifications of existing TDR loans that occurred during the three and six months ended June 30, 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 

No additional funds were committed to be advanced in connection with TDR loans at March 31, 2022 .

three and six months ended June 30, 2022  or 

No additional funds were committed to be advanced in connection with TDR loans at June 30, 2022 .

The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status:

March 31, 2022

June 30, 2022

(In thousands)

8 unchanged sentences

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.

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at June 30, 2022 and December 31, 2021 , were $ 76.0 million and $ 75.1 million, respectively.

Deposits and weighted-average interest rates at the dates indicated are as follows:

March 31, 2022

June 30, 2022

December 31, 2021

27 unchanged sentences

Maturities of certificates at the dates indicated are as follows:

March 31, 2022

June 30, 2022

December 31, 2021

16 unchanged sentences

$ 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.

March 31, 2022 and December 31, 2021 , deposits included $ 106.7 million and $ 134.1 million, respectively, in public fund deposits.

Brokered certificates of deposits of $ 85.7 million and $ 65.7 million are included in the June 30, 2022 and December 31, 2021 certificate of deposits totals above, respectively.

June 30, 2022 and December 31, 2021 , deposits included $ 118.6 million and $ 134.1 million, respectively, in public fund deposits.

Investment securities with a carrying value of $ 60.2 million and $ 67.9 million were pledged as collateral for these deposits at 

March 31, 2022 and December 31, 2021 , respectively.

June 30, 2022 and December 31, 2021 , respectively.

This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

4 unchanged sentences

Total interest expense on deposits

$ 1,513  

$ 1,759  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 - Borrowings

First Fed is a member of the FHLB.

As a member, First Fed has a committed line of credit of up to 

40 % of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements.

First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements.

First Fed also has overnight borrowings through FHLB which renew daily until paid.

First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of funds.

All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 648.1 million and $ 699.6 million at 

June 30, 2022 and December 31, 2021 , respectively.

First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco ("FRB") to utilize the discount window for short-term borrowing.

Available borrowing capacity was $ 8.7 million and $ 17.3 million at 

June 30, 2022 and December 31, 2021 , respectively. 

No funds have been borrowed to date. Investment securities with a carrying value of $ 9.3 million and $ 17.2 million were pledged to the FRB at 

June 30, 2022 and December 31, 2021 , respectively.

On March 25, 2021, the Company completed a private placement of $ 40.0 million of 3.75 % fixed-to-floating rate subordinated notes due 2031 (the “Notes”) to certain qualified institutional buyers and institutional accredited investors.

The net proceeds to the Company from the sale of the Notes were approximately $ 39.3 million after deducting placement agent fees and other offering expenses.

The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes.

The Company used the net proceeds of the offering for general corporate purposes and provided $ 20.0 million to the Bank as Tier 1 capital.

On May 20, 2022, First Northwest entered into a borrowing arrangement with NexBank for a $ 20.0 million revolving line of credit.

Borrowings are secured by a blanket lien on First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

The line of credit matures on May 19, 2023 .

The following table sets forth information regarding our borrowings at the end of and during the six months ended June 30, 2022 .

The table includes both long- and short-term borrowings.

FHLB Long-Term Advances

FHLB Overnight Variable-Rate Advances

FHLB Short-Term Fixed-Rate Advances

Line of Credit

Subordinated Debt, net

(Dollars in thousands)

Balance outstanding

$ 90,000  

$ 102,000  

$ 10,000  

$ 8,000  

$ 39,319  

Maximum outstanding at any month-end

90,000  

102,000  

20,000  

39,319  

Average monthly outstanding during the period

83,333  

43,300  

39,288  

Weighted-average daily interest rates

1.54 %  

0.69 %  

0.71 %  

4.78 %  

1.59 %  

1.40 %  

1.74 %  

5.25 %  

The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at June 30, 2022  are as follows:

Weighted- Average Interest Rate

(Dollars in thousands)

Within one year or less

1.76 %  

$ 20,000  

After one year through two years

15,000  

After two years through three years

20,000  

After three years through four years

15,000  

After four years through five years

10,000  

After five years

10,000  

Total FHLB long-term advances

1.59 %  

$ 90,000  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth information regarding our borrowings at the end of and during the year ended December 31, 2021 .

The table includes both long- and short-term borrowings.

FHLB Long-Term Advances

FHLB Overnight Variable-Rate Advances

Subordinated Debt, net

(Dollars in thousands)

Balance outstanding

$ 80,000  

$ 39,280  

Maximum outstanding at any month-end

80,000  

40,000  

Average monthly outstanding during the period

52,500  

30,370  

Weighted-average daily interest rates

1.46 %  

0.30 %  

1.52 %  

0.31 %  

Note 6 - Federal Taxes on Income

5 unchanged sentences

The effective tax rates were 20.2 % and 

13.2 % for the three months ended March 31, 2022 and 2021 , respectively.

16.0 % for the six months ended June 30, 2022 and 2021 , respectively.

The effective tax rates differ from the statutory maximum federal tax rate for 2022  and 

1 unchanged sentence

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

In the second quarter of 2022, the Company began accruing a provision for income tax for certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. The additional accrual for state income tax results in a higher effective tax rate.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7  - Earnings per Common Share

The two -class method is used for computing basic and diluted earnings per share.

1 unchanged sentence

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 .

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021 .

Three Months Ended

Six Months Ended

(In thousands, except share data)

Net income available to common shareholders

1 unchanged sentence

$ 2,996  

$ 5,294  

$ 6,116  

Earnings allocated to participating securities

( 25 )  

( 116 )  

( 55 )  

Earnings allocated to common shareholders

1 unchanged sentence

$ 2,880  

$ 5,239  

$ 5,898  

Weighted average common shares outstanding

1 unchanged sentence

10,215,223  

9,846,086  

10,208,110  

Weighted average unvested restricted stock awards

( 92,626 )  

( 367,940 )  

( 95,390 )  

Weighted average unallocated ESOP shares

( 661,745 )  

( 714,706 )  

( 668,323 )  

Total basic weighted average common shares outstanding

1 unchanged sentence

9,132,577  

9,082,373  

9,146,113  

Basic weighted average common shares outstanding

1 unchanged sentence

9,132,577  

9,082,373  

9,146,113  

Dilutive restricted stock awards

1 unchanged sentence

118,554  

84,942  

106,200  

Total diluted weighted average common shares outstanding

1 unchanged sentence

9,251,131  

9,167,315  

9,252,313  

Basic earnings per common share

1 unchanged sentence

$ 0.32  

$ 0.58  

$ 0.64  

Diluted earnings per common share

1 unchanged sentence

$ 0.32  

$ 0.58  

$ 0.64  

Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive.

March 31, 2022  and 

June 30, 2022  and 

December 31, 2021 , antidilutive shares as calculated under the treasury stock method totaled 

2 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Employee Benefits

Note 8  - Employee Benefits

Employee Stock Ownership Plan

4 unchanged sentences

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 .

A principal and interest payment of $835,000  was made by the ESOP during the six months ended June 30, 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.

2 unchanged sentences

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.

Compensation expense related to the ESOP for the three months ended June 30, 2022 and 2021 , was $ 245,000  and $ 227,000 , respectively.

Compensation expense related to the ESOP for the six months ended June 30, 2022 and 2021 , was $ 536,000  and $ 444,000 , respectively.

Shares issued to the ESOP as of the dates indicated are as follows:

March 31, 2022

June 30, 2022

December 31, 2021

5 unchanged sentences

26,442  

Unallocated shares

9 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Stock-based Compensation

Note 9  - 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.

1 unchanged sentence

The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 .

March 31, 2022 , there were 

June 30, 2022 , there were 

300,219  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.

March 31, 2022 , there were no shares available for grant under the 2015 EIP.

June 30, 2022 , there were no shares available for grant under the 2015 EIP.

At this date, there are 

2 unchanged sentences

53,343  and 

84,896  shares of restricted stock awarded, respectively, during the three months ended March 31, 2022 and 2021 .

84,896  shares of restricted stock awarded, respectively, during the six months ended June 30, 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.

For the three months ended June 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 479,000  and $ 606,000 , respectively. Included in the compensation expense for the three months ended 

June 30, 2022 and 2021 , was directors' compensation of $ 84,000  and $ 169,000 , respectively.

For the six months ended June 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 890,000  and $ 1.0 million, respectively. Included in the compensation expense for the 

six months ended June 30, 2022 and 2021 , was directors' compensation of $ 139,000  and $ 260,000 , 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

June 30, 2022

Weighted-Average Grant Date Fair Value

Non-vested at April 1, 2022

244,629  

$ 16.99  

11,100  

( 3,743 )  

( 1,407 )  

( 10,525 )  

Non-vested at June 30, 2022

240,054  

$ 17.13  

(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.

For the Six Months Ended

June 30, 2022

Weighted-Average Grant Date Fair Value

Non-vested at January 1, 2022

5 unchanged sentences

( 12,925 )  

Non-vested at March 31, 2022

Non-vested at June 30, 2022

240,054  

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

As of June 30, 2022 , there was $ 3.1 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 

2.06  years.

Note 9 - Fair Value Accounting and Measurement

Note 10  - 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.

28 unchanged sentences

The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:

March 31, 2022

June 30, 2022

Quoted Prices in Active Markets for Identical Assets or Liabilities

13 unchanged sentences

85,796  

MBS corporate

MBS non-agency

101,141  

26 unchanged sentences

79,962  

MBS corporate

MBS non-agency

60,008  

7 unchanged sentences

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

(In thousands)

June 30, 2022

Fair Value (In thousands)

Valuation Technique

Unobservable Input

(Weighted Average)

Range (Weighted Average)

Sold loan servicing rights

2 unchanged sentences

Constant prepayment rate

2.15%-10.55% (7.54%)  

6.40%-20.93% (8.43%)  

Discount rate

9.75%-14.25% (11.45%)  

10.88%-15.38% (12.48%)  

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

As of or For the Six Months Ended June 30, 2022

Election of Fair Value Option for Servicing Rights at January 1, 2022

5 unchanged sentences

$ ( 53 )  

$ 3,865  

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

December 31, 2021

As of or For the Year Ended December 31, 2021

Balance at January 1, 2021

5 unchanged sentences

$ ( 2,540 )  

MBS corporate

MBS non-agency

( 6,372 )  

7 unchanged sentences

The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:

March 31, 2022

June 30, 2022

(In thousands)

7 unchanged sentences

$ 3,195  

March 31, 2022 and December 31, 2021 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

June 30, 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

June 30, 2022

Fair Value Measurements Using:

17 unchanged sentences

1,420,881  

10,402  

Accrued interest receivable

14 unchanged sentences

197,505  

Subordinated debt

Line of Credit

Subordinated debt, net

39,319  

40 unchanged sentences

80,192  

Subordinated debt

Subordinated debt, net

39,280  

6 unchanged sentences

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.

Loans receivable, net - At June 30, 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.

Note 11 - Change in Accumulated Other Comprehensive Income ("AOCI")

4 unchanged sentences

(In thousands)  

BALANCE, December 31, 2020

BALANCE, March 31, 2021

$ 1,944  

Other comprehensive income before reclassification

Amounts reclassified from accumulated other comprehensive income

( 888 )  

Net other comprehensive income

BALANCE, June 30, 2021

$ 5,260  

$ 5,291  

BALANCE, March 31, 2022

$ ( 13,330 )  

$ ( 1,823 )  

Other comprehensive loss before reclassification

( 13,330 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

( 13,323 )  

BALANCE, June 30, 2022

$ ( 26,653 )  

$ ( 1,794 )  

BALANCE, December 31, 2020

$ 5,442  

Other comprehensive income (loss) before reclassification

( 1,745 )  

Amounts reclassified from accumulated other comprehensive income

( 888 )  

Net other comprehensive loss

1 unchanged sentence

( 1,714 )  

BALANCE, March 31, 2021

BALANCE, June 30, 2021

$ 5,260  

$ ( 1,714 )  

$ 3,546  

BALANCE, December 31, 2021

7 unchanged sentences

( 28,793 )  

BALANCE, March 31, 2022

BALANCE, June 30, 2022

$ ( 26,653 )  

60 unchanged sentences

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;

legislative or regulatory changes, including actions taken by governmental authorities in response to inflationary pressures, the COVID-19 pandemic, and climate change;

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

8 unchanged sentences

our ability to attract and retain deposits;

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

changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;

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;

1 unchanged sentence

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;

the impacts related to or resulting from Russia's military action in Ukraine, including the broader impacts to financial markets and economic conditions;

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

6 unchanged sentences

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.

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 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., a joint venture formed in April 2021, 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.

6 unchanged sentences

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.

Quin Ventures is a fintech focused on financial wellness and lifestyle protection products 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.

These limited partnerships invest in fintech-related business with a focus on developing digital solutions applicable to the banking industry.

In addition, First Northwest has invested in Meriwether Group Capital Hero Fund LP, a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.

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.

3 unchanged sentences

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 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 and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.

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.

3 unchanged sentences

We anticipate continued improvements in commercial and consumer activity and the U.S.

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’

economy as COVID-related restrictions continue to be removed.

We recognize that our business and consumer customers experience varying degrees of financial distress, which may continue through the remainder of 2022, as new COVID-19 variant infections increase, together with the potential for new mandatory restrictions.

If commercial activity slows, it 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.

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 were significantly impacted by the COVID-19 pandemic. At June 30, 2022, the Company’s exposure as a percent of the total loan portfolio to these industries was 3.1%, 0.3%, and 3.8%, r e spectively.

We continue to monitor these customers closely.

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.

1 unchanged sentence

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.

Payments by borrowers on these loans can be deferred up to six months after the date the loan forgiveness application is processed, 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.

We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As of June 30, 2022, $32.2 million, or 100.0%, of the first-round loans were forgiven and $32.7 million, or 93.4%, of second-round loans were forgiven.

Critical Accounting Policies

5 unchanged sentences

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

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.

There were no other material changes to the critical accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Comparison of Financial Condition at June 30, 2022 and December 31, 2021

Total assets increased to $2.03 billion at June 30, 2022 from $1.92 billion at December 31, 2021.

Cash and cash equivalents decreased by $38.2 million, or 30.3%, to $87.8 million as of June 30, 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.

Net loans, excluding loans held for sale, increased $111.3 million to $1.46 billion at June 30, 2022, from $1.35 billion at December 31, 2021.

During the six months ended June 30, 2022, multi-family loans increased $48.9 million through new originations along with $3.7 million of acquisition-renovation construction and $2.8 million of commercial construction loans converted into amortizing loans.

Auto and other consumer loans increased $38.1 million, as a result of a $16.0 million purchase of a pool of manufactured home loans, $5.4 million in individual manufactured home loan purchases, a net increase in auto loans of $7.7 million, and an increase in quin Credit Builder loans of $6.4 million, offset by payment activity.

One- to four-family residential loans increased $14.2 million as $12.0 million in residential construction loans converted to amortizing loans and new originations exceeded payment of loans.

Commercial business loans decreased $8.6 million, mainly as the result of a decrease in Northpointe Mortgage Participation Program ("Northpointe") of $26.3 million and PPP loans paid off year-to-date totaling $12.8 million, offset by $10.2 million in SBA loan originations, $6.9 million of Bankers Healthcare Group loan purchases, $6.8 million of Water Station Program loans 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.

Construction and land loans decreased $10.3 million, or 4.6%, to $214.4 million at June 30, 2022, from $224.7 million at December 31, 2021.

Our construction loans are geographically dispersed throughout western Washington with two loans 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.

We continue to monitor the projects currently in our portfolio to determine the impact of supply chain issues and inflation 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.

At June 30, 2022, acquisition-renovation loans of $27.1 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.

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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.

We continually assess our lending strategies across all product lines and markets where we do business to improve earnings while also prudently managing credit risk.

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

March 31, 2022

June 30, 2022

North Olympic Peninsula (1)

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Total disbursed for land

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.

During the six months ended June 30, 2022, the Company originated $337.9 million of loans, of which $230.9 million, or 68.3%, were originated in the Puget Sound region, $65.0 million, or 19.2%, in the North Olympic Peninsula, $18.1 million, or 5.4%, in other areas throughout Washington State, and $24.0 million, or 7.1%, in other states.

The Company purchased an additional $31.6 million in auto loans and $24.0 million in manufactured home loans during the six months ended June 30, 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.

Our ALLL increased to $15.8 million at June 30, 2022, as a $500,000 loan loss provision was recorded for the six-month period.

Net recoveries were $123,000 for the six-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 ALLL as a percentage of total loans was 1.1% at both June 30, 2022 and December 31, 2021.

Nonperforming loans decreased $140,000, or 10.1%, to $1.2 million at June 30, 2022, from $1.4 million at December 31, 2021, reflecting improvements in nonperforming auto and other consumer loans of $230,000, home equity loans of $31,000 and commercial real estate loans of $11,000, offset by a deterioration in one- to four-family loans of $132,000.

Nonperforming loans to total loans was 0.1% at both June 30, 2022 and December 31, 2021.

The ALLL as a percentage of nonperforming loans increased to 1269% at June 30, 2022, from 1095% at December 31, 2021.

At June 30, 2022, there were $1.8 million in restructured loans, of which $1.76 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans increased $1.2 million to $13.8 million at June 30, 2022, from $12.6 million at December 31, 2021, due to an improvement in commercial real estate offset by declines in in two construction relationships.

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.

We stopped originating loans from one of our indirect auto loan product offerings in 2020 in order to reduce credit risk and future charge-off activity.

The balance of indirect auto loans decreased to $7.1 million at June 30, 2022 from $10.6 million at December 31, 2021.

We believe our ALLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of June 30, 2022.

Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated :

Increase (Decrease)

March 31, 2022

June 30, 2022

December 31, 2021

13 unchanged sentences

Increase (Decrease)

March 31, 2022

June 30, 2022

December 31, 2021

11 unchanged sentences

Nonaccrual and 90 days or more past due loans as a percentage of total loans

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.

Investment securities increased $8.9 million, or 2.6%, to $353.1 million at June 30, 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 8.2 years as of June 30, 2022, compared to 5.7 years as of December 31, 2021, and had an estimated average repricing term of 7.6 years as of June 30, 2022, compared to 5.4 years as of December 31, 2021, based on the interest rate environment at those times.

We believe prepayment activity is likely to slow in a rising rate environment, extending the projected duration of our securities portfolio.

The investment portfolio was composed of 48.0% in amortizing securities at June 30, 2022, compared to 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.

however, we may 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.

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.

Total shareholders' equity decreased $12.4 million to $177.8 million for the three months ended March 31, 2022.

Total liabilities increased to $1.87 billion at June 30, 2022, from $1.73 billion at December 31, 2021, primarily due to an increase in borrowing of $130.0 million.

Deposit balances remained flat at $1.58 billion for both June 30, 2022 and December 31, 2021.

During the six-month period ended June 30, 2022, there were increases of $22.3 million in certificates of deposits ("CDs") and $409,000 in savings accounts offset by a $10.0 million decrease in money market accounts and a $12.5 million decrease in demand deposit accounts.

A runoff in commercial and public fund account balances of $45.5 million during the six-month period ended June 30, 2022, was offset by increases in consumer account balances of $21.4 million and brokered CDs of $20.0 million. We utilize 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 $85.7 million were included in the $269.5 million balance of certificates of deposit at June 30, 2022.

FHLB advances increased 152.5% to $202.0 million at June 30, 2022, from $80.0 million at December 31, 2021. We increased short-term advances as strong loan demand was outpaced by a lack of deposit growth.

Total shareholders' equity decreased $25.3 million to $165.2 million for the six months ended June 30, 2022.

The Company recorded year-to-date net income of $5.3 million.

The net income increase was offset by an after-tax decrease in unrealized gain on available-for-sale investments of $15.3 million.

The net income increase was offset by a decrease in the after-tax unrealized loss on available-for-sale investments of $28.8 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

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.

Comparison of Results of Operations for the Three Months Ended June 30, 2022  and 2021

Net income attributable to the Company was $2.5 million for the three months ended June 30, 2022, compared to $3.0 million for the three months ended June 30, 2021.

A $3.4 million increase in net interest income after provision for loan loss was offset by a $1.7 million decrease in noninterest income and a $3.3 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.

Net interest income increased $3.6 million to $17.2 million for the three months ended June 30, 2022, from $13.7 million for the three months ended June 30, 2021.

This increase was mainly the result of an increase in average earning assets of $196.4 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.

The yield on average interest-earning assets increased 46 basis points to 4.14% for the three months ended June 30, 2022, compared to 3.68% for the same period in the prior year, due to increases in yields earned on investment securities and the loan portfolio, higher average loan balances improved the earning asset mix .

The average cost of interest-bearing liabilities increased to 0.49% for the three months ended June 30, 2022, compared to 0.46% for the same period last year, due primarily to increases in average balances in advances of $97.2 million and interest-bearing deposits of $90.4 million.

Total cost of funds increased 2 basis points to 0.39% for the three months ended June 30, 2022, from 0.37% for the same period in 2021.

The net interest margin increased 43 basis points to 3.77% for the three months ended June 30, 2022, from 3.34% for the same period in 2021 due to an improvement in our earning asset mix and higher market rates for both fixed and variable rate assets.

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.

Total interest income increased $3.9 million, or 26.0%, to $19.0 million for the three months ended June 30, 2022, from $15.1 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets and change in the mix of assets.

Interest and fees on loans receivable increased $3.2 million, to $16.1 million for the three months ended June 30, 2022, from $12.9 million for the three months ended June 30, 2021, primarily due to an increase in the average balance of net loans receivable of $239.4 million compared to the prior year.

Average loan yields were 4.48% and 4.30% for the three months ended June 30, 2022 and 2021, respectively.

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,

Three Months Ended June 30,

Average Balance Outstanding

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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.

Total interest expense increased $316,000, or 22.5%, to $1.7 million for the three months ended June 30, 2022, compared to $1.4 million for the three months ended June 30, 2021, due to an increase in borrowing costs of $345,000 primarily related to additional FHLB borrowings in the current period, offset by a decrease in interest expense on deposits of $29,000 resulting from a 3 basis point decrease in the average cost of interest-bearing deposits.

The average balance of interest-bearing deposits increased $90.4 million, or 8.0%, to $1.22 billion for the three months ended June 30, 2022, from $1.13 billion for the three months ended June 30, 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 June 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $29.9 million, along with a decrease in the average rates paid of 5 basis points, compared to the three months ended June 30, 2021.

During the same period, the average balances of money market and savings accounts increased $82.9 million and $10.0 million, respectively, with no change in the average rate paid on money market accounts and a decrease of 2 basis points for savings accounts, resulting in comparatively minor changes to interest expense.

Interest-bearing demand account average balances increased $27.4 million and the average rate paid increased 3 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 average cost of interest-bearing deposit products decreased to 0.26% for the three months ended June 30, 2022, from 0.29% for the three months ended June 30, 2021, due in large part to the expiration of promotional rates and a shift in deposit mix to higher levels of interest-bearing and noninterest-bearing transaction accounts which carry lower rates than non-transaction accounts. Borrowing costs increased due to increases in both the average balance and cost of FHLB advances, which are more sensitive to Federal Reserve Bank rate increases, 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,

Three Months Ended June 30,

Average Balance Outstanding

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Certificates of deposit

FHLB advances

Subordinated debt

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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.

The following table details activity and information related to the allowance for loan losses for the periods shown:

Three Months Ended March 31,

The Company recorded a $500,000 loan loss provision during the second quarter of 2022.

This compares to a provision for loan losses of $300,000 for the three months ended June 30, 2021.

The provision reflects loan growth and changing economic conditions, offset by stable credit quality metrics.

The following table details activity and information related to the ALLL for the periods shown:

Three Months Ended June 30,

(Dollars in thousands)

Provision for loan losses

Net recoveries

Allowance for loan losses

Allowance for losses as a percentage of total gross loans receivable at period end

Total nonaccrual loans

Allowance for loan losses as a percentage of nonaccrual loans at period end

Nonaccrual and 90 days or more past due loans as a percentage of total loans

Noninterest Income.

Noninterest income decreased $1.7 million, or 42.6%, to $2.2 million for the three months ended June 30, 2022, from $3.9 million for the three months ended June 30, 2021.

Other income increased due to higher adjustable-rate conversion ("ARC") loan fee income of $193,000 in the current period compared to the same period in 2021 and Quin Ventures subscription fee income of $118,000, offset by a valuation decrease of $31,000 recorded on our limited partnership fintech investments compared to a gain of $82,000 in the same period in 2021. Increases in other income were offset by a decline of $820,000 in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory resulted in a decline in mortgage loan production, as well as a decline of $1.1 million from investment securities sales in the current quarter compared to the same period in 2021.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:

Three Months Ended June 30,

Increase (Decrease)

(Dollars in thousands)

Loan and deposit service fees

Sold loan servicing fees

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

Total noninterest income

Noninterest Expense.

Noninterest expense increased $3.3 million, or 23.8%, to $17.0 million for the three months ended June 30, 2022, compared to $13.7 million for the three months ended June 30, 2021.

Quin Ventures launched the Credit Builder product during the current quarter and, as a result, the compensation, software licensing, professional fees and administrative expenses which were previously capitalized as software development costs are now being expensed.

Additional Quin Ventures expenses totaling $1.5 million were recorded in advertising, compensation, depreciation and data processing during the current quarter.

Noninterest expenses attributable to Quin Ventures for the three months ended June 30, 2022, totaled $2.1 million. The Bank also recorded increases over the same quarter in 2021 in compensation expense as well as costs associated with expanding our footprint with two new locations, technology enhancements for core and digital banking products, and higher FDIC insurance premiums.

The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:

Three Months Ended June 30,

Increase (Decrease)

(Dollars in thousands)

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Professional fees

FDIC insurance premium

Other expense

Total noninterest expense

Provision for Income Tax.

An income tax expense of $467,000 was recorded for the three months ended June 30, 2022, compared to $663,000 for the three months ended June 30, 2021.

There was a year-over-year decrease in income before taxes of $1.5 million.

The current period provision includes accruals for both federal and state income taxes resulting in a higher effective tax rate.

The provision for state income tax began in the second quarter of 2022 with respect to certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. For additional information, see Note 6 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net income attributable to the Company was $5.3 million for the six months ended June 30, 2022, compared to $6.1 million for the six months ended June 30, 2021.

A $5.6 million increase in net interest income after provision for loan loss was offset by a $2.0 million decrease in noninterest income and a $6.0 million increase in noninterest expense.

Net Interest Income.

Net interest income increased $5.6 million to $32.7 million for the six months ended June 30, 2022, from $27.1 million for the six months ended June 30, 2021.

This increase was mainly the result of an increase in average earning assets of $212.3 million.

The yield on average interest-earning assets increased 25 basis points to 4.00% for the six months ended June 30, 2022, compared to 3.75% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, as well as an increase in yields earned on investment securities.

The average cost of interest-bearing liabilities increased to 0.46% for the six months ended June 30, 2022, compared to 0.43% for the same period last year, due primarily to an increase in the average balance of borrowings related to additional FHLB advances, partially offset by a decrease in rates on interest-bearing deposits of 7 basis points.

Total cost of funds increased 2 basis points to 0.37% for the six months ended June 30, 2022, from 0.35% for the same period in 2021.

The net interest margin increased 22 basis points to 3.65% for the six months ended June 30, 2022, from 3.43% for the same period in 2021.

Interest Income.

Total interest income increased $6.2 million, or 20.8%, to $35.9 million for the six months ended June 30, 2022, from $29.7 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 $5.2 million, to $30.6 million for the six months ended June 30, 2022, from $25.4 million for the six months ended June 30, 2021, primarily due to an increase in the average balance of net loans receivable of $218.8 million compared to the prior year, coupled with an increase in average loan yields to 4.46% for the six months ended June 30, 2022, from 4.39% for the same period in 2021.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:

Six Months Ended June 30,

Average Balance Outstanding

Increase (Decrease) in Interest Income

(Dollars in thousands)

Loans receivable, net

Investment securities

Interest-earning deposits in banks

Total interest-earning assets

Interest Expense.

Total interest expense increased $581,000, or 22.8%, to $3.1 million for the six months ended June 30, 2022, compared to $2.6 million for the six months ended June 30, 2021, due to an increase in borrowing costs of $827,000 primarily related to additional FHLB advances, offset by a decrease in interest expense on deposits of $246,000 resulting from a 7 basis point decrease in the average cost of interest-bearing deposits.

The average balance of interest-bearing deposits increased $109.7 million, or 9.9%, to $1.22 billion for the six months ended June 30, 2022, from $1.11 billion for the six months ended June 30, 2021, due to core deposit growth in new and existing market areas as well as purchasing the Bellevue branch in July of 2021.

Average deposit account balances were comprised of 78% interest-bearing deposits and 22% noninterest-bearing deposits at June 30, 2022.

During the six months ended June 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $41.6 million, along with a decrease in the average rates paid of 12 basis points, compared to the six months ended June 30, 2021.

During the same period, the average balances of money market and savings accounts increased $104.7 million and $15.5 million, respectively, with an average rate decrease of 3 basis points and 3 basis points, respectively, resulting in comparatively minor changes to interest expense.

Interest-bearing demand account average balances increased $31.1 million and the average rate increased 2 basis points, resulting in a minor increase to interest expense.

The average cost of interest-bearing deposit products decreased to 0.25% for the six months ended June 30, 2022, from 0.32% for the six months ended June 30, 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 increases in both the average balance and cost of FHLB advances compared to the same period in 2021 and the issuance of subordinated debt in March 2021.

The following table details average balances, cost of funds and the change in interest expense for the periods shown:

Six Months Ended June 30,

Average Balance Outstanding

Increase (Decrease) in Interest Expense

(Dollars in thousands)

Transaction accounts

Money market accounts

Savings accounts

Certificates of deposit

Subordinated debt

Total interest-bearing liabilities

Provision for Loan Losses.

The Company recorded a $500,000 loan loss provision during the six months ended June 30, 2022, compared to a provision for loan losses of $800,000 for the six months ended June 30, 2021.

The provision reflects loan growth and changing economic conditions, offset by stable credit quality metrics.

The following table details activity and information related to the ALLL for the periods shown:

Six Months Ended June 30,

(Dollars in thousands)

Provision for loan losses

Net recoveries (charge-offs)

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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.

Noninterest income decreased $2.0 million, or 29.7%, to $4.6 million for the six months ended June 30, 2022, from $6.6 million for the six months ended June 30, 2021.

The year-over-year change in servicing fee income included increases in commercial loan late fees of $132,000, deposit account interchange fee income of $107,000 and business deposit account fee income of $89,000. Servicing fee income on sold loans increased $257,000 due to the change in the fair value of the servicing asset and a $124,000 increase in Main Street Lending Program servicing fee income.

Other income increased due to higher ARC loan fee income of $394,000 in the current period compared to the same period in 2021 and Quin Ventures subscription fee income of $118,000, offset by a year-over-year decrease of $389,000 in the recorded value on our limited partnership fintech investments which were negatively impacted by market volatility. Increases in fee income and other income were offset by a decline of $1.9 million in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory continue to dampen mortgage loan production, and a decline of $1.0 million in investment securities sales during the current year compared to the same period in 2021.

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,

Six Months Ended June 30,

Increase (Decrease)

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Net gain on sale of loans

Net gain on sale of investment securities

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

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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.

Noninterest expense increased $6.0 million, or 23.2%, to $31.8 million for the six months ended June 30, 2022, compared to $25.8 million for the six months ended June 30, 2021.

Quin Ventures launched the Credit Builder product during the current quarter and, as a result, the compensation, software licensing, professional fees and administrative expenses which were previously capitalized as software development costs are now being expensed.

Additional Quin Ventures expenses totaling $1.5 million were recorded in advertising, compensation, depreciation and data processing.

Noninterest expenses attributable to Quin Ventures for the six months ended June 30, 2022, totaled $2.7 million. The Bank also recorded increases over the same period in 2021 in compensation expense as we added staff to manage the company and build up data and fintech infrastructures, as well as costs associated with expanding our footprint with two new locations.

The Bank also invested in technology enhancements for core and digital banking products to support digital initiatives and customer relationship management tools.

Regulatory assessments and state taxes were higher 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,

Six Months Ended June 30,

Increase (Decrease)

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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.

An income tax expense of $1.0 million was recorded for the six months ended June 30, 2022, compared to $1.1 million for the six months ended June 30, 2021.

There was a year-over-year decrease in income before taxes of $2.1 million; however, the expense recorded for the six months ended June 30, 2021, included a tax accrual true-up. The current year provision includes accruals for both federal and state income taxes resulting in a higher effective tax rate.

The provision for state income tax began in the second quarter of 2022 with respect to certain states in which we have employees and collateral for loans, thereby creating nexus in those states for income tax purposes.

For additional information, see Note 6 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

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.

Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of June 30, 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,

Three Months Ended June 30,

(Dollars in thousands)

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Certificates of deposit

Total deposits

FHLB borrowings

Total interest-bearing deposits

Subordinated debt

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(3) Net interest income divided by average interest-earning assets.

Six Months Ended June 30,

(Dollars in thousands)

Interest-earning assets:

Loans receivable, net (1)

Total investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (2)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Total interest-bearing deposits

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits

Other noninterest-bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Net interest rate spread

Net earning assets

Net interest margin (3)

Average interest-earning assets to average interest-bearing liabilities

(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.

Rate/Volume Analysis

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Three Months Ended

March 31, 2022 vs.

Six Months Ended

June 30, 2022 vs.

Increase (Decrease) Due to

Total Increase (Decrease)

(In thousands)

Interest-earning assets:

6 unchanged sentences

Certificates of deposit

FHLB advances

Subordinated debt

7 unchanged sentences

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.

For the six months ended June 30, 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.

Contractual Obligations

At March 31, 2022, our scheduled maturities of contractual obligations were as follows:

At June 30, 2022, our scheduled maturities of contractual obligations were as follows:

After 1 Year Through

3 unchanged sentences

FHLB advances

Line of credit

Subordinated debt obligation

4 unchanged sentences

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:

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2022:

Amount of Commitment Expiration

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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.

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%.

At June 30, 2022, cash and cash equivalents totaling $87.8 million and unpledged securities classified as available-for-sale with a market value of $252.0 million provided additional sources of liquidity.

The Bank pledged collateral of $459.2 million to support borrowings from the FHLB and has an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $9.3 million were pledged as of June 30, 2022.

First Northwest has a borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

At June 30, 2022, we had $3.0 million in loan commitments outstanding and $251.1 million in undisbursed loans and standby letters of credit, including $158.5 million in undisbursed construction loan commitments.

Certificates of deposit due within one year as of June 30, 2022, totaled $169.6 million, or 62.9% of certificates of deposit with a weighted-average rate of 0.70%.

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.

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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.

At June 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $1.5 million.

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.

At June 30, 2022, First Northwest had contributed $8.0 million in partial fulfillment of 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.

At June 30, 2022, shareholders' equity totaled $165.2 million, or 8.1% of total assets.

Our book value per share of common stock was $16.60 at June 30, 2022, compared to $19.10 at December 31, 2021.

At June 30, 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 June 30, 2022.

Minimum Capital Requirements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements