First Northwest Bancorp 10-Q

fnwb20220930_10q.htm     Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-Q   ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     For the quarterly period ended September 30, 2022 or   ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934     For the transition period from _____ to _____   Commission File Number: 001-36741 FIRST NORTHWEST BANCORP   (Exact name of registrant as specified in its charter)       Washington   46-1259100 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer I.D. Number)       105 West 8th Street , Port Angeles , Washington   98362 (Address of principal executive offices)   (Zip Code)       Registrant's telephone number, including area code:   ( 360 ) 457-0461   Securities registered pursuant to Section 12(b) of the Act:   Title of each class:   Trading Symbol(s):   Name of each exchange on which registered: Common Stock, par value $0.01 per share   FNWB   The Nasdaq Stock Market LLC   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes ☒ No ☐   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes ☒ No ☐   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.   Large accelerated filer ☐ Accelerated filer ☐ Emerging growth company ☐ Non-accelerated filer ☒ Smaller reporting company ☒       If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐ No ☒   Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 3, 2022, there were 9,949,057  shares of common stock, $0.01 par value per share, outstanding.   1 Table of Contents     FIRST NORTHWEST BANCORP FORM 10-Q TABLE OF CONTENTS     PART 1 - FINANCIAL INFORMATION     Page Item 1 - Financial Statements (Unaudited) 3     Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 40     Item 3 - Quantitative and Qualitative Disclosures About Market Risk 56     Item 4 - Controls and Procedures 56     PART II - OTHER INFORMATION       Item 1 - Legal Proceedings 57     Item 1A - Risk Factors 57     Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 57     Item 3 - Defaults Upon Senior Securities 58     Item 4 - Mine Safety Disclosures 58     Item 5 - Other Information 58     Item 6 - Exhibits 58     SIGNATURES 59     As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First Northwest"), its consolidated subsidiary and its joint venture controlling interest, unless the context indicates otherwise. When we refer to “First Fed” or the “Bank” in this report, we are referring to First Fed Bank, the wholly owned subsidiary of First Northwest Bancorp. When we refer to  "Quin" or "Quin Ventures" in this report, we are referring to Quin Ventures, Inc., a First Northwest joint venture.  First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."   2 Table of Contents     PART I - FINANCIAL INFORMATION   Item 1. Financial Statements (Unaudited)   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) (Unaudited)       September 30, 2022     December 31, 2021   ASSETS                 Cash and due from banks   $ 22,784     $ 13,868   Interest-earning deposits in banks     80,879       112,148   Investment securities available for sale, at fair value     329,436       344,212   Loans held for sale     263       760   Loans receivable (net of allowance for loan losses of $ 16,273 and $ 15,124 )     1,521,118       1,350,260   Federal Home Loan Bank (FHLB) stock, at cost     11,961       5,196   Accrued interest receivable     6,655       5,289   Premises and equipment, net     20,841       19,830   Servicing rights on sold loans, net     —       3,282   Servicing rights on sold loans, at fair value     3,872       —   Bank-owned life insurance, net     40,003       39,318   Equity and partnership investments     13,990       3,571   Goodwill and other intangible assets, net     1,173       1,183   Prepaid expenses and other assets     38,466       22,164                     Total assets   $ 2,091,441     $ 1,921,081                                       LIABILITIES AND SHAREHOLDERS' EQUITY                 Deposits   $ 1,605,235     $ 1,580,580   Borrowings     292,338       119,280   Accrued interest payable     105       393   Accrued expenses and other liabilities     34,940       29,240   Advances from borrowers for taxes and insurance     2,224       1,108                     Total liabilities     1,934,842       1,730,601                     Shareholders' Equity                 Preferred stock, $ 0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding     —       —   Common stock, $ 0.01 par value, authorized 75,000,000 shares; issued and outstanding 9,978,041 shares at September 30, 2022, and 9,972,698 shares at December 31, 2021     100       100   Additional paid-in capital     97,924       96,131   Retained earnings     110,107       103,014   Accumulated other comprehensive (loss) income, net of tax     ( 41,023 )     288   Unearned employee stock ownership plan (ESOP) shares     ( 8,077 )     ( 8,572 )                   Total parent's shareholders' equity     159,031       190,961   Noncontrolling interest in Quin Ventures, Inc.     ( 2,432 )     ( 481 )                   Total shareholders' equity     156,599       190,480                     Total liabilities and shareholders' equity   $ 2,091,441     $ 1,921,081     See selected notes to the consolidated financial statements.   3 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited)       Three Months Ended     Nine Months Ended       September 30,     September 30,       2022     2021     2022     2021   INTEREST INCOME                                 Interest and fees on loans receivable   $ 17,778     $ 14,581     $ 48,395     $ 39,988   Interest on investment securities     2,817       2,138       7,807       6,296   Interest on deposits and other     118       18       202       46   FHLB dividends     142       41       313       132   Total interest income     20,855       16,778       56,717       46,462                                     INTEREST EXPENSE                                 Deposits     1,251       850       2,764       2,609   Borrowings     1,400       576       3,020       1,369   Total interest expense     2,651       1,426       5,784       3,978                                     Net interest income     18,204       15,352       50,933       42,484   PROVISION FOR LOAN LOSSES     750       700       1,250       1,500   Net interest income after provision for loan losses     17,454       14,652       49,683       40,984                                     NONINTEREST INCOME                                 Loan and deposit service fees     1,302       1,015       3,566       2,853   Sold loan servicing fees     206       815       665       858   Net gain on sale of loans     285       660       769       3,014   Net gain on sale of investment securities     —       1,286       118       2,410   Increase in cash surrender value of bank-owned life insurance     221       241       686       727   Other income     320       269       1,155       1,000   Total noninterest income     2,334       4,286       6,959       10,862                                     NONINTEREST EXPENSE                                 Compensation and benefits     9,045       8,713       27,583       24,567   Data processing     1,778       1,568       5,420       4,426   Occupancy and equipment     1,499       1,106       4,098       3,139   Supplies, postage, and telephone     322       279       1,043       876   Regulatory assessments and state taxes     365       335       1,167       897   Advertising     645       547       2,802       1,484   Professional fees     695       422       1,883       1,588   FDIC insurance premium     219       134       653       450   Other expense     807       830       2,520       2,308   Total noninterest expense     15,375       13,934       47,169       39,735                                     INCOME BEFORE PROVISION FOR INCOME TAXES     4,413       5,004       9,473       12,111                                     PROVISION FOR INCOME TAXES     818       946       1,839       2,082                                     NET INCOME     3,595       4,058       7,634       10,029   Net loss attributable to noncontrolling interest in Quin Ventures, Inc.     696       120       1,951       265                                     NET INCOME ATTRIBUTABLE TO PARENT   $ 4,291     $ 4,178     $ 9,585     $ 10,294                                     Basic and diluted earnings per common share   $ 0.47     $ 0.44     $ 1.04     $ 1.09                                       See selected notes to the consolidated financial statements.   4 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) (Unaudited)         Three Months Ended     Nine Months Ended       September 30,     September 30,       2022     2021     2022     2021                                     NET INCOME   $ 3,595     $ 4,058     $ 7,634     $ 10,029                                     Other comprehensive (loss) income:                                 Unrealized holding losses on investments available for sale arising during the period     ( 15,954 )     ( 2,057 )     ( 52,283 )     ( 1,164 ) Income tax benefit related to unrealized holding losses     3,350       432       10,979       245   Unrecognized defined benefit ("DB") plan prior service cost     —       —       —       ( 2,210 ) Income tax benefit related to DB plan prior service cost     —       —       —       465   Amortization of unrecognized DB plan prior service cost     37       36       110       78   Income tax provision related to amortization of DB plan prior service cost     ( 9 )     ( 7 )     ( 24 )     ( 18 ) Reclassification adjustment for net (gains) losses on sales of securities realized in income     —       ( 1,286 )     ( 118 )     ( 2,410 ) Income tax benefit related to reclassification adjustment on sales of securities     —       270       25       506                                     Other comprehensive loss, net of tax     ( 12,576 )     ( 2,612 )     ( 41,311 )     ( 4,508 )                                   COMPREHENSIVE (LOSS) INCOME     ( 8,981 )     1,446       ( 33,677 )     5,521                                     Comprehensive loss attributable to noncontrolling interest     ( 696 )     ( 120 )     ( 1,951 )     ( 265 )                                   COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT   $ ( 8,285 )   $ 1,566     $ ( 31,726 )   $ 5,786     See selected notes to the consolidated financial statements.   5 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended September 30, 2022 and 2021 (Dollars in thousands, except share information) (Unaudited)         Common Stock     Additional Paid-in     Retained     Unearned ESOP     Accumulated Other Comprehensive Income (Loss),     Noncontrolling     Total Shareholders'       Shares     Amount     Capital     Earnings     Shares     Net of Tax     Interest     Equity                                                                     BALANCE, June 30, 2021     10,205,867     $ 102     $ 97,463     $ 96,573     $ ( 8,901 )   $ 3,546     $ ( 190 )   $ 188,593                                                                     Net income                         4,178                   ( 120 )     4,058   Common stock repurchased     ( 137,953 )     —       ( 1,378 )     ( 1,084 )                       ( 2,462 ) Restricted stock award forfeitures net of grants     ( 5,903 )     —       —                               —   Restricted stock awards canceled     ( 11,134 )     —       ( 199 )                             ( 199 ) Other comprehensive loss, net of tax                                     ( 2,612 )           ( 2,612 ) Share-based compensation expense                   433                               433   ESOP shares committed to be released                   77             165                   242   Cash dividends declared ($ 0.06 per share)                         ( 609 )                       ( 609 )                                                                   BALANCE, September 30, 2021     10,050,877     $ 102     $ 96,396     $ 99,058     $ ( 8,736 )   $ 934     $ ( 310 )   $ 187,444                                                                                                                                       BALANCE, June 30, 2022     9,950,172     $ 100     $ 96,479     $ 107,000     $ ( 8,242 )   $ ( 28,447 )   $ ( 1,736 )   $ 165,154                                                                     Net income                         4,291                   ( 696 )     3,595   Common stock issued     115,777       1       1,868       —                         1,869   Common stock repurchased     ( 79,054 )     —       ( 790 )     ( 491 )                       ( 1,281 ) Restricted stock award forfeitures net of grants     ( 3,350 )     ( 1 )     1                               —   Restricted stock awards canceled     ( 5,504 )     —       ( 89 )                             ( 89 ) Other comprehensive loss, net of tax                                     ( 12,576 )           ( 12,576 ) Share-based compensation expense                   404                               404   ESOP shares committed to be released                   51             165                   216   Cash dividends declared ($ 0.07 per share)                         ( 693 )                       ( 693 )                                                                   BALANCE, September 30, 2022     9,978,041     $ 100     $ 97,924     $ 110,107     $ ( 8,077 )   $ ( 41,023 )   $ ( 2,432 )   $ 156,599           See selected notes to the consolidated financial statements.   6 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 2022 and 2021 (Dollars in thousands, except share information) (Unaudited)       Common Stock     Additional Paid-in     Retained     Unearned ESOP     Accumulated Other Comprehensive Income (Loss),     Noncontrolling     Total Shareholders'       Shares     Amount     Capital     Earnings     Shares     Net of Tax     Interest     Equity                                                                     BALANCE, December 31, 2020     10,247,185     $ 102     $ 97,412     $ 92,657     $ ( 9,230 )   $ 5,442     $ —     $ 186,383                                                                     Net income                         10,294                   ( 265 )     10,029   Common stock issued and initial investment in Quin Ventures     29,719       1       498       ( 44 )                 ( 45 )     410   Common stock repurchased     ( 291,932 )     ( 2 )     ( 2,916 )     ( 2,018 )                       ( 4,936 ) Restricted stock award grants net of forfeitures     78,993       1       ( 1 )                             —   Restricted stock awards canceled     ( 13,088 )     —       ( 232 )                             ( 232 ) Other comprehensive loss, net of tax                                     ( 4,508 )           ( 4,508 ) Share-based compensation expense                   1,443                               1,443   ESOP shares committed to be released                   192             494                   686   Cash dividends declared ($ 0.18 per share)                         ( 1,831 )                       ( 1,831 )                                                                   BALANCE, September 30, 2021     10,050,877     $ 102     $ 96,396     $ 99,058     $ ( 8,736 )   $ 934     $ ( 310 )   $ 187,444                                                                                                                                       BALANCE, December 31, 2021     9,972,698     $ 100     $ 96,131     $ 103,014     $ ( 8,572 )   $ 288     $ ( 481 )   $ 190,480                                                                     Net income                         9,585                   ( 1,951 )     7,634   Common stock issued     115,777       1       1,868       —                         1,869   Common stock repurchased     ( 131,672 )     ( 1 )     ( 1,315 )     ( 824 )                       ( 2,140 ) Restricted stock award grants net of forfeitures     37,068       —       —                               —   Restricted stock awards canceled     ( 15,830 )     —       ( 311 )                             ( 311 ) Other comprehensive loss, net of tax                                     ( 41,311 )           ( 41,311 ) Reclassification resulting from change in accounting method                         424                         424   Share-based compensation expense                   1,294                               1,294   ESOP shares committed to be released                   257             495                   752   Cash dividends declared ($ 0.21 per share)                         ( 2,092 )                       ( 2,092 )                                                                   BALANCE, September 30, 2022     9,978,041     $ 100     $ 97,924     $ 110,107     $ ( 8,077 )   $ ( 41,023 )   $ ( 2,432 )   $ 156,599         See selected notes to the consolidated financial statements.   7 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Nine Months Ended September 30,       2022     2021   CASH FLOWS FROM OPERATING ACTIVITIES                 Net income before noncontrolling interest   $ 7,634     $ 10,029   Adjustments to reconcile net income to net cash from operating activities:                 Depreciation and amortization     1,547       1,032   Amortization of core deposit intangible     10       2   Amortization and accretion of premiums and discounts on investments, net     1,280       1,252   Accretion of deferred loan fees and purchased premiums, net     619       754   Amortization of debt issuance costs     58       38   Change in fair value of sold loan servicing rights     91       —   Additions to servicing rights on sold loans, net     ( 143 )     ( 720 ) Amortization of servicing rights on sold loans, net     —       ( 90 ) Net (decrease) increase in the valuation allowance on servicing rights on sold loans     —       ( 4 ) Provision for loan losses     1,250       1,500   Allocation of ESOP shares     546       503   Share-based compensation expense     1,294       1,943   Gain on sale of loans, net     ( 769 )     ( 3,014 ) Gain on sale of securities available for sale, net     ( 118 )     ( 2,410 ) Increase in cash surrender value of life insurance, net     ( 686 )     ( 727 ) Origination of loans held for sale     ( 22,272 )     ( 86,456 ) Proceeds from loans held for sale     23,538       90,899   Change in assets and liabilities:                 (Increase) decrease in accrued interest receivable     ( 1,366 )     1,191   Increase in prepaid expenses and other assets     ( 4,191 )     ( 14,473 ) Decrease in accrued interest payable     ( 288 )     ( 24 ) Increase in accrued expenses and other liabilities     5,680       10,230                     Net cash from operating activities     13,714       11,455                     CASH FLOWS FROM INVESTING ACTIVITIES                 Purchase of securities available for sale     ( 78,409 )     ( 125,909 ) Proceeds from maturities, calls, and principal repayments of securities available for sale     26,937       52,071   Proceeds from sales of securities available for sale     12,685       109,829   (Purchase) redemption of FHLB stock     ( 6,765 )     1,580   Net increase in loans receivable     ( 172,727 )     ( 205,411 ) Purchase of premises and equipment, net     ( 2,556 )     ( 3,976 ) Capital contributions to equity and partnership investments     ( 7,628 )     —   Capital contributions to low-income housing tax credit partnerships     ( 23 )     —   Capital contributions to historic tax credit partnerships     ( 1,829 )     —   Net cash acquired from branch acquisition     —       63,545                     Net cash from investing activities     ( 230,315 )     ( 108,271 )   See selected notes to the consolidated financial statements.   8 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Nine Months Ended September 30,       2022     2021   CASH FLOWS FROM FINANCING ACTIVITIES                 Net increase in deposits   $ 24,655     $ 124,532   Proceeds from long-term FHLB advances     —       10,000   Repayment of long-term FHLB advances     —       ( 10,000 ) Net increase (decrease) in short-term FHLB advances     161,000       ( 49,977 ) Proceeds from issuance of subordinated debt, net     —       39,223   Net increase (decrease) in line of credit     12,000       —   Net increase in advances from borrowers for taxes and insurance     1,116       1,002   Dividends paid     ( 2,072 )     ( 1,831 ) Restricted stock awards canceled     ( 311 )     ( 232 ) Repurchase of common stock     ( 2,140 )     ( 4,936 )                   Net cash from financing activities     194,248       107,781                     NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     ( 22,353 )     10,965                     CASH AND CASH EQUIVALENTS, beginning of period     126,016       65,155                     CASH AND CASH EQUIVALENTS, end of period   $ 103,663     $ 76,120                     SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                 Cash paid during the year for:                 Interest on deposits and borrowings   $ 6,072     $ 4,002   Income taxes   $ 2,954     $ 2,890   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   $ ( 52,401 )   $ ( 3,573 ) Cumulative adjustment to servicing right asset due to election of fair value option   $ 538     $ —   Lease liabilities arising from obtaining right-of-use assets   $ —     $ 1,412                     BUSINESS COMBINATION (see Note 12)                 Fair value of assets acquired   $ —     $ 1,340   Fair value of liabilities assumed   $ —     $ 65,947     See selected notes to the consolidated financial statements.   9 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 1 - Basis of Presentation and Critical Accounting Policies   Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").   In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $ 10.00 per share for gross proceeds of $ 121.7 million. An additional 933,360 shares of Company common stock and $ 400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $ 117.6 million in net proceeds from the stock offering of which $ 58.4 million were contributed to the Bank upon Conversion.   Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8 % of the common stock issued in the Conversion for a total of 1,048,029 shares.   In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "Quin Ventures"). First Northwest has partially fulfilled its commitment to extend $ 15.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of $ 500,000 .   On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.   On August 5, 2022, First Northwest's election to be treated as a financial holding company became effective, allowing the Company to engage in activities that are financial in nature or incidental to financial activities.   First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."   First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank 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. These services include deposit and lending transactions that are supplemented with bor rowing and investing activities.   Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10 -K for the year ended December 31, 2021 . In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for the three and nine months ended September 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. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for loan losses ("ALLL"), fair value of financial instruments, and deferred tax assets and liabilities.     10 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. While First Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest for financial reporting purposes under Accounting Standards Codification  810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.   Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate.   Recently adopted accounting pronouncements   In November 2019, the FASB issued Accounting Standards Update ("ASU") 2019 - 10, which defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs 2016 - 13, 2019 - 04, and 2019 - 05.  The effective date for smaller reporting companies was changed from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company adopted this ASU and anticipates implementing CECL effective January 1, 2023.   In January 2021, the FASB issued ASU No. 2021 - 01, Reference Rate Reform (Topic 848 ): Scope . ASU No. 2021 - 01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021 - 01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. This ASU was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021 - 01 did not have a material impact on the Company’s financial statements.   Recently issued accounting pronouncements not yet adopted   Credit Losses In June 2016, the FASB issued ASU No. 2016 - 13, Financial Instruments - Credit Loss , which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016 - 13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company will change processes and procedures to calculate the allowance for 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.   Additional updates were issued in ASU No. 2019 - 04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825 ), Financial Instruments . This ASU clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition and measurement of financial instruments. The amendments provide entities with various measurement alternatives and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables that were previously written off and expected to be written off. The amendments also allow entities to use projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments.   In addition, new updates were issued through ASU No. 2019 - 05, Financial Instruments - Credit Losses (Topic 326 ): Targeted Transition Relief . This amendment allows entities to elect the fair value option on certain financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326 - 20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment. The Company is evaluating the provisions of ASU No. 2016 - 13, ASU No. 2019 - 04 and ASU No. 2019 - 05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third -party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date, which is anticipated to be January  1, 2023. The Bank began running a parallel analysis comparing actual ALLL results to potential CECL results with the June 2022 quarter end and will continue running parallels through the remainder of 2022. Initial results indicate a moderate increase to the reserve; however, the modeling effort is ongoing with final decisions regarding valuation criteria for each segment yet to be made.   11 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Other Pronouncements In March 2020, the FASB issued ASU No. 2020 - 04 Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020 - 04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is implementing a transition plan to identify and modify its loans and other financial instruments that are either directly or indirectly influenced by LIBOR. The Company is in the process of evaluating ASU No. 2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, with no material expected impact on the Company's financial statements.   In March 2022, the FASB issued ASU No. 2022 - 01, Derivatives and Hedging (Topic 815 ): Fair Value Hedging—Portfolio Layer Method . ASU 2022 - 01 expands the portfolio layer method of hedge accounting prescribed in ASU No. 2017 - 12 to allow multiple hedged layers of a single closed portfolio and to include portfolios of both prepayable and non-prepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same accounting method to similar hedging strategies. The ASU also specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on accounting and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered in determining credit losses for assets in the designated closed portfolio. This ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2022. The Company is evaluating the effect that ASU 2022 - 01 will have on its consolidated financial statements.   In March 2022, the FASB issued ASU No. 2022 - 02,   Financial Instruments—Credit Losses (Topic 326 ): Troubled Debt Restructurings and Vintage Disclosures . ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310 - 40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments”. ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". ASU 2022 - 02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 02 will have on its consolidated financial statements and related disclosures.   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.   12       FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 2 - Securities   The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at September 30, 2022 are summarized as follows:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 120,380     $ —     $ ( 24,250 )   $ 96,130   U.S. Treasury notes     2,465       —       ( 110 )     2,355   International agency issued bonds (Agency bonds)     1,953       —       ( 270 )     1,683   Corporate issued debt securities (Corporate debt)     60,754       —       ( 4,589 )     56,165   Mortgage-backed securities:                                 U.S. government agency issued mortgage-backed securities (MBS agency)     90,940       2       ( 12,711 )     78,231   Non-agency issued mortgage-backed securities (MBS non-agency)     102,637       —       ( 7,765 )     94,872                                     Total securities available for sale   $ 379,129     $ 2     $ ( 49,695 )   $ 329,436     The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 2021 , are summarized as follows:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 110,497     $ 3,207     $ ( 340 )   $ 113,364   Agency bonds     1,947       —       ( 27 )     1,920   Corporate issued asset-backed securities (ABS corporate)     14,556       —       ( 67 )     14,489   Corporate debt     58,906       1,450       ( 567 )     59,789   U.S. Small Business Administration securities (SBA)     14,404       276       —       14,680   Mortgage-backed securities:                                 MBS agency     80,877       248       ( 1,163 )     79,962   MBS non-agency     60,317       71       ( 380 )     60,008                                     Total securities available for sale   $ 341,504     $ 5,252     $ ( 2,544 )   $ 344,212       There were no securities classified as held-to-maturity at  September 30, 2022  and  December 31, 2021 .   13 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of September 30, 2022 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 16,638 )   $ 72,717     $ ( 7,612 )   $ 23,113     $ ( 24,250 )   $ 95,830   U.S. Treasury notes     ( 110 )     2,355       —       —       ( 110 )     2,355   Agency bonds     —       —       ( 270 )     1,683       ( 270 )     1,683   Corporate debt     ( 2,272 )     33,701       ( 2,317 )     22,464       ( 4,589 )     56,165   Mortgage-backed securities:                                                 MBS agency     ( 5,896 )     47,543       ( 6,815 )     27,891       ( 12,711 )     75,434   MBS non-agency     ( 4,894 )     66,940       ( 2,871 )     27,932       ( 7,765 )     94,872                                                     Total available for sale   $ ( 29,810 )   $ 223,256     $ ( 19,885 )   $ 103,083     $ ( 49,695 )   $ 326,339     The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2021 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 306 )   $ 23,125     $ ( 34 )   $ 1,475     $ ( 340 )   $ 24,600   Agency bonds     ( 27 )     1,920       —       —       ( 27 )     1,920   ABS corporate     ( 67 )     10,976       —       —       ( 67 )     10,976   Corporate debt     ( 333 )     18,890       ( 234 )     9,752       ( 567 )     28,642   SBA     —       —       —       69       —       69   Mortgage-backed securities:                                                 MBS agency     ( 713 )     39,029       ( 450 )     12,802       ( 1,163 )     51,831   MBS non-agency     ( 374 )     32,849       ( 6 )     5,505       ( 380 )     38,354                                                     Total available for sale   $ ( 1,820 )   $ 126,789     $ ( 724 )   $ 29,603     $ ( 2,544 )   $ 156,392     The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At September 30, 2022 and December 31, 2021 , there were  183 and  76 investment securities in an unrealized loss position, respectively.   We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates, market demand, and related volatility that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. We do not believe the unrealized losses on our securities are related to deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company does not intend to sell the securities in an unrealized loss position and believes that it is unlikely that we will be required to sell these investments prior to a market price recovery or maturity.   There were no OTTI losses during the three and nine months ended September 30, 2022 and 2021 .   14 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.       September 30, 2022       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 6,316     $ 6,239   Due after one through five years     37,243       35,999   Due after five through ten years     13,549       12,252   Due after ten years     136,469       118,613                     Total mortgage-backed securities     193,577       173,103                     All other investment securities:                 Due within one year     —       —   Due after one through five years     18,741       16,999   Due after five through ten years     66,251       60,092   Due after ten years     100,560       79,242                     Total all other investment securities     185,552       156,333                     Total investment securities   $ 379,129     $ 329,436         December 31, 2021       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 7,827     $ 7,832   Due after one through five years     24,347       24,371   Due after five through ten years     8,466       8,391   Due after ten years     100,554       99,376                     Total mortgage-backed securities     141,194       139,970                     All other investment securities:                 Due within one year     —       —   Due after one through five years     6,391       6,289   Due after five through ten years     79,679       80,807   Due after ten years     114,240       117,146                     Total all other investment securities     200,310       204,242                     Total investment securities   $ 341,504     $ 344,212     15 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Sales of securities available-for-sale for the periods shown are summarized as follows:       Three Months Ended September 30,     Nine Months Ended September 30,       2022     2021     2022     2021       (In thousands)   Proceeds from sales   $ —     $ 64,394     $ 12,685     $ 109,829   Gross realized gains     —       1,627       128       2,827   Gross realized losses     —       ( 341 )     ( 10 )     ( 417 )       Note 3 - Loans Receivable   Loans receivable consisted of the following at the dates indicated:       September 30, 2022     December 31, 2021       (In thousands)   Real Estate:                 One-to-four family   $ 335,067     $ 294,965   Multi-family     243,256       172,409   Commercial real estate     385,272       363,299   Construction and land     217,175       224,709   Total real estate loans     1,180,770       1,055,382                     Consumer:                 Home equity     50,066       39,172   Auto and other consumer     223,100       182,769   Total consumer loans     273,166       221,941                     Commercial business loans     71,269       79,838                     Total loans     1,525,205       1,357,161                     Less:                 Net deferred loan fees     3,519       4,772   Premium on purchased loans, net     ( 15,705 )     ( 12,995 ) Allowance for loan losses     16,273       15,124                     Total loans receivable, net   $ 1,521,118     $ 1,350,260     Allowance for Loan Losses. 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. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.   16 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following tables summarize changes in the ALLL and loan portfolio by segment and impairment method for the periods shown:       At or For the Three Months Ended September 30, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,026     $ 2,168     $ 4,154     $ 2,550     $ 486     $ 2,367     $ 680     $ 316     $ 15,747   Provision for (recapture of) loan losses     188       164       ( 45 )     ( 36 )     9       428       14       28       750   Charge-offs     —       —       —       —       —       ( 265 )     —       —       ( 265 ) Recoveries     —       —       —       —       12       29       —       —       41   Ending balance   $ 3,214     $ 2,332     $ 4,109     $ 2,514     $ 507     $ 2,559     $ 694     $ 344     $ 16,273           At or For the Nine Months Ended September 30, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,184     $ 1,816     $ 3,996     $ 2,672     $ 407     $ 2,221     $ 470     $ 358     $ 15,124   (Recapture of) provision for loan losses     ( 2 )     516       113       ( 160 )     71       644       82       ( 14 )     1,250   Charge-offs     —       —       —       —       —       ( 475 )     —       —       ( 475 ) Recoveries     32       —       —       2       29       169       142       —       374   Ending balance   $ 3,214     $ 2,332     $ 4,109     $ 2,514     $ 507     $ 2,559     $ 694     $ 344     $ 16,273         At September 30, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   Total ALLL   $ 3,214     $ 2,332     $ 4,109     $ 2,514     $ 507     $ 2,559     $ 694     $ 344     $ 16,273   General reserve     3,182       2,332       4,109       2,513       504       2,552       694       344       16,230   Specific reserve     32       —       —       1       3       7       —       —       43                                                                             Total loans   $ 335,067     $ 243,256     $ 385,272     $ 217,175     $ 50,066     $ 223,100     $ 71,269     $ —     $ 1,525,205   Loans collectively evaluated (1)     332,263       243,256       385,218       215,408       49,852       222,834       71,269       —       1,520,100   Loans individually evaluated (2)     2,804       —       54       1,767       214       266       —       —       5,105     ( 1 )  Loans collectively evaluated for general reserves. ( 2 )  Loans individually evaluated for specific reserves.   17 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)       At or For the Three Months Ended September 30, 2021       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,356     $ 1,816     $ 3,674     $ 2,221     $ 393     $ 2,368     $ 464     $ 296     $ 14,588   (Recapture of) provision for loan losses     ( 117 )     101       278       260       24       58       26       70       700   Charge-offs     —       —       —       —       —       ( 421 )     —       —       ( 421 ) Recoveries     —       —       —       2       —       374       —       —       376   Ending balance   $ 3,239     $ 1,917     $ 3,952     $ 2,483     $ 417     $ 2,379     $ 490     $ 366     $ 15,243           At or For the Nine Months Ended September 30, 2021       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,469     $ 1,764     $ 3,420     $ 1,461     $ 368     $ 2,642     $ 429     $ 294     $ 13,847   (Recapture of) provision for loan losses     ( 236 )     153       532       1,016       44       ( 142 )     61       72       1,500   Charge-offs     —       —       —       —       ( 12 )     ( 801 )     —       —       ( 813 ) Recoveries     6       —       —       6       17       680       —       —       709   Ending balance   $ 3,239     $ 1,917     $ 3,952     $ 2,483     $ 417     $ 2,379     $ 490     $ 366     $ 15,243         At December 31, 2021       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   Total ALLL   $ 3,184     $ 1,816     $ 3,996     $ 2,672     $ 407     $ 2,221     $ 470     $ 358     $ 15,124   General reserve     3,159       1,816       3,996       2,672       402       2,138       470       358       15,011   Specific reserve     25       —       —       —       5       83       —       —       113                                                                             Total loans   $ 294,965     $ 172,409     $ 363,299     $ 224,709     $ 39,172     $ 182,769     $ 79,838     $ —     $ 1,357,161   Loans collectively evaluated (1)     292,708       172,409       363,228       224,687       38,839       182,257       79,838       —       1,353,966   Loans individually evaluated (2)     2,257       —       71       22       333       512       —       —       3,195     ( 1 )  Loans collectively evaluated for general reserves. ( 2 )  Loans individually evaluated for specific reserves.   Impaired loans. A loan is considered impaired when the Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.   18 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:       September 30, 2022     December 31, 2021       Recorded Investment     Unpaid Principal Balance     Related Allowance     Recorded Investment     Unpaid Principal Balance     Related Allowance       (In thousands)   With no allowance recorded:                                                 One-to-four family   $ 77     $ 115     $ —     $ 212     $ 247     $ —   Commercial real estate     54       151       —       71       177       —   Construction and land     1,748       1,765       —       —       24       —   Home equity     —       —       —       26       59       —   Auto and other consumer     238       243       —       —       77       —   Total     2,117       2,274       —       309       584       —                                                     With an allowance recorded:                                                 One-to-four family     2,727       2,871       32       2,045       2,245       25   Construction and land     19       19       1       22       22       —   Home equity     214       216       3       307       329       5   Auto and other consumer     28       28       7       512       512       83   Total     2,988       3,134       43       2,886       3,108       113                                                     Total impaired loans:                                                 One-to-four family     2,804       2,986       32       2,257       2,492       25   Commercial real estate     54       151       —       71       177       —   Construction and land     1,767       1,784       1       22       46       —   Home equity     214       216       3       333       388       5   Auto and other consumer     266       271       7       512       589       83   Total   $ 5,105     $ 5,408     $ 43     $ 3,195     $ 3,692     $ 113     19 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periods shown:       Three Months Ended     Nine Months Ended       September 30, 2022     September 30, 2022       Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized       (In thousands)   With no allowance recorded:                                 One-to-four family   $ 211     $ 1     $ 259     $ 1   Commercial real estate     56       —       63       —   Construction and land     583       1       194       1   Home equity     —       —       3       —   Auto and other consumer     239       5       246       14   Total     1,089       7       765       16                                     With an allowance recorded:                                 One-to-four family     2,258       51       2,138       120   Commercial real estate     —       —       7       —   Construction and land     18       —       21       —   Home equity     232       3       273       8   Auto and other consumer     33       1       104       2   Total     2,541       55       2,543       130                                     Total impaired loans:                                 One-to-four family     2,469       52       2,397       121   Commercial real estate     56       —       70       —   Construction and land     601       1       215       1   Home equity     232       3       276       8   Auto and other consumer     272       6       350       16   Total   $ 3,630     $ 62     $ 3,308     $ 146     Interest income recognized on a cash basis on impaired loans for the three and nine months ended September 30, 2022 , was $ 42,000 and $ 126,000 , respectively.     20 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periods shown:       Three Months Ended     Nine Months Ended       September 30, 2021     September 30, 2021       Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized       (In thousands)   With no allowance recorded:                                 One-to-four family   $ 217     $ 3     $ 221     $ 9   Multi-family     —       —       125       —   Commercial real estate     1,200       18       1,081       55   Home equity     31       —       34       1   Auto and other consumer     47       3       39       5   Total     1,495       24       1,500       70                                     With an allowance recorded:                                 One-to-four family     2,199       46       2,357       110   Commercial real estate     17       —       162       —   Construction and land     24       2       25       3   Home equity     122       3       117       —   Auto and other consumer     464       6       715       17   Total     2,826       57       3,376       130                                     Total impaired loans:                                 One-to-four family     2,416       49       2,578       119   Multi-family     —       —       125       —   Commercial real estate     1,217       18       1,243       55   Construction and land     24       2       25       3   Home equity     153       3       151       1   Auto and other consumer     511       9       754       22   Total   $ 4,321     $ 81     $ 4,876     $ 200     Interest income recognized on a cash basis on impaired loans for the  three and nine months ended September 30, 2021 , was $ 65,000  and $ 183,000 , respectively.   21 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:       September 30, 2022     December 31, 2021       (In thousands)   One-to-four family   $ 1,089     $ 494   Commercial real estate     54       71   Construction and land     1,767       22   Home equity     187       282   Auto and other consumer     266       512                     Total nonaccrual loans   $ 3,363     $ 1,381     Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. At September 30, 2022 , $ 154,000 of purchased loans serviced by others were past due 90 days or more and still accruing interest. There were no loans past due 90 days or more and still accruing interest at December 31, 2021 .   The following table presents the recorded investment in past due loans, by class, as of September 30, 2022 :       30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ 1,529     $ —     $ 623     $ 2,152     $ 332,915     $ 335,067   Multi-family     —       —       —       —       243,256       243,256   Commercial real estate     —       —       —       —       385,272       385,272   Construction and land     —       —       1,750       1,750       215,425       217,175   Total real estate loans     1,529       —       2,373       3,902       1,176,868       1,180,770                                                     Consumer:                                                 Home equity     —       —       —       —       50,066       50,066   Auto and other consumer     1,514       366       154       2,034       221,066       223,100   Total consumer loans     1,514       366       154       2,034       271,132       273,166                                                     Commercial business loans     4       —       —       4       71,265       71,269                                                     Total loans   $ 3,047     $ 366     $ 2,527     $ 5,940     $ 1,519,265     $ 1,525,205     22 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table presents the recorded investment in past due loans, by class, as of December 31, 2021 :       30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ 786     $ —     $ —     $ 786     $ 294,179     $ 294,965   Multi-family     —       —       —       —       172,409       172,409   Commercial real estate     —       —       —       —       363,299       363,299   Construction and land     293       —       —       293       224,416       224,709   Total real estate loans     1,079       —       —       1,079       1,054,303       1,055,382                                                     Consumer:                                                 Home equity     83       —       —       83       39,089       39,172   Auto and other consumer     469       368       99       936       181,833       182,769   Total consumer loans     552       368       99       1,019       220,922       221,941                                                     Commercial business loans     7       —       —       7       79,831       79,838                                                     Total loans   $ 1,638     $ 368     $ 99     $ 2,105     $ 1,355,056     $ 1,357,161     Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8 -point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.   When the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1 - 3 in our risk rating system.   Additionally, the Bank categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90 days past due and nonaccrual loans are considered nonperforming.   23 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table represents the internally assigned grade as of  September 30, 2022 , by class of loans:       Pass     Watch     Special Mention     Substandard     Total       (In thousands)   Real Estate:                                         One-to-four family   $ 330,386     $ 3,358     $ —     $ 1,323     $ 335,067   Multi-family     227,505       15,751       —       —       243,256   Commercial real estate     344,907       28,514       10,526       1,325       385,272   Construction and land     201,238       402       13,465       2,070       217,175   Total real estate loans     1,104,036       48,025       23,991       4,718       1,180,770                                             Consumer:                                         Home equity     49,558       307       14       187       50,066   Auto and other consumer     221,890       847       107       256       223,100   Total consumer loans     271,448       1,154       121       443       273,166                                             Commercial business loans     64,308       6,610       351       —       71,269                                             Total loans   $ 1,439,792     $ 55,789     $ 24,463     $ 5,161     $ 1,525,205     The following table represents the internally assigned grade as of December 31, 2021 , by class of loans:       Pass     Watch     Special Mention     Substandard     Total       (In thousands)   Real Estate:                                         One-to-four family   $ 291,421     $ 2,727     $ 53     $ 764     $ 294,965   Multi-family     153,704       18,705       —       —       172,409   Commercial real estate     326,444       22,850       3,057       10,948       363,299   Construction and land     215,262       295       9,130       22       224,709   Total real estate loans     986,831       44,577       12,240       11,734       1,055,382                                             Consumer:                                         Home equity     38,739       83       —       350       39,172   Auto and other consumer     181,356       835       65       513       182,769   Total consumer loans     220,095       918       65       863       221,941                                             Commercial business loans     79,616       222       —       —       79,838                                             Total loans   $ 1,286,542     $ 45,717     $ 12,305     $ 12,597     $ 1,357,161     24 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following table represents the credit risk profile based on payment activity as of September 30, 2022 , by class of loans:       Nonperforming     Performing     Total       (In thousands)   Real Estate:                         One-to-four family   $ 1,089     $ 333,978     $ 335,067   Multi-family     —       243,256       243,256   Commercial real estate     54       385,218       385,272   Construction and land     1,767       215,408       217,175                             Consumer:                         Home equity     187       49,879       50,066   Auto and other consumer     420       222,680       223,100                             Commercial business     —       71,269       71,269                             Total loans   $ 3,517     $ 1,521,688     $ 1,525,205     The following table represents the credit risk profile based on payment activity as of December 31, 2021 , by class of loans:       Nonperforming     Performing     Total       (In thousands)   Real Estate:                         One-to-four family   $ 494     $ 294,471     $ 294,965   Multi-family     —       172,409       172,409   Commercial real estate     71       363,228       363,299   Construction and land     22       224,687       224,709                             Consumer:                         Home equity     282       38,890       39,172   Auto and other consumer     512       182,257       182,769                             Commercial business     —       79,838       79,838                             Total loans   $ 1,381     $ 1,355,780     $ 1,357,161       25 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Troubled debt restructuring. A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Bank is granting the borrower a concession of some kind. First Fed has granted a variety of concessions to borrowers in the form of loan modifications. The modifications are generally related to the loan's interest rate, term and payment amount or a combination thereof.   The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:       September 30, 2022     December 31, 2021       (In thousands)   Total TDR loans   $ 1,771     $ 1,843   Allowance for loan losses related to TDR loans     18       21   Total nonaccrual TDR loans     29       29     There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three and nine months ended September 30, 2022 or 2021 .   There were no TDR loans that incurred a payment default within 12 months of the restructure date during the  three and nine months ended September 30, 2022  or  2021 .   No additional funds were committed to be advanced in connection with TDR loans at September 30, 2022 .   The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status:       September 30, 2022       Accrual     Nonaccrual     Total       (In thousands)   One-to-four family   $ 1,714     $ 29     $ 1,743   Home equity     28       —       28                             Total TDR loans   $ 1,742     $ 29     $ 1,771       26 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 4 - Deposits   The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at September 30, 2022 and December 31, 2021 , were $ 96.4 million and $ 75.1 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:       September 30, 2022     December 31, 2021       Amount     Weighted-Average Interest Rate     Amount     Weighted-Average Interest Rate       (Dollars in thousands)   Noninterest-bearing demand deposits   $ 342,808       0.00 %   $ 343,932       0.00 % Interest-bearing demand deposits     192,504       0.01 %     196,970       0.01 % Money market accounts     519,018       0.37 %     597,815       0.21 % Savings accounts     196,780       0.05 %     194,620       0.05 % Certificates of deposit     354,125       1.62 %     247,243       0.62 %                                   Total deposits   $ 1,605,235       0.48 %   $ 1,580,580       0.19 %   Brokered certificates of deposits of $ 129.6 million and $ 65.7 million are included in the September 30, 2022 and December 31, 2021 certificates of deposit totals above, respectively.   Maturities of certificates at the dates indicated are as follows:     September 30, 2022     December 31, 2021       (In thousands)   Within one year or less   $ 242,591     $ 153,472   After one year through two years     51,403       54,970   After two years through three years     43,563       17,620   After three years through four years     8,374       14,358   After four years through five years     8,194       6,823                     Total certificates of deposit   $ 354,125     $ 247,243     At  September 30, 2022 and December 31, 2021 , deposits included $ 99.3 million and $ 134.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $ 55.4 million and $ 67.9 million were pledged as collateral for these deposits at  September 30, 2022 and December 31, 2021 , respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at  September 30, 2022 and December 31, 2021 , were funds held by federally recognized tribes totaling $ 14.4 million and $ 33.4 million, respectively. Investment securities with a carrying value of $ 29.3 million and $ 40.9 million were pledged as collateral for these deposits at  September 30, 2022 and December 31, 2021 , respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs.    Interest on deposits by type for the periods shown was as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2022     2021     2022     2021       (In thousands)                   Demand deposits   $ 16     $ 11     $ 58     $ 28   Money market accounts     468       291       1,089       852   Savings accounts     24       28       76       102   Certificates of deposit     743       520       1,541       1,627                                     Total interest expense on deposits   $ 1,251     $ 850     $ 2,764     $ 2,609     27 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   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 $ 711.0 million and $ 699.6 million at  September 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 $ 8.6 million and $ 17.3 million at  September 30, 2022 and December 31, 2021 , respectively.  No funds have been borrowed to date. Investment securities with a carrying value of $ 9.0 million and $ 17.2 million were pledged to the FRB at  September 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 nine months ended September 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   $ 80,000     $ 141,000     $ 20,000     $ 12,000     $ 39,338   Maximum outstanding at any month-end     80,000       141,000       30,000       12,000       39,338   Average monthly outstanding during the period     80,000       39,993       14,689       3,788       39,301   Weighted-average daily interest rates                                         Annual     1.52 %     1.85 %     1.76 %     5.67 %     4.03 % Period End     1.52 %     2.85 %     1.93 %     6.75 %     4.02 %   The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at September 30, 2022  are as follows:       Amount     Weighted- Average Interest Rate       (Dollars in thousands)   Within one year or less   $ 15,000       1.54 % After one year through two years     15,000       1.47   After two years through three years     15,000       1.35   After three years through four years     15,000       1.49   After four years through five years     10,000       1.63   After five years     10,000       1.76   Total FHLB long-term advances   $ 80,000       1.52 %     28 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   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       40,000   Average monthly outstanding during the period     52,500       5,207       30,370   Weighted-average daily interest rates                         Annual     1.46 %     0.30 %     3.96 % Period End     1.52 %     0.31 %     3.01 %     Note 6 - Federal Taxes on Income   Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.   The effective tax rates were 19.4 % and  17.2 % for the nine months ended September 30, 2022 and 2021 , respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2022  and  2021 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. Additionally, a tax accrual true-up was recorded in the first quarter of 2021, which reduced the prior year provision and resulted in a lower effective tax rate. 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.     29 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 7  - Earnings per Common Share   The two -class method is used for computing basic and diluted earnings per share. Under the two -class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.   The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 .       Three Months Ended     Nine Months Ended       September 30,     September 30,       2022     2021     2022     2021       (In thousands, except share data)   Net income:                                 Net income available to common shareholders   $ 4,291     $ 4,178     $ 9,585     $ 10,294   Earnings allocated to participating securities     ( 35 )     ( 130 )     ( 92 )     ( 352 ) Earnings allocated to common shareholders   $ 4,256     $ 4,048     $ 9,493     $ 9,942                                     Basic:                                 Weighted average common shares outstanding     9,955,322       10,168,417       9,979,152       10,193,680   Weighted average unvested restricted stock awards     ( 212,930 )     ( 296,563 )     ( 231,253 )     ( 324,159 ) Weighted average unallocated ESOP shares     ( 648,571 )     ( 701,530 )     ( 661,670 )     ( 714,768 ) Total basic weighted average common shares outstanding     9,093,821       9,170,324       9,086,229       9,154,753                                     Diluted:                                 Basic weighted average common shares outstanding     9,093,821       9,170,324       9,086,229       9,154,753   Dilutive restricted stock awards     44,302       83,508       69,584       97,527   Total diluted weighted average common shares outstanding     9,138,123       9,253,832       9,155,813       9,252,280                                     Basic earnings per common share   $ 0.47     $ 0.44     $ 1.04     $ 1.09                                     Diluted earnings per common share   $ 0.47     $ 0.44     $ 1.04     $ 1.09     Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At  September 30, 2022  and  2021 , antidilutive shares as calculated under the treasury stock method totaled  2,617 and 0 , respectively.     30 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 8  - Employee Benefits   Employee Stock Ownership Plan   In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12 -month period are eligible to participate in the ESOP.   Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46 %. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. A principal and interest payment of $835,000  was made by the ESOP during the nine months ended September 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. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.   Compensation expense related to the ESOP for the three months ended September 30, 2022 and 2021 , was $ 216,000  and $ 242,000 , respectively. Compensation expense related to the ESOP for the nine months ended September 30, 2022 and 2021 , was $ 752,000  and $ 686,000 , respectively.   Shares issued to the ESOP as of the dates indicated are as follows:     September 30, 2022     December 31, 2021       (Dollars in thousands)   Allocated shares     386,285       333,396   Committed to be released shares     13,221       26,442   Unallocated shares     648,523       688,191                     Total ESOP shares issued     1,048,029       1,048,029                     Fair value of unallocated shares   $ 10,441     $ 13,901       31 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   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. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 . As of  September 30, 2022 , there were  300,869  total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.   As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made. As of  September 30, 2022 , there were no shares available for grant under the 2015 EIP. At this date, there are  72,520  shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.   There were  55,443  and  96,205  shares of restricted stock awarded, respectively, during the nine months ended September 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 September 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 404,000  and $ 433,000 , respectively. Included in the compensation expense for the three months ended  September 30, 2022 and 2021 , was directors' equity compensation of $ 50,000  and $ 64,000 , respectively.   For the nine months ended September 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 1.3 million and $ 1.4 million, respectively. Included in the compensation expense for the  nine months ended September 30, 2022 and 2021 , was directors' equity compensation of $ 189,000  and $ 324,000 , respectively.   The following tables provide a summary of changes in non-vested restricted stock awards for the period shown:       For the Three Months Ended       September 30, 2022       Shares     Weighted-Average Grant Date Fair Value   Non-vested at July 1, 2022     240,054     $ 17.13   Granted     2,100       16.20   Vested     ( 25,972 )     15.48   Canceled (1)     ( 5,504 )     15.48   Forfeited     ( 5,450 )     14.85                     Non-vested at September 30, 2022     205,228     $ 17.43                     (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 Nine Months Ended       September 30, 2022       Shares     Weighted-Average Grant Date Fair Value   Non-vested at January 1, 2022     236,432     $ 16.19   Granted     55,443       21.28   Vested     ( 52,442 )     16.50   Canceled (1)     ( 15,830 )     16.50   Forfeited     ( 18,375 )     16.54                     Non-vested at September 30, 2022     205,228     $ 17.43                     (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.       32 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     As of September 30, 2022 , there was $ 2.6 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  1.87  years.     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. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third -party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.   Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.   A three -level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:   Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.   Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.   Level 3 - Unobservable inputs.   The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.   The Company used the following methods to measure fair value on a recurring and nonrecurring basis.   Securities available for sale and partnership investments : Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.   Sold loan servicing rights, at fair value : The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation.   33 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:       September 30, 2022       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total       (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 4,602     $ 91,528     $ —     $ 96,130   U.S. Treasury notes     2,355       —       —       2,355   Agency bonds     —       1,683       —       1,683   Corporate debt     5,208       50,957       —       56,165   MBS agency     —       78,231       —       78,231   MBS non-agency     —       94,872       —       94,872   Sold loan servicing rights     —       —       3,872       3,872   Partnership investments     —       12,490       —       12,490       $ 12,165     $ 329,761     $ 3,872     $ 345,798         December 31, 2021       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total       (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 5,902     $ 107,462     $ —     $ 113,364   Agency bonds     —       1,920       —       1,920   ABS corporate     —       14,489       —       14,489   Corporate debt     6,061       53,728       —       59,789   SBA     —       14,680       —       14,680   MBS agency     —       79,962       —       79,962   MBS non-agency     —       60,008       —       60,008   Partnership investments     —       3,071       —       3,071       $ 11,963     $ 335,320     $ —     $ 347,283       34 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the date indicated:   September 30, 2022   Fair Value (In thousands)   Valuation Technique   Unobservable Input   Range (Weighted Average)   Sold loan servicing rights   $ 3,872   Discounted cash flow   Constant prepayment rate   6.20% - 16.07% (8.06%)                 Discount rate     11.88% - 16.38% (13.51%)     The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates indicated:       As of or For the Three Months Ended September 30, 2022       Balance at July 1, 2022     Servicing rights that result from transfers and sale of financial assets     Changes in fair value due to changes in model inputs or assumptions (1)     Total       (In thousands)                                     Sold loan servicing rights   $ 3,865     $ 45     $ ( 38 )   $ 3,872   (1) Represents changes due to collection/realization of expected cash flows and curtailments.         As of or For the Nine Months Ended September 30, 2022       Election of Fair Value Option for Servicing Rights at January 1, 2022     Servicing rights that result from transfers and sale of financial assets     Changes in fair value due to changes in model inputs or assumptions (1)     Total       (In thousands)                                     Sold loan servicing rights   $ 3,820     $ 143     $ ( 91 )   $ 3,872   (1) Represents changes due to collection/realization of expected cash flows and curtailments.         As of or For the Nine Months Ended September 30, 2021       Balance at January 1, 2021     Transfers Out of Level 3 (1)     Purchases     Unrealized     Total       (In thousands)   Securities available for sale                                         Corporate debt   $ 2,540     $ ( 2,540 )   $ —     $ —     $ —   MBS non-agency     6,372       ( 6,372 )     —       —       —       $ 8,912     $ ( 8,912 )   $ —     $ —     $ —   (1) Transferred from Level 3 to Level 2 after obtaining observable market data.     Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.   35 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:       September 30, 2022       Level 1     Level 2     Level 3     Total       (In thousands)   Impaired loans   $ —     $ —     $ 5,105     $ 5,105         December 31, 2021       Level 1     Level 2     Level 3     Total       (In thousands)   Impaired loans   $ —     $ —     $ 3,195     $ 3,195     At  September 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:       September 30, 2022                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 103,663     $ 103,663     $ 103,663     $ —     $ —   Investment securities available for sale     329,436       329,436       12,165       317,271       —   Loans held for sale     263       263       —       263       —   Loans receivable, net     1,521,118       1,460,472       —       —       1,460,472   FHLB stock     11,961       11,961       —       11,961       —   Accrued interest receivable     6,655       6,655       —       6,655       —   Sold loan servicing rights, at fair value     3,872       3,872       —       —       3,872   Partnership investments     12,490       12,490       —       12,490       —                                             Financial liabilities                                         Demand deposits   $ 1,251,110     $ 1,251,110     $ 1,251,110     $ —     $ —   Time deposits     354,125       344,911       —       —       344,911   FHLB Borrowings     241,000       234,470       —       —       234,470   Line of Credit     12,000       12,034       —       —       12,034   Subordinated debt, net     39,338       37,192       —       —       37,192   Accrued interest payable     105       105       —       105       —     36 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)       December 31, 2021                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 126,016     $ 126,016     $ 126,016     $ —     $ —   Investment securities available for sale     344,212       344,212       11,963       332,249       —   Loans held for sale     760       760       —       760       —   Loans receivable, net     1,350,260       1,328,589       —       —       1,328,589   FHLB stock     5,196       5,196       —       5,196       —   Accrued interest receivable     5,289       5,289       —       5,289       —   Sold loan servicing rights, net     3,282       3,820       —       —       3,820   Partnership investments     3,071       3,071       —       3,071       —                                             Financial liabilities                                         Demand deposits     1,333,337     $ 1,333,337     $ 1,333,337     $ —     $ —   Time deposits     247,243       247,217       —       —       247,217   FHLB Borrowings     80,000       80,192       —       —       80,192   Subordinated debt, net     39,280       39,144       —       —       39,144   Accrued interest payable     393       393       —       393       —     Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. The methods and assumptions used by the Company in estimating fair values of financial instruments as set forth below in accordance with ASC Topic 825, Financial Instruments , as amended by ASU 2016 - 01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:   Loans receivable, net - At September 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.     37 Table of Contents     Note 11 - Change in Accumulated Other Comprehensive Income ("AOCI")   Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:       Unrealized Gains and Losses on Available-for-Sale Securities     Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization     Total         (In thousands)                             BALANCE, June 30, 2021   $ 5,260     $ ( 1,714 )   $ 3,546   Other comprehensive loss before reclassification     ( 1,625 )     —       ( 1,625 ) Amounts reclassified from accumulated other comprehensive income     ( 1,016 )     29       ( 987 ) Net other comprehensive (loss) income     ( 2,641 )     29       ( 2,612 ) BALANCE, September 30, 2021   $ 2,619     $ ( 1,685 )   $ 934                             BALANCE, June 30, 2022   $ ( 26,653 )   $ ( 1,794 )   $ ( 28,447 ) Other comprehensive loss before reclassification     ( 12,604 )     —       ( 12,604 ) Amounts reclassified from accumulated other comprehensive income     —       28       28   Net other comprehensive (loss) income     ( 12,604 )     28       ( 12,576 ) BALANCE, September 30, 2022   $ ( 39,257 )   $ ( 1,766 )   $ ( 41,023 )                                                     BALANCE, December 31, 2020   $ 5,442     $ —     $ 5,442   Other comprehensive loss before reclassification     ( 919 )     ( 1,745 )     ( 2,664 ) Amounts reclassified from accumulated other comprehensive income     ( 1,904 )     60       ( 1,844 ) Net other comprehensive loss     ( 2,823 )     ( 1,685 )     ( 4,508 ) BALANCE, September 30, 2021   $ 2,619     $ ( 1,685 )   $ 934                             BALANCE, December 31, 2021   $ 2,140     $ ( 1,852 )   $ 288   Other comprehensive loss before reclassification     ( 41,304 )     —       ( 41,304 ) Amounts reclassified from accumulated other comprehensive income     ( 93 )     86       ( 7 ) Net other comprehensive (loss) income     ( 41,397 )     86       ( 41,311 ) BALANCE, September 30, 2022   $ ( 39,257 )   $ ( 1,766 )   $ ( 41,023 )     38 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   N ote 12 - Business Combination   On July 23, 2021, the Bank acquired certain assets and assumed liabilities of the Sterling  Bank and Trust of Southfield, Michigan  ("Sterling") upon purchasing their sole branch located in Washington State. As a result of the Sterling transaction, the Bank has established a presence in Bellevue, Washington, and expanded its deposit base. Total consideration paid under the Sterling transaction consisted of $ 63.5  million in cash. There were no transfers of common stock or other equity instruments in connection with the transaction, and the Bank did not obtain any equity interests in Sterling.   The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction consists largely of a premium paid for the deposit accounts.   In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required the Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as prepayments or early withdrawals, and other factors. Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the transaction, the Bank purchased certain assets and assumed certain liabilities of Sterling but did not acquire any equity or other ownership interests.   The following table summarizes the fair value of consideration transferred, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction (in thousands):     At July 23, 2021       Book Value     Fair Value Adjustment     Estimated Fair Value       (In thousands)                             Cash consideration transferred                   $ 63,545                             Recognized amounts of identifiable assets acquired and liabilities assumed                         Identifiable assets acquired                         Core deposit intangible ("CDI")   $ —     $ 126     $ 126   Premises and equipment     459       —       459   Accrued interest receivable and other assets     755       —       755   Total identifiable assets acquired     1,214       126       1,340                             Liabilities assumed                         Deposits   $ 65,096     $ ( 229 )   $ 64,867   Accrued expenses and other liabilities     1,080       —       1,080   Total liabilities assumed     66,176       ( 229 )     65,947   Total identifiable net liabilities assumed     ( 64,962 )     355       ( 64,607 ) Goodwill recognized                   $ 1,062     CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period o f ten yea rs. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.       39       ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements   Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:   • statements of our goals, intentions and expectations;   • statements regarding our business plans, prospects, growth and operating strategies;   • statements regarding the quality of our loan and investment portfolios;   • estimates of our risks and future costs and benefits; and   • statements concerning the continuing effects of the COVID-19 pandemic on the Bank's business and financial results and conditions.   These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:   • the 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 expanded consumer protection regulation and responses to inflation, climate change issues and the COVID-19 pandemic which could adversely affect the Company's business;   • a decrease in the market demand for loans that we originate for sale;   • our ability to control operating costs and expenses;   • whether our management team can implement our operational strategy, including but not limited to our efforts to achieve loan and revenue growth;   • our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related cost savings within expected time frames;   • our ability to successfully execute on growth strategies related to our entry into new markets;   • our ability to develop user-friendly digital applications to serve existing customers and attract new customers;   • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;   • changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;   • increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;   • our ability to attract and retain deposits;   • changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, 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;   • legislative or regulatory changes that adversely affect our business;   • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;   • 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; and   • other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021.   Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the direct and indirect impact of the ongoing pandemic on the Bank, its customers and third parties. These developments could have an adverse impact on our financial position and our results of operations.   Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.   40 Table of Contents   General   First Northwest Bancorp, a Washington corporation, is a financial holding company engaged in banking and financial activities, including those of its wholly owned subsidiary, First Fed Bank. The Company also has a controlling interest in Quin Ventures, Inc., a fintech joint venture formed in April 2021 focused on financial wellness and lifestyle protection products for consumers nationwide, and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures.   First Fed Bank is a community-oriented financial institution serving western Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We have twelve full-service branches and two business centers. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a fully array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology (“fintech”) companies to develop and deploy digitally focused financial solutions to meet customers’ needs on a broader scale. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and more recently have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.   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 businesses 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 ("Hero Fund"), a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. In September 2022, First Northwest completed an additional purchase and now holds a 33.3% interest in The Meriwether Group, LLC, a modern-day merchant bank focusing on providing entrepreneurs with resources to help them succeed. In October 2022, the Company completed an additional purchase and now holds a 25% equity interest in Meriwether Group Capital, LLC, which provides financial advice for borrowers and capital for the Hero Fund. The Meriwether Group, LLC, also holds a 20% interest in Meriwether Group Capital, LLC.   First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.   Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, late and other charges on loans, 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.   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 ALLL. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off.   Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and other customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.   Actions to Address Economic Uncertainties. Our business and consumer customers are subject to varying degrees of financial distress in the face of uncertainties presented by such factors as the continued development of COVID-19 variant infections, inflationary pressures, and the potential for economic recession. The commercial real estate sector has also been negatively impacted by the effects of COVID-19 on the hospitality, restaurant and food services industry, as well as changes in workforce behavior and demand for retail products. If commercial activity slows, it may result in lower demand for loans and other services we offer, as well the inability of customers to meet their loan obligations to us. We have taken specific actions to ensure that we have the balance sheet strength to serve our clients and communities, including managing our assets and liabilities in order to maintain liquidity and a strong capital position; however, future economic conditions are subject to significant uncertainty. While uncertainty exists, we believe we are well-positioned to operate effectively through the present economic environment.       41 Table of Contents   Critical Accounting Policies   Effective January 1, 2022, the Bank elected to measure servicing rights using the fair value method of accounting. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.   There were no other material changes to the critical accounting policies 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 September 30, 2022 and December 31, 2021   Assets . Total assets increased to $2.09 billion at September 30, 2022, from $1.92 billion at December 31, 2021.   Cash and cash equivalents decreased by $22.4 million, or 17.7%, to $103.7 million as of September 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 $170.9 million to $1.52 billion at September 30, 2022, from $1.35 billion at December 31, 2021. During the nine months ended September 30, 2022, multi-family loans increased $70.9 million through new originations, and through $20.4 million of commercial construction and $13.0 million of acquisition-renovation construction loans converting into permanent amortizing loans. Auto and other consumer loans increased $40.3 million, as a result of a $16.0 million purchase of a pool of manufactured home loans, $10.3 million in individual manufactured home loan purchases, an increase in other consumer loans of $10.8 million, and a net increase in auto loans of $8.5 million, offset by payment activity. One- to four-family residential loans increased $40.1 million as $28.5 million in residential construction loans converted to permanent amortizing loans and new originations exceeded payments of loans. Home equity loans increased $10.9 million through $7.2 million in new fixed-rate originations and draws on unfunded commitments. 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 $15.8 million, offset by $13.9 million in SBA loan originations, $8.1 million of Water Station Program loans, $6.3 million of Bankers Healthcare Group loan purchases and draws on unfunded commitments. 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 $7.5 million, or 3.4%, to $217.2 million at September 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 the progress toward completion of our construction projects. We continue to monitor the impact of supply chain challenges, inflation and consumer demand in a rising interest rate environment on completion of the projects currently in our portfolio. 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 September 30, 2022, acquisition-renovation loans of $18.8 million were included in the construction loan total compared to $51.1 million at December 31, 2021. These commercial acquisition-renovation loans represent financing primarily for the acquisition of multi-family properties with a construction component used for the renovation of common areas and specific units of the building. Given the construction component of these loans, we are required to report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects.   We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets where we do business to improve earnings while also prudently managing credit risk.   42 Table of Contents   The following tables show our construction commitments by type and geographic concentrations at the dates indicated:   September 30, 2022   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Idaho     Total       (In thousands)   Construction Commitment                                                 One- to four-family residential   $ 43,826     $ 72,413     $ 10,730     $ —     $ —     $ 126,969   Multi-family residential     —       143,202       8,761       415       3,592       155,970   Commercial acquisition-renovation     1,638       18,711       —       —       —       20,349   Commercial real estate     8,615       31,699       —       540       —       40,854   Total commitment   $ 54,079     $ 266,025     $ 19,491     $ 955     $ 3,592     $ 344,142                                                     Construction Funds Disbursed                                                 One- to four-family residential   $ 18,565     $ 32,206     $ 2,634     $ —     $ —     $ 53,405   Multi-family residential     —       91,947       4,841       42       2,454       99,284   Commercial acquisition-renovation     1,445       17,316       —       —       —       18,761   Commercial real estate     8,823       26,286       —       11       —       35,120   Total disbursed   $ 28,833     $ 167,755     $ 7,475     $ 53     $ 2,454     $ 206,570                                                     Undisbursed Commitment                                                 One- to four-family residential   $ 25,261     $ 40,207     $ 8,096     $ —     $ —     $ 73,564   Multi-family residential     —       51,255       3,920       373       1,138       56,686   Commercial acquisition-renovation     193       1,395       —       —       —       1,588   Commercial real estate     (208 )     5,413       —       529       —       5,734   Total undisbursed   $ 25,246     $ 98,270     $ 12,016     $ 902     $ 1,138     $ 137,572                                                     Land Funds Disbursed                                                 One- to four-family residential   $ 3,326     $ 3,368     $ 326     $ —     $ —     $ 7,020   Commercial real estate     —       3,585       —       —       —       3,585   Total disbursed for land   $ 3,326     $ 6,953     $ 326     $ —     $ —     $ 10,605     (1) Includes Clallam and Jefferson counties. (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.   December 31, 2021   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Total       (In thousands)   Construction Commitment                                         One- to four-family residential   $ 32,785     $ 57,050     $ 4,430     $ —     $ 94,265   Multi-family residential     —       182,151       4,095       8,435       194,681   Commercial acquisition-renovation     2,938       36,536       16,638       —       56,112   Commercial real estate     12,489       50,372       2,535       —       65,396   Total commitment   $ 48,212     $ 326,109     $ 27,698     $ 8,435     $ 410,454                                             Construction Funds Disbursed                                         One- to four-family residential   $ 10,242     $ 28,929     $ 562     $ —     $ 39,733   Multi-family residential     —       79,707       2,414       7,534       89,655   Commercial acquisition-renovation     2,449       32,789       15,861       —       51,099   Commercial real estate     3,486       29,484       2,701       —       35,671   Total disbursed   $ 16,177     $ 170,909     $ 21,538     $ 7,534     $ 216,158                                             Undisbursed Commitment                                         One- to four-family residential   $ 22,543     $ 28,121     $ 3,868     $ —     $ 54,532   Multi-family residential     —       102,444       1,681       901       105,026   Commercial acquisition-renovation     489       3,747       777       —       5,013   Commercial real estate     9,003       20,888       (166 )     —       29,725   Total undisbursed   $ 32,035     $ 155,200     $ 6,160     $ 901     $ 194,296                                             Land Funds Disbursed                                         One- to four-family residential   $ 3,502     $ 3,556     $ 191     $ —     $ 7,249   Commercial real estate     —       1,302       —       —       1,302   Total disbursed for land   $ 3,502     $ 4,858     $ 191     $ —     $ 8,551     43 Table of Contents   During the nine months ended September 30, 2022, the Company originated $478.7 million of loans, of which $320.6 million, or 66.9%, were originated in the Puget Sound region, $94.7 million, or 19.8%, in the North Olympic Peninsula, $41.1 million, or 8.6%, in other areas throughout Washington State, and $22.4 million, or 4.7%, in other states. The Company purchased an additional $46.9 million in auto loans, $26.3 million in manufactured home loans, and $6.4 million in commercial business loans with collateral located throughout the United States during the nine months ended September 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 total loan portfolio was comprised of 81.8% organic originations and 18.2% purchased loans at September 30, 2022.   Our ALLL increased to $16.3 million at September 30, 2022, as a $1.3 million loan loss provision was recorded for the nine-month period. Net charge-offs were $101,000 for the nine-month period. The loan loss provision was 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 and uncertain economic conditions, which is reflected in the qualitative factor adjustments. The ALLL as a percentage of total loans was 1.1% at both September 30, 2022 and December 31, 2021.   Nonperforming loans increased $2.1 million, or 154.7%, to $3.5 million at September 30, 2022, from $1.4 million at December 31, 2021, reflecting the deterioration of a $1.8 million speculative single-family home construction project and a $595,000 mortgage loan, offset by improvements in nonperforming auto and other consumer loans of $92,000, home equity loans of $95,000 and commercial real estate loans of $17,000. Nonperforming loans to total loans was 0.2% at September 30, 2022, up from 0.1% at December 31, 2021. The ALLL as a percentage of nonperforming loans decreased to 463% at September 30, 2022, from 1095% at December 31, 2021. A contract to sell the speculative single-family home was entered into subsequent to quarter end and the loan is expected to be paid off by year end.   At September 30, 2022, there were $1.8 million in restructured loans, of which $1.7 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans decreased $7.4 million to $5.2 million at September 30, 2022, from $12.6 million at December 31, 2021, due to commercial real estate loan upgrades offset by declines in in two construction loans.   Loan charge-offs are concentrated mainly in our quin CoreCard program and indirect auto loan portfolio. The quin CoreCard program was frozen in October 2022, halting future losses. 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 $5.9 million at September 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 September 30, 2022.   Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated :                       Increase (Decrease)       September 30, 2022     December 31, 2021     Amount     Percent       (In thousands)                   Real Estate:                                 One-to-four family   $ 335,067     $ 294,965     $ 40,102       13.6 % Multi-family     243,256       172,409       70,847       41.1   Commercial real estate     385,272       363,299       21,973       6.0   Construction and land     217,175       224,709       (7,534 )     (3.4 ) Total real estate loans     1,180,770       1,055,382       125,388       11.9                                     Consumer:                                 Home equity     50,066       39,172       10,894       27.8   Auto and other consumer     223,100       182,769       40,331       22.1   Total consumer loans     273,166       221,941       51,225       23.1                                     Commercial business loans     71,269       79,838       (8,569 )     (10.7 )                                   Total loans     1,525,205       1,357,161       168,044       12.4   Less:                                 Net deferred loan fees     3,519       4,772       (1,253 )     (26.3 ) Premium on purchased loans, net     (15,705 )     (12,995 )     (2,710 )     20.9   Allowance for loan losses     16,273       15,124       1,149       7.6   Loans receivable, net   $ 1,521,118     $ 1,350,260     $ 170,858       12.7     44 Table of Contents   The following table represents nonperforming assets at the dates indicated.                     Increase (Decrease)       September 30, 2022     December 31, 2021     Amount     Percent       (In thousands)                   Nonperforming loans:                                 Real estate loans:                                 One- to four-family   $ 1,089     $ 494     $ 595       120.4 % Commercial real estate     54       71       (17 )     (23.9 ) Construction and land     1,767       22       1,745       7,931.8   Total real estate loans     2,910       587       2,323       395.7                                     Consumer loans:                                 Home equity     187       282       (95 )     (33.7 ) Auto and other consumer     420       512       (92 )     (18.0 ) Total consumer loans     607       794       (187 )     (23.6 )                                   Total nonperforming assets   $ 3,517     $ 1,381     $ 2,136       154.7                                     Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.2 %     0.1 %     0.1 %     100.0     Investment securities decreased $14.8 million, or 4.3%, to $329.4 million at September 30, 2022, from $344.2 million at December 31, 2021, as declines in mark-to-market valuation, sales, normal payments and prepayment activity outpaced purchases. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 8.4 years as of September 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 September 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 50.8% in amortizing securities at September 30, 2022, compared to 49.8% 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 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.   Liabilities. Total liabilities increased to $1.93 billion at September 30, 2022, from $1.73 billion at December 31, 2021, primarily due to an increase in borrowing of $173.0 million.   Deposit balances increased $24.7 million to $1.61 billion at September 30, 2022 from $1.58 billion at December 31, 2021. During the nine-month period ended September 30, 2022, there were increases of $106.9 million in certificates of deposits ("CDs") and $2.2 million in savings accounts offset by a $78.8 million decrease in money market accounts and a $5.6 million decrease in demand deposit accounts. Runoffs in commercial and public fund account balances of $50.3 million during the nine-month period ended September 30, 2022, was offset by increases in consumer account balances of $11.2 million and brokered CDs of $63.8 million. We utilize brokered CDs as an additional funding source in order to provide liquidity, manage cost of funds, reduce reliance on public funds deposits, and manage interest rate risk. Brokered CDs totaling $129.6 million were included in the $354.1 million balance of certificates of deposit at September 30, 2022.   FHLB advances increased 201.3% to $241.0 million at September 30, 2022, from $80.0 million at December 31, 2021. We increased short-term advances as strong loan demand outpaced deposit growth.   Equity . Total shareholders' equity decreased $33.9 million to $156.6 million for the nine months ended September 30, 2022. The Company recorded year-to-date net income of $9.6 million. The net income increase was offset by a decrease in the after-tax unrealized loss on available-for-sale investments of $41.4 million. All categories of the investment portfolio have been significantly impacted by the rising rate environment with 97.9% below book value at September 30, 2022. Year-to-date, we repurchased 131,672 shares of common stock under the October 2020 stock repurchase plan at an average price of $16.21 per share for a total of $2.1 million, leaving 526,698 shares remaining in the share repurchase program.   45 Table of Contents     Comparison of Results of Operations for the Three Months Ended September 30, 2022  and 2021   General. Net income attributable to the Company was $4.3 million for the three months ended September 30, 2022, compared to $4.2 million for the three months ended September 30, 2021. A $2.8 million increase in net interest income after provision for loan loss was offset by a $2.0 million decrease in noninterest income and a $1.4 million increase in noninterest expense.   Net Interest Income. Net interest income increased $2.9 million to $18.2 million for the three months ended September 30, 2022, from $15.4 million for the three months ended September 30, 2021. This increase was mainly the result of an increase in average earning assets of $156.6 million combined with an increase to the yield on average interest-earning assets of 54 basis points to 4.45% for the three months ended September 30, 2022, compared to 3.91% for the same period in the prior year.   The average cost of interest-bearing liabilities increased to 0.73% for the three months ended September 30, 2022, compared to 0.45% for the same period last year, due primarily to increases in the average balance in FHLB advances of $130.9 million in combination with higher rates paid on money market accounts, CDs and borrowings. Total cost of funds increased 23 basis points to 0.59% for the three months ended September 30, 2022, from 0.36% for the same period in 2021. The net interest margin increased 30 basis points to 3.88% for the three months ended September 30, 2022, from 3.58% for the same period in 2021, due to an improvement in our earning asset mix and expanding realized returns for both fixed and variable rate assets relative to funding costs.   Interest Income. Total interest income increased $4.1 million, or 24.3%, to $20.9 million for the three months ended September 30, 2022, from $16.8 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets and improvement in the mix of assets. Interest and fees on loans receivable increased $3.2 million, to $17.8 million for the three months ended September 30, 2022, from $14.6 million for the three months ended September 30, 2021, primarily due to an increase in the average balance of net loans receivable of $189.7 million compared to the prior year. Average loan yields were 4.75% and 4.47% for the three months ended September 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 September 30,               2022     2021               Average Balance Outstanding     Yield     Average Balance Outstanding     Yield     Increase (Decrease) in Interest Income       (Dollars in thousands)   Loans receivable, net   $ 1,484,615       4.75 %   $ 1,294,877       4.47 %   $ 3,197   Investment securities     348,281       3.21       365,014       2.32       679   FHLB stock     9,269       6.08       4,061       4.01       101   Interest-earning deposits in banks     17,231       2.72       38,810       0.18       100   Total interest-earning assets   $ 1,859,396       4.45 %   $ 1,702,762       3.91 %   $ 4,077     Interest Expense. Total interest expense increased $1.2 million, or 85.9%, to $2.7 million for the three months ended September 30, 2022, compared to $1.4 million for the three months ended September 30, 2021, due to an increase in borrowing costs of $824,000 primarily related to additional FHLB borrowings in the current period along with an increase in interest expense on deposits of $401,000 given a 12 basis point increase in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $45.5 million, or 3.9%, to $1.22 billion for the three months ended September 30, 2022, from $1.18 billion for the three months ended September 30, 2021, due to core deposit growth in new and existing market areas.   During the three months ended September 30, 2022, interest expense increased on certificates of deposit and money market accounts due to increases in the average balances of $21.7 million and $3.6 million, respectively, along with increases in the average rates paid of 26 basis points and 12 basis points, compared to the three months ended September 30, 2021. During the same period, the average balances of interest-bearing demand and savings accounts increased $10.4 million and $9.7 million, respectively, with a 1 basis point increase in the average rate paid on interest-bearing demand and a 1 basis point decrease in the average rate paid on savings accounts, resulting in comparatively minor changes to interest expense. The average cost of interest-bearing deposit products increased to 0.41% for the three months ended September 30, 2022, from 0.29% for the three months ended September 30, 2021, due in large part to the expiration of promotional rates offered on CD products. Borrowing costs increased due to increases in both the average balance and cost of overnight FHLB advances, which are more sensitive to Federal Reserve Bank rate increases, compared to the same period in 2021.   46 Table of Contents   The following table details average balances, cost of funds and the change in interest expense for the periods shown:       Three Months Ended September 30,               2022     2021               Average Balance Outstanding     Rate     Average Balance Outstanding     Rate     Increase (Decrease) in Interest Expense       (Dollars in thousands)   Transaction accounts   $ 190,542       0.03 %   $ 180,162       0.02 %   $ 5   Money market accounts     556,434       0.33       552,811       0.21       177   Savings accounts     198,403       0.05       188,664       0.06       (4 ) Certificates of deposit     279,169       1.06       257,459       0.80       223   Advances     182,554       2.18       51,613       1.43       819   Subordinated debt     39,326       3.98       39,249       3.94       5   Total interest-bearing liabilities   $ 1,446,428       0.73 %   $ 1,269,958       0.45 %   $ 1,225     Provision for Loan Losses . The Company recorded a $750,000 loan loss provision during the third quarter of 2022. This compares to a provision for loan losses of $700,000 for the three months ended September 30, 2021. The provision reflects loan growth, higher charge-offs and an assessment of dynamic economic conditions, offset by continued stable credit quality metrics.   The following table details activity and information related to the ALLL for the periods shown:       Three Months Ended September 30,       2022     2021       (Dollars in thousands)   Provision for loan losses   $ 750     $ 700   Net charge-offs     (224 )     (45 ) Allowance for loan losses     16,273       15,243   Allowance for losses as a percentage of total gross loans receivable at period end     1.1 %     1.1 % Total nonaccrual loans     3,517       1,183   Allowance for loan losses as a percentage of nonaccrual loans at period end     462.7 %     1288.5 % Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.2 %     0.1 % Total loans   $ 1,525,205     $ 1,352,878     Noninterest Income. Noninterest income decreased $2.0 million, or 45.5%, to $2.3 million for the three months ended September 30, 2022, from $4.3 million for the three months ended September 30, 2021. The increase in loan and deposit service fees was primarily driven by late fee income from loans; other income reflects a valuation increase of $231,000 recorded on our partnership fintech investments compared to a gain of $79,000 in the same period in 2021, offset by a decline in ARC loan fee income of $114,000. Increases were also offset by a decline of $576,000 in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home borrowing demand resulted in a decline in saleable loans, as well as a decline of $1.3 million from investment securities sales as there were no sales in the current quarter compared to the same period in 2021. The $609,000 decline in sold loan servicing fee income over the three months ended September 30, 2021, reflects a fair market value decrease in the loan servicing rights asset.   The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:       Three Months Ended September 30,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Loan and deposit service fees   $ 1,302     $ 1,015     $ 287       28.3 % Sold loan servicing fees     206       815       (609 )     (74.7 ) Net gain on sale of loans     285       660       (375 )     (56.8 ) Net gain on sale of investment securities     —       1,286       (1,286 )     (100.0 ) Increase in cash surrender value of bank-owned life insurance     221       241       (20 )     (8.3 ) Other income     320       269       51       19.0   Total noninterest income   $ 2,334     $ 4,286     $ (1,952 )     (45.5 )%     47 Table of Contents   Noninterest Expense. Noninterest expense increased $1.4 million, or 10.3%, to $15.4 million for the three months ended September 30, 2022, compared to $13.9 million for the three months ended September 30, 2021. The increase over the third quarter of 2021 was due to higher Quin Ventures expenses, mainly related to compensation and advertising, and reflects increases in Bank compensation expense as well as other costs associated with our expansion of two new retail locations, technology enhancements for data and digital banking, and higher professional fees.   The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:       Three Months Ended September 30,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Compensation and benefits   $ 9,045     $ 8,713     $ 332       3.8 % Data processing     1,778       1,568       210       13.4   Occupancy and equipment     1,499       1,106       393       35.5   Supplies, postage, and telephone     322       279       43       15.4   Regulatory assessments and state taxes     365       335       30       9.0   Advertising     645       547       98       17.9   Professional fees     695       422       273       64.7   FDIC insurance premium     219       134       85       63.4   Other expense     807       830       (23 )     (2.8 ) Total noninterest expense   $ 15,375     $ 13,934     $ 1,441       10.3 %   Provision for Income Tax. An income tax expense of $818,000 was recorded for the three months ended September 30, 2022, compared to $946,000 for the three months ended September 30, 2021. There was a year-over-year decrease in income before taxes of $591,000 reflecting the decrease in pre-tax income. 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 Nine Months Ended September 30, 2022 and 2021   General. Net income attributable to the Company was $9.6 million for the nine months ended September 30, 2022, compared to $10.3 million for the nine months ended September 30, 2021. A $8.5 million increase in net interest income after provision for loan loss was offset by a $3.9 million decrease in noninterest income and a $7.4 million increase in noninterest expense.   Net Interest Income. Net interest income increased $8.5 million to $50.9 million for the nine months ended September 30, 2022, from $42.5 million for the nine months ended September 30, 2021. This increase was mainly the result of an increase in average earning assets of $193.6 million. The yield on average interest-earning assets increased 35 basis points to 4.16% for the nine months ended September 30, 2022, compared to 3.81% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, and an increase in yields earned on investment securities.   The average cost of interest-bearing liabilities increased to 0.55% for the nine months ended September 30, 2022, compared to 0.44% for the same period last year, due primarily to an increase in the average balance of borrowings related to additional FHLB advances. Total cost of funds increased 9 basis points to 0.44% for the nine months ended September 30, 2022, from 0.35% for the same period in 2021. The net interest margin increased 25 basis points to 3.73% for the nine months ended September 30, 2022, from 3.48% for the same period in 2021.   Interest Income. Total interest income increased $10.3 million, or 22.1%, to $56.7 million for the nine months ended September 30, 2022, from $46.5 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 $8.4 million, to $48.4 million for the nine months ended September 30, 2022, from $40.0 million for the nine months ended September 30, 2021, primarily due to an increase in the average balance of net loans receivable of $209.0 million compared to the prior year, coupled with an increase in average loan yields to 4.56% for the nine months ended September 30, 2022, from 4.42% for the same period in 2021. The yield earned on investment securities also increased 67 basis points to 2.91% compared to the same period in 2021.     48 Table of Contents   The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:       Nine Months Ended September 30,               2022     2021               Average Balance Outstanding     Yield     Average Balance Outstanding     Yield     Increase (Decrease) in Interest Income       (Dollars in thousands)   Loans receivable, net   $ 1,418,734       4.56 %   $ 1,209,710       4.42 %   $ 8,407   Investment securities     358,419       2.91       376,463       2.24       1,511   FHLB stock     7,605       5.50       3,982       4.43       181   Interest-earning deposits in banks     39,976       0.68       41,024       0.15       156   Total interest-earning assets   $ 1,824,734       4.16 %   $ 1,631,179       3.81 %   $ 10,255     Interest Expense. Total interest expense increased $1.8 million, or 45.4%, to $5.8 million for the nine months ended September 30, 2022, compared to $4.0 million for the nine months ended September 30, 2021, due to an increase in borrowing costs of $1.7 million primarily related to additional FHLB advances. The average balance of interest-bearing deposits increased $88.1 million, or 7.8%, to $1.22 billion for the nine months ended September 30, 2022, from $1.14 billion for the nine months ended September 30, 2021, due to core deposit growth in new and existing market areas. Average deposit account balances were composed of 78% in interest-bearing deposits and 22% in noninterest-bearing deposits at September 30, 2022.   During the nine months ended September 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $20.2 million, along with an increase in the average rates paid of 1 basis point, compared to the nine months ended September 30, 2021. During the same period, the average balances of money market accounts increased $70.6 million, with a 2 basis point average rate increase, resulting in an increase to interest expense. The average cost of interest-bearing deposit accounts decreased to 0.30% for the nine months ended September 30, 2022, from 0.31% for the nine months ended September 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:       Nine Months Ended September 30,               2022     2021               Average Balance Outstanding     Rate     Average Balance Outstanding     Rate     Increase (Decrease) in Interest Expense       (Dollars in thousands)   Transaction accounts   $ 194,568       0.04 %   $ 170,482       0.02 %   $ 30   Money market accounts     576,019       0.25       505,379       0.23       237   Savings accounts     196,170       0.05       182,604       0.07       (26 ) Certificates of deposit     256,508       0.80       276,748       0.79       (86 ) Advances     138,470       1.77       52,975       1.41       1,277   Subordinated debt     39,301       4.02       27,371       3.95       374   Total interest-bearing liabilities   $ 1,401,036       0.55 %   $ 1,215,559       0.44 %   $ 1,806     Provision for Loan Losses. The Company recorded a $1.3 million loan loss provision during the nine months ended September 30, 2022, compared to a provision for loan losses of $1.5 million for the nine months ended September 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:     Nine Months Ended September 30,       2022     2021       (Dollars in thousands)   Provision for loan losses   $ 1,250     $ 1,500   Net charge-offs     (101 )     (104 ) Allowance for loan losses     16,273       15,243   Allowance for losses as a percentage of total gross loans receivable at period end     1.1 %     1.1 % Total nonaccrual loans     3,517       1,183   Allowance for loan losses as a percentage of nonaccrual loans at period end     462.7 %     1288.5 % Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.2 %     0.1 % Total loans   $ 1,525,205     $ 1,352,878       49 Table of Contents   Noninterest Income. Noninterest income decreased $3.9 million, or 35.9%, to $7.0 million for the nine months ended September 30, 2022, from $10.9 million for the nine months ended September 30, 2021. The year-over-year change in loan and deposit service fees included increases in commercial loan late fees of $292,000, business deposit account fee income of $174,000, deposit account overdraft fees of $131,000 and deposit account interchange fee income of $74,000. Other income increased due to higher ARC loan fee income of $228,000 in the current year-to-date period compared to the same period in 2021 and Quin Ventures subscription fee income of $130,000, offset by a year-over-year decrease of $237,000 in the recorded value of our partnership fintech investments. Increases in fee income and other income were offset by a decline of $2.5 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 loan demand continue to dampen mortgage loan sales, and a decline of $2.3 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:       Nine Months Ended September 30,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Loan and deposit service fees   $ 3,566     $ 2,853     $ 713       25.0 % Sold loan servicing fees     665       858       (193 )     (22.5 ) Net gain on sale of loans     769       3,014       (2,245 )     (74.5 ) Net gain on sale of investment securities     118       2,410       (2,292 )     (95.1 ) Increase in cash surrender value of bank-owned life insurance     686       727       (41 )     (5.6 ) Other income     1,155       1,000       155       15.5   Total noninterest income   $ 6,959     $ 10,862     $ (3,903 )     (35.9 )%   Noninterest Expense. Noninterest expense increased $7.4 million, or 18.7%, to $47.2 million for the nine months ended September 30, 2022, compared to $39.7 million for the nine months ended September 30, 2021. Quin Ventures launched the Credit Builder product during the second quarter of 2022 and, as a result, a portion of the costs which were previously capitalized to software during the development phase were expensed. Additional Quin Ventures expenses resulted in increases to advertising, compensation, depreciation and data processing. Noninterest expenses attributable to Quin Ventures for the nine months ended September 30, 2022, totaled $3.9 million. We expect expenses related to Quin Ventures to decline in future quarters. The Bank also recorded increases over the same period in 2021 in compensation expense as we added staff to manage the company and enhance data and fintech infrastructure, 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:       Nine Months Ended September 30,     Increase (Decrease)       2022     2021     Amount     Percent       (Dollars in thousands)   Compensation and benefits   $ 27,583     $ 24,567     $ 3,016       12.3 % Data processing     5,420       4,426       994       22.5   Occupancy and equipment     4,098       3,139       959       30.6   Supplies, postage, and telephone     1,043       876       167       19.1   Regulatory assessments and state taxes     1,167       897       270       30.1   Advertising     2,802       1,484       1,318       88.8   Professional fees     1,883       1,588       295       18.6   FDIC insurance premium     653       450       203       45.1   Other expense     2,520       2,308       212       9.2   Total noninterest expense   $ 47,169     $ 39,735     $ 7,434       18.7 %   Provision for Income Tax. An income tax expense of $1.8 million was recorded for the nine months ended September 30, 2022, compared to $2.1 million for the nine months ended September 30, 2021. There was a year-over-year decrease in income before taxes of $2.6 million; however, the expense recorded for the nine months ended September 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.   50 Table of Contents     Average Balances, Interest and Average Yields/Cost   The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of September 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 September 30,       2022     2021       Average     Interest             Average     Interest               Balance     Earned/     Yield/     Balance     Earned/     Yield/       Outstanding     Paid     Rate     Outstanding     Paid     Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans receivable, net (1)   $ 1,484,615     $ 17,778       4.75 %   $ 1,294,877     $ 14,581       4.47 % Investment securities     348,281       2,817       3.21       365,014       2,138       2.32   FHLB dividends     9,269       142       6.08       4,061       41       4.01   Interest-earning deposits in banks     17,231       118       2.72       38,810       18       0.18   Total interest-earning assets (2)     1,859,396       20,855       4.45       1,702,762       16,778       3.91   Noninterest-earning assets     137,369                       107,781                   Total average assets   $ 1,996,765                     $ 1,810,543                                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 190,542     $ 16       0.03     $ 180,162     $ 11       0.02   Money market accounts     556,434       468       0.33       552,811       291       0.21   Savings accounts     198,403       24       0.05       188,664       28       0.06   Certificates of deposit     279,169       743       1.06       257,459       520       0.80   Total interest-bearing deposits (3)     1,224,548       1,251       0.41       1,179,096       850       0.29   Advances     182,554       1,005       2.18       51,613       186       1.43   Subordinated debt     39,326       395       3.98       39,249       390       3.94   Total interest-bearing liabilities     1,446,428       2,651       0.73       1,269,958       1,426       0.45   Noninterest-bearing deposits (3)     342,944                       314,677                   Other noninterest-bearing liabilities     39,129                       35,144                   Total average liabilities     1,828,501                       1,619,779                   Average equity     168,264                       190,764                   Total average liabilities and equity   $ 1,996,765                     $ 1,810,543                                                                     Net interest income           $ 18,204                     $ 15,352           Net interest rate spread                     3.72                       3.46   Net earning assets   $ 412,968                     $ 432,804                   Net interest margin (4)                     3.88                       3.58   Average interest-earning assets to average interest-bearing liabilities     128.6 %                     134.1 %                   (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.32% and 0.23% for the three months ended September 30, 2022 and 2021, respectively. (4) Net interest income divided by average interest-earning assets.       51 Table of Contents         Nine Months Ended September 30,       2022     2021       Average     Interest             Average     Interest               Balance     Earned/     Yield/     Balance     Earned/     Yield/       Outstanding     Paid     Rate     Outstanding     Paid     Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans receivable, net (1)   $ 1,418,734     $ 48,395       4.56 %   $ 1,209,710     $ 39,988       4.42 % Total investment securities     358,419       7,807       2.91       376,463       6,296       2.24   FHLB dividends     7,605       313       5.50       3,982       132       4.43   Interest-earning deposits in banks     39,976       202       0.68       41,024       46       0.15   Total interest-earning assets (2)     1,824,734       56,717       4.16       1,631,179       46,462       3.81   Noninterest-earning assets     129,004                       100,662                   Total average assets   $ 1,953,738                     $ 1,731,841                                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits (3)   $ 194,568     $ 58       0.04     $ 170,482     $ 28       0.02   Money market accounts     576,019       1,089       0.25       505,379       852       0.23   Savings accounts     196,170       76       0.05       182,604       102       0.07   Certificates of deposit     256,508       1,541       0.80       276,748       1,627       0.79   Total interest-bearing deposits     1,223,265       2,764       0.30       1,135,213       2,609       0.31   Advances     138,470       1,837       1.77       52,975       560       1.41   Subordinated debt     39,301       1,183       4.02       27,371       809       3.95   Total interest-bearing liabilities     1,401,036       5,784       0.55       1,215,559       3,978       0.44   Noninterest-bearing deposits (3)     338,745                       300,903                   Other noninterest-bearing liabilities     36,934                       27,666                   Total average liabilities     1,776,715                       1,544,128                   Average equity     177,023                       187,713                   Total average liabilities and equity   $ 1,953,738                     $ 1,731,841                                                                     Net interest income           $ 50,933                     $ 42,484           Net interest rate spread                     3.60                       3.37   Net earning assets   $ 423,698                     $ 415,620                   Net interest margin (4)                     3.73                       3.48   Average interest-earning assets to average interest-bearing liabilities     130.2 %                     134.2 %                   (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.24% for each of the nine months ended September 30, 2022 and 2021. (4) Net interest income divided by average interest-earning assets.     52 Table of Contents   Rate/Volume Analysis   The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.         Three Months Ended             Nine Months Ended               September 30, 2022 vs. 2021             September 30, 2022 vs. 2021               Increase (Decrease) Due to             Increase (Decrease) Due to               Volume     Rate     Total Increase (Decrease)     Volume     Rate     Total Increase (Decrease)       (In thousands)     (In thousands)   Interest-earning assets:                                                 Loans receivable, net   $ 2,144     $ 1,053     $ 3,197     $ 6,916     $ 1,491     $ 8,407   Investments     (98 )     777       679       (302 )     1,813       1,511   FHLB stock     53       48       101       120       61       181   Other (1)     (10 )     110       100       (1 )     157       156   Total interest-earning assets   $ 2,089     $ 1,988     $ 4,077     $ 6,733     $ 3,522     $ 10,255                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 1     $ 4     $ 5     $ 4     $ 26     $ 30   Money market accounts     2       175       177       119       118       237   Savings accounts     1       (5 )     (4 )     8       (34 )     (26 ) Certificates of deposit     44       179       223       (119 )     33       (86 ) Advances     472       347       819       904       373       1,277   Subordinated debt     1       4       5       353       21       374   Total interest-bearing liabilities   $ 521     $ 704     $ 1,225     $ 1,269     $ 537     $ 1,806                                                     Net change in interest income   $ 1,568     $ 1,284     $ 2,852     $ 5,464     $ 2,985     $ 8,449     (1) Includes interest-earning deposits (cash) at other financial institutions.         Off-Balance Sheet Activities   In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the nine months ended September 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.   53 Table of Contents   Contractual Obligations   At September 30, 2022, our scheduled maturities of contractual obligations were as follows:       Within     After 1 Year Through     After 3 Years Through     Beyond     Total       1 Year     3 Years     5 Years     5 Years     Balance       (In thousands)                                             Certificates of deposit   $ 242,591     $ 94,966     $ 16,568     $ —     $ 354,125   FHLB advances     176,000       30,000       25,000       10,000       241,000   Line of credit     12,000       —       —       —       12,000   Subordinated debt obligation     —       —       —       39,338       39,338   Operating leases     814       1,728       1,781       4,150       8,473   Borrower taxes and insurance     2,224       —       —       —       2,224   Deferred compensation     82       87       79       753       1,001   Total contractual obligations   $ 433,711     $ 126,781     $ 43,428     $ 54,241     $ 658,161     Commitments and Off-Balance Sheet Arrangements   The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, 2022:       Amount of Commitment Expiration       Within     After 1 Year Through     After 3 Years Through     Beyond     Total Amounts       1 Year     3 Years     5 Years     5 Years     Committed       (In thousands)   Commitments to originate loans:                                         Fixed-rate   $ 363     $ —     $ —     $ —     $ 363   Variable-rate     350       —       —       —       350   Unfunded commitments under lines of credit or existing loans     78,989       35,841       6,032       110,346       231,208   Standby letters of credit     566       58       —       200       824   Total commitments   $ 80,268     $ 35,899     $ 6,032     $ 110,546     $ 232,745       Liquidity Management   Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.   Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.   Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At September 30, 2022, cash and cash equivalents totaling $103.7 million and unpledged securities classified as available-for-sale with a market value of $235.8 million provided additional sources of liquidity. The Bank pledged collateral of $503.7 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 $9.0 million were pledged as of September 30, 2022. First Northwest has a $20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.   At September 30, 2022, we had $713,000 in loan commitments outstanding and $232.0 million in undisbursed loans and standby letters of credit, including $137.6 million in undisbursed construction loan commitments.   54 Table of Contents   Certificates of deposit due within one year as of September 30, 2022, totaled $242.6 million, or 68.5% of certificates of deposit with a weighted-average rate of 1.74%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates were in decline. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.   The Company is a separate legal entity from the Bank and provides for its own liquidity. At September 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $1.8 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, payments on the NexBank revolving credit facility, and commitments to limited partnership investments. 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.   At September 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 September 30, 2022, shareholders' equity totaled $156.6 million, or 7.5% of total assets. Our book value per share of common stock was $15.69 at September 30, 2022, compared to $19.10 at December 31, 2021.   At September 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 September 30, 2022.       Actual     Minimum Capital Requirements     Minimum Required to be Well-Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio                       (Dollars in thousands)                   Tier I leverage capital (to average assets)   $ 210,720       10.5 %   $ 80,308       4.0 %   $ 100,385       5.0 % Common equity tier I (to risk-weighted assets)   $ 210,720       12.6       75,308       4.5       108,779       6.5   Tier I risk-based capital (to risk-weighted assets)   $ 210,720       12.6       100,411       6.0       133,881       8.0   Total risk-based capital (to risk-weighted assets)   $ 227,286       13.6       133,881       8.0       167,352       10.0     In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.   Effect of Inflation and Changing Prices   The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.   55 Table of Contents     Item 3. Quantitative and Qualitative Disclosures about Market Risk   There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021.   Item 4. Controls and Procedures   (a) Evaluation of Disclosure Controls and Procedures.   An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2022, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.   (b) Changes in Internal Controls.   There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.   The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.   56 Table of Contents     PART II - OTHER INFORMATION     Item 1. Legal Proceedings   From time to time, the Company is engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations.   Item 1A. Risk Factors   There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2021.   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   (a) On September 2, 2022, First Northwest Bancorp (the “Company”) issued 115,777 shares of the Company’s common stock in the second closing under a Membership Interest Purchase Agreement dated June 30, 2022, as amended effective September 2, 2022, among the Company and the individual members of The Meriwether Group LLC (“Meriwether”). The shares had a total value of approximately $1,869,321 at the time of issuance and were issued to the individual members of Meriwether as partial consideration for the Company’s purchase of a portion of their limited liability company interests in Meriwether. In exchange for the 115,777 shares of the Company’s common stock, together with approximately $458,410 in cash, the Company received limited liability company interests totaling 28.33% of the percentage interests in Meriwether, bringing the Company’s total percentage interest in Meriwether to 33.33%. The shares were issued in reliance on the exemption from registration provided in Section 4(a)(2) of the Securities Act of 1933, as amended.   (b) Not applicable.   (c) The following table summarizes common stock repurchases during the three months ended September 30, 2022:                                   Period   Total Number of Shares Purchased (1)     Average Price Paid per Share     Total Number of Shares Repurchased as Part of Publicly Announced Plans (2)     Maximum Number of Shares that May Yet Be Repurchased Under the Plans                                     July 1, 2022 - July 31, 2022     23,671     $ 16.14       19,863       585,889   August 1, 2022 - August 31, 2022     30,066       16.22       29,462       556,427   September 1, 2022 - September 30, 2022     30,821       16.09       29,729       526,698   Total     84,558     $ 16.15       79,054                                             (1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 3,808 shares, 604 shares, and 1,092 shares, respectively, for the periods indicated.   (2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock issued and outstanding as of October 27, 2020. As of September 30, 2022, a total of 496,722 shares, or 48.5% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $16.83 per share, leaving 526,698 shares available for future purchases.     57 Table of Contents     Item 3. Defaults Upon Senior Securities   Not applicable.   Item 4. Mine Safety Disclosures   Not applicable.   Item 5. Other Information   Not applicable.   Item 6. Exhibits   Exhibit No. Exhibit Description Filed Herewith Form Original Exhibit No. Filing Date 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act X       31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act X       32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act X       101 The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive (Loss) Income; (4) Consolidated Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)   58 Table of Contents   SIGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.       FIRST NORTHWEST BANCORP     Date: November 10, 2022 /s/ Matthew P. Deines       Matthew P. Deines   President, Chief Executive Officer and Director   (Principal Executive Officer)         Date: November 10, 2022 /s/ Geraldine L. Bullard       Geraldine L. Bullard   Executive Vice President and Chief Financial Officer   (Principal Financial and Accounting Officer)       59