What changed in this filing

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Item 1. Financial Statements

2022-11-10 compared with 2022-08-12 · 331 added, 385 removed, 2300 unchanged (24% of the section changed)

3 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

23 unchanged sentences

39,318  

Equity and partnership investments

13,990  

Goodwill and other intangible assets, net

20 unchanged sentences

Common stock, $ 0.01 par value, authorized 75,000,000 shares;

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

issued and outstanding 9,978,041 shares at September 30, 2022, and 9,972,698 shares at December 31, 2021

Additional paid-in capital

24 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

Interest and fees on loans receivable

$ 16,081  

$ 12,866  

$ 30,617  

$ 25,407  

Interest on investment securities

2 unchanged sentences

Total interest income

18,961  

15,051  

35,862  

29,684  

INTEREST EXPENSE

1 unchanged sentence

Net interest income

17,243  

13,649  

32,729  

27,132  

PROVISION FOR LOAN LOSSES

Net interest income after provision for loan losses

16,743  

13,349  

32,229  

26,332  

NONINTEREST INCOME

2 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

2 unchanged sentences

Compensation and benefits

18,538  

15,854  

Data processing

6 unchanged sentences

Total noninterest expense

16,963  

13,707  

31,794  

25,801  

INCOME BEFORE PROVISION FOR INCOME TAXES

2 unchanged sentences

NET INCOME ATTRIBUTABLE TO PARENT

$ 2,488  

$ 2,996  

$ 5,294  

$ 6,116  

Basic and diluted earnings per common share

$ 0.27  

$ 0.32  

$ 0.58  

$ 0.64  

See selected notes to the consolidated financial statements.

3 unchanged sentences

Three Months Ended

Six Months Ended

$ 1,535  

$ 2,851  

$ 4,039  

$ 5,971  

Nine Months Ended

September 30,

Other comprehensive (loss) income:

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

( 16,875 )  

( 36,329 )  

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

( 1,117 )  

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

Income tax benefit related to unrealized holding losses

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

2 unchanged sentences

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

( 11 )  

( 15 )  

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

( 1,124 )  

( 118 )  

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

Other comprehensive (loss) income, net of tax

( 13,294 )  

( 28,735 )  

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

Income tax benefit related to reclassification adjustment on sales of securities

Other comprehensive loss, net of tax

COMPREHENSIVE (LOSS) INCOME

( 11,759 )  

( 24,696 )  

Comprehensive loss attributable to noncontrolling interest

( 953 )  

( 145 )  

( 1,255 )  

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT

$ ( 10,806 )  

$ 6,343  

$ ( 23,441 )  

$ 4,220  

See selected notes to the consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended June 30, 2022 and 2021

For the Three Months Ended September 30, 2022 and 2021

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

4 unchanged sentences

Total Shareholders'

BALANCE, March 31, 2021

10,195,644  

BALANCE, June 30, 2021

10,205,867  

3 unchanged sentences

$ 3,546  

Common stock issued and initial investment in Quin Ventures

$ ( 190 )  

5 unchanged sentences

( 1,084 )  

Restricted stock award grants net of forfeitures

Restricted stock award forfeitures net of grants

( 5,903 )  

Restricted stock awards canceled

1 unchanged sentence

( 199 )  

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

( 2,612 )  

Share-based compensation expense

2 unchanged sentences

( 609 )  

BALANCE, June 30, 2021

BALANCE, September 30, 2021

10,050,877  

4 unchanged sentences

$ 187,444  

BALANCE, June 30, 2022

9,950,172  

BALANCE, March 31, 2022

$ 96,479  

5 unchanged sentences

( 696 )  

Common stock issued

115,777  

3 unchanged sentences

( 491 )  

Restricted stock award grants net of forfeitures

Restricted stock award forfeitures net of grants

( 3,350 )  

Restricted stock awards canceled

7 unchanged sentences

( 693 )  

BALANCE, June 30, 2022

BALANCE, September 30, 2022

9,978,041  

5 unchanged sentences

$ 156,599  

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2022 and 2021

For the Nine Months Ended September 30, 2022 and 2021

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

12 unchanged sentences

10,294  

( 265 )  

10,029  

Common stock issued and initial investment in Quin Ventures

17 unchanged sentences

( 1,831 )  

BALANCE, June 30, 2021

10,205,867  

BALANCE, September 30, 2021

10,050,877  

12 unchanged sentences

( 1,951 )  

Common stock issued

115,777  

Common stock repurchased

14 unchanged sentences

( 2,092 )  

BALANCE, June 30, 2022

BALANCE, September 30, 2022

9,978,041  

9 unchanged sentences

(In thousands) (Unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net income before noncontrolling interest

$ 4,039  

$ 5,971  

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

6 unchanged sentences

Additions to servicing rights on sold loans, net

( 98 )  

Amortization of servicing rights on sold loans, net

Net increase in the valuation allowance on servicing rights on sold loans

Net (decrease) increase in the valuation allowance on servicing rights on sold loans

Provision for loan losses

2 unchanged sentences

Gain on sale of loans, net

( 484 )  

Gain on sale of securities available for sale, net

( 118 )  

Increase in cash surrender value of life insurance, net

( 465 )  

Origination of loans held for sale

( 16,487 )  

Proceeds from loans held for sale

17,035  

67,927  

Change in assets and liabilities:

(Increase) decrease in accrued interest receivable

( 513 )  

Increase in prepaid expenses and other assets

( 3,854 )  

Increase in accrued interest payable

Decrease in accrued interest payable

Increase in accrued expenses and other liabilities

2 unchanged sentences

Purchase of securities available for sale

( 78,409 )  

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

19,565  

42,612  

Proceeds from sales of securities available for sale

12,685  

45,435  

(Purchase) redemption of FHLB stock

( 5,206 )  

Net increase in loans receivable

( 112,363 )  

Purchase of premises and equipment, net

( 2,442 )  

Capital contributions to equity investments

( 6,979 )  

Capital contributions to equity and partnership investments

Capital contributions to low-income housing tax credit partnerships

Capital contributions to historic tax credit partnerships

( 1,829 )  

Net cash acquired from branch acquisition

Net cash from investing activities

( 174,978 )  

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits

$ 108,221  

Proceeds from long-term FHLB advances

10,000  

Repayment of long-term FHLB advances

Net increase (decrease) in short-term FHLB advances

112,000  

Proceeds from issuance of subordinated debt, net

39,223  

Net increase (decrease) in line of credit

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

( 174 )  

Net increase in advances from borrowers for taxes and insurance

Dividends paid

( 1,388 )  

Restricted stock awards canceled

( 222 )  

Repurchase of common stock

( 859 )  

Net cash from financing activities

127,501  

123,765  

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

( 38,221 )  

15,567  

CASH AND CASH EQUIVALENTS, beginning of period

126,016  

65,155  

CASH AND CASH EQUIVALENTS, end of period

$ 87,795  

$ 80,722  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

1 unchanged sentence

Interest on deposits and borrowings

$ 3,065  

$ 2,150  

$ 1,110  

$ 2,640  

Prior unrecognized service cost of defined benefit plan transferred to single-employer plan

$ 2,718  

NONCASH INVESTING ACTIVITIES

Change in unrealized loss on securities available for sale

$ ( 36,447 )  

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

Lease liabilities arising from obtaining right-of-use assets

BUSINESS COMBINATION (see Note 12)

Fair value of assets acquired

Fair value of liabilities assumed

See selected notes to the consolidated financial statements.

13 unchanged sentences

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."

9 unchanged sentences

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 six months ended June 30, 2022 , are not necessarily indicative of the results that may be expected for future periods.

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.

56 unchanged sentences

The Company's internal project management team continues to review models, work with our third -party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date, which is anticipated to be January 

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

Initial results indicate a modest increase to the reserve;

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.

41 unchanged sentences

Note 2 - Securities

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

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:

Amortized Cost

67 unchanged sentences

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

June 30, 2022  and 

September 30, 2022  and 

December 31, 2021 .

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of June 30, 2022 :

Less Than Twelve Months

93 unchanged sentences

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI").

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

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

183 and 

3 unchanged sentences

The Company does not intend to sell the securities in an unrealized loss position and believes that it is unlikely that we will be required to sell these investments prior to a market price recovery or maturity.

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

3 unchanged sentences

therefore, these securities are shown separately.

June 30, 2022

September 30, 2022

Available-for-Sale

21 unchanged sentences

Due after one through five years

18,741  

16,999  

Due after five through ten years

47 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

3 unchanged sentences

$ 109,829  

$ 45,435  

Gross realized gains

4 unchanged sentences

Loans receivable consisted of the following at the dates indicated:

June 30, 2022

September 30, 2022

December 31, 2021

43 unchanged sentences

The following tables summarize changes in the ALLL and loan portfolio by segment and impairment method for the periods shown:

At or For the Three Months Ended June 30, 2022

At or For the Three Months Ended September 30, 2022

One-to-four family

11 unchanged sentences

$ 15,747  

(Recapture of) provision for loan losses

Provision for (recapture of) loan losses

( 45 )  

( 36 )  

( 265 )  

Ending balance

5 unchanged sentences

$ 16,273  

At or For the Six Months Ended June 30, 2022

At or For the Nine Months Ended September 30, 2022

One-to-four family

15 unchanged sentences

( 475 )  

( 210 )  

Ending balance

5 unchanged sentences

$ 16,273  

At June 30, 2022

At September 30, 2022

One-to-four family

35 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At or For the Three Months Ended June 30, 2021

At or For the Three Months Ended September 30, 2021

One-to-four family

14 unchanged sentences

( 421 )  

( 13 )  

( 12 )  

( 151 )  

Ending balance

5 unchanged sentences

$ 15,243  

At or For the Six Months Ended June 30, 2021

At or For the Nine Months Ended September 30, 2021

One-to-four family

65 unchanged sentences

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

June 30, 2022

September 30, 2022

December 31, 2021

28 unchanged sentences

Three Months Ended

Six Months Ended

June 30, 2022

Nine Months Ended

September 30, 2022

Average Recorded Investment

20 unchanged sentences

$ 3,308  

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

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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

2 unchanged sentences

Three Months Ended

Six Months Ended

June 30, 2021

Nine Months Ended

September 30, 2021

Average Recorded Investment

20 unchanged sentences

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

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

three and nine months ended September 30, 2021 , was $ 65,000  and $ 183,000 , respectively.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

1 unchanged sentence

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

June 30, 2022

September 30, 2022

December 31, 2021

1 unchanged sentence

One-to-four family

$ 1,089  

Commercial real estate

6 unchanged sentences

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.

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

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

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 :

90 Days or More

5 unchanged sentences

$ 335,067  

243,256  

Commercial real estate

75 unchanged sentences

The following table represents the internally assigned grade as of 

June 30, 2022 , by class of loans:

September 30, 2022 , by class of loans:

Special Mention

7 unchanged sentences

15,751  

243,256  

Commercial real estate

2 unchanged sentences

10,526  

385,272  

Construction and land

65 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Nonperforming

5 unchanged sentences

243,256  

Commercial real estate

47 unchanged sentences

The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

Total nonaccrual TDR loans

There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three and six months ended June 30, 2022 or 2021 .

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 six months ended June 30, 2022  or 

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

three and nine months ended September 30, 2022  or 

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:

June 30, 2022

September 30, 2022

(In thousands)

8 unchanged sentences

Note 4 - Deposits

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

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at 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:

June 30, 2022

September 30, 2022

December 31, 2021

26 unchanged sentences

$ 1,580,580  

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:

June 30, 2022

September 30, 2022

December 31, 2021

11 unchanged sentences

14,358  

After four years through five years

2 unchanged sentences

$ 247,243  

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

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

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 

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

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

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

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

6 unchanged sentences

$ 2,764  

$ 2,609  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

8 unchanged sentences

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 

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

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 

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

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 

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

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.

5 unchanged sentences

The line of credit matures on May 19, 2023 .

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

The 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.

16 unchanged sentences

12,000  

39,338  

Average monthly outstanding during the period

2 unchanged sentences

14,689  

39,301  

Weighted-average daily interest rates

7 unchanged sentences

6.75 %  

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

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:

Weighted- Average Interest Rate

2 unchanged sentences

$ 15,000  

$ 20,000  

After one year through two years

10 unchanged sentences

$ 80,000  

$ 90,000  

FIRST NORTHWEST BANCORP AND SUBSIDIARY

28 unchanged sentences

The effective tax rates were 19.4 % and 

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

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 

8 unchanged sentences

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 six months ended June 30, 2022 and 2021 .

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except share data)

57 unchanged sentences

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

June 30, 2022  and 

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

September 30, 2022  and 

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

2,617 and 0 , respectively.

8 unchanged sentences

The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets.

A principal and interest payment of $835,000  was made by the ESOP during the six months ended June 30, 2022 .

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.

2 unchanged sentences

dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

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

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

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:

June 30, 2022

September 30, 2022

December 31, 2021

5 unchanged sentences

13,221  

26,442  

Unallocated shares

13 unchanged sentences

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

June 30, 2022 , there were 

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.

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

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

At this date, there are 

2 unchanged sentences

55,443  and 

84,896  shares of restricted stock awarded, respectively, during the six months ended June 30, 2022 and 2021 .

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

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

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

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

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

June 30, 2022

September 30, 2022

Weighted-Average Grant Date Fair Value

Non-vested at April 1, 2022

244,629  

Non-vested at July 1, 2022

240,054  

3 unchanged sentences

( 5,450 )  

Non-vested at June 30, 2022

Non-vested at September 30, 2022

205,228  

2 unchanged sentences

The surrendered shares are canceled and are unavailable for reissue.

For the Six Months Ended

June 30, 2022

For the Nine Months Ended

September 30, 2022

Weighted-Average Grant Date Fair Value

6 unchanged sentences

( 18,375 )  

Non-vested at June 30, 2022

Non-vested at September 30, 2022

205,228  

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of June 30, 2022 , there was $ 3.1 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards.

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 

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The Company used the following methods to measure fair value on a recurring and nonrecurring basis.

Securities available for sale and Equity investments :

Securities available for sale and partnership investments :

Where quoted prices are available in an active market, securities are classified as Level 1.

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

June 30, 2022

September 30, 2022

Quoted Prices in Active Markets for Identical Assets or Liabilities

17 unchanged sentences

Sold loan servicing rights

Equity investments

Partnership investments

12,490  

2 unchanged sentences

$ 329,761  

$ 3,872  

$ 345,798  

December 31, 2021

21 unchanged sentences

60,008  

Equity investments

Partnership investments

$ 11,963  

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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:

June 30, 2022

September 30, 2022

Fair Value (In thousands)

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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 Six Months Ended June 30, 2022

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)

(In thousands)

Sold loan servicing rights

$ 3,865  

$ ( 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

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

As of or For the Year Ended December 31, 2021

As of or For the Nine Months Ended September 30, 2021

Balance at January 1, 2021

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

June 30, 2022

September 30, 2022

(In thousands)

7 unchanged sentences

$ 3,195  

June 30, 2022 and December 31, 2021 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

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:

June 30, 2022

September 30, 2022

Fair Value Measurements Using:

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Sold loan servicing rights, at fair value

Equity investments

Partnership investments

12,490  

Financial liabilities

12 unchanged sentences

Line of Credit

12,000  

12,034  

Subordinated debt, net

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Sold loan servicing rights, net

Equity investments

Partnership investments

Financial liabilities

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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 June 30, 2022 , the fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities.

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.

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(In thousands)  

BALANCE, March 31, 2021

BALANCE, June 30, 2021

$ 5,260  

$ ( 1,714 )  

Other comprehensive income before reclassification

$ 3,546  

Other comprehensive loss before reclassification

( 1,625 )  

Amounts reclassified from accumulated other comprehensive income

( 1,016 )  

Net other comprehensive income

BALANCE, June 30, 2021

Net other comprehensive (loss) income

( 2,641 )  

BALANCE, September 30, 2021

$ 2,619  

BALANCE, March 31, 2022

$ ( 1,685 )  

BALANCE, June 30, 2022

$ ( 26,653 )  

$ ( 1,794 )  

Other comprehensive loss before reclassification

3 unchanged sentences

( 12,604 )  

BALANCE, June 30, 2022

BALANCE, September 30, 2022

$ ( 39,257 )  

3 unchanged sentences

$ 5,442  

Other comprehensive income (loss) before reclassification

Other comprehensive loss before reclassification

( 919 )  

( 1,745 )  

Amounts reclassified from accumulated other comprehensive income

3 unchanged sentences

( 1,685 )  

BALANCE, June 30, 2021

$ 5,260  

BALANCE, September 30, 2021

$ 2,619  

9 unchanged sentences

( 41,397 )  

BALANCE, June 30, 2022

BALANCE, September 30, 2022

$ ( 39,257 )  

61 unchanged sentences

the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio, particularly with respect to borrowers affected by the COVID-19 pandemic, natural disasters, or climate change;

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

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;

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Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

First Northwest Bancorp, a Washington corporation, is the bank holding company for First Fed Bank. The Company also has a controlling interest in Quin Ventures, Inc., a joint venture formed in April 2021, and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures.

First 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.

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Deposits are our primary source of funding for our lending and investing activities.

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

First Northwest's limited partnership investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM FINTOP Blockchain, L.P.

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

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

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.

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Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income.

A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.

A 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 customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.

Impact of COVID-19 Pandemic.

The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve.

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

economy as COVID-related restrictions continue to be removed.

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

If commercial activity slows, it may result in our customers’

inability to meet their loan obligations to us.

In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer.

Our borrowing base includes customers in industries such as hospitality, restaurant and food services, and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which were significantly impacted by the COVID-19 pandemic. At June 30, 2022, the Company’s exposure as a percent of the total loan portfolio to these industries was 3.1%, 0.3%, and 3.8%, r e spectively.

We continue to monitor these customers closely.

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty.

While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.

We provided assistance to many small businesses applying for the SBA's Paycheck Protection Program ("PPP") funding.

We processed $32.2 million of loans for 515 customers through the initial round of SBA PPP funding during 2020 with an average loan amount of $63,000.

W e processed $35.0 million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of $82,000. 

Payments by borrowers on these loans can be deferred up to six months after the date the loan forgiveness application is processed, and interest, at 1%, will continue to accrue during the deferment period.

Loans can be forgiven in whole or part (up to full principal and any accrued interest).

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

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.

Critical Accounting Policies

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

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

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

Cash and cash equivalents decreased by $38.2 million, or 30.3%, to $87.8 million as of June 30, 2022, compared to $126.0 million as of December 31, 2021.

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

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 $111.3 million to $1.46 billion at June 30, 2022, from $1.35 billion at December 31, 2021.

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

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

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

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

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 $10.3 million, or 4.6%, to $214.4 million at June 30, 2022, from $224.7 million at December 31, 2021.

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 our construction projects.

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

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 June 30, 2022, acquisition-renovation loans of $27.1 million were included in the construction loan total compared to $51.1 million at December 31, 2021.

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.

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

June 30, 2022

September 30, 2022

North Olympic Peninsula (1)

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Total disbursed for land

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

The Company purchased an additional $31.6 million in auto loans and $24.0 million in manufactured home loans during the six months ended June 30, 2022.

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

Net recoveries were $123,000 for the six-month period. The loan loss provision is made to account for growth in the loan portfolio, adjusted for qualitative factors.

We continue to monitor the economic impact of the COVID-19 pandemic, which is reflected in the qualitative factor adjustments. The ALLL as a percentage of total loans was 1.1% at both June 30, 2022 and December 31, 2021.

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

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

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

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

Loan charge-offs are concentrated mainly in our indirect auto loan portfolio.

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 $7.1 million at June 30, 2022 from $10.6 million at December 31, 2021.

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

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)

June 30, 2022

September 30, 2022

December 31, 2021

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Increase (Decrease)

June 30, 2022

September 30, 2022

December 31, 2021

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

Investment securities increased $8.9 million, or 2.6%, to $353.1 million at June 30, 2022, from $344.2 million at December 31, 2021, due to the purchase of securities, partially offset by sales, normal payments and prepayment activity.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 8.2 years as of June 30, 2022, compared to 5.7 years as of December 31, 2021, and had an estimated average repricing term of 7.6 years as of June 30, 2022, compared to 5.4 years as of December 31, 2021, based on the interest rate environment at those times.

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 48.0% in amortizing securities at June 30, 2022, compared to 43.0% at December 31, 2021.

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.

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For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

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

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

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

A runoff in commercial and public fund account balances of $45.5 million during the six-month period ended June 30, 2022, was offset by increases in consumer account balances of $21.4 million and brokered CDs of $20.0 million. We utilize brokered CDs as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and manage interest rate risk.

Brokered CDs totaling $85.7 million were included in the $269.5 million balance of certificates of deposit at June 30, 2022.

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

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

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.

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.

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

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

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.

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

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

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

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

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

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

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

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

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

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

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 June 30,

Three Months Ended September 30,

Average Balance Outstanding

7 unchanged sentences

Interest Expense.

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

The average balance of interest-bearing deposits increased $90.4 million, or 8.0%, to $1.22 billion for the three months ended June 30, 2022, from $1.13 billion for the three months ended June 30, 2021, due to core deposit growth in new and existing market areas as well as purchasing the Bellevue branch in July of 2021.

During the three months ended June 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $29.9 million, along with a decrease in the average rates paid of 5 basis points, compared to the three months ended June 30, 2021.

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

Interest-bearing demand account average balances increased $27.4 million and the average rate paid increased 3 basis points, resulting in a minor increase to interest expense.

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

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.

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

Three Months Ended June 30,

Three Months Ended September 30,

Average Balance Outstanding

9 unchanged sentences

Provision for Loan Losses .

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

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

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

The 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 June 30,

Three Months Ended September 30,

(Dollars in thousands)

Provision for loan losses

Net recoveries

Net charge-offs

Allowance for loan losses

4 unchanged sentences

Noninterest Income.

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

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

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 June 30,

Three Months Ended September 30,

Increase (Decrease)

3 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

1 unchanged sentence

Noninterest Expense.

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

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

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

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

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 June 30,

Three Months Ended September 30,

Increase (Decrease)

10 unchanged sentences

Provision for Income Tax.

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

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

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

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

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

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

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

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

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

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

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

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

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 $6.2 million, or 20.8%, to $35.9 million for the six months ended June 30, 2022, from $29.7 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets.

Interest and fees on loans receivable increased $5.2 million, to $30.6 million for the six months ended June 30, 2022, from $25.4 million for the six months ended June 30, 2021, primarily due to an increase in the average balance of net loans receivable of $218.8 million compared to the prior year, coupled with an increase in average loan yields to 4.46% for the six months ended June 30, 2022, from 4.39% for the same period in 2021.

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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Average Balance Outstanding

7 unchanged sentences

Interest Expense.

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

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

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

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

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

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

The average cost of interest-bearing deposit products decreased to 0.25% for the six months ended June 30, 2022, from 0.32% for the six months ended June 30, 2021, due in large part to the expiration of promotional rates and a shift in deposit mix to higher levels of transaction accounts.

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:

Six Months Ended June 30,

Nine Months Ended September 30,

Average Balance Outstanding

9 unchanged sentences

Provision for Loan Losses.

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

The 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

Provision for loan losses

Net recoveries (charge-offs)

Net charge-offs

Allowance for loan losses

4 unchanged sentences

Noninterest Income.

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

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

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

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:

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

3 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

1 unchanged sentence

Noninterest Expense.

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

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

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

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

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.

1 unchanged sentence

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

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

10 unchanged sentences

Provision for Income Tax.

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

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

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.

2 unchanged sentences

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 June 30, 2022 and 2021.

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

Three Months Ended September 30,

(Dollars in thousands)

27 unchanged sentences

(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.

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

27 unchanged sentences

(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.

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Three Months Ended

Six Months Ended

June 30, 2022 vs.

Nine Months Ended

September 30, 2022 vs.

Increase (Decrease) Due to

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requests for funding and take the form of loan commitments and lines of credit.

For the six months ended June 30, 2022 and the year ended December 31, 2021, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

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.

Contractual Obligations

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

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

After 1 Year Through

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Commitments and Off-Balance Sheet Arrangements

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

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

Amount of Commitment Expiration

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The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

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

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

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

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

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

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.

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.

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The Company is a separate legal entity from the Bank and provides for its own liquidity.

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

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 June 30, 2022, First Northwest had contributed $8.0 million in partial fulfillment of its commitment to extend $15.0 million to Quin Ventures, Inc.

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

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

At June 30, 2022, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at June 30, 2022.

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.

Minimum Capital Requirements

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

What changed 10-Q

Item 1. Financial Statements