Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2021March 31, 2022

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from _____ to _____

 

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

 

(Exact name of registrant as specified in its charter)

   

Washington

 

46-1259100

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer I.D. Number)

 

 

 

105 West 8th Street, Port Angeles, Washington

 

98362

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant's telephone number, including area code:

 

(360) 457-0461

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

FNWB

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of AugustMay 6, 2021,2022, there were 10,149,73810,003,622 shares of common stock, $0.01 par value per share, outstanding.

 

1

 

 

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

 

PART 1 - FINANCIAL INFORMATION

 

 

Page

Item 1 - Financial Statements (Unaudited)

3

 

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

35

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

5148

 

 

Item 4 - Controls and Procedures

5148

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1 - Legal Proceedings

5249

 

 

Item 1A - Risk Factors

5249

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

5249

 

 

Item 3 - Defaults Upon Senior Securities

5350

 

 

Item 4 - Mine Safety Disclosures

5350

 

 

Item 5 - Other Information

5350

 

 

Item 6 - Exhibits

5450

 

 

SIGNATURES

5551

 

 

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First Northwest"), its consolidated subsidiary and its consolidated subsidiary,joint venture controlling interest, unless the context indicates otherwise. When we refer to “First Fed” or the “Bank” in this report, we are referring to First Federal Savings and Loan Association of Port Angeles,Fed Bank, the wholly owned subsidiary of First Northwest Bancorp. When we refer to "Quin" or "Quin Ventures" in this report, we are referring to Quin Ventures, Inc., a First Northwest joint venture. First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 

ASSETS

            
  

Cash and due from banks

 $17,589  $13,508  $16,271  $13,868 

Interest-bearing deposits in banks

 63,133  51,647 

Interest-earning deposits in banks

 66,257  112,148 

Investment securities available for sale, at fair value

 370,500  364,296  377,695  344,212 

Loans held for sale

 1,971  3,753  1,334  760 

Loans receivable (net of allowance for loan losses of $14,588 and $13,847)

 1,246,340  1,141,969 

Loans receivable (net of allowance for loan losses of $15,127 and $15,124)

 1,370,589  1,350,260 

Federal Home Loan Bank (FHLB) stock, at cost

 5,597  5,977  8,122  5,196 

Accrued interest receivable

 5,949  6,966  5,696  5,289 

Premises and equipment, net

 16,386  14,785  21,050  19,830 

Mortgage servicing rights, net

 2,381  2,120 

Servicing rights on sold loans, net

 0  3,282 

Servicing rights on sold loans, at fair value

 4,046 0 

Bank-owned life insurance, net

 38,839  38,353  39,570  39,318 

Goodwill and other intangible assets, net

 1,180 1,183 

Prepaid expenses and other assets

  18,706   10,975   32,472   25,735 
  

Total assets

 $1,787,391  $1,654,349  $1,944,282  $1,921,081 
  
  

LIABILITIES AND SHAREHOLDERS' EQUITY

            
  

Deposits

 $1,441,738  $1,333,517  $1,549,414  $1,580,580 

FHLB advances

 90,000 109,977  145,000 80,000 

Subordinated debt, net

 39,241  0  39,250  39,280 

Accrued interest payable

 455  53  13  393 

Accrued expenses and other liabilities

 26,221  23,303  30,691  29,240 

Advances from borrowers for taxes and insurance

  1,143   1,116   2,138   1,108 
  

Total liabilities

  1,598,798   1,467,966   1,766,506   1,730,601 
  

Shareholders' Equity

          

Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding

 0  0  0  0 

Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,205,867 shares at June 30, 2021, and 10,247,185 shares at December 31, 2020

 102  102 

Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,003,622 shares at March 31, 2022, and 9,972,698 shares at December 31, 2021

 100  100 

Additional paid-in capital

 97,463  97,412  96,473  96,131 

Retained earnings

 96,573  92,657  105,546  103,014 

Accumulated other comprehensive income, net of tax

 3,546  5,442 

Accumulated other comprehensive (loss) income, net of tax

 (15,153) 288 

Unearned employee stock ownership plan (ESOP) shares

  (8,901)  (9,230)  (8,407)  (8,572)
  

Total parent's shareholders' equity

 188,783 186,383  178,559 190,961 

Noncontrolling interest in Quin Ventures LLC

  (190)  0 

Noncontrolling interest in Quin Ventures, Inc.

  (783)  (481)
  

Total shareholders' equity

  188,593   186,383   177,776   190,480 
  

Total liabilities and shareholders' equity

 $1,787,391  $1,654,349  $1,944,282  $1,921,081 

 

See selected notes to the consolidated financial statements.

 

3

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data) (Unaudited)

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 
 

June 30,

  

June 30,

  

March 31,

 
 

2021

  

2020

  

2021

  

2020

  

2022

  

2021

 

INTEREST INCOME

  

Interest and fees on loans receivable

 $12,866  $10,236  $25,407  $20,072  $14,536  $12,541 

Interest on mortgage-backed securities

 644  740  1,108  1,699 

Interest on investment securities

 1,480  1,316  3,050  2,385  2,275  2,034 

Interest on deposits and other

 15  8  28  76  38  13 

FHLB dividends

  46   55   91   102   52   45 
  

Total interest income

  15,051   12,355   29,684   24,334   16,901   14,633 

INTEREST EXPENSE

  

Deposits

 825  2,041  1,759  4,179  717  934 

Borrowings

 183  201  374  635  304  191 

Subordinated debt

  394   0   419   0   394   25 
  

Total interest expense

  1,402   2,242   2,552   4,814   1,415   1,150 
  

Net interest income

 13,649  10,113  27,132  19,520  15,486  13,483 

PROVISION FOR LOAN LOSSES

  300   1,500   800   2,766   0   500 
  

Net interest income after provision for loan losses

  13,349   8,613   26,332   16,754   15,486   12,983 

NONINTEREST INCOME

  

Loan and deposit service fees

 1,001  765  1,838  1,646  1,173  837 

Mortgage servicing fees, net of amortization

 13  (172) 43  (157)

Sold loan servicing fees

 432  30 

Net gain on sale of loans

 921  2,001  2,258  2,384  253  1,337 

Net gain on sale of investment securities

 1,124  661  1,124  1,266  126  0 

Increase in cash surrender value of bank-owned life insurance

 242  627  486  955  252  244 

Other income

  571   227   827   333   167   256 
  

Total noninterest income

  3,872   4,109   6,576   6,427   2,403   2,704 
  

NONINTEREST EXPENSE

  

Compensation and benefits

 8,559  5,966  15,854  11,327  8,803  7,295 

Data processing

 726  769  1,465  1,459  1,772  1,333 

Occupancy and equipment

 1,803  1,345  3,426  2,696  1,167  1,029 

Supplies, postage, and telephone

 355  284  597  495  313  242 

Regulatory assessments and state taxes

 301  223  562  397  361  261 

Advertising

 492  377  937  649  752  445 

Professional fees

 644  354  1,166  754  559  522 

FDIC insurance premium

 168  70  316  70  223  148 

FHLB prepayment penalty

 0  0  0  210 

Other expense

  659   894   1,478   1,607   881   819 
  

Total noninterest expense

  13,707   10,282   25,801   19,664   14,831   12,094 
  

INCOME BEFORE PROVISION FOR INCOME TAXES

 3,514  2,440  7,107  3,517  3,058  3,593 
  

PROVISION FOR INCOME TAXES

  663   464   1,136   668   554   473 
  

NET INCOME

 2,851  1,976  5,971  2,849  2,504  3,120 

Net loss attributable to noncontrolling interest in Quin Ventures LLC

  145   0   145   0 

Net loss attributable to noncontrolling interest in Quin Ventures, Inc.

  302   0 
  

NET INCOME ATTRIBUTABLE TO PARENT

 $2,996  $1,976  $6,116  $2,849  $2,806  $3,120 
  

Basic earnings per common share

 $0.33  $0.21  $0.67  $0.30 

Diluted earnings per common share

 $0.32 $0.21 $0.66 $0.30 

Basic and diluted earnings per common share

 $0.30  $0.33 
 

 

See selected notes to the consolidated financial statements.

 

4

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS

(In thousands) (Unaudited)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

NET INCOME

 $2,851  $1,976  $5,971  $2,849 
                 

Other comprehensive income:

                

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

  5,321   12,018   893   4,121 

Income tax provision related to unrealized holding gains

  (1,117)  (2,523)  (187)  (865)

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

  42   0   (2,168)  0 

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

  (11)  0   454   0 

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

  (1,124)  (661)  (1,124)  (1,266)

Income tax benefit related to reclassification adjustment on sales of securities

  236   139   236   266 
                 

Other comprehensive income (loss), net of tax

  3,347   8,973   (1,896)  2,256 
                 

COMPREHENSIVE INCOME

  6,198   10,949   4,075   5,105 
                 

Comprehensive loss attributable to noncontrolling interest

  (145)  0   (145)  0 
                 

COMPREHENSIVE INCOME ATTRIBUTABLE TO PARENT

 $6,343  $10,949  $4,220  $5,105 
  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
         

NET INCOME

 $2,504  $3,120 
         

Other comprehensive loss:

        

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

  (19,454)  (4,428)

Income tax benefit related to unrealized holding losses

  4,084   930 

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

  37   (2,210)

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

  (8)  465 

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

  (126)  0 

Income tax benefit related to reclassification adjustment on sales of securities

  26   0 
         

Other comprehensive loss, net of tax

  (15,441)  (5,243)
         

COMPREHENSIVE LOSS

  (12,937)  (2,123)
         

Comprehensive loss attributable to noncontrolling interest

  (302)  0 
         

COMPREHENSIVE LOSS ATTRIBUTABLE TO PARENT

 $(12,635) $(2,123)

 

See selected notes to the consolidated financial statements.

 

5

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended June 30,March 31, 2022 and 2021 and 2020

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

 

  

Common Stock

  

Additional Paid-in

  

Retained

  

Unearned ESOP

  

Accumulated Other Comprehensive Income (Loss),

  

Noncontrolling

  

Total Shareholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Net of Tax

  

Interest

  

Equity

 
                                 

BALANCE, December 31, 2020

  10,247,185  $102  $97,412  $92,657  $(9,230) $5,442  $0  $186,383 
                                 

Net income

      0   0   3,120   0   0   0   3,120 

Common stock repurchased

  (135,837)  0   (1,358)  (805)  0   0   0   (2,163)

Restricted stock award grants net of forfeitures

  84,896   0   0   0   0   0   0   0 

Restricted stock awards canceled

  (600)  0   (11)  0   0   0   0   (11)

Other comprehensive loss, net of tax

      0   0   0   0   (5,243)  0   (5,243)

Share-based compensation expense

      0   404   0   0   0   0   404 

ESOP shares committed to be released

      0   52   0   165   0   0   217 

Cash dividends declared and paid ($0.06 per share)

      0   0   (609)  0   0   0   (609)
                                 

BALANCE, March 31, 2021

  10,195,644  $102  $96,499  $94,363  $(9,065) $199  $0  $182,098 
                                 
                                 

BALANCE, December 31, 2021

  9,972,698  $100  $96,131  $103,014  $(8,572) $288  $(481) $190,480 
                                 

Net income

      0   0   2,806   0   0   (302)  2,504 

Restricted stock award grants net of forfeitures

  39,843   0   0   0   0   0   0   0 

Restricted stock awards canceled

  (8,919)  0   (195)  0   0   0   0   (195)

Other comprehensive loss, net of tax

      0   0   0   0   (15,441)  0   (15,441)

Reclassification resulting from change in accounting method

      0   0   424   0   0   0   424 

Share-based compensation expense

      0   411   0   0   0   0   411 

ESOP shares committed to be released

      0   126   0   165   0   0   291 

Cash dividends declared and paid ($0.07 per share)

      0   0   (698)  0   0   0   (698)
                                 

BALANCE, March 31, 2022

  10,003,622  $100  $96,473  $105,546  $(8,407) $(15,153) $(783) $177,776 

 

  

Common Stock

  

Additional Paid-in

  

Retained

  

Unearned ESOP

  

Accumulated Other Comprehensive Income,

  

Noncontrolling

  

Total Shareholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Net of Tax

  

Interest

  

Equity

 
                                 

BALANCE, March 31, 2020

  10,432,963  $104  $99,479  $85,549  $(9,725) $(8,256) $0  $167,151 
                                 

Net income

      0   0   1,976   0   0   0   1,976 

Common stock repurchased

  (130,237)  (1)  (1,301)  (370)  0   0   0   (1,672)

Restricted stock award grants net of forfeitures

  23,500                          

Restricted stock awards canceled

     0   0   0   0   0   0   0 

Other comprehensive income, net of tax

      0   0   0   0   8,973   0   8,973 

Share-based compensation expense

      0   251   0   0   0   0   251 

ESOP shares committed to be released

      0   (8)  0   166   0   0   158 

Cash dividends declared and paid ($0.05 per share)

      0   0   (522)  0   0   0   (522)
                                 

BALANCE, June 30, 2020

  10,326,226  $103  $98,421  $86,633  $(9,559) $717  $0  $176,315 
                                 
                                 

BALANCE, March 31, 2021

  10,195,644  $102  $96,499  $94,363  $(9,065) $199  $0  $182,098 
                                 

Net income

      0   0   2,996   0   0   (145)  2,851 

Common stock issued and initial investment in Quin Ventures

  29,719   1   498   (44)  0   0   (45)  410 

Common stock repurchased

  (18,142)  (2)  (180)  (129)  0   0   0   (311)

Restricted stock award grants net of forfeitures

  0   1   (1)  0   0   0   0   0 

Restricted stock awards canceled

  (1,354)  0   (22)  0   0   0   0   (22)

Other comprehensive income, net of tax

      0   0   0   0   3,347   0   3,347 

Share-based compensation expense

      0   606   0   0   0   0   606 

ESOP shares committed to be released

      0   63   0   164   0   0   227 

Cash dividends declared and paid ($0.06 per share)

      0   0   (613)  0   0   0   (613)
                                 

BALANCE, June 30, 2021

  10,205,867  $102  $97,463  $96,573  $(8,901) $3,546  $(190) $188,593 

 

See selected notes to the consolidated financial statements.

 

6

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2021 and 2020

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

  

Common Stock

  

Additional Paid-in

  

Retained

  

Unearned ESOP

  

Accumulated Other Comprehensive Income,

  

Noncontrolling

  

Total Shareholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Net of Tax

  

Interest

  

Equity

 
                                 

BALANCE, December 31, 2019

  10,731,639  $107  $102,017  $86,156  $(9,890) $(1,539) $0  $176,851 
                                 

Net income

      0   0   2,849   0   0   0   2,849 

Common stock repurchased

  (418,513)  (4)  (4,181)  (1,317)  0   0   0   (5,502)

Restricted stock award grants net of forfeitures

  13,100                          

Restricted stock awards canceled

     0   0   0   0   0   0   0 

Other comprehensive income, net of tax

      0   0   0   0   2,256   0   2,256 

Share-based compensation expense

      0   555   0   0   0   0   555 

ESOP shares committed to be released

      0   30   0   331   0   0   361 

Cash dividends declared and paid ($0.10 per share)

      0   0   (1,055)  0   0   0   (1,055)
                                 

BALANCE, June 30, 2020

  10,326,226  $103  $98,421  $86,633  $(9,559) $717  $0  $176,315 
                                 
                                 

BALANCE, December 31, 2020

  10,247,185  $102  $97,412  $92,657  $(9,230) $5,442  $0  $186,383 
                                 

Net income

      0   0   6,116   0   0   (145)  5,971 

Common stock issued and initial investment in Quin Ventures

  29,719   1   498   (44)  0   0   (45)  410 

Common stock repurchased

  (153,979)  (2)  (1,538)  (934)  0   0   0   (2,474)

Restricted stock award grants net of forfeitures

  84,896   1   (1)  0   0   0   0   0 

Restricted stock awards canceled

  (1,954)  0   (33)  0   0   0   0   (33)

Other comprehensive loss, net of tax

      0   0   0   0   (1,896)  0   (1,896)

Share-based compensation expense

      0   1,010   0   0   0   0   1,010 

ESOP shares committed to be released

      0   115   0   329   0   0   444 

Cash dividends declared and paid ($0.12 per share)

      0   0   (1,222)  0   0   0   (1,222)
                                 

BALANCE, June 30, 2021

  10,205,867  $102  $97,463  $96,573  $(8,901) $3,546  $(190) $188,593 

See selected notes to the consolidated financial statements.

7

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

Six Months Ended June 30,

  

Three Months Ended March 31,

 
 

2021

  

2020

  

2022

  

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

          

Net Income

 $5,971 $2,849 

Net income before noncontrolling interest

 $2,504 $3,120 

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

          

Depreciation and amortization

 665 675  372 338 

Amortization of core deposit intangible

 3 0 

Amortization and accretion of premiums and discounts on investments, net

 787 954  472 270 

Amortization (accretion) of deferred loan fees, net

 108 (767)

Accretion of deferred loan fees and purchased premiums, net

 279 160 

Amortization of debt issuance costs

 18 0  20 0 

Amortization of mortgage servicing rights, net

 290 347 

Additions to mortgage servicing rights, net

 (569) (574)

Net increase on the valuation allowance on mortgage servicing rights

 19 0 

Change in fair value of sold loan servicing rights

 (170) 0 

Additions to servicing rights on sold loans, net

 (169) (332)

Amortization of servicing rights on sold loans, net

 0 124 

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

  0   19 

Provision for loan losses

 800 2,766  0 500 

Allocation of ESOP shares

 325 361  217 154 

Share-based compensation expense

 1,010 555  411 404 

Gain on sale of loans, net

 (2,258) (2,384) (253) (1,337)

Gain on sale of securities available for sale, net

 (1,124) (1,266) (126) 0 

Increase in cash surrender value of life insurance, net

 (486) (955) (252) (244)

Origination of loans held for sale

 (63,887) (79,472) (10,878) (37,287)

Proceeds from loans held for sale

 67,927 79,248  10,557 38,340 

Net loss attributable to noncontrolling interest in Quin Ventures LLC

  145   0 

Change in assets and liabilities:

          

Decrease (increase) in accrued interest receivable

 1,017 (1,429)

(Increase) decrease in accrued interest receivable

 (407) 715 

Increase in prepaid expenses and other assets

 (9,698) (2,659) (400) (8,326)

Increase (decrease) in accrued interest payable

 402 (120)

(Decrease) increase in accrued interest payable

 (380) 31 

Increase in accrued expenses and other liabilities

 3,604 3,792  1,451 6,138 
          

Net cash from operating activities

  5,066   1,921   3,251   2,787 
  

CASH FLOWS FROM INVESTING ACTIVITIES

          

Purchase of securities available for sale

 (94,145) (166,253) (74,655) (53,290)

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

 42,612 26,296  10,718 19,393 

Proceeds from sales of securities available for sale

 45,435 94,432  10,452 0 

Redemption (purchase) of FHLB stock

 380 (40)

Purchase of bank-owned life insurance, net of surrenders

 0 (6,500)

(Purchase) redemption of FHLB stock

 (2,926) 1,980 

Net increase in loans receivable

 (105,279) (110,316) (20,608) (15,130)

Purchase of premises and equipment, net

 (2,267) (521) (1,590) (348)

Capital contributions to equity investments

 (272) 0 

Capital contributions to historic tax credit partnerships

 (1,829) 0 
          

Net cash from investing activities

  (113,264)  (162,902)  (80,710)  (47,395)

 

See selected notes to the consolidated financial statements.

 

87

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

Six Months Ended June 30,

  

Three Months Ended March 31,

 
 

2021

  

2020

  

2022

  

2021

 

CASH FLOWS FROM FINANCING ACTIVITIES

          

Net increase in deposits

 $108,221 $168,680 

Net (decrease) increase in deposits

 $(31,166) $101,290 

Proceeds from long-term FHLB advances

 10,000 30,000  0 10,000 

Repayment of long-term FHLB advances

 (10,000) (30,000) 0 (10,000)

Net decrease in short-term FHLB advances

 (19,977) (551)

Net increase (decrease) in short-term FHLB advances

 65,000 (59,977)

Proceeds from issuance of subordinated debt, net

 39,223 0  0 39,310 

Net increase in advances from borrowers for taxes and insurance

 27 258  1,030 884 

Dividends paid

 (1,222) (1,055) (698) (609)

Restricted stock awards canceled

 (33) 0  (195) (11)

Repurchase of common stock

 (2,474) (5,502) 0 (2,163)
              

Net cash from financing activities

  123,765  161,830   33,971  78,724 
          

NET INCREASE IN CASH AND CASH EQUIVALENTS

 15,567 849 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 (43,488) 34,116 
          

CASH AND CASH EQUIVALENTS, beginning of period

  65,155   48,739   126,016   65,155 
          

CASH AND CASH EQUIVALENTS, end of period

 $80,722 $49,588  $82,528 $99,271 
          

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

          

Cash paid during the year for:

          

Interest on deposits and borrowings

 $2,150 $4,933  $1,795 $1,119 

Income taxes

 $2,640 $0 

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

 $2,718 $0  $0 $2,718 
          

NONCASH INVESTING ACTIVITIES

          

Unrealized (loss) gain on securities available for sale

 $(232) $2,855 

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses

 $0 $403 

Change in unrealized loss on securities available for sale

 $(19,580) $(4,428)

Lease liabilities arising from obtaining right-of-use assets

 $672 $902  $0 $672 
     

 

See selected notes to the consolidated financial statements.

 

98

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 - Basis of Presentation and Critical Accounting Policies

 

Organization and Naturenature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Federal Savings and Loan Association of Port AngelesFed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "Quin Ventures"). First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."

 

In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $121.7 million. An additional 933,360 shares of Company common stock and $400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $117.6 million in net proceeds from the stock offering of which $58.4 million were contributed to the Bank upon Conversion.

 

Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8% of the common stock issued in the Conversion for a total of 1,048,029 shares.

 

In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "Quin Ventures"). First Northwest has partially fulfilled its commitment to extend $15.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of approximately $500,000.

On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.

First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."

 

First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank.

 

The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in Western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with borrowing and investing activities.

 

Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 20202021. 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 sixmonths ended June 30, 2021March 31, 2022, are not necessarily indicative of the results that may be expected for future periods.

 

In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for loan losses ("ALLL"), fair value of financial instruments, and deferred tax assets and liabilities.

 

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. While First Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest for financial reporting purposes under Accounting Standards Codification 810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.

 

Subsequent Eventsevents - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate. See Note 10 for additional information.

 

Recently adopted accounting pronouncements

 

In November 2019, the FASB issued Accounting Standards Update ("ASU") 2019-10, which defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs 2016-13, 2019-04, and 2019-05. The effective date for smaller reporting companies was changed from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company adopted this ASU and anticipates implementing CECL effective January 1, 2023.

 

109

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In December 2019,January 2021, the FASB issued ASU No. 20192021-12,01, Income TaxesReference Rate Reform (Topic 740848): Simplifying the Accounting for Income TaxesScope. ASU 2019No.2021-1201 simplifies various aspects relatedclarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to accounting for income taxesderivatives that are affected by removing certainthe discounting transition. ASU No.2021-01 also amends the expedients and exceptions in ASC 848to capture the general principles in Topic 740. The standard also clarifiesincremental consequences of the scope clarification and amendsto tailor the existing guidance to improve consistent application.derivative instruments affected by the discounting transition. This ASU which iswas effective for fiscal years beginning afterupon issuance and generally can be applied through December 15, 2020,31, 2022. The adoption of ASU 2021-01did not have a material impact on the Company's financial statements.

In January 2020, the FASB issued ASU No.2020-01,Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The ASU, which is effective for fiscal years beginning after December 15, 2020, did not have a material effect on the Company'sCompany’s financial statements.

 

Recently issued accounting pronouncements not yet adopted

 

Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Loss, which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company will change processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach.

 

Additional updates were issued in ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825), Financial Instruments. This ASU clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition and measurement of financial instruments. The amendments provide entities with various measurement alternatives and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables that were previously written off and expected to be written off. The amendments also allow entities to use projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments.

 

In addition, new updates were issued through ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This amendment allows entities to elect the fair value option on certain financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment.


The Company is evaluating the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third-party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date, which is anticipated to be January 1, 2023.

 

Other Pronouncements

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.reform. The amendments areASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. This ASU is effective for the Companyall entities as of March 12, 2020 through December 31, 2022. The Company doesis implementing a transition plan to identify and modify its loans and other financial instruments that are either directly or indirectly influenced by LIBOR. The Company is in the process of evaluating ASU notNo. believe this standard will have a material2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, with no material expected impact on the Company's financial statements.

 

In March 2022, the FASB issued ASU No.2022-01,Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. ASU 2022-01 expands the portfolio layer method of hedge accounting prescribed in ASU No.2017-12 to allow multiple hedged layers of a single closed portfolio and to include portfolios of both prepayable and non-prepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same accounting method to similar hedging strategies. The ASU also specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on accounting and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered in determining credit losses for assets in the designated closed portfolio. This ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2022. The Company is evaluating the effect that ASU 2022-01 will have on its consolidated financial statements.

10

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In March 2022, the FASB issued ASU No.2022-02,Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the current expected credit loss model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements and related disclosures.

Reclassifications - Certain amounts in the unaudited interim consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation with no effect on net income or shareholders' equity.

 

11

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 - Securities

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at June 30, 2021March 31, 2022 are summarized as follows:

 

   

Gross

 

Gross

 

Estimated

    

Gross

 

Gross

 

Estimated

 
 

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value  

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value 
 

(In thousands)

  

(In thousands)

 

Available for Sale

                

Municipal bonds

 $126,430  $4,289  $(261) $130,458  $118,135  $40  $(7,927) $110,248 

U.S. government and agency issued bonds (Agency bonds)

 1,942 7 0 1,949 

U.S. government agency issued asset-backed securities (ABS agency)

 35,600  1,040  (76) 36,564 

Corporate issued asset-backed securities (ABS corporate)

 4,016  0  (16) 4,000 

U.S. Treasury notes

 2,458 0 (8) 2,450 

International agency issued bonds (Agency bonds)

 1,948 0 (137) 1,811 

Corporate issued debt securities (Corporate debt)

 48,527  1,544  (191) 49,880  60,857  669  (1,622) 59,904 

U.S. Small Business Administration securities (SBA)

 16,459  294  0  16,753  2,695  82  0  2,777 

Mortgage-backed securities:

  

U.S. government agency issued mortgage-backed securities (MBS agency)

 75,253  668  (492) 75,429  101,227  13  (5,176) 96,064 

Corporate issued mortgage-backed securities (MBS corporate)

  55,615   153   (301)  55,467   107,247   3   (2,809)  104,441 
  

Total securities available for sale

 $363,842  $7,995  $(1,337) $370,500  $394,567  $807  $(17,679) $377,695 

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 20202021, are summarized as follows:

 

   

Gross

 

Gross

 

Estimated

    

Gross

 

Gross

 

Estimated

 
 

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value  

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value 
 

(In thousands)

  

(In thousands)

 

Available for Sale

                

Municipal bonds

 $122,667  $5,212  $(17) $127,862  $110,497  $3,207  $(340) $113,364 

ABS agency

 62,934  1,240  (354) 63,820 

ABS corporate

 29,661  37  (418) 29,280 

Agency bonds

 1,947  0  (27) 1,920 

Corporate issued asset-backed securities (ABS corporate)

 14,556  0  (67) 14,489 

Corporate debt

 35,408  687  (585) 35,510  58,906  1,450  (567) 59,789 

SBA

 18,420  144  0  18,564  14,404  276  0  14,680 

Mortgage-backed securities:

  

MBS agency

 61,859  876  (52) 62,683  80,877  248  (1,163) 79,962 

MBS corporate

  26,458   162   (43)  26,577   60,317   71   (380)  60,008 
  

Total securities available for sale

 $357,407  $8,358  $(1,469) $364,296  $341,504  $5,252  $(2,544) $344,212 

 

 

There were 0 securities classified as held-to-maturity at June 30, 2021March 31, 2022 and December 31, 20202021.

 

1211

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of June 30, 2021March 31, 2022:

 

 

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

  

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

 
 

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 

Available for Sale

                                    

Municipal bonds

 $(231) $12,154  $(30) $1,079  $(261) $13,233  $(3,612) $63,789  $(4,315) $43,267  $(7,927) $107,056 

U.S. Treasury notes

 (8) 2,450 0 0 (8) 2,450 

Agency bonds

 0 0 0 0 0 0  0 0 (137) 1,811 (137) 1,811 

ABS agency

 0  0  (76) 1,886  (76) 1,886 

ABS corporate

 0  0  (16) 2,000  (16) 2,000 

Corporate debt

 (144) 6,971  (47) 4,953  (191) 11,924  (778) 16,465  (844) 18,150  (1,622) 34,615 

SBA

 0  51  0  40  0  91 

Mortgage-backed securities:

                          

MBS agency

 (492) 33,284  0  5  (492) 33,289  (2,445) 59,762  (2,731) 26,783  (5,176) 86,545 

MBS corporate

  (301)  23,231   0   0   (301)  23,231   (1,733)  68,013   (1,076)  22,035   (2,809)  90,048 
  

Total available for sale

 $(1,168) $75,691  $(169) $9,963  $(1,337) $85,654  $(8,576) $210,479  $(9,103) $112,046  $(17,679) $322,525 

 

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 20202021:

 

 

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

  

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

 
 

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 

Available for Sale

                                    

Municipal bonds

 $(15) $5,214  $(2) $1,319  $(17) $6,533  $(306) $23,125  $(34) $1,475  $(340) $24,600 

ABS agency

 0  0  (354) 21,430  (354) 21,430 

Agency bonds

 (27) 1,920  0  0  (27) 1,920 

ABS corporate

 0  0  (418) 27,283  (418) 27,283  (67) 10,976  0  0  (67) 10,976 

Corporate debt

 (8) 5,892  (577) 9,409  (585) 15,301  (333) 18,890  (234) 9,752  (567) 28,642 

SBA

 0  63  0  47  0  110  0  0  0  69  0  69 

Mortgage-backed securities:

                          

MBS agency

 (52) 18,516  0  261  (52) 18,777  (713) 39,029  (450) 12,802  (1,163) 51,831 

MBS corporate

  (43)  10,003   0   0   (43)  10,003   (374)  32,849   (6)  5,505   (380)  38,354 
  

Total available for sale

 $(118) $39,688  $(1,351) $59,749  $(1,469) $99,437  $(1,820) $126,789  $(724) $29,603  $(2,544) $156,392 

 

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At June 30, 2021March 31, 2022 and December 31, 20202021, there were 41155 and 3676 investment securities in an unrealized loss position, respectively.

 

We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates, market demand, and related volatility rather than credit quality, that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. We do not believe the unrealized losses on our securities are related to deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company does not intend to sell the securities in an unrealized loss position and believes that it is not likely itunlikely that we will be required to sell these investments prior to a market price recovery or maturity.

 

There were 0 OTTI losses during the three and sixmonths ended June 30, 2021March 31, 2022 and 20202021.

 

1312

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.

 

 

June 30, 2021

  

March 31, 2022

 
 

Available-for-Sale

  

Available-for-Sale

 
 

Amortized Cost

  

Estimated Fair Value

  

Amortized Cost

  

Estimated Fair Value

 
 

(In thousands)

  

(In thousands)

 

Mortgage-backed securities:

          

Due within one year

 $23  $24  $7,821  $7,746 

Due after one through five years

 30,198  30,240  37,379  36,935 

Due after five through ten years

 6,493  6,555  17,995  17,332 

Due after ten years

  94,154   94,077   145,279   138,492 
  

Total mortgage-backed securities

  130,868   130,896   208,474   200,505 
  

All other investment securities:

          

Due within one year

 0  0  0  0 

Due after one through five years

 1,340  1,261  8,749  8,329 

Due after five through ten years

 68,436  70,124  66,822  65,562 

Due after ten years

  163,198   168,219   110,522   103,299 
  

Total all other investment securities

  232,974   239,604   186,093   177,190 
  

Total investment securities

 $363,842  $370,500  $394,567  $377,695 

 

 

December 31, 2020

  

December 31, 2021

 
 

Available-for-Sale

  

Available-for-Sale

 
 

Amortized Cost

  

Estimated Fair Value

  

Amortized Cost

  

Estimated Fair Value

 
 

(In thousands)

  

(In thousands)

 

Mortgage-backed securities:

          

Due within one year

 $80  $84  $7,827  $7,832 

Due after one through five years

 12,446  12,402  24,347  24,371 

Due after five through ten years

 0  0  8,466  8,391 

Due after ten years

  75,791   76,774   100,554   99,376 
  

Total mortgage-backed securities

  88,317   89,260   141,194   139,970 
  

All other investment securities:

          

Due within one year

 0  0  0  0 

Due after one through five years

 2,210  2,328  6,391  6,289 

Due after five through ten years

 74,568  74,351  79,679  80,807 

Due after ten years

  192,312   198,357   114,240   117,146 
  

Total all other investment securities

  269,090   275,036   200,310   204,242 
  

Total investment securities

 $357,407  $364,296  $341,504  $344,212 

 

1413

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended March 31,

 
 

2021

  

2020

  

2021

  

2020

  

2022

  

2021

 
 

(In thousands)

 

(In thousands)

  

(In thousands)

 

Proceeds from sales

 $45,435  $54,359  $45,435  $94,432  $10,452  $0 

Gross realized gains

 1,200  867  1,200  1,504  128  0 

Gross realized losses

 (76) (206) (76) (238) (2) 0 

 

 

Note 3 - Loans Receivable

 

Loans receivable consisted of the following at the dates indicated:

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

          

One-to-four family

 $301,816  $309,828  $291,053  $294,965 

Multi-family

 166,502  162,467  203,746  172,409 

Commercial real estate

 319,644  296,574  370,346  363,299 

Construction and land

  183,685   123,627   209,395   224,709 

Total real estate loans

 971,647  892,496  1,074,540  1,055,382 
  

Consumer:

          

Home equity

 36,886  33,103  39,858  39,172 

Auto and other consumer

  171,617   128,233   206,140   182,769 

Total consumer loans

 208,503  161,336  245,998  221,941 
  

Commercial business loans

  75,995   100,201   54,506   79,838 
  

Total loans

  1,256,145   1,154,033   1,375,044   1,357,161 
  

Less:

          

Net deferred loan fees

 5,610  4,346  4,144  4,772 

Premium on purchased loans, net

 (10,393) (6,129) (14,816) (12,995)

Allowance for loan losses

  14,588   13,847   15,127   15,124 
  

Total loans receivable, net

 $1,246,340  $1,141,969  $1,370,589  $1,350,260 

 

Allowance for Loan Losses. The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

 

1514

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

 

At or For the Three Months Ended June 30, 2021

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

At or For the Three Months Ended March 31, 2022

 
 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

  

One-to-four family

 

Multi-family

 

Commercial real estate

 

Construction and land

 

Home equity

 

Auto and other consumer

 

Commercial business

 

Unallocated

 

Total

 
 

(In thousands)

  

(In thousands)

 

ALLL:

                                      

Beginning balance

 $3,416  $1,822  $3,629  $1,890  $379  $2,337  $483  $309  $14,265  $3,184  $1,816  $3,996  $2,672  $407  $2,221  $470  $358  $15,124 

(Recapture of) provision for loan losses

 (60) (6) 45  330  26  (3) (19) (13) 300  (177) 276  42  (193) (19) 56  56  (41) 0 

Charge-offs

 0  0  0  0  (12) (151) 0  0  (163) 0  0  0  0  0  (137) 0  0  (137)

Recoveries

  0   0   0   1   0   185   0   0   186   32   0   0   2   17   89   0   0   140 

Ending balance

 $3,356  $1,816  $3,674  $2,221  $393  $2,368  $464  $296  $14,588  $3,039  $2,092  $4,038  $2,481  $405  $2,229  $526  $317  $15,127 

 

  

At or For the Six Months Ended June 30, 2021

 
  

One-to-

      

Commercial

  

Construction

  

Home

  

Auto and other

  

Commercial

         
  

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
  

(In thousands)

 

ALLL:

                                    

Beginning balance

 $3,469  $1,764  $3,420  $1,461  $368  $2,642  $429  $294  $13,847 

(Recapture of) provision for loan losses

  (119)  52   254   756   20   (200)  35   2   800 

Charge-offs

  0   0   0   0   (12)  (380)  0   0   (392)

Recoveries

  6   0   0   4   17   306   0   0   333 

Ending balance

 $3,356  $1,816  $3,674  $2,221  $393  $2,368  $464  $296  $14,588 

 

At June 30, 2021

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

At March 31, 2022

 
 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

  

One-to-four family

 

Multi-family

 

Commercial real estate

 

Construction and land

 

Home equity

 

Auto and other consumer

 

Commercial business

 

Unallocated

 

Total

 
 

(In thousands)

  

(In thousands)

 

Total ALLL

 $3,356  $1,816  $3,674  $2,221  $393  $2,368  $464  $296  $14,588  $3,039  $2,092  $4,038  $2,481  $405  $2,229  $526  $317  $15,127 

General reserve

 3,325  1,816  3,674  2,221  389  2,228  464  296  14,413  3,015  2,092  4,038  2,481  401  2,181  526  317  15,051 

Specific reserve

 31  0  0  0  4  140  0  0  175  24  0  0  0  4  48  0  0  76 
  

Total loans

 $301,816  $166,502  $319,644  $183,685  $36,886  $171,617  $75,995  $0  $1,256,145  $291,053  $203,746  $370,346  $209,395  $39,858  $206,140  $54,506  $0  $1,375,044 

Loans collectively evaluated (1)

 299,239  166,502  318,441  183,660  36,738  170,814  75,995  0  1,251,389  288,822  203,746  370,278  209,373  39,557  205,734  54,506  0  1,372,016 

Loans individually evaluated (2)

 2,577  0  1,203  25  148  803  0  0  4,756  2,231  0  68  22  301  406  0  0  3,028 

 


(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

 

1615

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

At or For the Three Months Ended June 30, 2020

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

At or For the Three Months Ended March 31, 2021

 
 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

  

One-to-four family

 

Multi-family

 

Commercial real estate

 

Construction and land

 

Home equity

 

Auto and other consumer

 

Commercial business

 

Unallocated

 

Total

 
 

(In thousands)

  

(In thousands)

 

ALLL:

                                      

Beginning balance

 $3,396  $923  $2,722  $592  $449  $2,317  $250  $181  $10,830  $3,469  $1,764  $3,420  $1,461  $368  $2,642  $429  $294  $13,847 

Provision for (recapture of) loan losses

 383  205  299  146  (20) 157  213  117  1,500 

(Recapture of) provision for loan losses

 (59) 58  209  426  (6) (197) 54  15  500 

Charge-offs

 0  0  0  0  0  (240) 0  0  (240) 0  0  0  0  0  (229) 0  0  (229)

Recoveries

  1   0   0   0   0   18   0   0   19   6   0   0   3   17   121   0   0   147 

Ending balance

 $3,780  $1,128  $3,021  $738  $429  $2,252  $463  $298  $12,109  $3,416  $1,822  $3,629  $1,890  $379  $2,337  $483  $309  $14,265 

 

  

At or For the Six Months Ended June 30, 2020

 
  

One-to-

      

Commercial

  

Construction

  

Home

  

Auto and other

  

Commercial

         
  

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
  (In thousands) 

ALLL:

   

Beginning balance

 $3,024  $888  $2,243  $399  $454  $2,261  $208  $151  $9,628 

Provision for (recapture of) loan losses

  702   240   778   337   (26)  333   255   147   2,766 

Charge-offs

  0   0   0   0   0   (374)  0   0   (374)

Recoveries

  54   0   0   2   1   32   0   0   89 

Ending balance

 $3,780  $1,128  $3,021  $738  $429  $2,252  $463  $298  $12,109 

 

At December 31, 2020

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

At December 31, 2021

 
 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

  

One-to-four family

 

Multi-family

 

Commercial real estate

 

Construction and land

 

Home equity

 

Auto and other consumer

 

Commercial business

 

Unallocated

 

Total

 
 

(In thousands)

  

(In thousands)

 

Total ALLL

 $3,469  $1,764  $3,420  $1,461  $368  $2,642  $429  $294  $13,847  $3,184  $1,816  $3,996  $2,672  $407  $2,221  $470  $358  $15,124 

General reserve

 3,433  1,764  3,419  1,461  364  2,366  429  294  13,530  3,159  1,816  3,996  2,672  402  2,138  470  358  15,011 

Specific reserve

 36  0  1  0  4  276  0  0  317  25  0  0  0  5  83  0  0  113 
  

Total loans

 $309,828  $162,467  $296,574  $123,627  $33,103  $128,233  $100,201  $0  $1,154,033  $294,965  $172,409  $363,299  $224,709  $39,172  $182,769  $79,838  $0  $1,357,161 

Loans collectively evaluated (1)

 306,862  162,183  295,296  123,601  32,968  127,411  100,201  0  1,148,522  292,708  172,409  363,228  224,687  38,839  182,257  79,838  0  1,353,966 

Loans individually evaluated (2)

 2,966  284  1,278  26  135  822  0  0  5,511  2,257  0  71  22  333  512  0  0  3,195 

 


(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

 

Impaired loans. A loan is considered impaired when the Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.

 

1716

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

 
 

(In thousands)

  

(In thousands)

 

With no allowance recorded:

                          

One-to-four family

 $220 $251 $ $227 $257 $  $209 $244 $ $212 $247 $ 

Multi-family

 0 0  284 284  

Commercial real estate

 1,203 1,303  1,216 1,308   68  176    71  177   

Construction and land

 0 26  0 29   0 23  0 24  

Home equity

 33 66  37 94   0 0  26 59  

Auto and other consumer

 0 98  0 224    250  302    0  77   

Commercial business

  0  0    0  0   

Total

 1,456  1,744    1,764  2,196     527   745      309   584    
  

With an allowance recorded:

                          

One-to-four family

 2,357 2,535 31 2,739 2,941 36  2,022 2,219 24 2,045 2,245 25 

Multi-family

 0 0 0 0 0 0 

Construction and land

 22 22 0 22 22 0 

Home equity

 301 323 4 307 329 5 

Auto and other consumer

  156  164  48  512  512  83 

Total

 2,501 2,728 76 2,886 3,108 113 
 

Total impaired loans:

             

One-to-four family

 2,231 2,463 24 2,257 2,492 25 

Commercial real estate

 0 0 0 62 62 1  68 176 0 71 177 0 

Construction and land

 25 25 0 26 26 0  22  45  0  22  46  0 

Home equity

 115 173 4 98 157 4  301 323 4 333 388 5 

Auto and other consumer

 803 818 140 822 953 276   406   466   48   512   589   83 

Commercial business

  0  0  0  0  0  0 

Total

 3,300  3,551  175  3,747  4,139  317  $3,028 $3,473 $76 $3,195 $3,692 $113 
 

Total impaired loans:

             

One-to-four family

 2,577  2,786  31  2,966  3,198  36 

Multi-family

 0  0  0  284  284  0 

Commercial real estate

 1,203  1,303  0  1,278  1,370  1 

Construction and land

 25  51  0  26  55  0 

Home equity

 148  239  4  135  251  4 

Auto and other consumer

 803  916  140  822  1,177  276 

Commercial business

  0   0   0   0   0   0 

Total

 $4,756  $5,295  $175  $5,511  $6,335  $317 

 

1817

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periodperiods shown:

 

 

Three Months Ended

 

Six Months Ended

  

Three Months Ended

 

Three Months Ended

 
 

June 30, 2021

  

June 30, 2021

  

March 31, 2022

  

March 31, 2021

 
 

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

 
 

(In thousands)

 

(In thousands)

  

(In thousands)

 

With no allowance recorded:

  

One-to-four family

 $221  $4  $223  $6  $210  $4  $226  $4 

Multi-family

 93  0  187  0  0  0  282  5 

Commercial real estate

 832  18  1,022  37  69  0  1,212  18 

Construction and land

 0  0  0  0  0  1  0  0 

Home equity

 34  0  35  1  9  17  36  0 

Auto and other consumer

 35  3  35  4   252   7   35   8 

Commercial business

  0   0   0   0 

Total

 1,215  25  1,502  48  540 29 1,791 35 
  

With an allowance recorded:

  

One-to-four family

 2,365  49  2,437  87  2,030  41  2,507  51 

Multi-family

 0  0  0  0 

Commercial real estate

 410  0  234  0  0  0  58  1 

Construction and land

 24  2  25  3  22 1 26 2 

Home equity

 119  4  115  6  303  4  111  3 

Auto and other consumer

 816  15  840  19   217   3   865   12 

Commercial business

  0   0   0   0 

Total

 3,734  70  3,651  115  2,572  49  3,567  69 
  

Total impaired loans:

  

One-to-four family

 2,586  53  2,660  93  2,240  45  2,733  55 

Multi-family

 93  0  187  0  0  0  282  5 

Commercial real estate

 1,242  18  1,256  37  69  0  1,270  19 

Construction and land

 24  2  25  3  22  2  26  2 

Home equity

 153  4  150  7  312  21  147  3 

Auto and other consumer

 851  18  875  23   469   10   900   20 

Commercial business

  0   0   0   0 

Total

 $4,949  $95  $5,153  $163  $3,112  $78  $5,358  $104 

 

Interest income recognized on a cash basis on impaired loans for the three and sixmonths ended June 30, March 31, 2022 and 2021, was $74,000$66,000 and $142,000,$76,000, respectively.

 

1918

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the period shown:

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2020

  

June 30, 2020

 
  

Average Recorded Investment

  

Interest Income Recognized

  

Average Recorded Investment

  

Interest Income Recognized

 
  

(In thousands)

 

With no allowance recorded:

                

One-to-four family

 $153  $9  $130  $9 

Multi-family

  198   0   148   0 

Commercial real estate

  1,205   0   1,218   15 

Construction and land

  36   0   18   0 

Home equity

  48   1   46   0 

Auto and other consumer

  0   12   0   14 

Commercial business

  102   0   51   0 

Total

  1,742   22   1,611   38 
                 

With an allowance recorded:

                

One-to-four family

  2,932   71   2,804   112 

Multi-family

  170   0   237   0 

Commercial real estate

  429   0   536   0 

Construction and land

  28   2   28   2 

Home equity

  246   5   247   10 

Auto and other consumer

  765   20   727   29 

Commercial business

  175   0   219   0 

Total

  4,745   98   4,798   153 
                 

Total impaired loans:

                

One-to-four family

  3,085   80   2,934   121 

Multi-family

  368   0   385   0 

Commercial real estate

  1,634   0   1,754   15 

Construction and land

  64   2   46   2 

Home equity

  294   6   293   10 

Auto and other consumer

  765   32   727   43 

Commercial business

  277   0   270   0 

Total

 $6,487  $120  $6,409  $191 

Interest income recognized on a cash basis on impaired loans for the three and six months ended June 30, 2020, was $56,000. and $126,000, respectively.

20

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

(In thousands)

  

(In thousands)

 

One-to-four family

 $784  $912  $484  $494 

Multi-family

 0  284 

Commercial real estate

 83  157  68  71 

Construction and land

 24  26  22  22 

Home equity

 90  73  253  282 

Auto and other consumer

 803  821   406   512 

Commercial business

  0   0 
  

Total nonaccrual loans

 $1,784  $2,273  $1,233  $1,381 

 

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were 0 loans past due 90 days or more and still accruing interest at June 30, 2021March 31, 2022 and December 31, 20202021.

 

The following table presents the recorded investment in past due loans, net of partial loan charge-offs, by class, as of June 30, 2021March 31, 2022:

 

 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

      

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

     
 

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                          

One-to-four family

 $0  $94  $0  $94  $301,722  $301,816  $240  $0  $0  $240  $290,813  $291,053 

Multi-family

 0  0  0  0  166,502  166,502  0  0  0  0  203,746  203,746 

Commercial real estate

 0  0  0  0  319,644  319,644  0  0  0  0  370,346  370,346 

Construction and land

  0   25   0   25   183,660   183,685   2   22   0   24   209,371   209,395 

Total real estate loans

 0  119  0  119  971,528  971,647  242  22  0  264  1,074,276  1,074,540 
  

Consumer:

                          

Home equity

 43  0  0  43  36,843  36,886  3  0  0  3  39,855  39,858 

Auto and other consumer

  326   210   61   597   171,020   171,617   334   0   30   364   205,776   206,140 

Total consumer loans

 369  210  61  640  207,863  208,503  337  0  30  367  245,631  245,998 
  

Commercial business loans

  0   0   0   0   75,995   75,995   0   0   0   0   54,506   54,506 
  

Total loans

 $369  $329  $61  $759  $1,255,386  $1,256,145  $579  $22  $30  $631  $1,374,413  $1,375,044 

 

2119

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the recorded investment in past due loans, net of partial loan charge-offs, by class, as of December 31, 20202021:

 

 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

      

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

     
 

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                          

One-to-four family

 $406  $132  $29  $567  $309,261  $309,828  $786  $0  $0  $786  $294,179  $294,965 

Multi-family

 0  0  0  0  162,467  162,467  0  0  0  0  172,409  172,409 

Commercial real estate

 0  0  0  0  296,574  296,574  0  0  0  0  363,299  363,299 

Construction and land

  56   0   26   82   123,545   123,627   293   0   0   293   224,416   224,709 

Total real estate loans

 462  132  55  649  891,847  892,496  1,079  0  0  1,079  1,054,303  1,055,382 
  

Consumer:

                          

Home equity

 94  0  0  94  33,009  33,103  83  0  0  83  39,089  39,172 

Auto and other consumer

  815   138   137   1,090   127,143   128,233   469   369   99   937   181,832   182,769 

Total consumer loans

 909  138  137  1,184  160,152  161,336  552  369  99  1,020  220,921  221,941 
  

Commercial business loans

  0   0   0   0   100,201   100,201   7   0   0   7   79,831   79,838 
  

Total loans

 $1,371  $270  $192  $1,833  $1,152,200  $1,154,033  $1,638  $369  $99  $2,106  $1,355,055  $1,357,161 

 

Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paypaying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

 

When the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1-3 in our risk rating system.

 

Additionally, the Bank categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90 days past due and nonaccrual loans are considered nonperforming.

 

2220

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table represents the internally assigned grade as of June 30, 2021March 31, 2022, by class of loans:

 

 

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

  

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                      

One-to-four family

 $298,012  $1,134  $1,611  $1,059  $301,816  $287,218  $3,033  $49  $753  $291,053 

Multi-family

 150,379  16,123  0  0  166,502  185,137  18,609  0  0  203,746 

Commercial real estate

 268,345  25,769  14,447  11,083  319,644  342,009  16,339  925  11,073  370,346 

Construction and land

  172,236   2,404   8,986   59   183,685   181,873   16,844   8,878   1,800   209,395 

Total real estate loans

 888,972  45,430  25,044  12,201  971,647  996,237  54,825  9,852  13,626  1,074,540 
  

Consumer:

                      

Home equity

 36,679  55  62  90  36,886  39,322  243  0  293  39,858 

Auto and other consumer

  168,284   2,158   361   814   171,617   205,040   670   48   382   206,140 

Total consumer loans

 204,963  2,213  423  904  208,503  244,362  913  48  675  245,998 
  

Commercial business loans

  68,457   7,306   0   232   75,995   53,708   798   0   0   54,506 
  

Total loans

 $1,162,392  $54,949  $25,467  $13,337  $1,256,145  $1,294,307  $56,536  $9,900  $14,301  $1,375,044 

 

The following table represents the internally assigned grade as of December 31, 20202021, by class of loans:

 

 

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

  

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                      

One-to-four family

 $303,840  $2,487  $1,730  $1,771  $309,828  $291,421  $2,727  $53  $764  $294,965 

Multi-family

 146,536  15,647  0  284  162,467  153,704  18,705  0  0  172,409 

Commercial real estate

 250,970  20,759  20,690  4,155  296,574  326,444  22,850  3,057  10,948  363,299 

Construction and land

  114,575   8,914   74   64   123,627   215,262   295   9,130   22   224,709 

Total real estate loans

 815,921  47,807  22,494  6,274  892,496  986,831  44,577  12,240  11,734  1,055,382 
  

Consumer:

                      

Home equity

 32,500  349  100  154  33,103  38,739  83  0  350  39,172 

Auto and other consumer

  124,115   2,034   1,216   868   128,233   181,356   835   65   513   182,769 

Total consumer loans

 156,615  2,383  1,316  1,022  161,336  220,095  918  65  863  221,941 
  

Commercial business loans

  92,010   7,791   168   232   100,201   79,616   222   0   0   79,838 
  

Total loans

 $1,064,546  $57,981  $23,978  $7,528  $1,154,033  $1,286,542  $45,717  $12,305  $12,597  $1,357,161 

 

2321

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table represents the credit risk profile based on payment activity as of June 30, 2021March 31, 2022, by class of loans:

 

 

Nonperforming

  

Performing

  

Total

  

Nonperforming

  

Performing

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

              

One-to-four family

 $784  $301,032  $301,816  $484  $290,569  $291,053 

Multi-family

 0  166,502  166,502  0  203,746  203,746 

Commercial real estate

 83  319,561  319,644  68  370,278  370,346 

Construction and land

 24  183,661  183,685  22  209,373  209,395 
  

Consumer:

              

Home equity

 90  36,796  36,886  253  39,605  39,858 

Auto and other consumer

 803  170,814  171,617  406  205,734  206,140 
  

Commercial business

  0   75,995   75,995   0   54,506   54,506 
  

Total loans

 $1,784  $1,254,361  $1,256,145  $1,233  $1,373,811  $1,375,044 

 

The following table represents the credit risk profile based on payment activity as of December 31, 20202021, by class of loans:

 

 

Nonperforming

  

Performing

  

Total

  

Nonperforming

  

Performing

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

              

One-to-four family

 $912  $308,916  $309,828  $494  $294,471  $294,965 

Multi-family

 284  162,183  162,467  0  172,409  172,409 

Commercial real estate

 157  296,417  296,574  71  363,228  363,299 

Construction and land

 26  123,601  123,627  22  224,687  224,709 
  

Consumer:

              

Home equity

 73  33,030  33,103  282  38,890  39,172 

Auto and other consumer

 821  127,412  128,233  512  182,257  182,769 
  

Commercial business

  0   100,201   100,201   0   79,838   79,838 
  

Total loans

 $2,273  $1,151,760  $1,154,033  $1,381  $1,355,780  $1,357,161 

 

2422

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Troubled debt restructuring. A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Bank is granting the borrower a concession of some kind. First Fed has granted a variety of concessions to borrowers in the form of loan modifications. The modifications are generally related to the loan's interest rate, term and payment amount or a combination thereof.

 

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act"), provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (i.e., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. This relief was extended under the Consolidated Appropriations Act 2021, to the earlier of 60 days after the COVID-19 pandemic national emergency termination date or January 1, 2022. Through June 30, 2021March 31, 2022, the Company had granted COVID-19 pandemic related temporary loan modifications on a total of 357 loans aggregating to $175.0totaling $177.6 million, or 13.9%12.9% of total loans. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determiningdetermine whether or not a loan is deemed to be impaired. As of June 30, 2021March 31, 2022, only 2 commercial real estate0 loans totaling $7.1 millionmodified in accordance with the CARES Act remained on deferral.

 

 

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

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

(In thousands)

  

(In thousands)

 

Total TDR loans

 $1,957 $2,224  $1,824 $1,843 

Allowance for loan losses related to TDR loans

 23 26  20 21 

Total nonaccrual TDR loans

 106  108  29  29 

 

There were 0 newly restructured, and renewals, or modifications of existing TDR loans that occurred during the three and sixmonths ended June 30, 2021March 31, 2022 or 20202021.

 

There were 0 TDR loans whichthat incurred a payment default within 12 months of the restructure date during the three and sixmonths ended June 30, 2021March 31, 2022 or 20202021.

 

NaN additional funds were committed to be advanced in connection with TDR loans at March 31, 2022.

 

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

  

March 31, 2022

 
  

Accrual

  

Nonaccrual

  

Total

 
  

(In thousands)

 

One-to-four family

 $1,747  $29  $1,776 

Home equity

  48   0   48 
             

Total TDR loans

 $1,795  $29  $1,824 

 

2523

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NaN additional funds were committed to be advanced in connection with TDR loans at June 30, 2021.

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

  

June 30, 2021

  

December 31, 2020

 
  

Accrual

  

Nonaccrual

  

Total

  

Accrual

  

Nonaccrual

  

Total

 
  

(In thousands)

 

One-to-four family

 $1,793  $106  $1,899  $2,054  $108  $2,162 

Home equity

  58   0   58   62   0   62 
                         

Total TDR loans

 $1,851  $106  $1,957  $2,116  $108  $2,224 

 

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, 2021March 31, 2022 and December 31, 20202021, were $78.9$63.8 million and $91.7$75.1 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:

 

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Noninterest-bearing demand deposits

 $307,119 0.00% $274,930 0.00% $326,289 0.00% $343,932 0.00%

Interest-bearing demand deposits

  175,939  0.01%  156,241  0.01%  204,949  0.01%  196,970  0.01%

Money market accounts

 511,051  0.21% 429,143  0.31% 581,804  0.20% 597,815  0.21%

Savings accounts

 185,798  0.06% 164,434  0.17% 197,351  0.05% 194,620  0.05%

Certificates of deposit

  261,831   0.76%  308,769   1.00%  239,021   0.52%  247,243   0.62%
  

Total deposits

 $1,441,738  0.22% $1,333,517  0.36% $1,549,414  0.16% $1,580,580  0.19%

 

26

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Maturities of certificates at the dates indicated are as follows:

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

(In thousands)

  

(In thousands)

 

Within one year or less

 $172,770  $185,804  $147,258  $153,472 

After one year through two years

 38,315  70,705  53,927  54,970 

After two years through three years

 38,100  37,417  17,164  17,620 

After three years through four years

 6,499  6,938  13,404  14,358 

After four years through five years

  6,147   7,905   7,268   6,823 
  

Total certificates of deposit

 $261,831 $308,769  $239,021 $247,243 

 

Brokered certificates of deposits of $74.0$65.7 million and $89.6$65.7 million are included in the June 30, 2021March 31, 2022 and December 31, 20202021 certificate of deposits totals above, respectively.

 

At June 30, 2021March 31, 2022 and December 31, 20202021, deposits included $112.2$106.7 million and $80.9$134.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $58.2$61.3 million and $48.1$67.9 million were pledged as collateral for these deposits at June 30, 2021March 31, 2022 and December 31, 20202021, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

 

Interest on deposits by type for the periods shown was as follows:

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
  

(In thousands)

 

Demand deposits

 $17  $7 

Money market accounts

  298   286 

Savings accounts

  26   40 

Certificates of deposit

  376   601 
         

Total interest expense on deposits

 $717  $934 

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands)

  

(In thousands)

 

Demand deposits

 $10  $4  $17  $23 

Money market accounts

  275   400   561   756 

Savings accounts

  34   269   74   609 

Certificates of deposit

  506   1,368   1,107   2,791 
                 

Total interest expense on deposits

 $825  $2,041  $1,759  $4,179 

 

24

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5 - Federal Taxes on Income

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

 

The effective tax rates were 16.0%18.1% and 18.9%13.2% for the sixthree months ended June 30, 2021March 31, 2022 and 20202021, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 20212022 and 20202021 of 21%, largely due to the nontaxable earnings on bank ownedbank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. Additionally, a cumulative adjustmenttax accrual true-up was recorded in the first quarter of 2021.2021, which reduced the prior year provision and resulted in a lower effective tax rate.

 

27

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6 - Earnings per Common Share

 

BasicThe two-class method is used for computing basic and diluted earnings per shareshare. Under the two-class method, EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstandingdetermined for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuanceeach class of common stock that then shared in the earnings of the entity. In addition, nonvested share-based payment awards that contain nonforfeitable rightsand participating security according to dividends or dividend equivalents are considereddeclared and participating securities and are includedrights in the computation of earnings per share.undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.

 

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and sixmonths ended June 30, 2021March 31, 2022 and 20202021.

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(In thousands, except share data)

  

(In thousands, except share data)

 

Numerator:

                

Net Income Attributable to Parent

 $2,996  $1,976  $6,116  $2,849 
                 

Denominator:

                

Basic weighted average common shares outstanding

  9,130,113   9,373,253   9,114,841   9,488,197 

Dilutive restricted stock grants

  118,554   34,870   106,200   40,011 

Diluted weighted average common shares outstanding

  9,248,667   9,408,123   9,221,041   9,528,208 
                 

Basic earnings per share

 $0.33  $0.21  $0.67  $0.30 
                 

Diluted earnings per share

 $0.32  $0.21  $0.66  $0.30 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
         

Net income:

        

Net income available to common shareholders

 $2,806  $3,120 

Earnings allocated to participating securities

  (70)  (102)

Earnings allocated to common shareholders

 $2,736  $3,018 
         

Basic:

        

Weighted average common shares outstanding

  10,040,090   10,241,823 

Weighted average unvested restricted stock awards

  (234,953)  (357,213)

Weighted average unallocated ESOP shares

  (674,969)  (727,786)

Total basic weighted average common shares outstanding

  9,130,168   9,156,824 
         

Diluted:

        

Basic weighted average common shares outstanding

  9,130,168   9,156,824 

Dilutive restricted stock awards

  95,200   91,371 

Total diluted weighted average common shares outstanding

  9,225,368   9,248,195 
         

Basic earnings per common share

 $0.30  $0.33 
         

Diluted earnings per common share

 $0.30  $0.33 

 

Unallocated ESOPPotentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At notMarch 31, 2022 included as outstanding for either basic or diluted earnings per share calculations. As of June 30, 2021 and 2020December 31, 2021, there were 714,633antidilutive shares as calculated under the treasury stock method totaled 17 and 727,859 shares in the ESOP that remain unallocated,115, respectively.

 

25

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 7 - Employee Benefits

 

Change from Multi-employer to Single-employer Pension Plan

Effective March 23, 2021, the Company withdrew from the Pentegra Defined Benefit Plan for Financial Institutions ("Pentegra DB Plan") and established the First Federal Defined Benefit Plan ("Bank DB Plan"), a single-employer plan. On March 23, 2021, all assets and liabilities were transferred from the Pentegra DB Plan to the newly established Bank DB Plan.

The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available under the plan are frozen. The plan provides defined benefits based on years of service and final average salary prior to the freeze. The Company uses December 31 as the measurement date for this plan. The initial measurement period will be March 23, 2021 – December 31, 2021.

The fair value of plan assets and projected benefit obligation on the March 23, 2021, Bank DB Plan adoption date were $14,705,000 and $14,197,000, respectively. A $2,717,599 cash contribution was made to the Pentegra DB Plan in March 2021 prior to the transition. A prior service cost of $1.7 million, net of tax, was included in accumulated other comprehensive loss on the Company's balance sheet at June 30, 2021. The prior service cost is expected to be amortized over 15 years.

Weighted-average assumptions used to determine pension benefit obligations at year-end include a 2.95% discount rate and a 0% rate of compensation increase. The weighted average assumptions used to determine net periodic pension cost include 2.95% discount rate, 5.75% expected return on plan assets and a 0% rate of compensation increase. The 5.75% weighted average expected long-term rate of return is estimated based on current trends in similar plan assets, as well as projected future rates of returns on similar assets.

Employee Stock Ownership Plan

 

In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month period are eligible to participate in the ESOP.

 

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. $835,000No principal orand interest payment was made by the ESOP during the sixthree months ended June 30, 2021March 31, 2022.

 

28

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

 

Compensation expense related to the ESOP for the sixthree months ended June 30, 2021March 31, 2022 and 20202021, was $444,000$291,000 and $260,000,$217,000, respectively.

 

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

 

June 30, 2021

  

December 31, 2020

  

March 31, 2022

  

December 31, 2021

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Allocated shares

 333,396 306,949  333,396 333,396 

Committed to be released shares

 39,663 26,442 

Unallocated shares

  714,633  741,080   674,970  688,191 
  

Total ESOP shares issued

  1,048,029   1,048,029   1,048,029   1,048,029 
  

Fair value of unallocated shares

 $12,542 $11,561  $14,910 $13,901 

 

26

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 8 - Stock-based Compensation

 

In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. As of June 30, 2021March 31, 2022, there were 336,480302,294 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.

 

As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and 0no additional awards will be made. As of June 30, 2021March 31, 2022, there were 0 shares available for grant under the 2015 EIP. At this date, there are 184,00094,900 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.

 

There were 84,89642,243 and 62,60084,896 shares of restricted stock awarded, respectively, during the sixthree months ended June 30, 2021March 31, 2022 and 20202021. Awarded shares of restricted stock vest ratably over periods ranging from threeone 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, 2021March 31, 2022 and 20202021, total compensation expense for the equity incentive plans was $606,000$411,000 and $250,000, respectively. For the six months ended June 30, 2021 and 2020, total compensation expense for the equity incentive plans was $1.0 million and $555,000,$404,000, respectively.

 

Included in the above compensation expense for the three months ended June 30, 2021March 31, 2022 and 2020, directors' compensation was $169,000 and $86,000, respectively. Included in the above compensation expense for the six months ended June 30, 2021and 2020, was directors' compensation of $260,000$55,000 and $171,000,$91,000, respectively.

 

The following tabletables provide a summary of changes in non-vested restricted stock awards for the period shown:

 

  

For the Three Months Ended

 
  

June 30, 2021

 
  

Shares

  

Weighted-Average Grant Date Fair Value

 

Non-vested at April 1, 2021

  371,568  $14.98 

Vested

  (4,146)  11.23 

Canceled (1)

  (1,354)  11.23 
         

Non-vested at June 30, 2021

  366,068  $15.03 
         

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's share of tax on the vested shares. The surrendered shares are canceled and are unavailable for reissue.

 
  

For the Three Months Ended

 
  

March 31, 2022

 
  

Shares

  

Weighted-Average Grant Date Fair Value

 

Non-vested at January 1, 2022

  236,432  $16.19 

Granted

  42,243   22.35 

Vested

  (22,727)  18.17 

Canceled (1)

  (8,919)  18.17 

Forfeited

  (2,400)  17.28 
         

Non-vested at March 31, 2022

  244,629  $16.99 
         

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue.

 

 

 

 

 

2927

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

  

For the Six Months Ended

 
  

June 30, 2021

 
  

Shares

  

Weighted-Average Grant Date Fair Value

 

Non-vested at January 1, 2021

  292,892  $13.96 

Granted

  84,896   18.60 

Vested

  (9,766)  13.99 

Canceled (1)

  (1,954)  13.99 
         

Non-vested at June 30, 2021

  366,068  $15.03 
         

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's share of tax on the vested shares. The surrendered shares are canceled and are unavailable for reissue.

 
 

As of June 30, 2021March 31, 2022, there was $4.0$3.5 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.732.19 years.

 

 

 

Note 9 - Fair Value Accounting and Measurement

 

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

 

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

 

A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

 

Level 3 - Unobservable inputs.

 

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

 

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

Qualitative disclosures of valuation techniques -Securities available for sale:sale and Equity investments: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.

If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

 

Sold loan servicing rights, at fair value: The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation.

 

3028

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:

 

 

June 30, 2021

  

March 31, 2022

 
 Quoted Prices in Active Markets for Identical Assets or Liabilities 

Significant Other Observable Inputs

 Significant Unobservable Inputs    

Quoted Prices in Active Markets for Identical Assets or Liabilities

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

   
 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 
 

(In thousands)

  

(In thousands)

 

Securities available-for-sale

          

Municipal bonds

 $0  $130,458  $0  $130,458  $5,337  $104,911  $0  $110,248 

U.S. Treasury notes

 2,450  0  0  2,450 

Agency bonds

 0 1,949 0 1,949  0  1,811  0  1,811 

ABS agency

 0  36,564  0  36,564 

ABS corporate

 0  4,000  0  4,000 

Corporate debt

 0  49,880  0  49,880  5,685  54,219  0  59,904 

SBA

 0  16,753  0  16,753  0  2,777  0  2,777 

MBS agency

 0  75,429  0  75,429  0  96,064  0  96,064 

MBS corporate

  0   55,467   0   55,467  0  104,441  0  104,441 

Sold loan servicing rights

 0 0 4,046 4,046 

Equity investments

  0   3,276   0   3,276 
 $0  $370,500  $0  $370,500  $13,472  $367,499  $4,046  $385,017 

 

 

December 31, 2020

  

December 31, 2021

 
 Quoted Prices in Active Markets for Identical Assets or Liabilities 

Significant Other Observable Inputs

 Significant Unobservable Inputs    Quoted Prices in Active Markets for Identical Assets or Liabilities 

Significant Other Observable Inputs

 Significant Unobservable Inputs   
 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 
 

(In thousands)

  

(In thousands)

 

Securities available-for-sale

                  

Municipal bonds

 $0  $127,862  $0  $127,862  $5,902  $107,462  $0  $113,364 

ABS agency

 0  63,820  0  63,820 

Agency bonds

 0  1,920  0  1,920 

ABS corporate

 0  29,280  0  29,280  0  14,489  0  14,489 

Corporate debt

 0  32,970  2,540  35,510  6,061  53,728  0  59,789 

SBA

 0  18,564  0  18,564  0  14,680  0  14,680 

MBS agency

 0  62,683  0  62,683  0  79,962  0  79,962 

MBS corporate

  0   20,205   6,372   26,577  0  60,008  0  60,008 

Equity investments

  0  3,071  0  3,071 
 $0  $355,384  $8,912  $364,296  $11,963  $335,320  $0  $347,283 

 

 

3129

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The significantfollowing table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs infor the fair value measurement of the Company's assets and liabilities classified as Level 3 securities are noted below. Significant fluctuations in any of those inputs in isolation would result in a significantly differentand measured at fair value measurement.


The following table presents quantitative information about
on a recurring Level 3 fair value measurementsbasis at the date indicated:

 

December 31, 2020

Fair Value (In thousands)

Valuation Technique

Unobservable Input

Range (a)

Corporate debt

$ 1,540

Consensus pricing

Offered quotes

89 - 91

Comparability adjustments (%)

-0.7% - +1.3%

1,000

Consensus pricing

Offered quotes

92 - 100

Comparability adjustments (%)

-7.4% - 0%

MBS corporate

6,372

Consensus pricing

Offered quotes

104 - 107

Comparability adjustments (%)

-1.5% - +1.5%

(a) Unobservable inputs were weighted by the relative fair value of the instruments.

March 31, 2022

 

Fair Value
(In thousands)

 

Valuation Technique

 

Unobservable Input

 

Range
(Weighted Average)

 

Sold loan servicing rights

 $4,046 

Discounted cash flow

 

Constant prepayment rate

  2.15%-10.55% (7.54%) 
       

Discount rate

  9.75%-14.25% (11.45%) 

 

The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates indicated:

 

  

June 30, 2021

 
  

Balance at Beginning of Period

  

Transfers Out of Level 3 (1)

  

Purchases

  

Unrealized

  

Total

 
  

(In thousands)

 

Securities available for sale

                    

Corporate debt

 $2,540  $(2,540) $0  $0  $0 

MBS corporate

  6,372   (6,372)  0   0   0 
  $8,912  $(8,912) $0  $0  $0 

(1) Transferred from Level 3 to Level 2 after obtaining observable market data.

 
  

March 31, 2022

 
  

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

  

Servicing rights that result from transfers and sale of financial assets

  

Changes in fair value due to changes in model inputs or assumptions (1)

  

Total

 
  

(In thousands)

 
                 

Sold loan servicing rights

 $3,820  $56  $170  $4,046 
                 

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

 

 

 

December 31, 2020

  

December 31, 2021

 
 

Balance at Beginning of Period

  

Transfers Into Level 3 (1)

  

Purchases

  

Unrealized

  

Total

  

Balance at January 1, 2021

  

Transfers Out of Level 3 (1)

  

Purchases

  

Unrealized

  

Total

 
 

(In thousands)

  

(In thousands)

 

Securities available for sale

  

Corporate debt

 $0  $1,540  $1,000  $0  $2,540  $2,540  $(2,540) $0  $0  $0 

MBS corporate

  0   0   6,372   0   6,372   6,372   (6,372)  0   0   0 
 $0  $1,540  $7,372  $0  $8,912  $8,912  $(8,912) $0  $0  $0 

(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no market activity for the securities.

 

(1) Transferred from Level 3 to Level 2 after obtaining observable market data.

(1) Transferred from Level 3 to Level 2 after obtaining observable market data.

 

 

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

 

3230

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

  

June 30, 2021

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $4,756  $4,756 
  

March 31, 2022

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $3,028  $3,028 

 

  

December 31, 2020

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $5,511  $5,511 
  

December 31, 2021

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $3,195  $3,195 

 

At June 30, 2021March 31, 2022 and December 31, 20202021, there were no0 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, 2021

  

March 31, 2022

 
     

Fair Value Measurements Using:

      

Fair Value Measurements Using:

 
 

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(In thousands)

  

(In thousands)

 

Financial assets

                      

Cash and cash equivalents

 $80,722  $80,722  $80,722  $0  $0  $82,528  $82,528  $82,528  $0  $0 

Investment securities available for sale

 370,500  370,500  0  370,500  0  377,695  377,695  13,472  364,223  0 

Loans held for sale

 1,971  1,971  0  1,971  0  1,334  1,334  0  1,334  0 

Loans receivable, net

 1,246,340 1,228,687 0 0 1,228,687  1,370,589 1,344,070 0 0 1,344,070 

FHLB stock

 5,597  5,597  0  5,597  0  8,122  8,122  0  8,122  0 

Accrued interest receivable

 5,949  5,949  0  5,949  0  5,696  5,696  0  5,696  0 

Mortgage servicing rights, net

 2,381 2,561 0 0 2,561 

Sold loan servicing rights, at fair value

 4,046 4,046 0 0 4,046 

Equity investments

 3,276 3,276 0 3,276 0 
  

Financial liabilities

                      

Demand deposits

 $1,179,907  $1,179,907  $1,179,907  $0  $0  $1,310,393  $1,310,393  $1,310,393  $0  $0 

Time deposits

 261,831 262,957 0 262,957 0  239,021 235,609 0 0 235,609 

FHLB Borrowings

 90,000 91,008 0 91,008 0  145,000 141,962 0 0 141,962 

Subordinated debt

 39,241 39,693 0 39,693 0  39,250 37,670 0 0 37,670 

Accrued interest payable

 455  455  0  455  0  13  13  0  13  0 

 

3331

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

December 31, 2020

  

December 31, 2021

 
     

Fair Value Measurements Using:

      

Fair Value Measurements Using:

 
 

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(In thousands)

  

(In thousands)

 

Financial assets

                      

Cash and cash equivalents

 $65,155  $65,155  $65,155  $0  $0  $126,016  $126,016  $126,016  $0  $0 

Investment securities available for sale

 364,296  364,296  0  355,384  8,912  344,212  344,212  11,963  332,249  0 

Loans held for sale

 3,753  3,753  0  3,753  0  760  760  0  760  0 

Loans receivable, net

 1,141,969  1,129,570  0  0  1,129,570  1,350,260  1,328,589  0  0  1,328,589 

FHLB stock

 5,977  5,977  0  5,977  0  5,196  5,196  0  5,196  0 

Accrued interest receivable

 6,966  6,966  0  6,966  0  5,289  5,289  0  5,289  0 

Mortgage servicing rights, net

 2,120  2,189  0  0  2,189 

Sold loan servicing rights, net

 3,282  3,820  0  0  3,820 

Equity investments

 3,071 3,071 0 3,071 0 
  

Financial liabilities

                      

Demand deposits

 $1,024,748  $1,024,748  $1,024,748  $0  $0   1,333,337  $1,333,337  $1,333,337  $0  $0 

Time deposits

 308,769  310,992  0  310,992  0  247,243  247,217  0  0  247,217 

FHLB Borrowings

 109,977  111,462  0  111,462  0  80,000  80,192  0  0  80,192 

Subordinated debt

 39,280 39,144 0 0 39,144 

Accrued interest payable

 53  53  0  53  0  393  393  0  393  0 

 

Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. The methods and assumptions used by the Company in estimating fair values of financial instruments as set forth below in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:

 

Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The pricing service uses pricing models based on market data. In the event that limited or less transparent information is provided by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.

 

Loans receivable, net - At June 30, 2021March 31, 2022, the fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

 

MortgageSold loan servicing rights, net - The estimated fair value of mortgage servicing rights on sold loans is based on market prices for comparable mortgageloan servicing contracts when available. If no comparable contract is available, the estimated fair value is based on a valuation model that calculates the present value of estimated future net servicing income.

 

3432

 
 

Note 10- Change in Accumulated Other Comprehensive Income ("AOCI")

 

Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:

  

Unrealized Gains and Losses on Available-for-Sale Securities

  

Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization

  

Total

 
             

BALANCE, March 31, 2020

 $(8,256) $0  $(8,256)

Other comprehensive income before reclassification

  9,495   0   9,495 

Amounts reclassified from accumulated other comprehensive income

  (522)  0   (522)

Net other comprehensive income

  8,973   0   8,973 

BALANCE, June 30, 2020

 $717  $0  $717 
             

BALANCE, March 31, 2021

 $1,944  $(1,745) $199 

Other comprehensive income before reclassification

  4,204   31   4,235 

Amounts reclassified from accumulated other comprehensive income

  (888)  0   (888)

Net other comprehensive income

  3,316   31   3,347 

BALANCE, June 30, 2021

 $5,260  $(1,714) $3,546 
             
             

BALANCE, December 31, 2019

 $(1,539) $0  $(1,539)

Other comprehensive income before reclassification

  3,256   0   3,256 

Amounts reclassified from accumulated other comprehensive income

  (1,000)  0   (1,000)

Net other comprehensive income

  2,256   0   2,256 

BALANCE, June 30, 2020

 $717  $0  $717 
             

BALANCE, December 31, 2020

 $5,442  $0  $5,442 

Other comprehensive income (loss) before reclassification

  706   (1,714)  (1,008)

Amounts reclassified from accumulated other comprehensive income

  (888)  0   (888)

Net other comprehensive loss

  (182)  (1,714)  (1,896)

BALANCE, June 30, 2021

 $5,260  $(1,714) $3,546 

 

  

Unrealized Gains and Losses on Available-for-Sale Securities

  

Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization

  

Total

 
   (In thousands) 
             

BALANCE, December 31, 2020

 $5,442  $0  $5,442 

Other comprehensive loss before reclassification

  (3,498)  (1,745)  (5,243)

Net other comprehensive loss

  (3,498)  (1,745)  (5,243)

BALANCE, March 31, 2021

 $1,944  $(1,745) $199 
             

BALANCE, December 31, 2021

 $2,140  $(1,852) $288 

Other comprehensive loss before reclassification

  (15,370)  0   (15,370)

Amounts reclassified from accumulated other comprehensive income

  (100)  29   (71)

Net other comprehensive (loss) income

  (15,470)  29   (15,441)

BALANCE, March 31, 2022

 $(13,330) $(1,823) $(15,153)

33

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NoteNote 11- Subsequent EventBusiness Combination

 

On July 23, 2021, the Bank completed the purchaseacquired certain assets and assumed liabilities of the Bellevue, Washington branch from Sterling Bank and Trust of Southfield, Michigan ("Sterling"). The purchase added $65.4 upon purchasing their sole branch located in Washington State. As a result of the Sterling transaction, the Bank has established a presence in Bellevue, Washington, and expanded its deposit base. Total consideration paid under the Sterling transaction consisted of $63.5 million in deposit accountscash. There were no transfers of common stock or other equity instruments in connection with the transaction, and $459,000the Bank did not obtain any equity interests in fixed assets. Sterling.

The Bank also acquired assets and assumed liabilities were recorded in the leaseCompany's consolidated balance sheets at their estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction consists largely of a premium paid for the branch location and welcomed the former Sterling retail staff as First Fed employees. The acquisition method of accounting for business combinations was used to record the transaction.deposit accounts.

 

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required the Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at the appropriate rate of interest. Differences may arise between contractually required payments and the expected cash flows at the acquisition date due to items such as prepayments or early withdrawals, and other factors. Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the transaction, the Bank purchased certain assets and assumed certain liabilities of Sterling but did not acquire any equity or other ownership interests.

The following table summarizes the fair value of consideration transferred, the estimated fair values of assets acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction (in thousands):

  

At July 23, 2021

 
  

Book Value

  

Fair Value Adjustment

  

Estimated Fair Value

 
  

(In thousands)

 
             

Cash consideration transferred

         $63,545 
             

Recognized amounts of identifiable assets acquired and liabilities assumed

            

Identifiable assets acquired

            

Core deposit intangible ("CDI")

 $0  $126  $126 

Premises and equipment

  459      459 

Accrued interest receivable and other assets

  755      755 

Total identifiable assets acquired

  1,214   126   1,340 
             

Liabilities assumed

            

Deposits

 $65,096  $(229) $64,867 

Accrued expenses and other liabilities

  1,080      1,080 

Total liabilities assumed

  66,176   (229)  65,947 

Total identifiable net liabilities assumed

  (64,962)  355   (64,607)

Goodwill recognized

         $1,062 

CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring core deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to non-interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten years. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life.

34

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:

 

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the quality of our loan and investment portfolios;

 

estimates of our risks and future costs and benefits; and

 

statements concerning the potentialcontinuing effects of the COVID-19 pandemic on the Bank's business and financial results and conditions.

35

 

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

 

the scope and duration of the COVID-19 pandemic;

the effects of the COVID-19 pandemic, including on our credit quality and operations, as well as its impact on general economic conditions;

 

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

 

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

 

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

 

our ability to control operating costs and expenses;

 

whether our management team can implement our operational strategy, including but not limited to our efforts to achieve loan and revenue growth;

 

our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related cost savings within expected time frames;

 

our ability to successfully execute on growth strategies related to our entry into new markets;

 

our ability to develop user-friendly digital applications to serve existing customers and attract new customers;

 

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

 

changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

 

increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;

 

our ability to attract and retain deposits;

 

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

 

results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;

 

legislative or regulatory changes that adversely affect our business;

 

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

 

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

 

other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020.2021.


 

Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the ongoing pandemic on the Bank, its customers and third parties. These developments could have an adverse impact on our financial position and our results of operations.

 

Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

 

General

First Northwest is a bank holding company that primarily engages in the business activity of its subsidiary, First Fed. First Fed is a community-oriented financial institution which has served customers and communities since 1923. Currently, First Fed has 11 full-service branches and one lending center serving Clallam, Jefferson, Kitsap, Whatcom, and King counties in Washington State. Our business and operating strategy is focused on building sustainable earnings through hiring experienced bankers, geographic expansion, diversifying our loan product mix, expanding our deposit product offerings that deliver value-added solutions, enhancing existing services and digital service delivery channels, and enhancing our infrastructure to support the changing needs and expectations of our customers.

3635

 

General

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

First Fed Bank is a community-oriented financial institution serving Western Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We offerhave twelve full-service branches and two business centers. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a wide rangefully array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology (“fintech”) companies to develop and deploy digitally focused financial solutions to meet customers’ needs on the financial security and payment needs of the communities we serve.a broader scale. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. We continue to increaseOver the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans. Moreloans, and more recently we have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs, in order to diversify our asset portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase noninterest income and manage interest rate risk. We also retain one- to four-family first and second lien loans in our portfolio to generate interest income.programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals businesses, and nonprofit organizations.businesses. Deposits are our primary source of fundsfunding for our lending and investing activities. We also borrow funds, typically from

Quin Ventures is a fintech focused on financial wellness and lifestyle protection for consumers nationwide. First Northwest's limited partnership investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM FINTOP Blockchain, L.P., which invest in fintech-related business with a focus on developing digital solutions applicable to the Federal Home Loan Bank of Des Moines, as a way to provide cost effective liquidity and manage interest rate risk.banking industry.

 

First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.

 

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, loan sales, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.

 

An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our allowance for loan losses. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off.

 

Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.

Recent Developments. On March 22, 2021, the Company announced that First Fed had entered into an agreement with Sterling Bank and Trust of Southfield, Michigan ("Sterling") to purchase its Bellevue, Washington branch, subject to applicable regulatory approvals and other customary closing conditions. The purchase was finalized on July 23, 2021 and included $65.4 million in deposits and a small amount of fixed assets. The Bank also assumed the lease for the branch location and welcomed the former Sterling retail staff as First Fed employees.

 

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. As initial restrictive measures were eased during 2020 and into 2021, the U.S. economy started to recover and, with the availability and distribution of a COVID-19 vaccine, weWe anticipate continued improvements in commercial and consumer activity and the U.S. economy. As of JuneSeptember 30, 2021, the governor of Washington removed restrictions initially set in place, allowing businesses to return to full capacity.

 

We recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue through the remainder of 2021, especially if2022, as new COVID-19 variant infections increase and new restrictions are mandated. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which have been significantly impacted by the COVID-19 pandemic. At June 30, 2021,March 31, 2022, the Company’s exposure as a percent of the total loan portfolio to these industries was 4.2% 4.0%, 0.2%0.3%, and 4.2%4.0%, respectively.respectively. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.

36

 

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, and the impact on our customers, employees, vendors and the economy. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.

 

We continue to provide banking and financial services to our customers, withhaving returned to regular lobby and drive-thru access available at all our branch locations and in-person services available to walk-in customers or by appointment. Our branch locations are currently open and operating, having returned to normal business hours at the beginning ofin May 2021. In addition, we continue to provide access to banking and financial services through online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone. We continue to take additional precautions within all our locations, including providing personal protection equipment and enhanced cleaning procedures, to ensure the safety of our customers and our employees.

 

37

We provided assistance to many small businesses applying for the SBA's Paycheck Protection Program ("PPP") funding. As of June 30, 2021, we processed $34.8 million of loans for 422 customers through the current round of SBA PPP funding with an average loan amount of $83,000. 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. We processed $35.0 million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of $82,000. Payments by borrowers on these loans can be deferred up to sixteen months after the note date, and interest, at 1%, will continue to accrue during the deferment period. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As of June 30, 2021, $21.5March 31, 2022, $32.1 million, or 66.9%99.7%, of the first-round loans were forgiven and $221,000,$27.9 million, or 0.6%79.7%, of second-round loans were forgiven.

 

Critical Accounting Policies

 

Effective January 1, 2022, the Bank elected to measure servicing rights using the fair value method of accounting. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.

There arewere no other material changes to the critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.2021.

 

 

 

Comparison of Financial Condition at June 30, 2021March 31, 2022 and December 31, 20202021

 

Assets. Total assets increased to $1.79$1.94 billion at June 30, 2021March 31, 2022 from $1.65$1.92 billion at December 31, 2020.2021.

Cash and cash equivalents decreased by $43.5 million, or 34.5%, to $82.5 million as of March 31, 2022, compared to $126.0 million as of December 31, 2021. Excess cash was deployed into the investment and loan portfolios as the Bank continued to build earning assets.

 

Net loans, excluding loans held for sale, increased $104.4$20.3 million to $1.25$1.37 billion at June 30, 2021,March 31, 2022, from $1.14$1.35 billion at December 31, 2020.2021. During the sixthree months ended June 30, 2021, autoMarch 31, 2022, multi-family loans increased $31.3 million as $16.6 million of acquisition-renovation construction and $13.6 million of commercial construction loans transitioned into amortizing loans. Auto and other consumer loans increased $43.4$23.4 million, with $13.9as a result of a $16.0 million in purchasespurchase of a pool of manufactured home loans, and $34.5$5.9 million in purchasedindividual manufactured home loan purchases, and a net increase in auto loans of $2.4 million offset by prepaymentpayment activity. One- to four-family residential loans decreased $8.0$3.9 million as prepaymentpayment of loans exceeded originations during the period.current quarter. Commercial business loans decreased $24.2$25.3 million, mainly as newly funded PPPthe result of a decrease in Northpointe Mortgage Participation Program of $26.3 million and Paycheck Protection Program (“PPP”) loans werepaid off during the quarter totaling $7.3 million, offset by PPP forgiveness payments received during the period for net increase of $22.0$1.9 million SBA loan origination and draws on existing loans. Our participation in the Northpointe Bank Mortgage Participation Program decreased to $0 at June 30, 2021, from $47.3 million at December 31, 2020. 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 increased $60.1decreased $15.3 million, or 48.6%6.8%, to $183.7$209.4 million at June 30, 2021,March 31, 2022, from $123.6$224.7 million at December 31, 2020.2021. Our construction loans are geographically dispersed throughout Western Washington (withwith one loan in Oregon)Oregon and as a result, are susceptible to risks that may vary depending on the nature and location of the project.two loans in Idaho. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of COVID-19 on completion. As of the date of this point in time,report, we have no reason to believe that any of the projects in process will not be completed. At June 30, 2021, $59.1March 31, 2022, acquisition-renovation loans of $31.2 million waswere included in the construction loan total for commercial acquisition-renovation loans which have a small construction component included with a traditional real estate loan, compared to $39.3$51.1 million at December 31, 2020. By investing in one- to four-family,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 acquisition-renovationspecific units of the building. Given the construction projects which increase housing options,component of these loans we are doing our small partrequired to address housing affordability.report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects.

 

We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets within which we do business to improve earnings while also prudently managing credit risk.

 

3837

 

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

 

June 30, 2021

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Total

 

March 31, 2022

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Idaho

  

Total

 
 

(In thousands)

  

(In thousands)

 

Construction Commitment

                                       

One- to four-family residential

 $23,702  $42,495  $1,059  $  $67,256  $36,886  $65,326  $4,983  $  $  $107,195 

Multi-family residential

   146,634    8,020  154,654    154,503  5,798  415  3,592  164,308 

Commercial acquisition-renovation

 5,329 44,196 16,638  66,163  2,934  31,304        34,238 

Commercial real estate

  1,712   40,705   2,679      45,096   9,078   45,054            54,132 

Total commitment

 $30,743  $274,030  $20,376  $8,020  $333,169  $48,898  $296,187  $10,781  $415  $3,592  $359,873 
                        

Construction Funds Disbursed

                                       

One- to four-family residential

 $7,952  $24,959  $538  $  $33,449  $13,600  $31,015  $1,052  $  $  $45,667 

Multi-family residential

   54,303    3,794  58,097    80,953  2,438  8  1,805  85,204 

Commercial acquisition-renovation

 4,555 38,925 15,661  59,141  2,445  28,742        31,187 

Commercial real estate

  1,505   21,525   1,240      24,270   5,883   30,682            36,565 

Total disbursed

 $14,012  $139,712  $17,439  $3,794  $174,957  $21,928  $171,392  $3,490  $8  $1,805  $198,623 
                        

Undisbursed Commitment

                                       

One- to four-family residential

 $15,750  $17,536  $521  $  $33,807  $23,286  $34,311  $3,931  $  $  $61,528 

Multi-family residential

   92,331    4,226  96,557    73,550  3,360  407  1,787  79,104 

Commercial acquisition-renovation

 774 5,271 977  7,022  489  2,562        3,051 

Commercial real estate

  207   19,180   1,439      20,826   3,195   14,372            17,567 

Total undisbursed

 $16,731  $134,318  $2,937  $4,226  $158,212  $26,970  $124,795  $7,291  $407  $1,787  $161,250 
                        

Land Funds Disbursed

                                       

One- to four-family residential

 $4,284  $2,840  $166  $  $7,290  $3,870  $3,609  $190  $  $  $7,669 

Commercial real estate

     1,438         1,438      3,103            3,103 

Total disbursed for land

 $4,284  $4,278  $166  $  $8,728  $3,870  $6,712  $190  $  $  $10,772 

 

(1) Includes Clallam and Jefferson counties.

(2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.

 

December 31, 2020

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Total

 

December 31, 2021

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Total

 
 

(In thousands)

  

(In thousands)

 

Construction Commitment

                              

One- to four-family residential

 $15,473  $29,827  $1,477  $  $46,777  $32,785  $57,050  $4,430  $  $94,265 

Multi-family residential

   117,524    8,020  125,544    182,151  4,095  8,435  194,681 

Commercial acquisition-renovation

 1,644 28,177 16,637  46,458  2,938 36,536 16,638  56,112 

Commercial real estate

  2,282   46,103   2,755      51,140   12,489   50,372   2,535      65,396 

Total Commitment

 $19,399  $221,631  $20,869  $8,020  $269,919 

Total commitment

 $48,212  $326,109  $27,698  $8,435  $410,454 
                      

Construction Funds Disbursed

                              

One- to four-family residential

 $7,208  $15,976  $845  $  $24,029  $10,242  $28,929  $562  $  $39,733 

Multi-family residential

   33,217      33,217    79,707  2,414  7,534  89,655 

Commercial acquisition-renovation

 1,297 24,045 15,300  40,642  2,449 32,789 15,861  51,099 

Commercial real estate

  1,677   14,812   429      16,918   3,486   29,484   2,701      35,671 

Total disbursed

 $10,182  $88,050  $16,574  $  $114,806  $16,177  $170,909  $21,538  $7,534  $216,158 
                      

Undisbursed Commitment

                              

One- to four-family residential

 $8,265  $13,851  $632  $  $22,748  $22,543  $28,121  $3,868  $  $54,532 

Multi-family residential

   84,307    8,020  92,327    102,444  1,681  901  105,026 

Commercial acquisition-renovation

 347 4,132 1,337  5,816  489 3,747 777  5,013 

Commercial real estate

  605   31,291   2,326      34,222   9,003   20,888   (166)     29,725 

Total undisbursed

 $9,217  $133,581  $4,295  $8,020  $155,113  $32,035  $155,200  $6,160  $901  $194,296 
                      

Land Funds Disbursed

                              

One- to four-family residential

 $4,350  $2,728  $347  $53  $7,478  $3,502  $3,556  $191  $  $7,249 

Commercial real estate

     1,343         1,343      1,302         1,302 

Total disbursed for land

 $4,350  $4,071  $347  $53  $8,821  $3,502  $4,858  $191  $  $8,551 

 

3938

 

During the sixthree months ended June 30, 2021,March 31, 2022, the Company originated $216.7$139.8 million of loans, of which $149.3$92.3 million, or 68.9%66.1%, were originated in the Puget Sound region, $63.1$27.2 million, or 29.1%19.4%, in the North Olympic Peninsula, $1.0$9.4 million, or 0.5%6.7%, in other areas throughout Washington State, and $3.2$10.9 million, or 1.5%7.8%, in Oregon.other states. The Company purchased an additional $34.5$16.0 million in auto loans and $13.9$21.5 million in manufactured home loans during the sixthree months ended June 30, 2021.March 31, 2022. We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.

 

Our allowance for loan losses increased $741,000, or 5.4%, to $14.6remained $15.1 million at June 30, 2021, from $13.8 million at DecemberMarch 31, 2020. The increase was due to a2022, as no loan loss provision of $800,000, offset by net charge-offs of $59,000was recorded for the six-monththree months ended March 31, 2022. Net recoveries were $3,000 for the three-month period. The loan loss provision is made to account for growth in the loan portfolio adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic, which is includedreflected in the qualitative factor adjustments. The allowance for loan losses as a percentage of total loans was 1.1% at both June 30, 2021March 31, 2022 and December 31, 2020 was 1.2%.2021.

 

Nonperforming loans decreased $489,000,$148,000, or 21.5%10.7%, to $1.8$1.2 million at June 30, 2021,March 31, 2022, from $2.3$1.4 million at December 31, 2020, mainly attributable to2021, reflecting improvements in nonperforming one- to four-family loans of $128,000, multi-family loans of $284,000, commercial real estate loans of $74,000 and auto and other consumer loans of $18,000.$106,000, home equity loans of $29,000, one- to four-family loans of $10,000, and commercial real estate loans of $3,000. Nonperforming loans to total loans was 0.1% at June 30, 2021both March 31, 2022 and 0.2% at December 31, 2020.2021. The allowance for loan losses as a percentage of nonperforming loans increased to 817.7%1227% at June 30, 2021,March 31, 2022, from 609.2%1095% at December 31, 2020.2021.

 

At June 30, 2021,March 31, 2022, there were $2.0$1.8 million in restructured loans, of which $1.8$1.79 million were performing in accordance with their modified payment terms and returned to accrual status.are accruing loans. Classified loans increased $5.8$1.7 million to $13.3$14.3 million at June 30, 2021,March 31, 2022, from $7.5$12.6 million at December 31, 2020,2021, due to the addition of one commerciala single residential real estate loan that was downgraded during the period.in 2022.

 

Net loanLoan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 to reduce credit risk and future charge-off activity. We continue to monitor the program in order to prudently manage risk within the portfolio. The balance of indirect auto loans decreased to $15.1$8.8 million at June 30, 2021March 31, 2022 from $20.5$10.6 million at December 31, 2020.2021. We believe our allowance for loan losses is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of June 30, 2021.March 31, 2022.

 

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

 

     

Increase (Decrease)

      

Increase (Decrease)

 
 

June 30, 2021

  

December 31, 2020

  

Amount

  

Percent

  

March 31, 2022

  

December 31, 2021

  

Amount

  

Percent

 
 

(In thousands)

      

(In thousands)

     

Real Estate:

                        

One-to-four family

 $301,816  $309,828  $(8,012) (2.6)% $291,053  $294,965  $(3,912) (1.3)%

Multi-family

 166,502  162,467  4,035  2.5  203,746  172,409  31,337  18.2 

Commercial real estate

 319,644  296,574  23,070  7.8  370,346  363,299  7,047  1.9 

Construction and land

  183,685   123,627   60,058  48.6   209,395   224,709   (15,314) (6.8)

Total real estate loans

 971,647  892,496  79,151  8.9  1,074,540  1,055,382  19,158  1.8 
                  

Consumer:

                        

Home equity

 36,886  33,103  3,783  11.4  39,858  39,172  686  1.8 

Auto and other consumer

  171,617   128,233   43,384  33.8   206,140   182,769   23,371  12.8 

Total consumer loans

 208,503  161,336  47,167  29.2  245,998  221,941  24,057  10.8 
                  

Commercial business loans

  75,995   100,201   (24,206) (24.2)  54,506   79,838   (25,332) (31.7)
                  

Total loans

 1,256,145  1,154,033  102,112  8.8  1,375,044  1,357,161  17,883  1.3 

Less:

                        

Net deferred loan fees

 5,610  4,346  1,264  29.1  4,144  4,772  (628) (13.2)

Premium on purchased loans, net

 (10,393) (6,129) (4,264) 69.6  (14,816) (12,995) (1,821) 14.0 

Allowance for loan losses

  14,588   13,847   741  5.4   15,127   15,124   3   

Loans receivable, net

 $1,246,340  $1,141,969  $104,371  9.1  $1,370,589  $1,350,260  $20,329  1.5 

 

4039

 

The following table represents nonperforming assets at the dates indicated.

     

Increase (Decrease)

      

Increase (Decrease)

 
 

June 30, 2021

  

December 31, 2020

  

Amount

  

Percent

  

March 31, 2022

  

December 31, 2021

  

Amount

  

Percent

 
 

(In thousands)

      

(In thousands)

     

Nonperforming loans:

                        

Real estate loans:

                  

One- to four-family

 $784  $912  $(128) (14.0)% $484  $494  $(10) (2.0)%

Multi-family

   284  (284) (100.0)

Commercial real estate

 83  157  (74) (47.1) 68  71  (3) (4.2)

Construction and land

  24   26   (2) (7.7)  22   22      

Total real estate loans

 891  1,379  (488) (35.4)  574   587   (13)  (2.2)
                  

Consumer loans:

                  

Home equity

 90  73  17  23.3  253  282  (29) (10.3)

Auto and other consumer

  803   821   (18) (2.2)  406   512   (106) (20.7)

Total consumer loans

  893   894   (1) (0.1)  659   794   (135) (17.0)
                  

Commercial business

       100.0 
         

Total nonperforming loans

  1,784   2,273   (489) (21.5)
         

Real estate owned:

            

Land

     2   (2) (100.0)

Total real estate owned

     2   (2) (100.0)
         

Repossessed assets

          100.0 
         

Total nonperforming assets

 $1,784  $2,275  $(491) (21.6) $1,233  $1,381  $(148) (10.7)
                  

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

 0.1% 0.2% (0.1)% (50.0) 0.1% 0.1% 0.0%  

 

Investment securities increased $6.2$33.5 million, or 1.7%9.7%, to $370.5$377.7 million at June 30, 2021,March 31, 2022, from $364.3$344.2 million at December 31, 2020,2021, due to the purchase of securities, partially offset by sales, normal payments and prepayment activity. Other investment securities, including municipal bonds and other asset-backed securities, were $239.6 million at June 30, 2021, or 64.7% of the total investment securities portfolio, a decrease of $35.4 million from $275.0 million at December 31, 2020. Mortgage-backed securities totaled $130.9 million at June 30, 2021, or 35.3% of the investment securities portfolio, an increase during the year of $41.6 million, or 46.6%, from $89.3 million at December 31, 2020. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.37.0 years as of June 30, 2021,March 31, 2022, and 5.7 years as of December 31, 2020,2021, and had an estimated average repricing term of 6.67.0 years as of June 30, 2021,March 31, 2022, and 5.05.4 years as of December 31, 2020,2021, based on the interest rate environment at those times.

 

The investment portfolio was composed of 45.0% in amortizing securities at June 30, 2021March 31, 2022 and 48.0%43.0% at December 31, 2020.2021. The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is impacted by prevailing mortgage interest rates. Management maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets; however, we continue to purchase investment securities as a source of additional interest income. Securities are sold to provide liquidity, improve long-term portfolio yields, reduce LIBOR risk, and manage duration in the portfolio. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

 

4140

 

Liabilities. Total liabilities increased to $1.6$1.77 billion at June 30, 2021,March 31, 2022, from $1.47$1.73 billion at December 31, 2020,2021, primarily due to an increase in borrowing of $65.0 million, offset by a decrease in deposits of $108.2 million and the issuance of subordinated debt of $40.0 million in March 2021.$31.2 million.

 

Deposit balances increased 8.1%decreased 2.0%, to $1.44$1.55 billion at June 30, 2021,March 31, 2022, from $1.33$1.58 billion at December 31, 2020.2021. There was a $51.9$2.7 million increase in demand depositsavings accounts offset by $81.9$16.0 million increasedecrease in money market accounts and a $21.3$9.7 million increasedecrease in savingsdemand deposit accounts, during the period, while the balance ofand certificates of deposits decreased $46.9 million. The$8.2 million during the period. A runoff in commercial and public fund account balances of $44.1 million was partially offset by an increase in deposits is in large part due to organic growth, the Federal government's continued response to the pandemic including stimulus payments, and depositconsumer account balances of additional PPP funding.$13.0 million. We strategically increased noninterest-bearing and other core deposits to manage overall funding costs. In addition to collecting customer deposits, wealso utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and allow flexibility when competing on retail rates. At June 30, 2021, we had $74.0manage interest rate risk. Brokered CDs totaling $65.7 million in brokered CDswere included in the $261.8$239.0 million balance of certificates of deposit comparedat March 31, 2022.

FHLB advances increased 81.3% to $86.0$145.0 million in brokered CDsat March 31, 2022, from $80.0 million at December 31, 2020.

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”)2021. We increased short-term advances to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the offering for general corporate purposes and has provided $20.0 million to the Bank as Tier 1 capital.replace liquidity lost with deposit outflow.

 

Equity. Total shareholders' equity increased $2.4decreased $12.4 million to $188.8$177.8 million for the sixthree months ended June 30, 2021.March 31, 2022. The Company recorded year-to-date net income of $6.1 million and$2.8 million. The net income increase was offset by an after-tax increasedecrease in unrealized gain on available-for-sale investments of $706,000. Increases were partially offset$15.3 million. All categories of the investment portfolio have been significantly impacted by $2.5 million in repurchases of shares of common stock, a $1.7 million adjustment in other comprehensive income reflecting the recognition of prior service cost related to the transfer out of participation in a multiemployer pension plan into a single employer plan, and an $888,000 decrease for realized gains on securities sold.rising rate environment.

 

 

 

Comparison of Results of Operations for the Three Months Ended June 30,March 31, 2022 and 2021 and 2020

 

General. Net income increased $1.0 million, or 51.6%, to $3.0was $2.8 million for the three months ended June 30, 2021,March 31, 2022, and compared to net income of $2.0$3.1 million for the three months ended June 30, 2020, due to anMarch 31, 2021. A $2.5 million increase in net interest income after provision for loan losses compared to the same period in 2020 andloss was offset by a modest increase$301,000 decrease in noninterest income partially offset by anand a $2.7 million increase in noninterest expense.

 

Net Interest Income. Net interest income increased $3.5$2.0 million to $13.6$15.5 million for the three months ended June 30, 2021,March 31, 2022, from $10.1$13.5 million for the three months ended June 30, 2020.March 31, 2021. This increase was mainly the result of an increase in average earning assets of $334.4$228.4 million. The yield on average interest-earning assets decreased 11increased 8 basis points to 3.68%3.86% for the three months ended June 30, 2021,March 31, 2022, compared to 3.79%3.78% for the same period in the prior year, due to a decreasean increase in reinvestment loan andyields earned on investment securities rates.securities.

 

The average cost of interest-bearing liabilities decreasedincreased to 0.46%0.43% for the three months ended June 30, 2021,March 31, 2022, compared to 0.89%0.40% for the same period last year, due primarily to an increase in borrowing rates of 85 basis points related to the issuance of subordinated debt offset by a decrease in rates on interest-bearing deposits of 5810 basis points combined with an increase in borrowing volume of $20.0 million and higher borrowing rates due to the issuance of subordinated debt.points. Total cost of funds decreased 37increased 2 basis points to 37 basis points0.34% for the three months ended June 30, 2020,March 31, 2022, from 74 basis points0.32% for the same period in 2020.2021. The net interest margin increased 245 basis points to 3.34%3.53% for the three months ended June 30, 2021,March 31, 2022, from 3.10%3.48% for the same period in 2020.2021.

 

Interest Income. Total interest income increased $2.7$2.3 million, or 21.8%15.5%, to $15.0$16.9 million for the three months ended June 30, 2021,March 31, 2022, from $12.4$14.6 million for the comparable period in 2020,2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased $2.6$2.0 million, to $12.9$14.5 million for the three months ended June 30, 2021,March 31, 2022, from $10.2$12.5 million for the three months ended June 30, 2020,March 31, 2021, related to an increase in the average balance of net loans receivable of $268.9$198.0 million compared to the prior year. Average loan yields decreased 10 basis points to 4.30%were 4.43% for each of the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

The following table compares average earning asset balances, associated yields,March 31, 2022 and resulting changes in interest income for the periods shown:

  

Three Months Ended June 30,

     
  

2021

  

2020

     
  

Average Balance Outstanding

  

Yield

  

Average Balance Outstanding

  

Yield

  

Increase (Decrease) in Interest Income

 
  

(Dollars in thousands)

 

Loans receivable, net

 $1,200,273   4.30% $931,344   4.40% $2,630 

Investment securities

  273,014   2.17   213,141   2.47   164 

Mortgage-backed securities

  122,671   2.11   135,604   2.18   (96)

FHLB stock

  4,074   4.53   4,426   4.97   (9)

Interest-bearing deposits in banks

  39,750   0.15   20,922   0.15   7 

Total interest-earning assets

 $1,639,782   3.68% $1,305,437   3.79% $2,696 

42

Interest Expense. Total interest expense decreased $840,000, or 37.5%, to $1.4 million for the three months ended June 30, 2021, compared to $2.2 million for the three months ended June 30, 2020, due to a decrease in interest expense on deposits of $1.2 million resulting from a 58 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $196.5 million, or 21.0%, to $1.13 billion for the three months ended June 30, 2021, from $937.0 million for the three months ended June 30, 2020, as we grew deposits in new and existing market areas. Additionally, the growth was supported by Government programs put in place to support the economy during the COVID-19 pandemic.

During the three months ended June 30, 2021, interest expense on certificates of deposit decreased due to a decrease in the average balance of $72.4 million and a decrease of 84 basis points in the average rate paid, compared to the three months ended June 30, 2020. During the same period, the average balances of savings, demand deposit, and money market accounts increased $12.5 million, $46.7 million and $209.7 million, respectively. The average cost of interest-bearing deposit products decreased to 0.29% for the three months ended June 30, 2021, from 0.87% for the three months ended June 30, 2020, due in large part to the expiration of promotional rates and a shift in balances to demand deposit accounts. Borrowing costs increased due to the subordinated debt issued in March 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,

     
  

2021

  

2020

     
  

Average Balance Outstanding

  

Rate

  

Average Balance Outstanding

  

Rate

  

Increase (Decrease) in Interest Expense

 
  

(Dollars in thousands)

 

Savings accounts

 $185,336   0.07% $172,833   0.62% $(235)

Transaction accounts

  169,681   0.02   122,951   0.01   6 

Money market accounts

  501,237   0.22   291,526   0.55   (125)

Certificates of deposit

  277,218   0.73   349,658   1.57   (862)

FHLB advances

  51,917   1.41   71,170   1.13   (18)

Subordinated debt

  39,276   4.02         394 

Total interest-bearing liabilities

 $1,224,665   0.46% $1,008,138   0.89% $(840)

Provision for Loan Losses. The provision for loan losses was $300,000 for the three months ended June 30, 2021, primarily due to growth in the loan portfolio, and was $1.5 million for the three months ended June 30, 2020, due to the uncertainty in economic conditions created by the COVID-19 pandemic and growth in the loan portfolio.

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

  

Three Months Ended June 30,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 

Provision for loan losses

 $300  $1,500 

Net recoveries (charge-offs)

  23   (221)

Allowance for loan losses

  14,588   12,109 

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

  1.2%  1.2%

Total nonaccrual loans

  1,784   3,356 

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

  817.7%  360.8%

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

  0.1%  0.3%

Total loans

 $1,256,145  $996,401 

Noninterest Income. Noninterest income decreased $237,000, or 5.8%, to $3.9 million for the three months ended June 30, 2021, from $4.1 million for the three months ended June 30, 2020, mainly due to a decrease in gain on sale of mortgage loans of $1.1 million. Gain on sale of investments was $1.1 million for the second quarter of 2021, compared to gain on sale of investments of $661,000 for the same period in 2020.

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

  

Three Months Ended June 30,

  

Increase (Decrease)

 
  

2021

  

2020

  

Amount

  

Percent

 
  

(Dollars in thousands)

 

Loan and deposit service fees

 $1,001  $765  $236   30.8%

Mortgage servicing fees, net of amortization

  13   (172)  185   (107.6)

Net gain on sale of loans

  921   2,001   (1,080)  (54.0)

Net gain on sale of investment securities

  1,124   661   463   70.0 

Increase in cash surrender value of bank-owned life insurance

  242   627   (385)  (61.4)

Other income

  571   227   344   151.5 

Total noninterest income

 $3,872  $4,109  $(237)  (5.8)%

43

Noninterest Expense. Noninterest expense increased $3.4 million, or 33.3%, to $13.7 million for the three months ended June 30, 2021, compared to $10.3 million for the three months ended June 30, 2020, primarily as a result of an increase in compensation and benefits as we added staff to manage the company and generate additional revenue. Compensation and benefits was also higher due to a $160,000 increase in commissions paid on increased mortgage and commercial loan production and a $500,000 increase related to equity awarded to the principal owners of POM Peace of Mind, Inc. ("POM") as part of the Quin Ventures, Inc. ("Quin" or "Quin Ventures") joint venture agreement. Occupancy and equipment increased as a result of new software implementation.

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

  

Three Months Ended June 30,

  

Increase (Decrease)

 
  

2021

  

2020

  

Amount

  

Percent

 
  

(Dollars in thousands)

 

Compensation and benefits

 $8,559  $5,966  $2,593   43.5%

Data processing

  726   769   (43)  (5.6)

Occupancy and equipment

  1,803   1,345   458   34.1 

Supplies, postage, and telephone

  355   284   71   25.0 

Regulatory assessments and state taxes

  301   223   78   35.0 

Advertising

  492   377   115   30.5 

Professional fees

  644   354   290   81.9 

FDIC insurance premium

  168   70   98   140.0 

Other expense

  659   894   (235)  (26.3)

Total

 $13,707  $10,282  $3,425   33.3%

Provision for Income Tax. An income tax expense of $663,000 was recorded for the three months ended June 30, 2021, compared to $464,000 for the three months ended June 30, 2020, due to an increase in income before taxes of $1.1 million. For additional information, see Note 5 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, 2021 and 2020

General. Net income increased $3.3 million, or 114.7%, to $6.1 million for the six months ended June 30, 2021, compared to net income of $2.8 million for the six months ended June 30, 2020, due to an increase in net interest income after provision for loan losses compared to the same period in 2020 and a modest increase in noninterest income partially offset by an increase in noninterest expense.

Net Interest Income. Net interest income increased $7.6 million to $27.1 million for the six months ended June 30, 2021, from $19.5 million for the six months ended June 30, 2020. This increase was mainly the result of an increase in average earning assets of $337.8 million. The yield on average interest-earning assets decreased 12 basis points to 3.75% for the six months ended June 30, 2021, compared to 3.87% for the same period in the prior year due to a decrease in reinvestment loan and investment securities rates.

The average cost of interest-bearing liabilities decreased to 0.43% for the six months ended June 30, 2021, compared to 0.99% for the same period last year, due primarily to a decrease in rates on interest-bearing deposits of 62 basis points offset by an increase in borrowing rates of 45 basis points related to the issuance of subordinated debt. Total cost of funds decreased 49 basis points to 35 basis points for the six months ended June 30, 2021, from 84 basis points for the same period in 2020. The net interest margin increased 32 basis points to 3.43% for the six months ended June 30, 2021, from 3.11% for the same period in 2020.

Interest Income. Totalinterest income increased $5.4 million, or 22.0%, to $29.7 million for the six months ended June 30, 2021, from $24.3 million for the comparable period in 2020, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased $5.3 million, to $25.4 million for the six months ended June 30, 2021, from $20.1 million for the six months ended June 30, 2020, related to an increase in the average balance of net loans receivable of $265.3 million compared to the prior year. Average loan yields decreased 6 basis points to 4.39% for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

 

 

4441

 

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,

     

Three Months Ended March 31,

    
 

2021

  

2020

     

2022

  

2021

    
 

Average Balance Outstanding

  

Yield

  

Average Balance Outstanding

  

Yield

  

Increase (Decrease) in Interest Income

  

Average Balance Outstanding

  

Yield

  

Average Balance Outstanding

  

Yield

  

Increase (Decrease) in Interest Income

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Loans receivable, net

 $1,166,422  4.39% $901,116  4.45% $5,335  $1,330,177  4.43% $1,132,194  4.43% $1,995 

Investment securities

 274,610  2.24  181,586  2.63  665  359,436  2.57  368,737  2.21  241 

Mortgage-backed securities

 107,673  2.08  148,593  2.29  (591)

FHLB stock

 3,942  4.66  4,573  4.46  (11) 5,311  3.97  3,809  4.73  7 

Interest-bearing deposits in banks

  42,150  0.13   21,110  0.72   (48)

Interest-earning deposits in banks

  82,780  0.19   44,576  0.12   25 

Total interest-earning assets

 $1,594,797  3.75% $1,256,978  3.87% $5,350  $1,777,704  3.86% $1,549,316  3.78% $2,268 

 

Interest Expense. Total interest expense decreased $2.3 million,increased $265,000, or 47.0%23.0%, to $2.6$1.4 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to $4.8$1.2 million for the sixthree months ended June 30, 2020,March 31, 2021, due to an increase in borrowing costs of $428,000 primarily related to the subordinated debt issued in 2021, offset by a decrease in interest expense on deposits of $2.4 million$217,000 resulting from a 6210 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $219.9$129.2 million, or 24.6%11.8%, to $1.11$1.22 billion for the sixthree months ended June 30, 2021,March 31, 2022, from $893.0 million$1.09 billion for the sixthree months ended June 30, 2020, as we grew depositsMarch 31, 2021, due to core deposit growth in new and existing market areas. Additionally,areas as well as purchasing the growth was supported by manyBellevue branch in July of the Government programs put in place to support the economy during the COVID-19 pandemic.2021.

 

During the sixthree months ended June 30, 2021,March 31, 2022, interest expense decreased on cost of certificates of deposit decreased due to a decrease in the average balancebalances of $46.1$53.4 million, andalong with a decrease of 90 basis points in the average raterates paid of 18 basis points, compared to the sixthree months ended June 30, 2020.March 31, 2021. During the same period, the average balances of savings, demand deposit, and money market and savings accounts increased $10.2 million, $46.6$126.7 million and $209.2$21.1 million, respectively.respectively, while the average rate paid decreased 4 basis points for both categories, resulting in comparatively minor changes to interest expense. Interest-bearing demand account average balances increased $34.8 million and the average rate paid increased 2 basis points, resulting in a minor increase to interest expense. The average cost of allinterest-bearing deposit products decreased to 0.25%0.24% for the sixthree months ended June 30, 2021,March 31, 2022, from 0.78%0.34% for the sixthree months ended June 30, 2020,March 31, 2021, due in large part to the expiration of promotional rates and a shift in balancesdeposit mix to higher levels of transaction accounts. Borrowing costs increased due to the issuance of subordinated debt in March 2021 partially offset by a decreaseand increases in both the average balance and cost of FHLB advances compared to the same period in 2020.2021.

 

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

 

 

Six Months Ended June 30,

     

Three Months Ended March 31,

    
 

2021

  

2020

     

2022

  

2021

    
 

Average Balance Outstanding

  

Rate

  

Average Balance Outstanding

  

Rate

  

Increase (Decrease) in Interest Expense

  

Average Balance Outstanding

  

Rate

  

Average Balance Outstanding

  

Rate

  

Increase (Decrease) in Interest Expense

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Savings accounts

 $179,524  0.08% $169,371  0.72% $(535)

Transaction accounts

 165,562  0.02  118,963  0.04  (6) $196,154  0.04% $161,398  0.02% $10 

Money market accounts

 481,269  0.24  272,030  0.56  (195) 587,806  0.21  461,080  0.25  12 

Savings accounts

  194,721  0.05   173,647  0.09   (14)

Certificates of deposit

 286,552  0.78  332,674  1.68  (1,684) 242,642  0.63  295,989  0.81  (225)

FHLB advances

 53,667 1.41  75,574 1.68  (261) 82,611 1.49  55,437 1.38  113 

Subordinated debt

  21,334  3.96        419   39,282  4.07   3,192  3.13   369 

Total interest-bearing liabilities

 $1,187,908  0.43% $968,612  0.99% $(2,262) $1,343,216  0.43% $1,150,743  0.40% $265 

 

Provision for Loan Losses. The Company recorded no loan loss provision during the first quarter of 2022. This compares to a provision for loan losses was $800,000of $500,000 for the sixthree months ended June 30, 2021, primarily due to growth in the loan portfolio, and was $2.8 million for the six months ended June 30, 2020, due to the uncertaintyMarch 31, 2021. The lack of provision reflects improvement in economic conditions, created byless uncertainty regarding the impact of COVID-19, pandemic as well as growth inand stable credit quality metrics compared to the loan portfolio.prior year.

 

 

4542

 

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

 

 

Six Months Ended June 30,

  

Three Months Ended March 31,

 
 

2021

  

2020

  

2022

  

2021

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Provision for loan losses

 $800 $2,766  $ $500 

Net charge-offs

 (59) (285)

Net recoveries (charge-offs)

 3  (82)

Allowance for loan losses

 14,588  12,109  15,127  14,265 

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

 1.2% 1.2% 1.1% 1.2%

Total nonaccrual loans

 1,784  3,356  1,233  2,135 

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

 817.7% 360.8% 1226.8% 668.1%

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

 0.1% 0.3% 0.1% 0.2%

Total loans

 $1,256,145  $996,401  $1,375,044  $1,168,340 

 

Noninterest Income. Noninterest income increased $149,000,decreased $301,000, or 2.3%11.1%, to $6.6$2.4 million for the sixthree months ended June 30, 2021,March 31, 2022, from $6.4$2.7 million for the sixthree months ended June 30, 2020. Interchange fee income onMarch 31, 2021. Loan and deposit accountsservice fees increased $241,000, mortgage servicing fee income increased $200,000, and loan swap fee income increased $315,000 over the same period in 2020. The cash surrender2021 due to $120,000 of commercial loan late fees received during the quarter. Servicing fee income on sold loans increased $200,000 due to the fair value accounting election and a $63,000 increase in Main Street Lending Program servicing fee income. Investment securities with low yields driven by high levels of bank-owned life insurance (BOLI)prepayment activity were sold for a gain of $126,000 during the quarter, allowing the Company to reallocate funds into higher yielding assets. Other income decreased $469,000 due to a BOLI restructure that occurredvaluation decrease of $67,000 recorded on our joint venture fintech investments compared to a gain of $208,000 in the same period in 2021, offset by adjustable-rate conversion ("ARC") loan fee income of $149,000 in the current period compared to no ARC fee income during the six months ended June 30, 2020, whichsame period in 2021. These increases were offset by a decline in gain on sales of mortgage loans of $1.1 million over the same period in 2021 as rising mortgage loan rates and lack of single family home inventory have resulted in the recognition of additional market gains.a decline in mortgage loan production.

 

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

  

Six Months Ended June 30,

  

Increase (Decrease)

 
  

2021

  

2020

  

Amount

  

Percent

 
  

(Dollars in thousands)

 

Loan and deposit service fees

 $1,838  $1,646  $192   11.7%

Mortgage servicing fees, net of amortization

  43   (157)  200   (127.4)

Net gain on sale of loans

  2,258   2,384   (126)  (5.3)

Net gain on sale of investment securities

  1,124   1,266   (142)  (11.2)

Increase in cash surrender value of bank-owned life insurance

  486   955   (469)  (49.1)

Other income

  827   333   494   148.3 

Total noninterest income

 $6,576  $6,427  $149   2.3%

  

Three Months Ended March 31,

  

Increase (Decrease)

 
  

2022

  

2021

  

Amount

  

Percent

 
  

(Dollars in thousands)

 

Loan and deposit service fees

 $1,173  $837  $336   40.1%

Sold loan servicing fees

  432   30   402   1,340.0 

Net gain on sale of loans

  253   1,337   (1,084)  (81.1)

Net gain on sale of investment securities

  126      126   100.0 

Increase in cash surrender value of bank-owned life insurance

  252   244   8   3.3 

Other income

  167   256   (89)  (34.8)

Total noninterest income

 $2,403  $2,704  $(301)  (11.1)%

 

Noninterest Expense. Noninterest expense increased $6.1$2.7 million, or 31.2%22.6%, to $25.8$14.8 million for the sixthree months ended June 30, 2021,March 31, 2022, compared to $19.7$12.1 million for the sixthree months ended June 30, 2020,March 31, 2021, primarily as a result of an increase in compensation and benefits as we added staff to manage the company and generate additional revenue. Compensationbuild up data and benefits was also higher due to a $672,000 increase in commissions paid on increased mortgage and commercial loan production and a $500,000 increase related to equity awarded to the principal owners of POM as part of the Quin joint venture agreement.fintech infrastructures. Costs related to software increased $619,000$423,000 as we implemented more robust systems to support digital initiatives and Company growth.implement customer relationship management tools. Increases in advertising and professional fees were related to the purchase of the Bellevue branch, our investment in Quin Ventures and the relocation of our Fairhaven branch.online initiatives. The increase in FDIC insurance over the prior yearregulatory assessments and state taxes was due to a combination of a small bank assessment credit issued in September 2019 that resulted in no FDIC insurance payment during the first quarter of 2020 and an increase in average assets of $347.2 million which resultedtaxable income compared to the same period in a higher assessment base.2021 combined with an accrual for regulatory exams in the current year.

 

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

 

 

Six Months Ended June 30,

  

Increase (Decrease)

  

Three Months Ended March 31,

  

Increase (Decrease)

 
 

2021

  

2020

  

Amount

  

Percent

  

2022

  

2021

  

Amount

  

Percent

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Compensation and benefits

 $15,854  $11,327  $4,527  40.0% $8,803  $7,295  $1,508  20.7%

Data processing

 1,465  1,459  6  0.4  1,772  1,333  439  32.9 

Occupancy and equipment

 3,426  2,696  730  27.1  1,167  1,029  138  13.4 

Supplies, postage, and telephone

 597  495  102  20.6  313  242  71  29.3 

Regulatory assessments and state taxes

 562  397  165  41.6  361  261  100  38.3 

Advertising

 937  649  288  44.4  752  445  307  69.0 

Professional fees

 1,166  754  412  54.6  559  522  37  7.1 

FDIC insurance premium

 316  70  246  351.4  223  148  75  50.7 

FHLB prepayment penalty

   210  (210) (100.0)

Other expense

  1,478   1,607   (129)  (8.0)  881   819   62   7.6 

Total

 $25,801  $19,664  $6,137   31.2%

Total noninterest expense

 $14,831  $12,094  $2,737   22.6%

 

Provision for Income Tax. An income tax expense of $1.1 million$554,000 was recorded for the sixthree months ended June 30, 2021,March 31, 2022, compared to $668,000$473,000 for the sixthree months ended June 30, 2020, due to an increaseMarch 31, 2021. There was a year-over-year decrease in income before taxes of $3.6 million.$535,000; however, the expense recorded for the three months ended March 31, 2021, included a tax accrual true-up. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

 

4643

 

 

Average Balances, Interest and Average Yields/Cost

 

The following tabletables 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, 2021March 31, 2022 and 2020.2021. 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,

  

Six Months Ended June 30,

  

Three Months Ended March 31,

 
 

At June 30, 2021

  

2021

  

2020

  

2021

  

2020

  

2022

  

2021

 
   

Average

 

Interest

   

Average

 

Interest

   

Average

 

Interest

   

Average

 

Interest

    

Average

 

Interest

   

Average

 

Interest

   
 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

  

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 
 

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

 
 

(Dollars in thousands)

 

(Dollars in thousands)

  (Dollars in thousands) 

Interest-earning assets:

                                                   

Loans receivable, net (1)

 4.26% $1,200,273  $12,866  4.30% $931,344  $10,236  4.40% $1,166,422  $25,407  4.39% $901,116  $20,072  4.45% $1,330,177  $14,536  4.43% $1,132,194  $12,541  4.43%

Investment securities

 2.62  273,014  1,480  2.17  213,141  1,316  2.47  274,610  3,050  2.24  181,586  2,385  2.63  359,436  2,275  2.57  368,737  2,034  2.21 

Mortgage-backed securities

 2.18  122,671  644  2.11  135,604  740  2.18  107,673  1,108  2.08  148,593  1,699  2.29 

FHLB dividends

 4.93  4,074  46  4.53  4,426  55  4.97  3,942  91  4.66  4,573  102  4.46  5,311  52  3.97  3,809  45  4.73 

Interest-bearing deposits in banks

  0.07   39,750   15   0.15   20,922   8   0.15   42,150   28   0.13   21,110   76   0.72 

Interest-earning deposits in banks

  82,780   38   0.19   44,576   13   0.12 

Total interest-earning assets (2)

 3.71  1,639,782  15,051  3.68  1,305,437  12,355  3.79  1,594,797  29,684  3.75  1,256,978  24,334  3.87  1,777,704  16,901  3.86  1,549,316  14,633  3.78 

Noninterest-earning assets

  122,013        96,490      

Total average assets

 $1,899,717       $1,645,806      
                            

Interest-bearing liabilities:

                                                   

Interest-bearing demand deposits

 0.01  $169,681  $10  0.02  $122,951  $4  0.01  $165,562  $17  0.02  $118,963  $23  0.04  $196,154  $17  0.04  $161,398  $7  0.02 

Money market accounts

 0.21  501,237  275  0.22  291,526  400  0.55  481,269  561  0.24  272,030  756  0.56  587,806  298  0.21  461,080  286  0.25 

Savings accounts

 0.06  185,336   34  0.07   172,833   269  0.62   179,524   74  0.08   169,371   609  0.72  194,721  26  0.05  173,647  40  0.09 

Certificates of deposit

  0.76   277,218   506   0.73   349,658   1,368   1.57   286,552   1,107   0.78   332,674   2,791   1.68   242,642   376   0.63   295,989   601   0.81 

Total deposits

 0.22  1,133,472  825  0.29  936,968  2,041  0.87  1,112,907  1,759  0.32  893,038  4,179  0.94  1,221,323  717  0.24  1,092,114  934  0.34 

FHLB borrowings

 0.83  51,917  183  1.41  71,170  201  1.13  53,667  374  1.41  75,574  635  1.68  82,611  304  1.49  55,437  191  1.38 

Subordinated debt

  4.07   39,276   394   4.02            21,334   419   3.96            39,282   394   4.07   3,192   25   3.13 

Total interest-bearing liabilities

 0.35  1,224,665  1,402  0.46  1,008,138  2,242  0.89  1,187,908  2,552  0.43  968,612  4,814  0.99  1,343,216  1,415  0.43  1,150,743  1,150  0.40 

Noninterest-bearing deposits

 328,304       283,204      

Other noninterest-bearing liabilities

  38,742          25,688        

Total average liabilities

  1,710,262          1,459,635        

Average equity

  189,455        186,171      

Total average liabilities and equity

 $1,899,717         $1,645,806        
                            

Net interest income

      $13,649       $10,113       $27,132       $19,520        $15,486       $13,483    

Net interest rate spread

 3.36       3.22       2.90       3.32       2.88        3.43        3.38 

Net earning assets

    $415,117       $297,299       $406,889       $288,366       $434,488       $398,573      

Net interest margin (3)

        3.34       3.10       3.43       3.11        3.53        3.48 

Average interest-earning assets to average interest-bearing liabilities

    133.9%      129.5%      134.3%      129.8%      132.3%      134.6%     

 

(1) The average loans receivable, net balances include nonaccrual loans.

(2) Includes interest-bearinginterest-earning deposits (cash) at other financial institutions.

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

 

 

4744

 

Rate/Volume Analysis

 

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

 

 

Three Months Ended

   

Six Months Ended

    

Three Months Ended

    
 

June 30, 2021 vs. 2020

     

June 30, 2021 vs. 2020

     

March 31, 2022 vs. 2021

    
 

Increase (Decrease) Due to

     

Increase (Decrease) Due to

     

Increase (Decrease) Due to

    
 

Volume

  

Rate

  

Total Increase (Decrease)

  

Volume

  

Rate

  

Total Increase (Decrease)

  

Volume

  

Rate

  

Total Increase (Decrease)

 
 

(In thousands)

 

(In thousands)

  

(In thousands)

 

Interest earning assets:

                        

Interest-earning assets:

      

Loans receivable, net

 $2,939  $(309) $2,630  $5,768  $(433) $5,335  $1,995  $  $1,995 

Investments

 296  (228) 68  731  (657) 74  (64) 305  241 

FHLB stock

 (5) (4) (9) (15) 4  (11) 17  (10) 7 

Other(1)

  7      7   74   (122)  (48)

Other (1)

  11   14   25 

Total interest-earning assets

 $3,237  $(541) $2,696  $6,558  $(1,208) $5,350  $1,959  $309  $2,268 
              

Interest-bearing liabilities:

                              

Interest-bearing demand deposits

 $2  $4  $6  $9  $(15) $(6) $1  $9  $10 

Money market accounts

 286  (411) (125) 573  (768) (195) 76  (64) 12 

Savings accounts

 19  (254) (235) 34  (569) (535) 4  (18) (14)

Certificates of deposit

 (284) (578) (862) (396) (1,288) (1,684) (111) (114) (225)

FHLB advances

 (55) 37  (18) (185) (76) (261) 91  22  113 

Subordinated debt

     394   394      419   419   278   91   369 

Total interest-bearing liabilities

 $(32) $(808) $(840) $35  $(2,297) $(2,262) $339  $(74) $265 
              

Net change in interest income

 $3,269  $267  $3,536  $6,523  $1,089  $7,612  $1,620  $383  $2,003 

 

(1) Includes interest-bearinginterest-earning deposits (cash) at other financial institutions.

 

 

Off-Balance Sheet Activities

 

In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the sixthree months ended June 30, 2021March 31, 2022 and the year ended December 31, 2020,2021, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

 

4845

 

Contractual Obligations

 

At June 30, 2021,March 31, 2022, our scheduled maturities of contractual obligations were as follows:

 

 

Within

 

After 1 Year Through

 

After 3 Years Through

 

Beyond

 

Total

  

Within

 

After 1 Year Through

 

After 3 Years Through

 

Beyond

 

Total

 
 

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Balance

  

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Balance

 
 

(In thousands)

  

(In thousands)

 
  

Certificates of deposit

 $172,770 $76,415 $12,646 $ $261,831  $147,258 $71,091 $20,672 $ $239,021 

FHLB advances

 40,000 25,000 25,000  90,000  75,000 35,000 25,000 10,000 145,000 

Subordinated debt obligation

    39,241 39,241     39,250 39,250 

Operating leases

 458 887 926 3,230 5,501  803 1,691 1,777 4,601 8,872 

Borrower taxes and insurance

 1,143    1,143  2,138    2,138 

Deferred compensation

 381 235 80 500 1,196   123  383  78  497  1,081 

Total contractual obligations

 $214,752 $102,537 $38,652 $42,971 $398,912  $225,322 $108,165 $47,527 $54,348 $435,362 

 

Commitments and Off-Balance Sheet Arrangements

 

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2021:March 31, 2022:

 

 

Amount of Commitment Expiration

  

Amount of Commitment Expiration

 
 Within After 1 Year Through After 3 Years Through Beyond Total Amounts  Within After 1 Year Through After 3 Years Through Beyond Total Amounts 
 

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Committed

  

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Committed

 
 

(In thousands)

  

(In thousands)

 

Commitments to originate loans:

                      

Fixed-rate

 $3,582  $  $  $  $3,582  $3,028  $  $  $  $3,028 

Variable-rate

 175    175  9,795    9,795 

Unfunded commitments under lines of credit or existing loans

 66,240  45,456  9,781  113,945  235,422  95,067  30,986  10,666  123,672  260,391 

Standby letters of credit

  124   58         182   212            212 

Total commitments

 $70,121  $45,514  $9,781  $113,945  $239,361  $108,102  $30,986  $10,666  $123,672  $273,426 
 

 

Liquidity Management

 

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.

 

Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.

 

Our most liquid assets are cash and cash equivalents followed by available for saleavailable-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2021,March 31, 2022, cash and cash equivalents totaled $80.7$82.5 million, and unpledged securities classified as available-for-sale with a market value of $255.4$272.0 million provided additional sources of liquidity. We pledged collateral of $475.7 million to support borrowings from the FHLB of $427.1 million and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $24.3$9.7 million were pledged as of June 30, 2021.March 31, 2022.

 

At June 30, 2021,March 31, 2022, we had $3.8$12.8 million in loan commitments outstanding and $235.6$260.6 million in undisbursed loans and standby letters of credit, including $158.2$161.3 million in undisbursed construction loan commitments.

 

4946

 

Certificates of deposit due within one year as of June 30, 2021March 31, 2022 totaled $172.8$147.3 million, or 66.0%61.6% of certificates of deposit with a weighted-average rate of 0.76%0.40%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates have recently declined.were in decline. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

 

The Company is a separate legal entity from the Bank and provides for its own liquidity. At June 30, 2021,March 31, 2022, the Company, on an unconsolidated basis, had liquid assets of $20.7$7.8 million. In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on subordinated notes held at the Company level.level, and commitments to joint ventures. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. First Northwest has partially fulfilled its commitment to extend $15.0 million to Quin Ventures, Inc. under a capital financing agreement and related promissory note.

 

Capital Resources

 

At June 30, 2021,March 31, 2022, shareholders' equity totaled $188.8$177.8 million, or 10.6%9.1% of total assets. Our book value per share of common stock was $18.48$17.77 at June 30, 2021,March 31, 2022, compared to $18.20$19.10 at December 31, 2020.2021.

 

At June 30, 2021,March 31, 2022, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

 

The following table provides the capital requirements and actual results for First Fed at June 30, 2021.March 31, 2022.

 

 

Actual

  

Minimum Capital Requirements

  

Minimum Required to be Well-Capitalized

  

Actual

  

Minimum Capital Requirements

  

Minimum Required to be Well-Capitalized

 
 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
     

(Dollars in thousands)

          

(Dollars in thousands)

     

Tier I leverage capital (to average assets)

 $187,564  10.9% $69,071  4.0% $86,339  5.0% $200,865  10.6% $75,735  4.0% $94,669  5.0%

Common equity tier I (to risk-weighted assets)

 187,564  14.5  58,367  4.5  84,308  6.5  200,865  13.1  69,014  4.5  99,687  6.5 

Tier I risk-based capital (to risk-weighted assets)

 187,564  14.5  77,822  6.0  103,763  8.0  200,865  13.1  92,019  6.0  122,692  8.0 

Total risk-based capital (to risk-weighted assets)

 202,490  15.6  103,763  8.0  129,704  10.0  216,321  14.1  122,692  8.0  153,365  10.0 

 

In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.

 

Effect of Inflation and Changing Prices

 

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

5047

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures.

 

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2021,March 31, 2022, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

 

(b) Changes in Internal Controls.

 

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2021,March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

 

5148

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

From time to time, the Company is engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations.

 

Item 1A. Risk Factors

 

The disclosures below supplementThere have been no material changes to the risk factors previously disclosed underset forth in Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2020.

The effects of the COVID-19 pandemic could adversely affect the future results of operations of our customers and/or the market price of our stock.

The COVID-19 pandemic continues to rapidly evolve, as do federal, state and local efforts to address it. Both the direct effects of the pandemic and the resulting United States governmental responses are of an unprecedented scope as it impacts both the health and the economy of our country and the world at large. No one can predict the extent or duration of the pandemic, or its effect on the markets that we serve. Further, the ongoing efforts and impact of the government in mitigating the health and the economic effects of the pandemic cannot currently be predicted, whether on our business or as to the economy as a whole. The pandemic has thus far resulted in significant volatility in international and United States markets, which could adversely affect the market price of our stock. To date, the pandemic has resulted in significant business disruption and volatility in the international and domestic markets, which has adversely affected the market price of our stock.

The Company continues to manage through uncertainties and complexities created by the pandemic. As an essential business, our employees have been able to work safely in our branch locations and over 70% of our workforce has the ability to work from home. However, the economic downturn in local markets we serve could result in increased credit risk associated with the loan portfolio to the extent that customers are unable to repay loans and meet their obligations, as well as adversely impacting our earnings. We believe our strong capital position will be important in managing through the effects of the pandemic.2021.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

The following table summarizes common stock repurchases during the three months ended June 30, 2021:March 31, 2022:

                 

Period

 

Total Number of Shares Purchased (1)

  

Average Price Paid per Share

  

Total Number of Shares Repurchased as Part of Publicly Announced Plans (2)

  

Maximum Number of Shares that May Yet Be Repurchased Under the Plans

 
                 

April 1, 2021 - April 30, 2021

  6,485  $16.15   6,485   865,545 

May 1, 2021 - May 31, 2021

  1,354         865,545 

June 1, 2021 - June 30, 2021

  11,657   17.56   11,657   853,888 

Total

  19,496  $17.06   18,142     
                 

(1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 0 shares, 1,354 shares, and 0 shares, respectively, for the periods indicated.

 

(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock issued and outstanding as of October 27, 2020. As of June 30, 2021, a total of 169,532 shares, or 16.6% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $17.06 per share, leaving 853,888 shares available for future purchases.

 
                 

Period

 

Total Number of Shares Purchased (1)

  

Average Price Paid per Share

  

Total Number of Shares Repurchased as Part of Publicly Announced Plans (2)

  

Maximum Number of Shares that May Yet Be Repurchased Under the Plans

 
                 

January 1, 2022 - January 31, 2022

  1,572  $      658,370 

February 1, 2022 - March 1, 2022

           658,370 

March 2, 2022 - April 1, 2022

  7,347         658,370 

Total

  8,919  $        
                 

(1) Shares repurchased by the Company during the quarter represent shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 1,572 shares, 0 shares, and 7,347 shares, respectively, for the periods indicated.

 

(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock issued and outstanding as of October 27, 2020. As of March 31, 2022, a total of 365,050 shares, or 35.7% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $17.05 per share, leaving 658,370 shares available for future purchases.

 

 

5249

 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

COVID-19 Legislation and Regulation.Not applicable.

Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 pandemic. On March 27, 2020, the CARES Act was signed into law, which included $350 billion in stimulus for small businesses under the SBA PPP, along with direct stimulus payments (i.e., "economic impact payments" or "stimulus checks") for many eligible Americans. Shortly thereafter, the Paycheck Protection Program and Health Care Enforcement Act was signed into law and replenished funding to the SBA PPP and provided other spending for hospitals and virus testing. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was enacted. Main provisions of the PPPFA extended the PPP loan repayment period from two to five years, extended the covered expense period from eight to 24 weeks, and lowered the percentage of forgiveness amount required to be used for eligible payroll costs to 60%. The PPPFA also extended the repayment start date until after the SBA finalized the application process for loan forgiveness. The Consolidated Appropriations Act, enacted in December 2020, included another $284 billion to fund an expansion of the SBA PPP, subject to certain changes in eligibility requirements and program design. Most recently, the American Rescue Plan Act of 2021 became law in March 2021 and provides for a $1.9 billion stimulus package that, among other financial aid measures, included a new round of PPP funding with an application deadline of May 31, 2021.

53

 

Item 6. Exhibits

 

Exhibit

No.

Exhibit Description

Filed

Herewith

Form

Original Exhibit No.

Filing Date

10.1*First Fed Fiscal 2022 Officer Cash Incentive PlanX

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

 

 

 

32

Certification pursuant to Section 906 of the Sarbanes-Oxley Act

X

 

 

 

101

The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021,March 31, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income;Loss; (4) Consolidated Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Denotes a management contract or compensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

FIRST NORTHWEST BANCORP

 

 

Date: AugustMay 13, 20212022

/s/ Matthew P. Deines

 

 

 

Matthew P. Deines

 

President, Chief Executive Officer and Director

 

(Principal Executive Officer)

 

 

 

 

Date: AugustMay 13, 20212022

/s/ Geraldine L. Bullard

 

 

 

Geraldine L. Bullard

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

 

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