FIRST NORTHWEST BANCORP: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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 objectives, intentions and expectations;

• statements regarding our business plans, prospects, growth and

strategies;

• statements regarding the quality of our loan and investment portfolios;

• estimates of our risks and future costs and benefits; and

• statements regarding the continuing effects of the COVID-19 pandemic on

        the Bank's business and financial results and conditions.




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


• the effects of the COVID-19 pandemic, including on our credit quality and

        operations, as well as its impact on general economic conditions?
    •   legislative or regulatory changes, including actions taken by
        governmental authorities in response to inflationary pressures, the
        COVID-19 pandemic, and climate change;

• the risks associated with the loans and potential adverse changes in the

the credit quality of the loans in our portfolio, particularly with regard to

to borrowers affected by the COVID-19 pandemic, natural disasters or

climate change;

• reduced market demand for the loans 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 obtain loans and income

growth;

• our ability to successfully execute a merger and/or acquisition

strategies and integrate all assets, liabilities,

customers, systems and management personnel in our operations and our

ability to achieve related cost savings within the expected time frame;

• our ability to successfully execute growth strategies related to our

entry into new markets;

• our ability to develop user-friendly digital applications to serve

existing customers and attracting new customers;

• the use of estimates to determine the fair value of certain of our assets,

whose estimates may turn out to be erroneous and lead to

valuation declines;

• the evolution of general interest rate levels and the relative

differences between short and long-term interest rates, interest on deposits

rates, our net interest margin and funding sources;

• increased competitive pressures among financial services companies,

in particular from non-traditional banking entities such as challenger

banks, fintechs and tech mega-companies;

• our ability to attract and retain deposits;

• changes in consumption, borrowing and saving 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;

• interruptions, security breaches or other adverse events, failures or

interruptions or attacks on our computer systems or

third-party vendors who perform many of our critical processing

functions;

• any failure of major third-party providers to fulfill their obligations of

we; and

• other economic, competitive, governmental, regulatory and technical aspects

        factors affecting our operations, pricing, products and services and
        other risks described elsewhere in our filings with the Securities and
        Exchange Commission, including this Form 10-Q and our Annual Report on
        Form 10-K for the year ended December 31, 2021.





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



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



                                       35

————————————————– ——————————

  Table of Contents



General



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



First Fed Bank is a community-oriented financial institution serving Western
Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom
counties. We have twelve full-service branches and two business centers. First
Fed's business and operating strategy is focused on building sustainable
earnings by delivering a fully array of financial products and services for
individuals, small business, and commercial customers. Additionally, First Fed
focuses on strategic partnerships with financial technology ("fintech")
companies to develop and deploy digitally focused financial solutions to meet
customers' needs on a broader scale. Lending activities include the origination
of first lien one- to four-family mortgage loans, commercial and multi-family
real estate loans, construction and land loans (including lot loans), commercial
business loans, and consumer loans, consisting primarily of automobile loans as
well as home equity loans and lines of credit. Over the last five years, we have
significantly increased the origination of commercial real estate, multi-family
real estate, construction, and commercial business loans, and more recently have
increased our consumer loan portfolio through our manufactured home and auto
loan purchase programs. We offer traditional consumer and business deposit
products, including transaction accounts, savings and money market accounts and
certificates of deposit for individuals and businesses. Deposits are our primary
source of funding for our lending and investing activities.



Quin Ventures is a fintech focused on financial wellness and lifestyle
protection for consumers nationwide. First Northwest's limited partnership
investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM
FINTOP Blockchain, L.P., which invest in fintech-related business with a focus
on developing digital solutions applicable to the banking industry.



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



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



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



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



Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive
measures taken by governments, businesses and individuals caused unprecedented
uncertainty, volatility and disruption in financial markets and in governmental,
commercial and consumer activity in the United States and globally, including
the markets that we serve. We anticipate continued improvements in commercial
and consumer activity and the U.S. economy. As of September 30, 2021, the
governor of Washington removed restrictions initially set in place, allowing
businesses to return to full capacity.



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

————————————————– ——————————

Contents



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



We continue to provide banking and financial services to our customers, having
returned to regular lobby and drive-thru access at all our branch locations in
May 2021. In addition, we continue to provide access to banking and financial
services through online banking, Interactive Teller Machines ("ITMs"),
Automated Teller Machines ("ATMs"), and by telephone. We continue to take
additional precautions within all our locations, including providing personal
protection equipment and enhanced cleaning procedures, to ensure the safety of
our customers and our employees.



We provided assistance to many small businesses applying for the SBA's Paycheck
Protection Program ("PPP") funding. We processed $32.2 million of loans for 515
customers through the initial round of SBA PPP funding during 2020 with an
average loan amount of $63,000. 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 March 31, 2022, $32.1 million, or 99.7%, of the
first-round loans were forgiven and $27.9 million, or 79.7%, of second-round
loans were forgiven.



Critical Accounting Policies



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



There have been no other material changes in critical accounting policies as disclosed in the company’s annual report on Form 10-K for the year ended
December 31, 2021.

Comparison of the financial situation at March 31, 2022 and December 31, 2021

Assets. Total assets increased to $1.94 billion to March 31, 2022 from $1.92 billion to December 31, 2021.



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



Net loans, excluding loans held for sale, increased $20.3 million to $1.37
billion at March 31, 2022, from $1.35 billion at December 31, 2021. During the
three months ended March 31, 2022, multi-family loans increased $31.3 million as
$16.6 million of acquisition-renovation construction and $13.6 million of
commercial construction loans transitioned into amortizing loans. Auto and other
consumer loans increased $23.4 million, as a result of a $16.0 million purchase
of a pool of manufactured home loans, $5.9 million in individual manufactured
home loan purchases, and a net increase in auto loans of $2.4 million offset by
payment activity. One- to four-family residential loans decreased $3.9
million as payment of loans exceeded originations during the current quarter.
Commercial business loans decreased $25.3 million, mainly as the result of a
decrease in Northpointe Mortgage Participation Program of $26.3 million and
Paycheck Protection Program ("PPP") loans paid off during the quarter totaling
$7.3 million, offset by a $1.9 million SBA loan origination and draws on
existing loans. Our participation in the Northpointe program is based on current
funding needs of the program. Given the slowdown in the mortgage market, as well
as recent funding raises by Northpointe, we do not anticipate significant
activity in the near term.



Construction and land loans decreased $15.3 million, or 6.8%, to $209.4
million at March 31, 2022, from $224.7 million at December 31, 2021. Our
construction loans are geographically dispersed throughout Western Washington
with one loan in Oregon and two loans in Idaho. We manage our construction
lending by utilizing a licensed third-party vendor to assist us in monitoring
our construction projects. We continue to monitor the projects currently in our
portfolio to determine the impact of COVID-19 on completion. As of the date of
this report, we have no reason to believe that any of the projects in process
will not be completed. At March 31, 2022, acquisition-renovation loans of $31.2
million were included in the construction loan total compared to $51.1
million at December 31, 2021. These commercial acquisition-renovation loans
represent financing primarily for the acquisition of multi-family properties
with a construction component used for the renovation of common areas and
specific units of the building. Given the construction component of these loans
we are required to report them as construction under regulatory guidelines;
however, we consider these loans to be lower risk than typical ground-up
construction projects.



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



                                       37

————————————————– ——————————

Contents

The following tables present our construction commitments by type and geographic concentration on the dates indicated:



                         North Olympic      Puget Sound
March 31, 2022           Peninsula (1)       Region (2)       Other Washington        Oregon         Idaho         Total
                                                                  (In thousands)
Construction
Commitment
One- to four-family
residential              $       36,886     $     65,326     $            4,983     $        -     $       -     $ 107,195
Multi-family
residential                           -          154,503                  5,798            415         3,592       164,308
Commercial
acquisition-renovation            2,934           31,304                      -              -             -        34,238
Commercial real estate            9,078           45,054                      -              -             -        54,132
Total commitment         $       48,898     $    296,187     $           10,781     $      415     $   3,592     $ 359,873

Construction Funds
Disbursed
One- to four-family
residential              $       13,600     $     31,015     $            1,052     $        -     $       -     $  45,667
Multi-family
residential                           -           80,953                  2,438              8         1,805        85,204
Commercial
acquisition-renovation            2,445           28,742                      -              -             -        31,187
Commercial real estate            5,883           30,682                      -              -             -        36,565
Total disbursed          $       21,928     $    171,392     $            3,490     $        8     $   1,805     $ 198,623

Undisbursed Commitment
One- to four-family
residential              $       23,286     $     34,311     $            3,931     $        -     $       -     $  61,528
Multi-family
residential                           -           73,550                  3,360            407         1,787        79,104
Commercial
acquisition-renovation              489            2,562                      -              -             -         3,051
Commercial real estate            3,195           14,372                      -              -             -        17,567
Total undisbursed        $       26,970     $    124,795     $            7,291     $      407     $   1,787     $ 161,250

Land Funds Disbursed
One- to four-family
residential              $        3,870     $      3,609     $              190     $        -     $       -     $   7,669
Commercial real estate                -            3,103                      -              -             -         3,103
Total disbursed for
land                     $        3,870     $      6,712     $              190     $        -     $       -     $  10,772




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




                             North Olympic     Puget Sound
December 31, 2021            Peninsula (1)      Region (2)       Other Washington        Oregon         Total
                                                               (In thousands)
Construction Commitment
One- to four-family
residential                  $      32,785     $     57,050     $            4,430     $        -     $   94,265
Multi-family residential                 -          182,151                  4,095          8,435        194,681
Commercial
acquisition-renovation               2,938           36,536                 16,638              -         56,112
Commercial real estate              12,489           50,372                  2,535              -         65,396
Total commitment             $      48,212     $    326,109     $           27,698     $    8,435     $  410,454

Construction Funds
Disbursed
One- to four-family
residential                  $      10,242     $     28,929     $              562     $        -     $   39,733
Multi-family residential                 -           79,707                  2,414          7,534         89,655
Commercial
acquisition-renovation               2,449           32,789                 15,861              -         51,099
Commercial real estate               3,486           29,484                  2,701              -         35,671
Total disbursed              $      16,177     $    170,909     $           21,538     $    7,534     $  216,158

Undisbursed Commitment
One- to four-family
residential                  $      22,543     $     28,121     $            3,868     $        -     $   54,532
Multi-family residential                 -          102,444                  1,681            901        105,026
Commercial
acquisition-renovation                 489            3,747                    777              -          5,013
Commercial real estate               9,003           20,888                   (166 )            -         29,725
Total undisbursed            $      32,035     $    155,200     $            6,160     $      901     $  194,296

Land Funds Disbursed
One- to four-family
residential                  $       3,502     $      3,556     $              191     $        -     $    7,249
Commercial real estate                   -            1,302                      -              -          1,302
Total disbursed for land     $       3,502     $      4,858     $              191     $        -     $    8,551




                                       38

————————————————– ——————————

Contents



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



Our allowance for loan losses remained $15.1 million at March 31, 2022, as no
loan loss provision was recorded for the three months ended March 31, 2022. Net
recoveries were $3,000 for the three-month period. The loan loss provision is
made to account for growth in the loan portfolio adjusted for qualitative
factors. We continue to monitor the economic impact of the COVID-19 pandemic,
which is reflected in the qualitative factor adjustments. The allowance for loan
losses as a percentage of total loans was 1.1% at both March 31, 2022 and
December 31, 2021.



Nonperforming loans decreased $148,000, or 10.7%, to $1.2 million at March 31,
2022, from $1.4 million at December 31, 2021, reflecting improvements in
nonperforming auto and other consumer loans of $106,000, home equity loans
of $29,000, one- to four-family loans of $10,000, and commercial real estate
loans of $3,000. Nonperforming loans to total loans was 0.1% at both March 31,
2022 and December 31, 2021. The allowance for loan losses as a percentage of
nonperforming loans increased to 1227% at March 31, 2022, from 1095% at December
31, 2021.



At March 31, 2022, there were $1.8 million in restructured loans, of which $1.79
million were performing in accordance with their modified payment terms and are
accruing loans. Classified loans increased $1.7 million to $14.3 million at
March 31, 2022, from $12.6 million at December 31, 2021, due to the addition of
a single residential real estate loan that was downgraded in 2022.



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



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



                                                                                   Increase (Decrease)
                                   March 31, 2022       December 31, 2021         Amount          Percent
                                               (In thousands)
Real Estate:
One-to-four family                $        291,053     $           294,965     $     (3,912 )          (1.3 )%
Multi-family                               203,746                 172,409           31,337            18.2
Commercial real estate                     370,346                 363,299            7,047             1.9
Construction and land                      209,395                 224,709          (15,314 )          (6.8 )
Total real estate loans                  1,074,540               1,055,382           19,158             1.8

Consumer:
Home equity                                 39,858                  39,172              686             1.8
Auto and other consumer                    206,140                 182,769           23,371            12.8
Total consumer loans                       245,998                 221,941           24,057            10.8

Commercial business loans                   54,506                  79,838          (25,332 )         (31.7 )

Total loans                              1,375,044               1,357,161           17,883             1.3
Less:
Net deferred loan fees                       4,144                   4,772             (628 )         (13.2 )
Premium on purchased loans, net            (14,816 )               (12,995 )         (1,821 )          14.0
Allowance for loan losses                   15,127                  15,124                3               -
Loans receivable, net             $      1,370,589     $         1,350,260     $     20,329             1.5




                                       39

————————————————– ——————————

Contents

The following table represents non-performing assets as of the dates indicated.

                                                                                    Increase (Decrease)
                                   March 31, 2022       December 31, 2021        Amount            Percent
                                               (In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family               $            484     $               494     $       (10 )            (2.0 )%
Commercial real estate                          68                      71              (3 )            (4.2 )
Construction and land                           22                      22               -                 -
Total real estate loans                        574                     587             (13 )            (2.2 )

Consumer loans:
Home equity                                    253                     282             (29 )           (10.3 )
Auto and other consumer                        406                     512            (106 )           (20.7 )
Total consumer loans                           659                     794            (135 )           (17.0 )

Total nonperforming assets        $          1,233     $             1,381     $      (148 )           (10.7 )

Nonaccrual and 90 days or more
past due loans as a percentage
of total loans                                 0.1 %                   0.1 %           0.0 %               -




Investment securities increased $33.5 million, or 9.7%, to $377.7 million at
March 31, 2022, from $344.2 million at December 31, 2021, due to the purchase of
securities, partially offset by sales, normal payments and prepayment activity.
The investment portfolio, including mortgage-backed securities, had an estimated
projected average life of 7.0 years as of March 31, 2022, and 5.7 years as
of December 31, 2021, and had an estimated average repricing term of 7.0 years
as of March 31, 2022, and 5.4 years as of December 31, 2021, based on the
interest rate environment at those times.



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



                                       40

————————————————– ——————————

Contents

Passives. Total liabilities increased to $1.77 billion to March 31, 2022from $1.73 billion to December 31, 2021mainly due to an increase in borrowings of $65.0 millionoffset by a drop in deposits of $31.2 million.



Deposit balances decreased 2.0%, to $1.55 billion at March 31, 2022, from $1.58
billion at December 31, 2021. There was a $2.7 million increase in savings
accounts offset by a $16.0 million decrease in money market accounts and a $9.7
million decrease in demand deposit accounts, and certificates of deposits
decreased $8.2 million during the period. A runoff in commercial and public fund
account balances of $44.1 million was partially offset by an increase in
consumer account balances of $13.0 million. We also utilize brokered
certificates of deposit ("brokered CDs") as an additional funding source in
order to manage our cost of funds, reduce our reliance on public funds deposits,
and manage interest rate risk. Brokered CDs totaling $65.7 million were included
in the $239.0 million balance of certificates of deposit at March 31, 2022.



FHLB advances increased by 81.3% to reach $145.0 million to March 31, 2022from $80.0 million to December 31, 2021. We increased short-term advances to replace cash lost through deposit outflows.



Equity. Total shareholders' equity decreased $12.4 million to $177.8 million for
the three months ended March 31, 2022. The Company recorded year-to-date net
income of $2.8 million. The net income increase was offset by an after-tax
decrease in unrealized gain on available-for-sale investments of $15.3 million.
All categories of the investment portfolio have been significantly impacted by
the rising rate environment.






Comparison of operating results for the three months ended March 31, 2022
and 2021



General. Net income was $2.8 million for the three months ended March 31, 2022,
and compared to $3.1 million for the three months ended March 31, 2021. A $2.5
million increase in net interest income after provision for loan loss was offset
by a $301,000 decrease in noninterest income and a $2.7 million increase in
noninterest expense.



Net Interest Income. Net interest income increased $2.0 million to $15.5
million for the three months ended March 31, 2022, from $13.5 million for the
three months ended March 31, 2021. This increase was mainly the result of an
increase in average earning assets of $228.4 million. The yield on average
interest-earning assets increased 8 basis points to 3.86% for the three months
ended March 31, 2022, compared to 3.78% for the same period in the prior year,
due to an increase in yields earned on investment securities.



The average cost of interest-bearing liabilities increased to 0.43% for the
three months ended March 31, 2022, compared to 0.40% for the same period last
year, due primarily to an increase in borrowing rates of 85 basis points related
to the issuance of subordinated debt offset by a decrease in rates on
interest-bearing deposits of 10 basis points. Total cost of funds increased
2 basis points to 0.34% for the three months ended March 31, 2022, from 0.32%
for the same period in 2021. The net interest margin increased 5 basis points
to 3.53% for the three months ended March 31, 2022, from 3.48% for the same
period in 2021.



Interest Income. Total interest income increased $2.3 million, or 15.5%,
to $16.9 million for the three months ended March 31, 2022, from $14.6 million
for the comparable period in 2021, primarily due to an increase in the average
balances on interest-earning assets. Interest and fees on loans receivable
increased $2.0 million, to $14.5 million for the three months ended March 31,
2022, from $12.5 million for the three months ended March 31, 2021, related to
an increase in the average balance of net loans receivable of $198.0 million
compared to the prior year. Average loan yields were 4.43% for each of the three
months ended March 31, 2022 and 2021.





                                       41

————————————————– ——————————

Contents

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


                                             Three Months Ended March 31,
                                          2022                           2021
                                  Average                        Average                         Increase
                                  Balance                        Balance                       (Decrease) in
                                Outstanding       Yield        Outstanding       Yield        Interest Income
                                                           (Dollars in thousands)
Loans receivable, net          $   1,330,177         4.43 %   $   1,132,194         4.43 %   $           1,995
Investment securities                359,436         2.57           368,737         2.21                   241
FHLB stock                             5,311         3.97             3,809         4.73                     7
Interest-earning deposits in
banks                                 82,780         0.19            44,576         0.12                    25
Total interest-earning
assets                         $   1,777,704         3.86 %   $   1,549,316
        3.78 %   $           2,268




Interest Expense. Total interest expense increased $265,000, or 23.0%, to $1.4
million for the three months ended March 31, 2022, compared to $1.2 million for
the three months ended March 31, 2021, due to an increase in borrowing costs of
$428,000 primarily related to the subordinated debt issued in 2021, offset by a
decrease in interest expense on deposits of $217,000 resulting from a 10 basis
point decrease in the average cost of interest-bearing deposits. The average
balance of interest-bearing deposits increased $129.2 million, or 11.8%,
to $1.22 billion for the three months ended March 31, 2022, from $1.09 billion
for the three months ended March 31, 2021, due to core deposit growth in new and
existing market areas as well as purchasing the Bellevue branch in July of 2021.



During the three months ended March 31, 2022, interest expense decreased on
certificates of deposit due to a decrease in the average balances of $53.4
million, along with a decrease in the average rates paid of 18 basis points,
compared to the three months ended March 31, 2021. During the same period, the
average balances of money market and savings accounts increased $126.7 million
and $21.1 million, respectively, while the average rate paid decreased 4 basis
points for both categories, resulting in comparatively minor changes to interest
expense. Interest-bearing demand account average balances increased $34.8
million and the average rate paid increased 2 basis points, resulting in a minor
increase to interest expense. The average cost of interest-bearing deposit
products decreased to 0.24% for the three months ended March 31, 2022,
from 0.34% for the three months ended March 31, 2021, due in large part to the
expiration of promotional rates and a shift in deposit mix to higher levels of
transaction accounts. Borrowing costs increased due to the issuance of
subordinated debt in March 2021 and increases in both the average balance and
cost of FHLB advances compared to the same period in 2021.



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



                                             Three Months Ended March 31,
                                          2022                           2021
                                                                                               Increase
                                  Average                        Average                      (Decrease)
                                  Balance                        Balance                     in Interest
                                Outstanding        Rate        Outstanding        Rate         Expense
                                                         (Dollars in thousands)
Transaction accounts           $     196,154         0.04 %   $     161,398         0.02 %   $         10
Money market accounts                587,806         0.21           461,080         0.25               12
Savings accounts                     194,721         0.05           173,647         0.09              (14 )
Certificates of deposit              242,642         0.63           295,989         0.81             (225 )
FHLB advances                         82,611         1.49            55,437         1.38              113
Subordinated debt                     39,282         4.07             3,192         3.13              369
Total interest-bearing
liabilities                    $   1,343,216         0.43 %   $   1,150,743         0.40 %   $        265



Allowance for loan losses. The Company recorded no loan loss provision in the first quarter of 2022. This compares to a loan loss provision of
$500,000 for the three months ended March 31, 2021. The lack of provision reflects improving economic conditions, lower uncertainty regarding the impact of COVID-19 and stable credit quality measures compared to the prior year.






                                       42

————————————————– ——————————

Contents

The following table details the activities and information relating to the provision for loan losses for the periods indicated:


                                                       Three Months Ended March 31,
                                                         2022                 2021
                                                          (Dollars in thousands)
Provision for loan losses                           $             -       $        500
Net recoveries (charge-offs)                                      3                (82 )
Allowance for loan losses                                    15,127             14,265
Allowance for losses as a percentage of total
gross loans receivable at period end                            1.1 %              1.2 %
Total nonaccrual loans                                        1,233         

2,135

Allowance for loan losses as a percentage of
nonaccrual loans at period end                               1226.8 %            668.1 %
Nonaccrual and 90 days or more past due loans as
a percentage of total loans                                     0.1 %              0.2 %
Total loans                                         $     1,375,044       $  1,168,340




Noninterest Income. Noninterest income decreased $301,000, or 11.1%, to $2.4
million for the three months ended March 31, 2022, from $2.7 million for the
three months ended March 31, 2021. Loan and deposit service fees increased over
the same period in 2021 due to $120,000 of commercial loan late fees received
during the quarter. Servicing fee income on sold loans increased $200,000 due to
the fair value accounting election and a $63,000 increase in Main Street Lending
Program servicing fee income. Investment securities with low yields driven by
high levels of prepayment activity were sold for a gain of $126,000 during the
quarter, allowing the Company to reallocate funds into higher yielding
assets. Other income decreased due to a valuation decrease of $67,000 recorded
on our joint venture fintech investments compared to a gain of $208,000 in the
same period in 2021, offset by adjustable-rate conversion ("ARC") loan fee
income of $149,000 in the current period compared to no ARC fee income during
the same period in 2021. These increases were offset by a decline in gain on
sales of mortgage loans of $1.1 million over the same period in 2021 as rising
mortgage loan rates and lack of single family home inventory have resulted in a
decline in mortgage loan production.



The following table presents a detailed analysis of the variations of the components of non-interest income for the periods indicated:


                                        Three Months Ended March 31,           Increase (Decrease)
                                          2022                2021            Amount         Percent
                                                           (Dollars in thousands)

Loan and deposit service fees $1,173 $837 $336

           40.1 %
Sold loan servicing fees                        432                  30             402        1,340.0
Net gain on sale of loans                       253               1,337          (1,084 )        (81.1 )
Net gain on sale of investment
securities                                      126                   -             126          100.0
Increase in cash surrender value of
bank-owned life insurance                       252                 244               8            3.3
Other income                                    167                 256             (89 )        (34.8 )
Total noninterest income              $       2,403       $       2,704     $      (301 )        (11.1 )%




Noninterest Expense. Noninterest expense increased $2.7 million, or 22.6%,
to $14.8 million for the three months ended March 31, 2022, compared to $12.1
million for the three months ended March 31, 2021, primarily as a result of an
increase in compensation and benefits as we added staff to manage the company
and build up data and fintech infrastructures. Costs related to software
increased $423,000 as we implemented more robust systems to support digital
initiatives and implement customer relationship management tools. Increases in
advertising were related to Quin Ventures and online initiatives. The increase
in regulatory assessments and state taxes was due to an increase in taxable
income compared to the same period in 2021 combined with an accrual for
regulatory exams in the current year.



The following table provides an analysis of the changes in the components of non-interest expense for the periods indicated:



                                            Three Months Ended March 31,              Increase (Decrease)
                                              2022                 2021            Amount            Percent
                                                                (Dollars in thousands)
Compensation and benefits                $        8,803       $        7,295     $     1,508              20.7 %
Data processing                                   1,772                1,333             439              32.9
Occupancy and equipment                           1,167                1,029             138              13.4
Supplies, postage, and telephone                    313                  242              71              29.3
Regulatory assessments and state taxes              361                  261             100              38.3
Advertising                                         752                  445             307              69.0
Professional fees                                   559                  522              37               7.1
FDIC insurance premium                              223                  148              75              50.7
Other expense                                       881                  819              62               7.6
Total noninterest expense                $       14,831       $       12,094     $     2,737              22.6 %




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



                                       43

————————————————– ——————————

  Table of Contents



Average balances, interest and average returns/costs



The following tables set forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin (otherwise known as net yield on interest-earning assets),
and the ratio of average interest-earning assets to average interest-bearing
liabilities. Also presented is the weighted average yield on interest-earning
assets, rates paid on interest-bearing liabilities and the net spread as
of March 31, 2022 and 2021. Income and all average balances are monthly average
balances, which management deems to be not materially different than daily
averages. Nonaccrual loans have been included in the table as loans carrying a
zero yield.





                                                       Three Months Ended March 31,
                                            2022                                           2021
                           Average         Interest                       Average         Interest
                           Balance         Earned/         Yield/         Balance         Earned/         Yield/
                         Outstanding         Paid           Rate        Outstanding         Paid           Rate
                                                          (Dollars in thousands)
Interest-earning
assets:
Loans receivable, net
(1)                      $  1,330,177     $   14,536           4.43 %   $  1,132,194     $   12,541           4.43 %
Investment securities         359,436          2,275           2.57          368,737          2,034           2.21
FHLB dividends                  5,311             52           3.97            3,809             45           4.73
Interest-earning
deposits in banks              82,780             38           0.19           44,576             13           0.12
Total interest-earning
assets (2)                  1,777,704         16,901           3.86        1,549,316         14,633           3.78
Noninterest-earning
assets                        122,013                                         96,490
Total average assets     $  1,899,717                                   $  1,645,806

Interest-bearing
liabilities:
Interest-bearing
demand deposits          $    196,154     $       17           0.04     $    161,398     $        7           0.02
Money market accounts         587,806            298           0.21          461,080            286           0.25
Savings accounts              194,721             26           0.05          173,647             40           0.09
Certificates of
deposit                       242,642            376           0.63          295,989            601           0.81
Total deposits              1,221,323            717           0.24        1,092,114            934           0.34
FHLB borrowings                82,611            304           1.49           55,437            191           1.38
Subordinated debt              39,282            394           4.07            3,192             25           3.13
Total interest-bearing
liabilities                 1,343,216          1,415           0.43        1,150,743          1,150           0.40
Noninterest-bearing
deposits                      328,304                                        283,204
Other
noninterest-bearing
liabilities                    38,742                                         25,688
Total average
liabilities                 1,710,262                                      1,459,635
Average equity                189,455                                        186,171
Total average
liabilities and equity   $  1,899,717                                   $  1,645,806

Net interest income                       $   15,486                                     $   13,483
Net interest rate
spread                                                         3.43                                           3.38
Net earning assets       $    434,488                                   $    398,573
Net interest margin
(3)                                                            3.53                                           3.48
Average
interest-earning
assets to average
interest-bearing
liabilities                     132.3 %                                        134.6 %



(1) Average loans receivable, net balances include outstanding loans. (2) Includes remunerated deposits (cash) with other financial institutions. (3) Net interest income divided by average interest-earning assets.





                                       44

————————————————– ——————————

  Table of Contents



Rate/Volume Analysis



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





                                                        Three Months Ended
                                                     March 31, 2022 vs. 2021
                                                    Increase (Decrease) Due to
                                                                                        Total Increase
                                                    Volume                 Rate           (Decrease)
                                                                    (In thousands)
Interest-earning assets:
Loans receivable, net                          $          1,995         $         -     $         1,995
Investments                                                 (64 )               305                 241
FHLB stock                                                   17                 (10 )                 7
Other (1)                                                    11                  14                  25
Total interest-earning assets                  $          1,959         $   

309 $2,268

Interest-bearing liabilities:
Interest-bearing demand deposits               $              1         $         9     $            10
Money market accounts                                        76                 (64 )                12
Savings accounts                                              4                 (18 )               (14 )
Certificates of deposit                                    (111 )              (114 )              (225 )
FHLB advances                                                91                  22                 113
Subordinated debt                                           278                  91                 369
Total interest-bearing liabilities             $            339         $       (74 )   $           265

Net change in interest income                  $          1,620         $       383     $         2,003



(1) Includes remunerated deposits (cash) with other financial institutions.

Off-balance sheet activities



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



                                       45

————————————————– ——————————

  Table of Contents



Contractual Obligations



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



                                                          After 3
                                       After 1 Year        Years
                          Within         Through          Through          Beyond         Total
                          1 Year         3 Years          5 Years         5 Years        Balance
                                                      (In thousands)

Certificates of
deposit                 $  147,258     $     71,091     $     20,672     $        -     $  239,021
FHLB advances               75,000           35,000           25,000         10,000        145,000
Subordinated debt
obligation                       -                -                -         39,250         39,250
Operating leases               803            1,691            1,777          4,601          8,872
Borrower taxes and
insurance                    2,138                -                -              -          2,138
Deferred compensation          123              383               78            497          1,081
Total contractual
obligations             $  225,322     $    108,165     $     47,527     $   54,348     $  435,362



Off-balance sheet commitments and arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks at March 31, 2022:


                                                      Amount of Commitment Expiration
                                                                After 3
                                             After 1 Year        Years
                                Within         Through          Through          Beyond        Total Amounts
                                1 Year         3 Years          5 Years         5 Years          Committed
                                                              (In thousands)
Commitments to originate
loans:
Fixed-rate                    $    3,028     $          -     $          -     $        -     $         3,028
Variable-rate                      9,795                -                -              -               9,795
Unfunded commitments under
lines of credit or existing
loans                             95,067           30,986           10,666        123,672             260,391
Standby letters of credit            212                -                -              -                 212
Total commitments             $  108,102     $     30,986     $     10,666     $  123,672     $       273,426






Liquidity Management



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



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



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



To March 31, 2022we have had $12.8 million outstanding credit commitments and $260.6 million in undisbursed loans and stand-by letters of credit, including $161.3 million in undisbursed construction loan commitments.



                                       46

————————————————– ——————————

Contents



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



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



Capital Resources



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



To March 31, 2022the Bank exceeded all regulatory capital requirements and was considered “well capitalized” FDIC regulatory capital guidelines.



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



                                                              Minimum Capital                 Minimum Required to be
                                      Actual                    Requirements                     Well-Capitalized
                               Amount        Ratio         Amount           Ratio         Amount                 Ratio
                                                           (Dollars in thousands)
Tier I leverage capital (to
average assets)               $ 200,865         10.6 %   $   75,735             4.0 %   $    94,669                     5.0 %
Common equity tier I (to
risk-weighted assets)           200,865         13.1         69,014             4.5          99,687                     6.5
Tier I risk-based capital
(to risk-weighted assets)       200,865         13.1         92,019             6.0         122,692                     8.0
Total risk-based capital
(to risk-weighted assets)       216,321         14.1        122,692             8.0         153,365                    10.0




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



Effect of inflation and price change



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



                                       47

————————————————– ——————————

Contents

© Edgar Online, source Previews

Comments are closed.