FIRST FINANCIAL NORTHWEST, INC. 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. These statements relate to our financial
condition, results of operations, plans, objectives, future performance or
business. Forward-looking statements are not statements of historical fact, are
based on certain assumptions and are generally identified by use of the words
"believes," "expects," "anticipates," "estimates," "forecasts," "intends,"
"plans," "targets," "potentially," "probably," "projects," "outlook" or similar
expressions or future or conditional verbs such as "may," "will," "should,"
"would" and "could." Forward-looking statements include statements with respect
to our beliefs, plans, objectives, goals, expectations, assumptions and
statements about, among other things, expectations of the business environment
in which we operate, projections of future performance or financial items,
perceived opportunities in the market, potential future credit experience, and
statements regarding our mission and vision. These forward-looking statements
are based upon current management expectations and may, therefore, involve risks
and uncertainties. Our actual results, performance, or achievements may differ
materially from those suggested, expressed, or implied by forward-looking
statements as a result of a wide variety or range of factors including, but not
limited to:
•potential adverse impacts to economic conditions in our local market areas,
other markets where the Company has lending relationships, or other aspects of
the Company's business operations or financial markets, generally, resulting
from the ongoing novel coronavirus of 2019 ("COVID-19") and any governmental or
societal responses thereto;
•the credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write-offs, that may be affected by
deterioration in the housing and commercial real estate markets, and may lead to
increased losses and nonperforming assets in our loan portfolio, and may result
in our allowance for loan losses not being adequate to cover actual losses, and
require us to materially increase our allowance for loan and lease losses;
•changes in general economic conditions, either nationally or in our market
areas, including as a result of employment levels and labor shortages, and the
effects of inflation, a potential recession or slowed economic growth caused by
increasing oil prices and supply chain disruptions;
•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;
•uncertainty regarding the future of the London Interbank Offered Rate
("LIBOR"), and the transition away from LIBOR toward new interest rate
benchmarks;
•fluctuations in the demand for loans, the number of unsold homes and other
properties and fluctuations in real estate values in our market areas;
•results of examinations of us by the Federal Reserve Bank of San Francisco
("FRB") and our bank subsidiary by the Federal Deposit Insurance Corporation
("FDIC"), the Washington State Department of Financial Institutions , Division of
Banks ("DFI") or other regulatory authorities, including the possibility that
any such regulatory authority may initiate an enforcement action against the
Company or the Bank which could require us to increase our allowance for loan
and lease losses, write-down assets, change our regulatory capital position,
affect our ability to borrow funds or maintain or increase deposits, or impose
additional requirements or restrictions on us, any of which could adversely
affect our liquidity and earnings;
•our ability to pay dividends on our common stock;
•our ability to attract and retain deposits;
•our ability to control operating costs and expenses;
•the use of estimates in determining the fair value of certain of our assets,
which estimates may prove to be incorrect and result in significant declines in
valuation;
•difficulties in reducing risk associated with the loans on our balance sheet;
•staffing fluctuations in response to product demand or the implementation of
corporate strategies that affect our work force and potential associated
charges;
•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;
•our ability to retain key members of our senior management team;
•our ability to execute a branch expansion strategy;
•our ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we have acquired or may in the future acquire
into our operations and our ability to realize related revenue synergies and
cost savings within expected time frames and any goodwill charges related
thereto;
•our ability to manage loan delinquency rates;
•costs and effects of litigation, including settlements and judgments;
•increased competitive pressures among financial services companies;
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•changes in consumer spending, borrowing and savings habits;
•legislative or regulatory changes that adversely affect our business as a
result of COVID-19;
•the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the "Dodd-Frank Act") and the implementing regulations;
•the availability of resources to address changes in laws, rules, or regulations
or to respond to regulatory actions;
•adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the
financial institution regulatory agencies or the Financial Accounting Standards
Board , including additional guidance and interpretation on accounting issues and
details of the implementation of new accounting methods; and
•other economic, competitive, governmental, regulatory, and technological
factors affecting our operations, pricing, products and services, and other
risks detailed in our Form 10-K for the year ended December 31, 2021 ("2021
Form 10-K") and our other reports filed with the U.S. Securities and Exchange
Commission ("SEC").
Any of the forward-looking statements that we make in this Form 10-Q and in the
other public reports and statements we make may turn out to be wrong because of
the inaccurate assumptions we might make, because of the factors illustrated
above or because of other factors that we cannot foresee. Because of these and
other uncertainties, our actual future results may be materially different from
those expressed in any forward-looking statements made by or on our behalf.
Therefore, these factors should be considered in evaluating the forward-looking
statements, and undue reliance should not be placed on such statements. We
undertake no responsibility to update or revise any forward-looking statements.
As used throughout this report, the terms "Company", "we", "our", or "us" refer
to First Financial Northwest, Inc. and its consolidated subsidiaries, including
First Financial Northwest Bank and First Financial Diversified Corporation .
Overview
First Financial Northwest Bank ("the Bank") is a wholly-owned subsidiary ofFirst Financial Northwest, Inc. ("the Company") and, as such, comprises substantially all of the activity for the Company.First Financial Northwest Bank was a community-based savings bank untilFebruary 4, 2016 , when the Bank converted to aWashington chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily servesKing ,Pierce ,Snohomish , andKitsap counties,Washington , through its full-service banking office and headquarters inRenton, Washington , as well as seven retail branches inKing County, Washington , five retail branches inSnohomish County, Washington , and two retail branches inPierce County, Washington . The Bank's business consists predominantly of attracting deposits from the general public, combined with borrowing from the FHLB and raising funds in the wholesale market (which may include brokered deposits), then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. The Bank's strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in 12 to 24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans and consumer classic car loans that are outside of our primary market area. Through our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 46 other states and theDistrict of Columbia , with the largest concentrations atJune 30, 2022 , inCalifornia ,Oregon ,Texas ,Florida andAlabama of$37.1 million ,$14.1 million ,$11.4 million ,$9.7 million and$8.1 million , respectively. The Bank's strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. The Bank has created an SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of 39 --------------------------------------------------------------------------------
credit, business term loans or equipment financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.
Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income.First Financial Northwest Bank is currently slightly asset-sensitive, meaning our interest-earning assets reprice at a faster rate than our interest-bearing liabilities. The Bank had a modest improvement in the net interest margin over the last year. The cost of funds has declined substantially due to the higher levels of noninterest-bearing deposits and the repricing of retail certificates of deposit at much lower market rates. During the quarter endedJune 30, 2022 , loan yields decreased compared to the same quarter last year, primarily due to the decrease in recognition of unamortized deferred fee income on Paycheck Protection Program ("PPP") loans forgiven and repaid by the SBA. InMarch 2022 , in response to inflation, theFederal Open Market Committee ("FOMC") of theFederal Reserve System commenced increasing the target range for the federal funds rate by 25 basis points. During the second quarter of 2022, theFOMC increased the target range for the federal funds rate by an additional 125 basis points to a range of 1.50% to 1.75%. We expect if theFOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent communications and interest rate forecasts, the Company's loan yields and yields from other floating rate interest earning assets will improve. An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth or an increase in probable loan losses. Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of BOLI, and revenue earned on our wealth management services. This income is increased or partially offset by any net gain or loss on sales of investment securities. Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits. Professional fees include legal services, auditing and accounting services, computer support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities. Also included in noninterest expense is the change to the Company's unfunded commitment reserve which is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.
COVID-19 Related Information
The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As ofJune 30, 2022 , all Bank branches are open with normal hours. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Critical Accounting Policies
Our significant accounting policies are fundamental to understanding our
results of operations and financial condition because they require that we use
estimates and assumptions that may affect the value of our assets or liabilities
and our financial results. These policies are critical because they require
management to make difficult, subjective, and complex judgments about matters
that are inherently uncertain and because it is likely that materially different
amounts would be reported under different conditions or by using different
assumptions. These policies govern the ALLL, the valuation of OREO, and the
calculation of deferred taxes, the right-of-use asset and lease liability on our
operating leases, fair values, and other-than-temporary
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impairments on the market value of investments and derivatives. These policies
and estimates are described in further detail in Part II, Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 1, Summary of Significant Accounting Policies in the 2021 Form 10-K. There
have not been any material changes in the Company's critical accounting policies
and estimates as compared to the disclosure contained in the 2021 Form 10-K.
Comparison of Financial Condition at
Total assets were$1.45 billion atJune 30, 2022 , an increase of 2.0%, from$1.43 billion atDecember 31, 2021 . The following table details the$28.4 million net change in the composition of our assets atJune 30, 2022 fromDecember 31, 2021 . Balance at Balance at June 30, December 31, Change from 2022 2021 December 31, 2021 Percent Change (Dollars in thousands) Cash on hand and in banks$ 9,458 $ 7,246 $ 2,212 30.5 % Interest-earning deposits 26,194 66,145 (39,951) (60.4) Investments available-for-sale, at fair value 210,826 168,948 41,878 24.8 Investments held-to-maturity, at amortized cost 2,432 2,432 - - Loans receivable, net 1,119,795 1,103,461 16,334 1.5 FHLB stock, at cost 5,512 5,465 47 0.9 Accrued interest receivable 5,738 5,285 453 8.6 Deferred tax assets, net 1,840 850 990 116.5 Premises and equipment, net 21,855 22,440 (585) (2.6) BOLI, net 35,819 35,210 609 1.7 Prepaid expenses and other assets 10,493 3,628 6,865 189.2 ROU, net 3,301 3,646 (345) (9.5) Goodwill 889 889 - - Core deposit intangible, net 616 684 (68) (9.9) Total assets$ 1,454,768 $ 1,426,329 $ 28,439 2.0 % Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at theFederal Reserve Bank of San Francisco ("FRB"), decreased by$40.0 million during the six months endedJune 30, 2022 . Growth in both loans receivable and investments available-for-sale was achieved by investing excess cash earning a nominal yield into these higher yielding assets. Investments available-for-sale. Our investments available-for-sale portfolio increased by$41.9 million during the six months endedJune 30, 2022 . During this period, the Bank purchased available-for-sale investment securities that included$40.0 million of fixed rateU.S. Treasury bonds with remaining maturities of approximately two years. In addition, the Bank purchased$20.1 million of mortgage-backed securities,$4.0 million in corporate securities, and$5.2 million in Community Reinvestment Act qualified municipal and mortgage-backed securities. During the six months endedJune 30, 2022 ,$1.0 million of investments were called and$2.4 million of investments matured. The effective duration of the investments available-for-sale atJune 30, 2022 , was 3.77% as compared to 3.54% atDecember 31, 2021 . Effective duration measures the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank's portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank's investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change. Loans receivable. Net loans receivable increased$16.3 million during the six months endedJune 30, 2022 , primarily due to growth in one-to-four family residential, multifamily and consumer loans of$51.6 million ,$5.8 million , and$6.8 million , respectively. Partially offsetting these increases, business loans decreased$12.9 million due primarily to a$9.3 million 41 -------------------------------------------------------------------------------- decrease in PPP loans, a$2.9 million decrease in aircraft loans, and commercial real estate loans decreased$6.7 million . In addition, construction/land loans decreased$29.1 million , however,$20.7 million of these loans converted to permanent multi-family loans during the six months endedJune 30, 2022 . AtJune 30, 2022 andDecember 31, 2021 , the Bank's construction/land loans totaled 45.2% and 59.7% of total capital plus surplus, respectively, and total non-owner occupied commercial real estate was 360.0% and 384.0% of total capital plus surplus, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and construction/land loans, should not exceed 550% of total capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total capital plus surplus. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review. The following table presents a breakdown of our multifamily, commercial and construction loans by collateral type atJune 30, 2022 andDecember 31, 2021 . Total commercial real estate loans and construction/land loans are net of$0 and$43.0 million of LIP, respectively, atJune 30, 2022 , as compared to$89,000 and$43.3 million of LIP, respectively, atDecember 31, 2021 . June 30, 2022 December 31, 2021 % of Total in % of Total in Amount Portfolio Amount Portfolio (In thousands) Multifamily residential$ 135,961
100.0 %$ 130,146 100.0 % Non-residential: Retail 138,892 33.7 % 138,463 33.0 % Office 84,905 20.6 90,727 21.6 Hotel / motel 57,285 13.9 64,854 15.5 Storage 34,261 8.3 32,990 7.9 Mobile home park 22,387 5.4 20,636 4.9 Warehouse 18,943 4.6 17,724 4.2 Nursing home 12,535 3.0 12,713 3.0 Other non-residential 43,485 10.5 41,310 9.9 Total non-residential 412,693 100.0 % 419,417 100.0 % Construction/land: One-to-four family residential 34,932 54.3 % 34,677 37.1 % Multifamily 15,500 24.1 37,194 39.8 Commercial - - 6,189 6.6 Land 13,915 21.6 15,395 16.5 Total construction/land 64,347 100.0 % 93,455 100.0 % Total multifamily residential, non-residential and construction/land loans$ 613,001 $ 643,018 Included in total construction/land loans atJune 30, 2022 , are$15.5 million of multifamily loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. At 42 --------------------------------------------------------------------------------December 31, 2021 , construction/land loans included$37.2 million of multifamily loans and$6.2 million of commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank originates and purchases loans and utilize loan participations with the underlying collateral located within areas ofWashington State outside our primary market area or in other states. The Bank's goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank's underwriting and risk guidelines. During the six months endedJune 30, 2022 , the Bank purchased$28.0 million of loans and loan participations to borrowers located inWashington and other states, including$7.5 million of commercial real estate loans,$5.9 million other business loans and$14.6 million of consumer loans secured by classic/collectible automobiles. The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas ofWashington , inCalifornia , and in other states. AtJune 30, 2022 , total loans secured by collateral located inCalifornia represented 3.3% of our total loans, and total loans secured by collateral located outside the states ofCalifornia andWashington represented 10.0% of our total loans. The following table details geographic concentrations in our loan portfolio: At June 30, 2022 One-to-Four Family Commercial Residential Multifamily Real Estate Construction/Land Business Consumer Total (In thousands) King County$ 337,453 $ 75,905 $ 251,299 $ 63,323$ 22,307 $ 9,454 $ 759,741 Pierce County 40,149 13,171 25,705 - 274 611 79,910 Snohomish County 31,091 7,580 13,531 394 4,831 940 58,367 Kitsap County 4,695 5 735 - - - 5,435 Other Washington Counties 16,476 27,753 34,914 630 244 476 80,493 California 823 9,606 18,094 - - 8,562 37,085 Outside Washington and California (1) 6,067 1,941 68,415 - 6,036 31,560 114,019 Total loans$ 436,754 $ 135,961 $ 412,693 $ 64,347$ 33,692 $ 51,603 $ 1,135,050 _______________
(1) Includes loans in
The ALLL decreased to$15.1 million atJune 30, 2022 , from$15.7 million atDecember 31, 2021 , and represented 1.33% and 1.40% of total loans receivable atJune 30, 2022 , andDecember 31, 2021 , respectively. The ALLL consists of two components, the general allowance and the specific allowance. The ALLL general allowance decreased as a partial result of$8.1 million of loans downgraded to substandard, where the individual analysis on these loans indicated no additional specific reserve was needed and these loans were omitted from the general allowance calculations used to calculate the ALLL and provision for loan losses. The downgrades included a$6.4 million participation interest in commercial loans secured by medical rehabilitation facilities that were impacted unfavorably by the limitations on elective medical procedures during the COVID-19 pandemic. In addition, a$1.7 million multifamily loan was downgraded to substandard subsequent to an overall financial analysis on one of our borrowing relationships with multiple other loans that were previously downgraded to substandard. Further, balances of lower risk one-to-four family and multifamily residential loans increased and balances of higher risk construction/land loans decreased, thereby reducing the related general allowance. Partially offsetting these decreases in the general allowance, a$6.3 million participation interest in a loan secured by a nursing home facility was downgraded to special mention due to continued reduced occupancy as a result of the COVID-19 pandemic. The$1.5 million balance of PPP loans was omitted from the ALLL calculation atJune 30, 2022 , as these loans are fully guaranteed by the SBA. Management expects 43 --------------------------------------------------------------------------------
that the majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven.
At
We believe that the ALLL atJune 30, 2022 , was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Part 1, Item 1A of our 2021 Form 10-K. As we work with our borrowers who face difficult financial circumstances, we explore various options available to minimize our risk of loss. At times, the best option for our customers and the Bank is to modify the loan for a period of time, usually one year or less. Certain loan modifications are accounted for as TDRs. These modifications have included a reduction in interest rate on the loan for a period of time, advancing the maturity date of the loan, or allowing interest-only payments for a specific time frame. These modifications are granted only when there is a reasonable and attainable restructured loan plan that has been agreed to by the borrower and is considered to be in the Bank's best interest.
The following table presents a breakdown of our TDRs at the dates indicated, all of which were performing and on accrual status:
June 30, 2022 December 31, 2021 Six Month Change
(Dollars in thousands)
Performing TDRs:
One-to-four family residential
$ (25) Total TDRs$ 2,082 $ 2,107 $ (25) % TDRs classified as performing 100.0 % 100.0 % Our TDRs decreased$25,000 atJune 30, 2022 , compared toDecember 31, 2021 as a result of principal repayments. AtJune 30, 2022 , there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship atJune 30, 2022 , totaled$900,000 and was secured by non-owner occupied one-to-four family properties located inPierce County . Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. AtJune 30, 2022 , there were no loans past due, and atDecember 31, 2021 , past due loans totaled$255,000 , representing 0.02% of total loans receivable. Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. There were no nonaccrual loans at bothJune 30, 2022 andDecember 31, 2021 . We will continue to focus our efforts on working with borrowers to bring any past due loans current. By taking ownership of the underlying collateral if needed, we can generally convert non-earning assets into earning assets on a more timely basis than may otherwise be the case. Our success in this area is reflected by not having any nonperforming assets. 44 -------------------------------------------------------------------------------- OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. AtJune 30, 2022 , andDecember 31, 2021 , the Bank had no OREO properties and no real estate secured loans in the foreclosure process. Intangible assets. The balance of goodwill was$889,000 at bothJune 30, 2022 andDecember 31, 2021 .Goodwill was calculated as the excess purchase price of the branches acquired inAugust 2017 (the "Branch Acquisition") over the fair value of the assets acquired and liabilities assumed. The core deposit intangible ("CDI") recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing demand, interest-bearing demand, savings, and money market accounts. The CDI balance was$616,000 atJune 30, 2022 and$684,000 atDecember 31, 2021 . The initial ratio of CDI to the acquired balances of core deposits was 2.23%. The CDI amortizes into noninterest expense on an accelerated basis over ten years.
Deposits. During the first six months of 2022, deposits increased
Balance at
Balance at December 31, Change from
June 30, 2022 2021 December 31, 2021 Percent Change
(Dollars in thousands)
Noninterest-bearing $ 127,808 $ 117,751 $ 10,057 8.5 %
Interest-bearing demand 107,478 97,907 $ 9,571 9.8
Savings 23,525 23,146 $ 379 1.6
Money market 596,515 624,543 $ (28,028) (4.5)
Certificates of deposit, retail 270,866 294,127 $ (23,261) (7.9)
Brokered deposits 53,277 $ - $ 53,277 -
$ 1,179,469 $ 1,157,474 $ 21,995 1.9
Decreases in money market accounts and retail certificates of deposit of $28.0
million and $23.3 million , respectively, were partially offset by increases in
noninterest-bearing demand accounts and interest-bearing demand accounts of
$10.1 million and $9.6 million , respectively. In addition, management utilized
$53.3 million of brokered deposits to more than offset the reduction in money
market and retail certificates of deposit and fund asset growth. At June 30,
2022 , brokered deposits consisted of $28.3 million of brokered certificates of
deposit and $25.0 million of brokered interest-bearing demand deposits. The Bank
continued to consider multiple funding alternatives in addition to customer
deposits, including wholesale markets, brokered deposits, and the national
deposit market.
At June 30, 2022 and December 31, 2021 , we held $60.0 million and $60.6 million
in public funds, respectively, primarily in retail certificates of deposit and
money market accounts.
Advances. We use advances from the FHLB as an alternative funding source to
manage interest rate risk, to leverage our balance sheet and to supplement our
deposits. Total FHLB advances were $95.0 million at both June 30, 2022 , and
December 31, 2021 . At June 30, 2022 , the Bank's advances included $35.0 million
of fixed-rate three-month advances that renew quarterly, and $60.0 million of
fixed-rate one-month advances that renew monthly, all of which are utilized in
cash flow hedge agreements, as described below. At June 30, 2022 , all of our
FHLB advances were due to reprice in less than two months. At that date, there
were no FHLB Fed Funds short-term borrowings.
Cash Flow Hedge. To assist in our interest rate risk management efforts, the
Bank has entered into multiple interest rate swap agreements with qualified
institutions. Each interest rate swap agreement qualifies as a cash flow hedge
of the variability of future interest payments attributable to the changes in
one-month or three-month LIBOR rates. The objective of the cash flow hedge is to
offset the variability of cash flows due to the rollover of the Bank's FHLB, or
other fixed rate advances, for one-month or three-months, respectively, for the
term of the agreement. The agreements allow for a substitute index to be used if
LIBOR is unavailable.
The following table presents details of the Bank's interest rate swap agreements
as of June 30, 2022 . For each interest rate swap agreement listed, the Bank has
secured a fixed-rate FHLB advance for the notional amount that reprices at the
same
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frequency as the corresponding interest rate swap. The Bank pays a fixed
interest rate to the counterparty and in return, receives a floating interest
rate based on the index noted in the below table. The original term of these
interest rate swap agreements range from four to eight years.
Fixed rate paid to Index rate received
Notional amount Start Date Maturity Date counterparty from counterparty Repricing Frequency
(Dollars in thousands)
$ 15,000 9/27/2019 9/27/2024 1.440 % 1-month LIBOR monthly
10,000 11/20/2019 11/20/2023 1.585 3-month LIBOR quarterly
15,000 3/2/2020 3/2/2026 0.911 1-month LIBOR monthly
15,000 3/2/2020 3/2/2027 0.937 1-month LIBOR monthly
15,000 3/2/2020 3/2/2028 0.984 1-month LIBOR monthly
15,000 10/25/2021 10/25/2028 0.793 3-month LIBOR quarterly
10,000 10/25/2021 10/25/2029 0.800 3-month LIBOR quarterly
A change in the net fair value of these cash flow hedges is recognized as an
other asset or other liability on the balance sheet with the tax-effected
portion of the change included in other comprehensive income. At June 30, 2022
and December 31, 2021 , we recognized fair value assets of $7.9 million and $1.5
million , respectively, as a result of the increase in market value of the
interest rate swap agreements.
The Bank has confirmed its adherence to the International Swaps and Derivatives
Association ("ISDA") 2020 LIBOR Fallbacks Protocol ("Protocol") to prepare for
the cessation of LIBOR by June 30, 2023 . The Protocol provides a mechanism for
parties to bilaterally amend their existing derivative transaction to
incorporate ISDA's fallback terms, providing for a clear transition from LIBOR
to SOFR.
Stockholders' Equity. Total stockholders' equity decreased $983,000 during the
first six months of 2022, to $156.9 million at June 30, 2022 , from $157.9
million at December 31, 2021 . Stockholders' equity decreased $5.0 million , net
of tax, due to recent increases in market interest rates which negatively
impacted the fair value of our available-for-sale investments, outpacing the
improvement in market values of our cash flow hedges. In addition, stockholders'
equity decreased by $977,000 from the repurchase of 57,711 shares of common
stock, $2.2 million in cash dividends paid, and $226,000 from canceled
restricted stock awards. As part of the strategy to increase shareholder value,
the Company's Board of Directors authorized a stock repurchase plan that began
on August 16, 2021 , for the repurchase of up to 476,000 shares of the Company's
stock. At this repurchase plan's expiration on February 15, 2022 , the Company
had repurchased 459,732 shares at an average price of $16.83 per share. The
Board of Directors authorized another stock repurchase plan that began on
February 18, 2022 , and which expires on September 16, 2022 . This plan authorizes
the repurchase of up to 455,000 shares. At June 30, 2022 , the Company had
repurchased 34,643 shares under this repurchase plan at an average price of
$16.83 per share. At that date, 420,357 shares were available for purchase under
this repurchase plan. These decreases to stockholders' equity were partially
offset by the $6.1 million of net income and a $1.3 million increase in stock
based compensation during the first six months of 2022.
The following table shows cash dividends paid per share and the related dividend payout ratio for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Dividend declared per common
share $ 0.12 $ 0.11 $ 0.24 $ 0.22
Dividend payout ratio (1) 38.5 % 27.5 % 35.7 % 33.3 %
______________(1) Dividends paid per common share divided by basic earnings per common share.
46
--------------------------------------------------------------------------------
Comparison of Operating Results for the Three Months Ended
General. Net income for the three months endedJune 30, 2022 , was$2.8 million , or$0.31 per diluted share compared to$3.8 million , or$0.40 per diluted share for the three months endedJune 30, 2021 . Net income decreased$1.0 million primarily due to no provision or recapture of provision for loan losses for the three months endedJune 30, 2022 , as compared to a$700,000 recapture of provision for loan losses for the three months endedJune 30, 2021 . Also, contributing to the decrease in net income during the first three months endedJune 30, 2022 , was a$1.1 million increase in noninterest expense that more than offset a$558,000 increase in net interest income. Net Interest Income. Net interest income for the three months endedJune 30, 2022 , increased$558,000 to$11.8 million from$11.3 million for the three months endedJune 30, 2021 , as the decrease in interest expense outpaced the decrease in interest income. Interest income decreased by$57,000 for the three months endedJune 30, 2022 , as compared to the same period in 2021, including a$368,000 decrease in loan interest income due to a reduction in average loan yields partially offset by an increase of$24.4 million in the average loan balance between periods. Our average loan yield declined to 4.41% for the three months endedJune 30, 2022 , from 4.64% for the three months endedJune 30, 2021 . The average loan yield for the three months endedJune 30, 2021 , was favorably impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling$512,000 as compared to$69,000 in the quarter endedJune 30, 2022 . In addition, the three months endedJune 30, 2021 , was positively impacted by the receipt of$394,000 in interest and late charges from the payoff of a$2.0 million nonperforming loan. Interest income from investment securities increased$302,000 , primarily due to an increase in the average yield of both taxable and non-taxable investment securities and secondarily to a$20.5 million increase in the average balance of taxable investment securities. The average yield of taxable securities increased 46 basis points to 2.36% while the average yield on non-taxable securities increased 25 basis points to 2.13% for the three months endedJune 30, 2022 , as compared to the same quarter in 2021. The increase in average yields on investment securities during the current quarter, reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher. Interest income from interest-earning deposits remained relatively unchanged with a$21,000 increase for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 . During these comparative periods, the average yield increased to 0.67% for the three months endedJune 30, 2022 , from 0.10% for the three months endedJune 30, 2021 . Excess cash was invested in higher earning assets, resulting in a$42.0 million decrease in the average balance of interest-earning deposits for the three months endedJune 30, 2022 , as compared to the same period in 2021. The modest decrease in interest income was more than offset by a$517,000 decrease in deposit interest expense for the three months endedJune 30, 2022 , as compared to the three months endedJune 30, 2021 . The average rate paid on interest-bearing deposits decreased to 0.55% for the three months endedJune 30, 2022 , as compared to 0.75% for the three months endedJune 30, 2021 . In addition, average balance of interest-bearing deposits decreased$5.0 million for the three months endedJune 30, 2022 , as compared to the same period in 2021, including a$89.0 million decrease in the average balance of higher cost retail certificates of deposit that was partially replaced by a$70.0 million increase in lower cost money market accounts. Interest expense from borrowings decreased$98,000 as a combined result of a$15.7 million decrease in the average balance and a 16 basis point decrease in cost for the three months endedJune 30, 2022 , as compared to the same period in 2021. Our borrowings are comprised of FHLB advances matched to fixed-rate interest rate swap agreements. Reductions in both the average balance and cost of borrowings was the combined result of the repayment of$25.0 million in FHLB advances due to a maturing interest rate swap agreement, and the$25.0 million of fixed rate FHLB advances secured at lower rates upon the onset of$25.0 million of previously contracted forward-starting interest rate swap agreements inOctober 2021 . The Company's net interest margin increased to 3.53% for the three months endedJune 30, 2022 , from 3.36% for the three months endedJune 30, 2021 . This increase was primarily due to the 21 basis point reduction in our average cost of interest bearing liabilities outpacing the two basis point reduction in our average yield on interest earning assets between periods. For more information on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of this report. 47 -------------------------------------------------------------------------------- The following table presents the effects of changing rates and volumes on our net interest income during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume are allocated proportionately to the changes in rate and volume. Three Months Ended June 30, 2022 Compared to June 30, 2021 Net Change in Interest Rate Volume Total (In thousands) Interest-earning assets: Loans receivable, net$ (650) $ 282 $ (368) Investment securities, taxable 199 97 296 Investment securities, non-taxable 14 (8) 6 Interest-earning deposits with banks 32 (11) 21 FHLB stock (5) (7) (12) Total net change in income on interest-earning assets (410) 353 (57) Interest-bearing liabilities: Interest-bearing demand 30 (1) 29 Savings 1 - 1 Money market 17 55 72 Certificates of deposit, retail (293) (366) (659) Brokered deposits 40 - 40 Borrowings (44) (54) (98) Total net change in expense on interest-bearing liabilities (249) (366) (615) Total net change in net interest income$ (161) $ 719 $ 558 48
-------------------------------------------------------------------------------- The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months endedJune 30, 2022 and 2021. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield. Three Months Ended June 30, 2022 2021 Average Interest Yield / Average Interest Yield / Balance Earned / Paid Cost Balance Earned / Paid Cost (Dollars in thousands) Assets Loans receivable, net$ 1,117,079 $ 12,273 4.41 %$ 1,092,710 $ 12,641 4.64 % Investment securities, taxable 175,858 1,034 2.36 155,388 738
1.90
Investment securities, non-taxable 22,961 122 2.13 24,740 116
1.88
Interest-earning deposits with banks 22,010 37 0.67 64,035 16 0.10 FHLB stock 5,905 71 4.82 6,485 83 5.13 Total interest-earning assets 1,343,813 13,537 4.04 1,343,358 13,594 4.06 Noninterest earning assets 87,190 80,768 Total average assets$ 1,431,003 $ 1,424,126 Liabilities and Stockholders' Equity Interest-bearing demand$ 105,260 $ 51 0.19 %$ 108,396 $ 22 0.08 % Savings 23,240 2 0.03 20,875 1 0.02 Money market 599,758 488 0.33 529,643 416 0.32 Certificates of deposit, retail 270,160 817 1.21 359,169 1,476 1.65 Brokered deposits 14,662 40 1.09 - - - Total interest-bearing deposits 1,013,080 1,398 0.55 1,018,083 1,915 0.75 Borrowings 104,835 315 1.21 120,494 413 1.37 Total interest-bearing liabilities 1,117,915 1,713 0.61 1,138,577 2,328
0.82
Noninterest bearing liabilities 154,739 125,360 Average equity 158,349 160,189 Total average liabilities and equity$ 1,431,003 $ 1,424,126 Net interest income$ 11,824 $ 11,266 Net interest margin 3.53 % 3.36 % Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, management's experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. Specific allowances result when management performs an impairment analysis on a loan when management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this impairment analysis, if the recorded investment in the loan is less than the market value of the collateral less costs to sell ("market value"), a specific allowance is established in the ALLL for the loan. The amount of the specific allowance is computed using current appraisals, listed sales 49 -------------------------------------------------------------------------------- prices, and other available information less costs to complete, if any, and costs to sell the property. This analysis is inherently subjective as it relies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from predictions. Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Loans classified as a TDR due to the borrower being granted a rate concession are analyzed by discounted cash flow analysis. The amount of the specific allowance on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the recorded investment in the loan. During the three months endedJune 30, 2022 , management evaluated the adequacy of the ALLL and concluded that no provision for loan losses was appropriate. In comparison, a$700,000 recapture of provision for loan losses was made in the three months endedJune 30, 2021 . This recapture was primarily attributed to the downgrade to substandard and impaired status loans totaling$10.5 million subsequent to an overall financial analysis of a single borrowing relationship. These loans, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were adversely impacted by the COVID-19 pandemic. These downgrades removed the loans from the calculation of the general allowance to an individual analysis for a specific allowance, however, the analysis concluded that no losses are anticipated from these loans. By omitting these loans from the general allowance calculations, the general allowance was reduced, contributing to the recapture. In addition, loans totaling$2.9 million were upgraded during the quarter endedJune 30, 2021 , further contributing to the recapture. Partially offsetting these decreases to the general allowance, during the quarter endedJune 30, 2021 , management downgraded to special mention$6.5 million of loans where the Bank is a participating lender. These loans are secured by medical rehabilitation facilities, adversely impacted by the COVID-19 pandemic. As discussed below, these participation loans were further downgraded to substandard and impaired during the six months endedJune 30, 2022 . For more information, see Note 5 - Loans Receivable--ALLL.
Noninterest Income. Noninterest income decreased
The following table provides a detailed analysis of the changes in the components of noninterest income:
Change from Three
Three Months Ended Three Months Ended Months Ended
June 30, 2022 June 30, 2021 June 30, 2021 Percent Change
(Dollars in thousands)
BOLI income $ 251 $ 246 $ 5 2.0 %
Wealth management revenue 104 167 (63) (37.7)
Deposit related fees 246 227 19 8.4
Loan related fees 354 281 73 26.0
Other 6 52 (46) (88.5)
Total noninterest income $ 961 $ 973 $ (12) (1.2)
During the three months ended June 30, 2022 , as compared to the three months
ended June 30, 2021 , loan related fee income increased $73,000 , including a
$25,000 increase in loan prepayment fees. Wealth management revenue decreased
$63,000 during the three months ended June 30, 2022 , as compared to the same
period in 2021, primarily due to lower sales volume.
Noninterest Expense. Noninterest expense increased
50
--------------------------------------------------------------------------------
The following table provides a detailed analysis of the changes in the components of noninterest expense:
Change from Three
Three Months Ended Three Months Ended Months Ended
June 30, 2022 June 30, 2021 June 30, 2021 Percent Change
(Dollars in thousands)
Salaries and employee benefits $ 5,478 $ 5,062 $ 416 8.2 %
Occupancy and equipment 1,205 1,187 18 1.5
Professional fees 731 389 342 87.9
Data processing 692 680 12 1.8
Regulatory assessments 90 113 (23) (20.4)
Insurance and bond premiums 113 111 2 1.8
Marketing 96 23 73 317.4
Other general and administrative 880 625 255 40.8
Total noninterest expense $ 9,285 $ 8,190 $ 1,095 13.4
During the three months ended June 30, 2022 , salaries and employee benefits
increased $416,000 as compared to the three months ended June 30, 2021 ,
primarily due to higher than normal vacancies in staffing in the year ago
quarter as 25 open positions were filled during the current quarter and higher
incentive commissions were paid for one-to-four family residential loan
originations. Professional fees increased $342,000 , due in part to fees paid to
human resources recruiters to attract employees in this competitive employment
environment, along with $151,000 in regulatory examination fees paid in the
three months ended June 30, 2022 , with no comparable expenses in the three
months ended June 30, 2021 . Marketing expenses increased $73,000 related to a
marketing campaign during the quarter. Other general and administrative expenses
increased $255,000 , due in part to increased conference attendance, postage
relating to the aforementioned marketing expenses, and business entertainment
related expenses as business generating opportunities increased this quarter. In
addition, the payoff of a $2.0 million nonaccrual loan during the three months
ended June 30, 2021 included a $84,000 reimbursement in past legal fees,
reflected in other general and administrative expenses for the quarter.
Federal Income Tax Expense. The federal income tax provision decreased to
Comparison of Operating Results for the Six Months Ended
General. Net income for the six months endedJune 30, 2022 was$6.1 million , or$0.66 per diluted share as compared to net income of$6.3 million , or$0.66 per diluted share for the six months endedJune 30, 2021 . The decrease in net income was primarily the result of a$1.6 million increase in total noninterest expense offsetting the$1.2 million improvement in net interest income and$100,000 increase in the recapture of provision for loan losses between the periods. Net Interest Income. Net interest income for the six months endedJune 30, 2022 was$23.2 million , as compared to$22.0 million for the same period in 2021, due to the decreases in interest expense outpacing the decrease in interest income between the periods. Interest income decreased by$595,000 for the six months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to a$991,000 decrease in loan interest income. Our average yields on loans declined to 4.39% in the six months endedJune 30, 2022 , compared to 4.65% in the six months endedJune 30, 2021 . The average loan yield for the six months endedJune 30, 2021 , was positively impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling$1.2 million as compared to$240,000 in the current period. In addition, the prior year period included$394,000 in interest and late charges received from the payoff of a$2.0 million nonperforming loan. Slightly offsetting the decline in loan yields, the average balance of net loans receivable increased$20.2 million between the comparative periods. Interest income from investment securities increased$385,000 , primarily as a result of an increase in both the average yield and average balance of taxable investment securities. The average yield of taxable securities increased 27 basis points to 2.18% for the six months endedJune 30, 2022 , from 1.91% for the six months endedJune 30, 2021 . The average balance of 51 --------------------------------------------------------------------------------
taxable investment securities increased
Interest income from interest-earning deposits increased$28,000 increase for the six months endedJune 30, 2022 , as compared to the same period in 2021, with an increase in average yield to 0.31% from 0.10%, partially offset by a$22.4 million decrease in the average balance of these funds between these comparative periods. A$1.8 million decrease in interest expense for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 more than offset the decrease in interest income between the periods. The average cost of interest-bearing deposits decreased 32 basis points between the periods, as a combined result of the declining interest rate environment and a shift in balances from higher cost certificates of deposit into money market accounts. Interest expense for retail certificates of deposit decreased$1.7 million due to a decrease of$98.3 million in average balances and a 58 basis point reduction in the average cost of retail certificates of deposit between periods. Slightly offsetting this improvement, interest expense on money market accounts increased$60,000 due primarily to an increase of$104.2 million in average balances between periods. Also partially offsetting this improvement in interest expense, brokered deposit interest expense totaled$40,000 in the six months endedJune 30, 2022 , compared to none in the prior year period. During the six months endedJune 30, 2022 , the Bank supplemented its funding needs with brokered deposits as they were deemed the most appropriate alternative outside of its retail branch network. Interest expense on borrowings declined$217,000 for the six months endedJune 30, 2022 , as compared to the six months endedJune 30, 2021 . The average cost of borrowings decreased to 1.24% for the six months endedJune 30, 2022 , from 1.40% for the six months endedJune 30, 2021 , and the average balance decreased by$20.3 million between periods. Reductions in both the average balance and cost of borrowings was primarily due to the repayment of$25.0 million in FHLB advances due to a maturing interest rate swap agreement, and the$25.0 million of fixed rate FHLB advances secured at lower rates upon the onset of$25.0 million of previously contracted forward-starting interest rate swap agreements inOctober 2021 . The Company's net interest margin increased to 3.48% for the six months endedJune 30, 2022 , from 3.34% for the six months endedJune 30, 2021 . This is due primarily to the improvement in interest expense outpacing the decline in interest income, as outlined above. For more information on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of this Form 10-Q. 52 -------------------------------------------------------------------------------- The following table details the change in net interest income due to changes in yield or cost, or changes in the average balance of the related asset or liability: Six Months Ended June 30, 2022 Compared to June 30, 2021 Net Change in Interest Rate Volume Total (In thousands) Interest-earning assets: Loans receivable, net$ (1,458) $ 467 $ (991) Investment securities, taxable 219 135 354 Investment securities, no-taxable 13 18 31 Interest-earning deposits with banks 39 (11) 28 FHLB stock 2 (19) (17)
Total net change in income on interest-earning assets (1,185)
590 (595)
Interest-bearing liabilities:
Interest-bearing demand 23 (2) 21 Money market (107) 167 60 Certificates of deposit, retail (805) (874) (1,679) Brokered deposits 40 - 40 Borrowings (77) (140) (217) Total net change in expense on interest-bearing liabilities (926) (849) (1,775) Total net change in net interest income$ (259) $ 1,439 $ 1,180 53
-------------------------------------------------------------------------------- The following table compares detailed average balances, associated yields and rates, and the resulting changes in interest and dividend income or expense for the six months endedJune 30, 2022 and 2021. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield. Six Months EndedJune 30, 2022 2021 Interest Interest Average Balance
Earned / Paid Yield or Cost Average Balance Earned / Paid Yield or Cost
(Dollars in thousands)
Assets
Loans receivable, net$ 1,116,258 $ 24,274 4.39 %$ 1,096,019 $ 25,265 4.65 % Investments available-for-sale 161,534 1,746 2.18 147,282 1,392 1.91 Investments held-to-maturity 23,794 241 2.04 21,946 210 1.93 Interest-earning deposits with banks 35,856 56 0.31 58,218 28 0.10 FHLB stock 5,687 145 5.14 6,449 162 5.07 Total interest-earning assets 1,343,129 26,462 3.97 1,329,914 27,057 4.10 Noninterest earning assets 84,419 79,338 Total average assets$ 1,427,548 $ 1,409,252 Liabilities and Stockholders' Equity Interest-bearing demand$ 102,576 $ 70 0.14 %$ 105,982 $ 49 0.09 % Statement savings 23,468 3 0.03 20,317 3 0.03 Money market 608,034 866 0.29 503,820 806 0.32 Certificates of deposit, retail 278,859 1,676 1.21 377,130 3,355 1.79 Brokered deposits 7,317 40 1.10 - - - Total interest-bearing deposits 1,020,254 2,655 0.52 1,007,249 4,213 0.84 Borrowings 99,945 615 1.24 120,249 832 1.40 Total interest-bearing liabilities 1,120,199 3,270 0.59 1,127,498 5,045 0.90 Noninterest bearing liabilities 148,798 122,725 Average equity 158,551 159,029 Total average liabilities and equity$ 1,427,548 $ 1,409,252 Net interest income$ 23,192 $ 22,012 Net interest margin 3.48 % 3.34 % Provision for Loan Losses. During the six months endedJune 30, 2022 , management evaluated the adequacy of the ALLL and concluded that a recapture of provision for loan losses in the amount of$500,000 was appropriate for the period. This recapture was primarily attributed to the downgrade to substandard and impaired status of a$6.4 million participation interest in a commercial loan secured by medical rehabilitation facilities and a$1.7 million multifamily loan subsequent to an overall financial analysis of a single borrowing relationship with multiple other loans that were previously downgraded to substandard and impaired status. These downgrades removed the loans form the calculation of the general allowance to an individual analysis for a specific allowance, however, the analysis concluded that no losses are anticipated from these loans. By omitting these loans from the general allowance calculations, the general allowance was reduced, contributing to the recapture. Partially offsetting these decreases in the general allowance, a$6.3 million participating interest in a loan secured by a nursing home facility was downgraded to special mention due to continued reduced occupancy as a result of the COVID-19 pandemic. In addition, changes in the composition of our loan portfolio, with growth in lower lower risk one-to-four family residential and multifamily loans, including over$20.0 million in loans that converted from construction loans to permanent multifamily loans during the period, and reduced balances in higher risk construction/land development loans contributed to the recapture of provision for the six months endedJune 30, 2022 . In comparison, a$400,000 provision for loan losses was recognized for the six months endedJune 30, 2021 , primarily the result of downgrades on$10.5 million of loans to the single lending relationship 54 -------------------------------------------------------------------------------- discussed above. These loans, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were adversely impacted by the COVID-19 pandemic. For more information, see Note 5 - Loans Receivable - ALLL.
The following table shows certain credit ratios at and for the periods indicated and each component of the ratio's calculations.
At or
For the Six Months Ended
2022 2021
(Dollars in thousands)
ALLL as a percent of total loans 1.33 % 1.35 %
ALLL at period end $ 15,125 $ 14,878
Total loans outstanding 1,135,050 1,098,220
Non-accrual loans as a percentage of total loans outstanding at
period end - % - %
Total non-accrual loans $ - $ -
Total loans outstanding 1,135,050 1,098,220
ALLL as a percent of non-accrual loans at period end n/a n/a
ALLL at period end $ 15,125 $ 14,878
Total non-accrual loans - -
Net recoveries during period to average loans outstanding: One-to-four family residential:
- % 0.03 %
Net recoveries during period $ 5 $ 104
Average loans receivable, net (1) 406,687 374,126
Multifamily: - % - %
Net recoveries during period $ - $ -
Average loans receivable, net (1) 136,341 139,309
Commercial: - % - %
Net recoveries during period $ - $ -
Average loans receivable, net (1) 411,847 380,234
Construction/land development: - % - %
Net recoveries during period $ - $ -
Average loans receivable, net (1) 79,711 90,164
Business: - % - %
Net recoveries during period $ - $ -
Average loans receivable, net (1) 33,481 72,183
Consumer: (0.08) % - %
Net recoveries during period $ (37) $ -
Average loans receivable, net (1) 48,191 40,003
Total loans: - % 0.01 %
Net recoveries during period (32) 104
Average loans receivable, net (1) 1,116,258 1,096,019
_______________
(1) The average loans receivable, net balances, include nonaccruing loans and deferred fees.
55
--------------------------------------------------------------------------------
Noninterest Income. Total noninterest income was virtually unchanged at $1.7
million at both the six months ended June 30, 2022 and 2021, increasing by
$13,000 between periods. The following table provides a detailed analysis of the
changes in the components of noninterest income:
Change from
Six Months Ended Six Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2021 Percent Change
(Dollars in thousands)
BOLI income $ 539 $ 515 $ 24 4.7 % Wealth management revenue 187 327 (140) (42.8) Deposit related fees 460 426 34 8.0 Loan related fees 553 413 140 33.9 Other 11 56 (45) (80.4)
Total noninterest income $ 1,750 $ 1,737 $ 13 0.7 Noninterest income from loan related fees increased by$140,000 for the six months endedJune 30, 2022 , as compared to the same period in 2021, primarily as a result of an$86,000 increase in loan prepayment fees. Deposit related fees increased$34,000 , primarily from debit card related service fees reflecting increased usage as businesses reopened in our markets. BOLI income increased$24,000 as a result of additional policies purchased in 2021. Wealth management revenue decreased$140,000 primarily due to a reduction in sales, impacted in part by reduced sales personnel/staff turnover. Noninterest Expense. Noninterest expense increased$1.6 million to$17.9 million to for the six months endedJune 30, 2022 , as compared to$16.3 million for the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest expense:
Change from
Six Months Ended Six Months Ended Six Months Ended
June 30, 2022 June 30, 2021 June 30, 2021 Percent Change
(Dollars in thousands)
Salaries and employee benefits $ 10,738 $ 10,007 $ 731 7.3 %
Occupancy and equipment 2,433 2,286 147 6.4
Professional fees 1,183 921 262 28.4
Data processing 1,369 1,377 (8) (0.6)
Regulatory assessments 191 235 (44) (18.7)
Insurance and bond premiums 242 235 7 3.0
Marketing 133 53 80 150.9
Other general and administrative 1,622 1,205 417 34.6
Total noninterest expense $ 17,911 $ 16,319 $ 1,592 9.8
During the six months ended June 30, 2022 , as compared to the same period in
2021, salaries and employee benefits increased $731,000 primarily due to an
increase in the number of employees, with a higher than normal vacancies in
staffing in the year ago period, and higher incentive commissions paid for
increased production of one-to-four family residential loans. Occupancy and
equipment expense increased $147,000 during the six months ended June 30, 2022 ,
due to increases in facilities/repairs expense of $62,000 , lease expenses of
$47,000 , and office improvements of $36,000 between the periods. Professional
fees increased $262,000 for the six months ended June 30, 2022 , as compared to
the same prior year period, due to primarily to $151,000 in regulatory exam
expenses incurred in 2022 with no such similar expenses in 2021. Partially
offsetting these increases, the payoff of a $2.0 million nonaccrual loan
included a $84,000 reimbursement in past legal fees, as reflected in other
general and administrative expenses above. Other general and administrative
expenses increased $417,000 in the six
56
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months ended
Federal Income Tax Expense. The federal income tax provision decreased$60,000 for the six months endedJune 30, 2022 , primarily as a result of a$299,000 decrease in income before federal income taxes for the six months endedJune 30, 2022 , as compared to the same period in 2021.
Liquidity and Capital Resources
We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained. Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used to fund loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. AtJune 30, 2022 , the undisbursed portion of construction LIP and unused portion of lines of credit totaled$43.0 million and$32.1 million , respectively. Certificates of deposit scheduled to mature in one year or less atJune 30, 2022 , totaled$158.3 million . Management's policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain withFirst Financial Northwest Bank . We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements. When retail deposits are not sufficient to provide the funds for our assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs. During the second quarter of 2022, to support our balance sheet growth and fund deposit outflow, we supplemented our funding with$53.3 million brokered deposits as their rates and terms were deemed most appropriate to achieve our asset/liability objectives. AtJune 30, 2022 , brokered deposits consisted of$28.3 million of brokered certificates of deposit and$25.0 million of interest-bearing demand deposits. AtJune 30, 2022 , the Bank maintained credit facilities with the FHLB totaling$636.8 million , subject to qualifying collateral limits that reduced our pledged collateral to$399.3 million , with an outstanding balance of$95.0 million . As further funding sources, we also had the ability to borrow$74.6 million from the FRB, and$75.0 million from unused lines of credit with other financial institutions, with no balance outstanding from these sources atJune 2022 . For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this report.
On a monthly basis we estimate our liquidity sources and needs for the next twelve months. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability Management Committee in forecasting funding needs and investing opportunities.
We incur capital expenditures on an ongoing basis to expand and improve our
product offerings, enhance and modernize our technology infrastructure, and to
introduce new technology-based products to compete effectively in our markets.
We evaluate capital expenditure projects based on a variety of factors,
including expected strategic impacts (such as forecasted impact on revenue
growth, productivity, expenses, service levels and customer retention) and our
expected return on
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--------------------------------------------------------------------------------investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.
Based on our current capital allocation objectives, during the remainder of fiscal 2022 we expect cash expenditures of$950,000 for capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is$0.12 per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of$0.12 per share, our average total dividend paid each quarter would be approximately$1.1 million , based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). AtJune 30, 2022 , we project that our fixed commitments for the remainder of the fiscal year endingDecember 31, 2022 , will include (i)$424,000 of operating lease payments and (ii) other future obligations and accrued expenses of$19.9 million . AtJune 30, 2022 , our$95.0 million in FHLB borrowings are all short-term and tied to interest rate swap agreements and are expected to be renewed as they mature during 2022. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months. Our total stockholders' equity was$156.9 million atJune 30, 2022 . Consistent with our goal to operate a sound and profitable financial organization we actively seek to maintain the Bank as a "well capitalized" institution in accordance with regulatory standards. As ofJune 30, 2022 ,First Financial Northwest Bank exceeded all regulatory capital requirements. Regulatory capital ratios forFirst Financial Northwest Bank were as follows as ofJune 30, 2022 : Total capital to risk-weighted assets was 15.47%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 14.22%; and Tier 1 capital to total assets was 10.53%. AtJune 30, 2022 ,First Financial Northwest Bank met the financial ratios to be considered well-capitalized under the regulatory guidelines. In addition, the Bank is required to maintain a capital conservation buffer consisting of additional Common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum regulatory capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. AtJune 30, 2022 , the Bank's capital conservation buffer was 7.47%. See Item 1. "Business - How We Are Regulated - Regulation and Supervision ofFirst Financial Northwest Bank - Capital Requirements" included in the 2021 Form 10-K for additional information regarding regulatory capital requirements for the Bank. The Accumulated Other Comprehensive Income ("AOCI") component of capital includes a variety of items, including the value of our available-for-sale investment securities portfolio and the value of our derivative instruments, net of tax. We model various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to withstand the estimated potential fluctuations in a variety of interest rate environments.
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