FIRST NORTHWEST BANCORP Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating
strategies;
• statements regarding the quality of our loan and investment portfolios;
• estimates of our risks and future costs and benefits; and
• statements concerning the continuing effects of the COVID-19 pandemic on
the Bank's business and financial results and conditions.
These forward-looking statements are based on current beliefs and expectations
of management and are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control. Actual results may differ materially from those contemplated
by the forward-looking statements due to, among others, the following factors:
• the risks associated with lending and potential adverse changes in the
credit quality of loans in our portfolio, particularly with respect
to borrowers affected by the COVID-19 pandemic, natural disasters, or
climate change;
• legislative or regulatory changes, including actions taken by
governmental authorities in response to inflationary pressures, the
COVID-19 pandemic, and climate change;• a decrease in the market demand for loans that we originate for sale;
• our ability to control operating costs and expenses;
• whether our management team can implement our operational strategy,
including but not limited to our efforts to achieve loan and revenue
growth;
• our ability to successfully execute on merger and/or acquisition
strategies and integrate any newly acquired assets, liabilities,
customers, systems, and management personnel into our operations and our
ability to realize related cost savings within expected time frames;
• our ability to successfully execute on growth strategies related to our
entry into new markets;
• our ability to develop user-friendly digital applications to serve
existing customers and attract new customers;
• the use of estimates in determining fair value of certain of our assets,
which estimates may prove to be incorrect and result in significant
declines in valuation;
• changes in the levels of general interest rates, and the relative
differences between short and long-term interest rates, deposit interest
rates, our net interest margin and funding sources;
• increased competitive pressures among financial services companies,
particularly from non-traditional banking entities such as challenger
banks, fintech, and mega technology companies;
• our ability to attract and retain deposits;
• changes in consumer spending, borrowing and savings habits, resulting in
reduced demand for banking products and services, particularly in the
event of a recession that affects our market areas;
• results of examinations of us by the Washington State Department of
Financial Institutions , Department of Banks , the Federal Deposit
Insurance Corporation , Federal Reserve Bank of San Francisco , or other
regulatory authorities, which could result in restrictions that may
adversely affect our liquidity and earnings;• legislative or regulatory changes that adversely affect our business;
• disruptions, security breaches, or other adverse events, failures or
interruptions in, or attacks on, our information technology systems or on
the third-party vendors who perform several of our critical processing
functions;
• the impacts related to or resulting from
conditions;
• any failure of key third-party vendors to perform their obligations to
us; and
• other economic, competitive, governmental, regulatory and technical
factors affecting our operations, pricing, products and services and
other risks described elsewhere in our filings with the Securities and
Exchange Commission , including this Form 10-Q and our Annual Report on
Form 10-K for the year ended December 31, 2021 .
Further, statements about the potential effects of the COVID-19 pandemic on the
Bank's businesses and financial results and condition may constitute
forward-looking statements and are subject to the risk that the actual effects
may differ, possibly materially, from what is reflected in those forward-looking
statements due to factors and future developments that are uncertain,
unpredictable and in many cases beyond the Bank's control, including the direct
and indirect impact of the ongoing pandemic on the Bank, its customers and third
parties. These developments could have an adverse impact on our financial
position and our results of operations.
Any of the forward-looking statements that we make in this report and in other
statements we make may turn out to be wrong because of inaccurate assumptions we
might make, because of the factors illustrated above or because of other factors
that we cannot anticipate or predict. Any forward-looking statements are based
upon management's beliefs and assumptions at the time they are made. We
undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update
the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise.
Due to these risks, uncertainties and assumptions, the forward-looking
statements discussed in this report might not occur, and you should not put
undue reliance on any forward-looking statements.
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Table of Contents GeneralFirst Northwest Bancorp , aWashington corporation, is the bank holding company forFirst Fed Bank . The Company also has a controlling interest inQuin Ventures, Inc. , a joint venture formed inApril 2021 , and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments inFirst Fed and Quin Ventures .First Fed Bank is a community-oriented financial institution serving westernWashington with offices inClallam ,Jefferson ,King ,Kitsap , andWhatcom 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 products for consumers nationwide. First Northwest's limited partnership investments includeCanapi Ventures Fund, L.P. ,BankTech Ventures, L.P. , andJAM FINTOP Blockchain, L.P. These limited partnerships invest in fintech-related business with a focus on developing digital solutions applicable to the banking industry. In addition, First Northwest has invested inMeriwether Group Capital Hero Fund LP , a private commercial lender focused on lower-middle market businesses, primarily in thePacific Northwest . 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 and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our ALLL. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off. Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses. Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. We anticipate continued improvements in commercial and consumer activity and theU.S. economy as COVID-related restrictions continue to be removed. We recognize that our business and consumer customers experience varying degrees of financial distress, which may continue through the remainder of 2022, as new COVID-19 variant infections increase, together with the potential for new mandatory restrictions. If commercial activity slows, it may result in our customers' inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality, restaurant and food services, and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which were significantly impacted by the COVID-19 pandemic. AtJune 30, 2022 , the Company's exposure as a percent of the total loan portfolio to these industries was 3.1%, 0.3%, and 3.8%, respectively. We continue to monitor these customers closely. 41
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We have taken deliberate actions to ensure that we have the balance sheet
strength to serve our clients and communities, including increases in liquidity
and managing our assets and liabilities in order to maintain a strong capital
position; however, future economic conditions are subject to significant
uncertainty. While uncertainty still exists, we believe we are well-positioned
to operate effectively through the present economic environment.
We provided assistance to many small businesses applying for the SBA's Paycheck
Protection Program ("PPP") funding. We processed $32.2 million of loans for 515
customers through the initial round of SBA PPP funding during 2020 with an
average loan amount of $63,000 . 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
six months after the date the loan forgiveness application is processed, and
interest, at 1%, will continue to accrue during the deferment period. Loans can
be forgiven in whole or part (up to full principal and any accrued interest). We
partnered with a third-party financial technology provider to assist our
borrowers with the loan forgiveness application process. As of June 30, 2022 ,
$32.2 million , or 100.0%, of the first-round loans were forgiven and
$32.7 million , or 93.4%, of second-round loans were forgiven.
Critical Accounting Policies
Effective January 1, 2022 , the Bank elected to measure servicing rights using
the fair value method of accounting. We record servicing rights on loans
originated and subsequently sold into the secondary market. We stratify our
capitalized servicing rights based on the type, term and interest rates of the
underlying loans. Servicing rights are measured at fair value at each reporting
date with the change reported in earnings. The value is determined through a
discounted cash flow analysis, which uses interest rates, prepayment speeds and
delinquency rate assumptions as inputs. All of these assumptions require a
significant degree of management judgment. If our assumptions prove to be
incorrect, the value of our mortgage servicing rights could be negatively
affected.
There were no other material changes to the critical accounting policies from
those disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021 .
Comparison of Financial Condition at
Assets. Total assets increased to
Cash and cash equivalents decreased by$38.2 million , or 30.3%, to$87.8 million as ofJune 30, 2022 , compared to$126.0 million as ofDecember 31, 2021 . Excess cash was deployed into the investment and loan portfolios as the Bank continued to build earning assets. Net loans, excluding loans held for sale, increased$111.3 million to$1.46 billion atJune 30, 2022 , from$1.35 billion atDecember 31, 2021 . During the six months endedJune 30, 2022 , multi-family loans increased$48.9 million through new originations along with$3.7 million of acquisition-renovation construction and$2.8 million of commercial construction loans converted into amortizing loans. Auto and other consumer loans increased$38.1 million , as a result of a$16.0 million purchase of a pool of manufactured home loans,$5.4 million in individual manufactured home loan purchases, a net increase in auto loans of$7.7 million , and an increase in quin Credit Builder loans of$6.4 million , offset by payment activity. One- to four-family residential loans increased$14.2 million as$12.0 million in residential construction loans converted to amortizing loans and new originations exceeded payment of loans. Commercial business loans decreased$8.6 million , mainly as the result of a decrease in Northpointe Mortgage Participation Program ("Northpointe") of$26.3 million and PPP loans paid off year-to-date totaling$12.8 million , offset by$10.2 million in SBA loan originations,$6.9 million ofBankers Healthcare Group loan purchases,$6.8 million of Water Station Program loans 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$10.3 million , or 4.6%, to$214.4 million atJune 30, 2022 , from$224.7 million atDecember 31, 2021 . Our construction loans are geographically dispersed throughout westernWashington with two loans inOregon and two loans inIdaho . We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of supply chain issues and inflation on completion. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. AtJune 30, 2022 , acquisition-renovation loans of$27.1 million were included in the construction loan total compared to$51.1 million atDecember 31, 2021 . These commercial acquisition-renovation loans represent financing primarily for the acquisition of multi-family properties with a construction component used for the renovation of common areas and specific units of the building. Given the construction component of these loans, we are required to report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects. We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets where we do business to improve earnings while also prudently managing credit risk. 42
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The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
North Olympic Puget Sound
June 30, 2022 Peninsula (1) Region (2) Other Washington Oregon Idaho Total
(In thousands)
Construction
Commitment
One- to four-family
residential $ 42,889 $ 69,665 $ 7,157 $ - $ - $ 119,711
Multi-family
residential - 151,823 6,098 415 3,592 161,928
Commercial
acquisition-renovation 1,638 27,965 - - - 29,603
Commercial real estate 8,931 41,876 - 540 - 51,347
Total commitment $ 53,458 $ 291,329 $ 13,255 $ 955 $ 3,592 $ 362,589
Construction Funds
Disbursed
One- to four-family
residential $ 15,749 $ 30,293 $ 2,170 $ - $ - $ 48,212
Multi-family
residential - 84,192 2,714 32 2,308 89,246
Commercial
acquisition-renovation 1,396 25,707 - - - 27,103
Commercial real estate 7,179 32,352 - 11 - 39,542
Total disbursed $ 24,324 $ 172,544 $ 4,884 $ 43 $ 2,308 $ 204,103
Undisbursed Commitment
One- to four-family
residential $ 27,140 $ 39,372 $ 4,987 $ - $ - $ 71,499
Multi-family
residential - 67,631 3,384 383 1,284 72,682
Commercial
acquisition-renovation 242 2,258 - - - 2,500
Commercial real estate 1,752 9,524 - 529 - 11,805
Total undisbursed $ 29,134 $ 118,785 $ 8,371 $ 912 $ 1,284 $ 158,486
Land Funds Disbursed
One- to four-family
residential $ 3,409 $ 3,120 $ 329 $ - $ - $ 6,858
Commercial real estate - 3,433 - - - 3,433
Total disbursed for
land $ 3,409 $ 6,553 $ 329 $ - $ - $ 10,291
(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
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During the six months endedJune 30, 2022 , the Company originated$337.9 million of loans, of which$230.9 million , or 68.3%, were originated in thePuget Sound region,$65.0 million , or 19.2%, in theNorth Olympic Peninsula ,$18.1 million , or 5.4%, in other areas throughoutWashington State , and$24.0 million , or 7.1%, in other states. The Company purchased an additional$31.6 million in auto loans and$24.0 million in manufactured home loans during the six months endedJune 30, 2022 . We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income. Our ALLL increased to$15.8 million atJune 30, 2022 , as a$500,000 loan loss provision was recorded for the six-month period. Net recoveries were$123,000 for the six-month period. The loan loss provision is made to account for growth in the loan portfolio, adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic, which is reflected in the qualitative factor adjustments. The ALLL as a percentage of total loans was 1.1% at bothJune 30, 2022 andDecember 31, 2021 . Nonperforming loans decreased$140,000 , or 10.1%, to$1.2 million atJune 30, 2022 , from$1.4 million atDecember 31, 2021 , reflecting improvements in nonperforming auto and other consumer loans of$230,000 , home equity loans of$31,000 and commercial real estate loans of$11,000 , offset by a deterioration in one- to four-family loans of$132,000 . Nonperforming loans to total loans was 0.1% at bothJune 30, 2022 andDecember 31, 2021 . The ALLL as a percentage of nonperforming loans increased to 1269% atJune 30, 2022 , from 1095% atDecember 31, 2021 . AtJune 30, 2022 , there were$1.8 million in restructured loans, of which$1.76 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans increased$1.2 million to$13.8 million atJune 30, 2022 , from$12.6 million atDecember 31, 2021 , due to an improvement in commercial real estate offset by declines in in two construction relationships. Loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 in order to reduce credit risk and future charge-off activity. The balance of indirect auto loans decreased to$7.1 million atJune 30, 2022 from$10.6 million atDecember 31, 2021 . We believe our ALLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as ofJune 30, 2022 . Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated: Increase (Decrease) June 30, 2022 December 31, 2021 Amount Percent (In thousands) Real Estate: One-to-four family$ 309,191 $ 294,965$ 14,226 4.8 % Multi-family 221,337 172,409 48,928 28.4 Commercial real estate 381,279 363,299 17,980 4.9 Construction and land 214,394 224,709 (10,315 ) (4.6 ) Total real estate loans 1,126,201 1,055,382 70,819 6.7 Consumer: Home equity 46,993 39,172 7,821 20.0 Auto and other consumer 220,865 182,769 38,096 20.8 Total consumer loans 267,858 221,941 45,917 20.7 Commercial business loans 71,218 79,838 (8,620 ) (10.8 ) Total loans 1,465,277 1,357,161 108,116 8.0 Less: Net deferred loan fees 3,670 4,772 (1,102 ) (23.1 ) Premium on purchased loans, net (15,692 ) (12,995 ) (2,697 ) 20.8 Allowance for loan losses 15,747 15,124 623 4.1 Loans receivable, net$ 1,461,552 $ 1,350,260$ 111,292 8.2 44
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The following table represents nonperforming assets at the dates indicated.
Increase (Decrease)
June 30, 2022 December 31, 2021 Amount Percent
(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family $ 626 $ 494 $ 132 26.7 %
Commercial real estate 60 71 (11 ) (15.5 )
Construction and land 22 22 - -
Total real estate loans 708 587 121 20.6
Consumer loans:
Home equity 251 282 (31 ) (11.0 )
Auto and other consumer 282 512 (230 ) (44.9 )
Total consumer loans 533 794 (261 ) (32.9 )
Total nonperforming assets $ 1,241 $ 1,381 $ (140 ) (10.1 )
Nonaccrual and 90 days or more
past due loans as a percentage
of total loans 0.1 % 0.1 % 0.0 % -
Investment securities increased $8.9 million , or 2.6%, to $353.1 million at June
30, 2022 , from $344.2 million at December 31, 2021 , due to the purchase of
securities, partially offset by sales, normal payments and prepayment activity.
The investment portfolio, including mortgage-backed securities, had an estimated
projected average life of 8.2 years as of June 30, 2022 , compared to 5.7 years
as of December 31, 2021 , and had an estimated average repricing term of 7.6
years as of June 30, 2022 , compared to 5.4 years as of December 31, 2021 , based
on the interest rate environment at those times. We believe prepayment activity
is likely to slow in a rising rate environment, extending the projected duration
of our securities portfolio.
The investment portfolio was composed of 48.0% in amortizing securities at June
30, 2022 , compared to 43.0% at December 31, 2021 . The projected average life of
our securities may vary due to prepayment activity, which, particularly in the
mortgage-backed securities portfolio, is impacted by prevailing mortgage
interest rates. Management maintains a focus on enhancing the mix of earning
assets by originating loans as a percentage of earning assets; however, we may
continue to purchase investment securities as a source of additional interest
income. Securities are sold to provide liquidity, improve long-term portfolio
yields, reduce LIBOR risk, and manage duration in the portfolio. For additional
information, see Note 2 of the Notes to Consolidated Financial Statements
contained in Item 1 of this Form 10-Q.
Liabilities. Total liabilities increased to $1.87 billion at June 30, 2022 , from
$1.73 billion at December 31, 2021 , primarily due to an increase in borrowing
of $130.0 million .
Deposit balances remained flat at $1.58 billion for both June 30,
2022 and December 31, 2021 . During the six-month period ended June 30, 2022 ,
there were increases of $22.3 million in certificates of deposits ("CDs")
and $409,000 in savings accounts offset by a $10.0 million decrease in money
market accounts and a $12.5 million decrease in demand deposit accounts. A
runoff in commercial and public fund account balances of $45.5 million during
the six-month period ended June 30, 2022 , was offset by increases in consumer
account balances of $21.4 million and brokered CDs of $20.0 million . We utilize
brokered CDs as an additional funding source in order to manage our cost of
funds, reduce our reliance on public funds deposits, and manage interest rate
risk. Brokered CDs totaling $85.7 million were included in the $269.5 million
balance of certificates of deposit at June 30, 2022 .
FHLB advances increased 152.5% to $202.0 million at June 30, 2022 , from $80.0
million at December 31, 2021 . We increased short-term advances as strong loan
demand was outpaced by a lack of deposit growth.
Equity. Total shareholders' equity decreased $25.3 million to $165.2 million for
the six months ended June 30, 2022 . The Company recorded year-to-date net income
of $5.3 million . The net income increase was offset by a decrease in the
after-tax unrealized loss on available-for-sale investments of $28.8 million .
All categories of the investment portfolio have been significantly impacted by
the rising rate environment.
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Comparison of Results of Operations for the Three Months Ended
General. Net income attributable to the Company was$2.5 million for the three months endedJune 30, 2022 , compared to$3.0 million for the three months endedJune 30, 2021 . A$3.4 million increase in net interest income after provision for loan loss was offset by a$1.7 million decrease in noninterest income and a$3.3 million increase in noninterest expense. Net Interest Income. Net interest income increased$3.6 million to$17.2 million for the three months endedJune 30, 2022 , from$13.7 million for the three months endedJune 30, 2021 . This increase was mainly the result of an increase in average earning assets of$196.4 million . The yield on average interest-earning assets increased 46 basis points to 4.14% for the three months endedJune 30, 2022 , compared to 3.68% for the same period in the prior year, due to increases in yields earned on investment securities and the loan portfolio, higher average loan balances improved the earning asset mix. The average cost of interest-bearing liabilities increased to 0.49% for the three months endedJune 30, 2022 , compared to 0.46% for the same period last year, due primarily to increases in average balances in advances of$97.2 million and interest-bearing deposits of$90.4 million . Total cost of funds increased 2 basis points to 0.39% for the three months endedJune 30, 2022 , from 0.37% for the same period in 2021. The net interest margin increased 43 basis points to 3.77% for the three months endedJune 30, 2022 , from 3.34% for the same period in 2021 due to an improvement in our earning asset mix and higher market rates for both fixed and variable rate assets. Interest Income. Total interest income increased$3.9 million , or 26.0%, to$19.0 million for the three months endedJune 30, 2022 , from$15.1 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets and change in the mix of assets. Interest and fees on loans receivable increased$3.2 million , to$16.1 million for the three months endedJune 30, 2022 , from$12.9 million for the three months endedJune 30, 2021 , primarily due to an increase in the average balance of net loans receivable of$239.4 million compared to the prior year. Average loan yields were 4.48% and 4.30% for the three months endedJune 30, 2022 and 2021, respectively.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Three Months Ended June 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,439,714 4.48 % $ 1,200,273 4.30 % $ 3,215
Investment securities 367,662 2.96 395,685 2.15 591
FHLB stock 8,190 5.83 4,074 4.53 73
Interest-earning deposits
in banks 20,636 0.89 39,750 0.15 31
Total interest-earning
assets $ 1,836,202 4.14 % $ 1,639,782 3.68 % $ 3,910
Interest Expense. Total interest expense increased $316,000 , or 22.5%, to $1.7
million for the three months ended June 30, 2022 , compared to $1.4 million for
the three months ended June 30, 2021 , due to an increase in borrowing costs
of $345,000 primarily related to additional FHLB borrowings in the current
period, offset by a decrease in interest expense on deposits
of $29,000 resulting from a 3 basis point decrease in the average cost of
interest-bearing deposits. The average balance of interest-bearing deposits
increased $90.4 million , or 8.0%, to $1.22 billion for the three months ended
June 30, 2022 , from $1.13 billion for the three months ended June 30, 2021 , due
to core deposit growth in new and existing market areas as well as purchasing
the Bellevue branch in July of 2021.
During the three months ended June 30, 2022 , interest expense decreased on
certificates of deposit due to a decrease in the average balances of $29.9
million , along with a decrease in the average rates paid of 5 basis points,
compared to the three months ended June 30, 2021 . During the same period, the
average balances of money market and savings accounts increased $82.9
million and $10.0 million , respectively, with no change in the average rate paid
on money market accounts and a decrease of 2 basis points for savings accounts,
resulting in comparatively minor changes to interest expense. Interest-bearing
demand account average balances increased $27.4 million and the average rate
paid increased 3 basis points, resulting in a minor increase to interest
expense. The average cost of interest-bearing deposit products decreased
to 0.26% for the three months ended June 30, 2022 , from 0.29% for the three
months ended June 30, 2021 , due in large part to the expiration of promotional
rates and a shift in deposit mix to higher levels of interest-bearing and
noninterest-bearing transaction accounts which carry lower rates than
non-transaction accounts. Borrowing costs increased due to increases in both the
average balance and cost of FHLB advances, which are more sensitive to Federal
Reserve Bank rate increases, compared to the same period in 2021.
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The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Three Months Ended June 30,
2022 2021
Increase
Average Average (Decrease)
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
(Dollars in thousands)
Transaction accounts $ 197,071 0.05 % $ 169,681 0.02 % $ 15
Money market accounts 584,162 0.22 501,237 0.22 48
Savings accounts 195,345 0.05 185,336 0.07 (8 )
Certificates of deposit 247,310 0.68 277,218 0.73 (84 )
Advances 149,145 1.42 51,917 1.41 344
Subordinated debt 39,294 4.03 39,276 4.02 1
Total interest-bearing
liabilities $ 1,412,327 0.49 % $ 1,224,665 0.46 % $ 316
Provision for Loan Losses. The Company recorded a $500,000 loan loss provision
during the second quarter of 2022. This compares to a provision for loan losses
of $300,000 for the three months ended June 30, 2021 . The provision reflects
loan growth and changing economic conditions, offset by stable credit quality
metrics.
The following table details activity and information related to the ALLL for the
periods shown:
Three Months Ended June 30,
2022 2021
(Dollars in thousands)
Provision for loan losses $ 500 $ 300
Net recoveries 120 23
Allowance for loan losses 15,747 14,588Allowance for losses as a percentage of total gross loans receivable at period end
1.1 % 1.2 %
Total nonaccrual loans 1,241 1,784
Allowance for loan losses as a percentage of nonaccrual loans at period end 1268.9 % 817.7 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.1 % Total loans$ 1,465,277 $ 1,256,145 Noninterest Income. Noninterest income decreased$1.7 million , or 42.6%, to$2.2 million for the three months endedJune 30, 2022 , from$3.9 million for the three months endedJune 30, 2021 . Other income increased due to higher adjustable-rate conversion ("ARC") loan fee income of$193,000 in the current period compared to the same period in 2021 andQuin Ventures subscription fee income of$118,000 , offset by a valuation decrease of$31,000 recorded on our limited partnership fintech investments compared to a gain of$82,000 in the same period in 2021. Increases in other income were offset by a decline of$820,000 in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory resulted in a decline in mortgage loan production, as well as a decline of$1.1 million from investment securities sales in the current quarter compared to the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 1,091 $ 1,001 $ 90 9.0 %
Sold loan servicing fees 27 13 14 107.7
Net gain on sale of loans 231 1,017 (786 ) (77.3 )
Net (loss) gain on sale of investment
securities (8 ) 1,124 (1,132 ) (100.7 )
Increase in cash surrender value of
bank-owned life insurance 213 242 (29 ) (12.0 )
Other income 668 475 193 40.6
Total noninterest income $ 2,222 $ 3,872 $ (1,650 ) (42.6 )%
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Noninterest Expense. Noninterest expense increased$3.3 million , or 23.8%, to$17.0 million for the three months endedJune 30, 2022 , compared to$13.7 million for the three months endedJune 30, 2021 .Quin Ventures launched the Credit Builder product during the current quarter and, as a result, the compensation, software licensing, professional fees and administrative expenses which were previously capitalized as software development costs are now being expensed.Additional Quin Ventures expenses totaling$1.5 million were recorded in advertising, compensation, depreciation and data processing during the current quarter. Noninterest expenses attributable toQuin Ventures for the three months endedJune 30, 2022 , totaled$2.1 million . The Bank also recorded increases over the same quarter in 2021 in compensation expense as well as costs associated with expanding our footprint with two new locations, technology enhancements for core and digital banking products, and higherFDIC insurance premiums.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Three Months Ended June 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 9,735 $ 8,559 $ 1,176 13.7 %
Data processing 1,870 1,525 345 22.6
Occupancy and equipment 1,432 1,004 428 42.6
Supplies, postage, and telephone 408 355 53 14.9
Regulatory assessments and state taxes 441 301 140 46.5
Advertising 1,370 492 878 178.5
Professional fees 629 644 (15 ) (2.3 )
FDIC insurance premium 211 168 43 25.6
Other expense 867 659 208 31.6
Total noninterest expense $ 16,963 $ 13,707 $ 3,256 23.8 %
Provision for Income Tax. An income tax expense of $467,000 was recorded for the
three months ended June 30, 2022 , compared to $663,000 for the three months
ended June 30, 2021 . There was a year-over-year decrease in income before taxes
of $1.5 million . The current period provision includes accruals for both federal
and state income taxes resulting in a higher effective tax rate. The provision
for state income tax began in the second quarter of 2022 with respect to certain
states in which we have employees and collateral for loans, thereby creating a
nexus in those states for income tax purposes. For additional information, see
Note 6 of the Notes to Consolidated Financial Statements contained in Item 1 of
this Form 10-Q.
Comparison of Results of Operations for the Six Months Ended
General. Net income attributable to the Company was$5.3 million for the six months endedJune 30, 2022 , compared to$6.1 million for the six months endedJune 30, 2021 . A$5.6 million increase in net interest income after provision for loan loss was offset by a$2.0 million decrease in noninterest income and a$6.0 million increase in noninterest expense. Net Interest Income. Net interest income increased$5.6 million to$32.7 million for the six months endedJune 30, 2022 , from$27.1 million for the six months endedJune 30, 2021 . This increase was mainly the result of an increase in average earning assets of$212.3 million . The yield on average interest-earning assets increased 25 basis points to 4.00% for the six months endedJune 30, 2022 , compared to 3.75% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, as well as an increase in yields earned on investment securities. The average cost of interest-bearing liabilities increased to 0.46% for the six months endedJune 30, 2022 , compared to 0.43% for the same period last year, due primarily to an increase in the average balance of borrowings related to additional FHLB advances, partially offset by a decrease in rates on interest-bearing deposits of 7 basis points. Total cost of funds increased 2 basis points to 0.37% for the six months endedJune 30, 2022 , from 0.35% for the same period in 2021. The net interest margin increased 22 basis points to 3.65% for the six months endedJune 30, 2022 , from 3.43% for the same period in 2021. Interest Income. Total interest income increased$6.2 million , or 20.8%, to$35.9 million for the six months endedJune 30, 2022 , from$29.7 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased$5.2 million , to$30.6 million for the six months endedJune 30, 2022 , from$25.4 million for the six months endedJune 30, 2021 , primarily due to an increase in the average balance of net loans receivable of$218.8 million compared to the prior year, coupled with an increase in average loan yields to 4.46% for the six months endedJune 30, 2022 , from 4.39% for the same period in 2021. 48
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The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
Six Months Ended June 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,385,248 4.46 % $ 1,166,422 4.39 % $ 5,210
Investment securities 363,572 2.77 382,283 2.19 832
FHLB stock 6,758 5.10 3,942 4.66 80
Interest-earning deposits in
banks 51,537 0.33 42,150 0.13 56
Total interest-earning
assets $ 1,807,115 4.00 % $ 1,594,797
3.75 % $ 6,178
Interest Expense. Total interest expense increased $581,000 , or 22.8%, to $3.1
million for the six months ended June 30, 2022 , compared to $2.6 million for the
six months ended June 30, 2021 , due to an increase in borrowing costs
of $827,000 primarily related to additional FHLB advances, offset by a decrease
in interest expense on deposits of $246,000 resulting from a 7 basis point
decrease in the average cost of interest-bearing deposits. The average balance
of interest-bearing deposits increased $109.7 million , or 9.9%, to $1.22 billion
for the six months ended June 30, 2022 , from $1.11 billion for the six months
ended June 30, 2021 , due to core deposit growth in new and existing market areas
as well as purchasing the Bellevue branch in July of 2021. Average deposit
account balances were comprised of 78% interest-bearing deposits and 22%
noninterest-bearing deposits at June 30, 2022 .
During the six months ended June 30, 2022 , interest expense decreased on
certificates of deposit due to a decrease in the average balances of $41.6
million , along with a decrease in the average rates paid of 12 basis points,
compared to the six months ended June 30, 2021 . During the same period, the
average balances of money market and savings accounts increased $104.7 million
and $15.5 million , respectively, with an average rate decrease of 3 basis points
and 3 basis points, respectively, resulting in comparatively minor changes to
interest expense. Interest-bearing demand account average balances increased
$31.1 million and the average rate increased 2 basis points, resulting in a
minor increase to interest expense. The average cost of interest-bearing deposit
products decreased to 0.25% for the six months ended June 30, 2022 , from 0.32%
for the six months ended June 30, 2021 , due in large part to the expiration of
promotional rates and a shift in deposit mix to higher levels of transaction
accounts. Borrowing costs increased due to increases in both the average balance
and cost of FHLB advances compared to the same period in 2021 and the issuance
of subordinated debt in March 2021 .
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Six Months Ended June 30,
2022 2021
Increase
Average Average (Decrease)
Balance Balance in Interest
Outstanding Rate Outstanding Rate Expense
(Dollars in thousands)
Transaction accounts $ 196,615 0.04 % $ 165,562 0.02 % $ 25
Money market accounts 585,974 0.21 481,269 0.24 60
Savings accounts 195,034 0.05 179,524 0.08 (22 )
Certificates of deposit 244,989 0.66 286,552 0.78 (309 )
Advances 116,062 1.44 53,667 1.41 457
Subordinated debt 39,288 4.05 21,334 3.96 370
Total interest-bearing
liabilities $ 1,377,962 0.46 % $ 1,187,908 0.43 % $ 581
Provision for Loan Losses. The Company recorded a $500,000 loan loss provision
during the six months ended June 30, 2022 , compared to a provision for loan
losses of $800,000 for the six months ended June 30, 2021 . The provision
reflects loan growth and changing economic conditions, offset by stable credit
quality metrics.
The following table details activity and information related to the ALLL for the
periods shown:
Six Months Ended June 30,
2022 2021
(Dollars in thousands)
Provision for loan losses $ 500 $ 800
Net recoveries (charge-offs) 123 (59 )
Allowance for loan losses 15,747 14,588Allowance for losses as a percentage of total gross loans receivable at period end
1.1 % 1.2 %
Total nonaccrual loans 1,241 1,784
Allowance for loan losses as a percentage of nonaccrual loans at period end 1268.9 % 817.7 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.1 % Total loans$ 1,465,277 $ 1,256,145 49
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Noninterest Income. Noninterest income decreased$2.0 million , or 29.7%, to$4.6 million for the six months endedJune 30, 2022 , from$6.6 million for the six months endedJune 30, 2021 . The year-over-year change in servicing fee income included increases in commercial loan late fees of$132,000 , deposit account interchange fee income of$107,000 and business deposit account fee income of$89,000 . Servicing fee income on sold loans increased$257,000 due to the change in the fair value of the servicing asset and a$124,000 increase inMain Street Lending Program servicing fee income. Other income increased due to higher ARC loan fee income of$394,000 in the current period compared to the same period in 2021 andQuin Ventures subscription fee income of$118,000 , offset by a year-over-year decrease of$389,000 in the recorded value on our limited partnership fintech investments which were negatively impacted by market volatility. Increases in fee income and other income were offset by a decline of$1.9 million in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory continue to dampen mortgage loan production, and a decline of$1.0 million in investment securities sales during the current year compared to the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 2,264 $ 1,838 $ 426 23.2 %
Sold loan servicing fees 459 43 416 967.4
Net gain on sale of loans 484 2,354 (1,870 ) (79.4 )
Net (loss) gain on sale of
investment securities 118 1,124 (1,006 ) (89.5 )
Increase in cash surrender value of
bank-owned life insurance 465 486 (21 ) (4.3 )
Other income 835 731 104 14.2
Total noninterest income $ 4,625 $ 6,576 $ (1,951 ) (29.7 )%
Noninterest Expense. Noninterest expense increased $6.0 million , or 23.2%,
to $31.8 million for the six months ended June 30, 2022 , compared to $25.8
million for the six months ended June 30, 2021 . Quin Ventures launched the
Credit Builder product during the current quarter and, as a result, the
compensation, software licensing, professional fees and administrative expenses
which were previously capitalized as software development costs are now being
expensed. Additional Quin Ventures expenses totaling $1.5 million were recorded
in advertising, compensation, depreciation and data processing. Noninterest
expenses attributable to Quin Ventures for the six months ended June 30, 2022 ,
totaled $2.7 million . The Bank also recorded increases over the same period in
2021 in compensation expense as we added staff to manage the company and build
up data and fintech infrastructures, as well as costs associated with expanding
our footprint with two new locations. The Bank also invested in technology
enhancements for core and digital banking products to support digital
initiatives and customer relationship management tools. Regulatory assessments
and state taxes were higher due to an increase in taxable income compared to the
same period in 2021 combined with an accrual for regulatory exams in the current
year.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Six Months Ended June 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 18,538 $ 15,854 $ 2,684 16.9 %
Data processing 3,642 2,858 784 27.4
Occupancy and equipment 2,599 2,033 566 27.8
Supplies, postage, and telephone 721 597 124 20.8
Regulatory assessments and state taxes 802 562 240 42.7
Advertising 2,157 937 1,220 130.2
Professional fees 1,188 1,166 22 1.9
FDIC insurance premium 434 316 118 37.3
Other expense 1,713 1,478 235 15.9
Total noninterest expense $ 31,794 $ 25,801 $ 5,993 23.2 %
Provision for Income Tax. An income tax expense of $1.0 million was recorded for
the six months ended June 30, 2022 , compared to $1.1 million for the six months
ended June 30, 2021 . There was a year-over-year decrease in income before taxes
of $2.1 million ; however, the expense recorded for the six months ended June 30,
2021 , included a tax accrual true-up. The current year provision includes
accruals for both federal and state income taxes resulting in a higher effective
tax rate. The provision for state income tax began in the second quarter of 2022
with respect to certain states in which we have employees and collateral for
loans, thereby creating nexus in those states for income tax purposes. For
additional information, see Note 6 of the Notes to Consolidated Financial
Statements contained in Item 1 of this Form 10-Q.
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Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as ofJune 30, 2022 and 2021. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield. Three Months Ended June 30, 2022 2021 Average Interest Average Interest Balance Earned/ Yield/ Balance Earned/ Yield/ Outstanding Paid Rate Outstanding Paid Rate (Dollars in thousands) Interest-earning assets: Loans receivable, net (1)$ 1,439,714 $ 16,081 4.48 %$ 1,200,273 $ 12,866 4.30 % Investment securities 367,662 2,715 2.96 395,685 2,124 2.15 FHLB dividends 8,190 119 5.83 4,074 46 4.53 Interest-earning deposits in banks 20,636 46 0.89 39,750 15 0.15 Total interest-earning assets (2) 1,836,202 18,961 4.14 1,639,782 15,051 3.68 Noninterest-earning assets 127,463 97,581 Total average assets$ 1,963,665 $ 1,737,363 Interest-bearing liabilities: Interest-bearing demand deposits$ 197,071 $ 25 0.05$ 169,681 $ 10 0.02 Money market accounts 584,162 323 0.22 501,237 275 0.22 Savings accounts 195,345 26 0.05 185,336 34 0.07 Certificates of deposit 247,310 422 0.68 277,218 506 0.73 Total interest-bearing deposits 1,223,888 796 0.26 1,133,472 825 0.29 Advances 149,145 527 1.42 51,917 183 1.41 Subordinated debt 39,294 395 4.03 39,276 394 4.02 Total interest-bearing liabilities 1,412,327 1,718 0.49 1,224,665 1,402 0.46 Noninterest-bearing deposits 344,827 304,483 Other noninterest-bearing liabilities 32,927 22,062 Total average liabilities 1,790,081 1,551,210 Average equity 173,584 186,153 Total average liabilities and equity$ 1,963,665 $ 1,737,363 Net interest income$ 17,243 $ 13,649 Net interest rate spread 3.65 3.22 Net earning assets$ 423,875 $ 415,117 Net interest margin (3) 3.77 3.34 Average interest-earning assets to average interest-bearing liabilities 130.0 % 133.9 %
(1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.
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Six Months Ended June 30,
2022 2021
Average Interest Average Interest
Balance Earned/ Yield/ Balance Earned/ Yield/
Outstanding Paid Rate Outstanding Paid Rate
(Dollars in thousands)
Interest-earning
assets:
Loans receivable, net
(1) $ 1,385,248 $ 30,617 4.46 % $ 1,166,422 $ 25,407 4.39 %
Total investment
securities 363,572 4,990 2.77 382,283 4,158 2.19
FHLB dividends 6,758 171 5.10 3,942 91 4.66
Interest-earning
deposits in banks 51,537 84 0.33 42,150 28 0.13
Total interest-earning
assets (2) 1,807,115 35,862 4.00 1,594,797 29,684 3.75
Noninterest-earning
assets 124,753 97,040
Total average assets $ 1,931,868 $ 1,691,837
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 196,615 $ 42 0.04 $ 165,562 $ 17 0.02
Money market accounts 585,974 621 0.21 481,269 561 0.24
Savings accounts 195,034 52 0.05 179,524 74 0.08
Certificates of
deposit 244,989 798 0.66 286,552 1,107 0.78
Total interest-bearing
deposits 1,222,612 1,513 0.25 1,112,907 1,759 0.32
Advances 116,062 831 1.44 53,667 374 1.41
Subordinated debt 39,288 789 4.05 21,334 419 3.96
Total interest-bearing
liabilities 1,377,962 3,133 0.46 1,187,908 2,552 0.43
Noninterest-bearing
deposits 336,611 293,902
Other
noninterest-bearing
liabilities 35,820 23,865
Total average
liabilities 1,750,393 1,505,675
Average equity 181,475 186,162
Total average
liabilities and equity $ 1,931,868 $ 1,691,837
Net interest income $ 32,729 $ 27,132
Net interest rate
spread 3.54 3.32
Net earning assets $ 429,153 $ 406,889
Net interest margin
(3) 3.65 3.43
Average
interest-earning
assets to average
interest-bearing
liabilities 131.1 % 134.3 %
(1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.
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Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Three Months Ended Six Months Ended
June 30, 2022 vs. 2021 June 30, 2022 vs. 2021
Increase (Decrease) Due to Increase (Decrease) Due to
Total Increase Total Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands) (In thousands)
Interest-earning
assets:
Loans receivable, net $ 2,568 $ 647 $ 3,215 $ 4,746 $ 464 $ 5,210
Investments (150 ) 741 591 (203 ) 1,035 832
FHLB stock 46 27 73 65 15 80
Other (1) (7 ) 38 31 6 50 56
Total
interest-earning
assets $ 2,457 $ 1,453 $ 3,910 $ 4,614 $ 1,564 $ 6,178
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 2 $ 13 $ 15 $ 3 $ 22 $ 25
Money market accounts 46 2 48 122 (62 ) 60
Savings accounts 2 (10 ) (8 ) 6 (28 ) (22 )
Certificates of
deposit (55 ) (29 ) (84 ) (161 ) (148 ) (309 )
Advances 343 1 344 435 22 457
Subordinated debt - 1 1 353 17 370
Total
interest-bearing
liabilities $ 338 $ (22 ) $ 316 $ 758 $ (177 ) $ 581
Net change in
interest income $ 2,119 $ 1,475 $ 3,594 $ 3,856 $ 1,741 $ 5,597
(1) Includes interest-earning deposits (cash) at other financial institutions.
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. For the six months endedJune 30, 2022 and the year endedDecember 31, 2021 , we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. 53
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Table of Contents Contractual Obligations AtJune 30, 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$ 169,555 $ 79,154 $ 20,814 $ -$ 269,523 FHLB advances 132,000 35,000 25,000 10,000 202,000 Line of credit 8,000 - - - 8,000 Subordinated debt obligation - - - 39,319 39,319 Operating leases 808 1,710 1,779 4,376 8,673 Borrower taxes and insurance 934 - - - 934 Deferred compensation 104 326 73 496 999 Total contractual obligations$ 311,401 $ 116,190 $ 47,666 $ 54,191 $ 529,448
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with
off-balance sheet risks as of
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 $ 1,334 $ - $ - $ - $ 1,334
Variable-rate 1,705 - - - 1,705
Unfunded commitments under
lines of credit or existing
loans 82,930 34,400 10,469 122,512 250,311
Standby letters of credit 613 - - 200 813
Total commitments $ 86,582 $ 34,400 $ 10,469 $ 122,712 $ 254,163
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a
short-term and long-term nature. Our primary sources of funds consist of deposit
inflows, loan repayments, maturities and sales of securities, and borrowings
from the FHLB. While maturities and scheduled amortization of loans and
securities are usually predictable sources of funds, deposit flows, calls of
investment securities and borrowed funds, and prepayments on loans and
investment securities are greatly influenced by general interest rates, economic
conditions and competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. AtJune 30, 2022 , cash and cash equivalents totaling$87.8 million and unpledged securities classified as available-for-sale with a market value of$252.0 million provided additional sources of liquidity. The Bank pledged collateral of$459.2 million to support borrowings from the FHLB and has an established borrowing arrangement with theFederal Reserve Bank of San Francisco , for which available-for-sale securities with a market value of$9.3 million were pledged as ofJune 30, 2022 . First Northwest has a borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments. AtJune 30, 2022 , we had$3.0 million in loan commitments outstanding and$251.1 million in undisbursed loans and standby letters of credit, including$158.5 million in undisbursed construction loan commitments. 54
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Certificates of deposit due within one year as ofJune 30, 2022 , totaled$169.6 million , or 62.9% of certificates of deposit with a weighted-average rate of 0.70%. 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. AtJune 30, 2022 , the Company, on an unconsolidated basis, had liquid assets of$1.5 million . In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments to limited partnership investments. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. AtJune 30, 2022 , First Northwest had contributed$8.0 million in partial fulfillment of its commitment to extend$15.0 million toQuin Ventures, Inc. under a capital financing agreement and related promissory note. Capital Resources AtJune 30, 2022 , shareholders' equity totaled$165.2 million , or 8.1% of total assets. Our book value per share of common stock was$16.60 atJune 30, 2022 , compared to$19.10 atDecember 31, 2021 .
At
The following table provides the capital requirements and actual results for First Fed atJune 30, 2022 . Minimum Capital Minimum Required to be Actual Requirements Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets)$ 205,397 10.4 %$ 78,894 4.0 %$ 98,617 5.0 % Common equity tier I (to risk-weighted assets)$ 205,397 12.7 72,985 4.5 105,423 6.5 Tier I risk-based capital (to risk-weighted assets)$ 205,397 12.7 97,313 6.0 129,751 8.0 Total risk-based capital (to risk-weighted assets)$ 221,464 13.7 129,751 8.0 162,189 10.0 In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles inthe United States , which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 55
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