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 expanded consumer protection
regulation and responses to inflation, climate change issues and the
COVID-19 pandemic which could adversely affect the Company's business;
• a decrease in the market demand for loans that we originate for sale;
• 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 a financial holding company engaged in banking and financial activities, including those of its wholly owned subsidiary,First Fed Bank . The Company also has a controlling interest inQuin Ventures, Inc. , a fintech joint venture formed inApril 2021 focused on financial wellness and lifestyle protection products for consumers nationwide, and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments 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. 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 businesses with a focus on developing digital solutions applicable to the banking industry. In addition, First Northwest has invested inMeriwether Group Capital Hero Fund LP ("Hero Fund "), a private commercial lender focused on lower-middle market businesses, primarily in thePacific Northwest . InSeptember 2022 , First Northwest completed an additional purchase and now holds a 33.3% interest inThe Meriwether Group, LLC , a modern-day merchant bank focusing on providing entrepreneurs with resources to help them succeed. InOctober 2022 , the Company completed an additional purchase and now holds a 25% equity interest inMeriwether Group Capital, LLC , which provides financial advice for borrowers and capital for theHero Fund .The Meriwether Group, LLC , also holds a 20% interest inMeriwether Group Capital, LLC . First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. 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, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our ALLL. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off. Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and other customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses. Actions to Address Economic Uncertainties. Our business and consumer customers are subject to varying degrees of financial distress in the face of uncertainties presented by such factors as the continued development of COVID-19 variant infections, inflationary pressures, and the potential for economic recession. The commercial real estate sector has also been negatively impacted by the effects of COVID-19 on the hospitality, restaurant and food services industry, as well as changes in workforce behavior and demand for retail products. If commercial activity slows, it may result in lower demand for loans and other services we offer, as well the inability of customers to meet their loan obligations to us. We have taken specific actions to ensure that we have the balance sheet strength to serve our clients and communities, including managing our assets and liabilities in order to maintain liquidity and a strong capital position; however, future economic conditions are subject to significant uncertainty. While uncertainty exists, we believe we are well-positioned to operate effectively through the present economic environment. 41
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Table of Contents Critical Accounting Policies EffectiveJanuary 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 endedDecember 31, 2021 .
Comparison of Financial Condition at
Assets. Total assets increased to
Cash and cash equivalents decreased by$22.4 million , or 17.7%, to$103.7 million as ofSeptember 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$170.9 million to$1.52 billion atSeptember 30, 2022 , from$1.35 billion atDecember 31, 2021 . During the nine months endedSeptember 30, 2022 , multi-family loans increased$70.9 million through new originations, and through$20.4 million of commercial construction and$13.0 million of acquisition-renovation construction loans converting into permanent amortizing loans. Auto and other consumer loans increased$40.3 million , as a result of a$16.0 million purchase of a pool of manufactured home loans,$10.3 million in individual manufactured home loan purchases, an increase in other consumer loans of$10.8 million , and a net increase in auto loans of$8.5 million , offset by payment activity. One- to four-family residential loans increased$40.1 million as$28.5 million in residential construction loans converted to permanent amortizing loans and new originations exceeded payments of loans. Home equity loans increased$10.9 million through$7.2 million in new fixed-rate originations and draws on unfunded commitments. Commercial business loans decreased$8.6 million , mainly as the result of a decrease in Northpointe Mortgage Participation Program ("Northpointe") of$26.3 million and PPP loans paid off year-to-date totaling$15.8 million , offset by$13.9 million in SBA loan originations,$8.1 million of Water Station Program loans,$6.3 million ofBankers Healthcare Group loan purchases and draws on unfunded commitments. Our participation in the Northpointe program is based on current funding needs of the program. Given the slowdown in the mortgage market, as well as recent funding raises by Northpointe, we do not anticipate significant activity in the near term. Construction and land loans decreased$7.5 million , or 3.4%, to$217.2 million atSeptember 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 the progress toward completion of our construction projects. We continue to monitor the impact of supply chain challenges, inflation and consumer demand in a rising interest rate environment on completion of the projects currently in our portfolio. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. AtSeptember 30, 2022 , acquisition-renovation loans of$18.8 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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Table of Contents
The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
North Olympic Puget Sound
September 30, 2022 Peninsula (1) Region (2) Other Washington Oregon Idaho Total
(In thousands)
Construction Commitment
One- to four-family
residential $ 43,826 $ 72,413 $ 10,730 $ - $ - $ 126,969
Multi-family
residential - 143,202 8,761 415 3,592 155,970
Commercial
acquisition-renovation 1,638 18,711 - - - 20,349
Commercial real estate 8,615 31,699 - 540 - 40,854
Total commitment $ 54,079 $ 266,025 $ 19,491 $ 955 $ 3,592 $ 344,142
Construction Funds
Disbursed
One- to four-family
residential $ 18,565 $ 32,206 $ 2,634 $ - $ - $ 53,405
Multi-family
residential - 91,947 4,841 42 2,454 99,284
Commercial
acquisition-renovation 1,445 17,316 - - - 18,761
Commercial real estate 8,823 26,286 - 11 - 35,120
Total disbursed $ 28,833 $ 167,755 $ 7,475 $ 53 $ 2,454 $ 206,570
Undisbursed Commitment
One- to four-family
residential $ 25,261 $ 40,207 $ 8,096 $ - $ - $ 73,564
Multi-family
residential - 51,255 3,920 373 1,138 56,686
Commercial
acquisition-renovation 193 1,395 - - - 1,588
Commercial real estate (208 ) 5,413 - 529 - 5,734
Total undisbursed $ 25,246 $ 98,270 $ 12,016 $ 902 $ 1,138 $ 137,572
Land Funds Disbursed
One- to four-family
residential $ 3,326 $ 3,368 $ 326 $ - $ - $ 7,020
Commercial real estate - 3,585 - - - 3,585
Total disbursed for
land $ 3,326 $ 6,953 $ 326 $ - $ - $ 10,605
(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 nine months endedSeptember 30, 2022 , the Company originated$478.7 million of loans, of which$320.6 million , or 66.9%, were originated in thePuget Sound region,$94.7 million , or 19.8%, in theNorth Olympic Peninsula ,$41.1 million , or 8.6%, in other areas throughoutWashington State , and$22.4 million , or 4.7%, in other states. The Company purchased an additional$46.9 million in auto loans,$26.3 million in manufactured home loans, and$6.4 million in commercial business loans with collateral located throughoutthe United States during the nine months endedSeptember 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 total loan portfolio was comprised of 81.8% organic originations and 18.2% purchased loans atSeptember 30, 2022 . Our ALLL increased to$16.3 million atSeptember 30, 2022 , as a$1.3 million loan loss provision was recorded for the nine-month period. Net charge-offs were$101,000 for the nine-month period. The loan loss provision was made to account for growth in the loan portfolio, adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic and uncertain economic conditions, which is reflected in the qualitative factor adjustments. The ALLL as a percentage of total loans was 1.1% at bothSeptember 30, 2022 andDecember 31, 2021 . Nonperforming loans increased$2.1 million , or 154.7%, to$3.5 million atSeptember 30, 2022 , from$1.4 million atDecember 31, 2021 , reflecting the deterioration of a$1.8 million speculative single-family home construction project and a$595,000 mortgage loan, offset by improvements in nonperforming auto and other consumer loans of$92,000 , home equity loans of$95,000 and commercial real estate loans of$17,000 . Nonperforming loans to total loans was 0.2% atSeptember 30, 2022 , up from 0.1% atDecember 31, 2021 . The ALLL as a percentage of nonperforming loans decreased to 463% atSeptember 30, 2022 , from 1095% atDecember 31, 2021 . A contract to sell the speculative single-family home was entered into subsequent to quarter end and the loan is expected to be paid off by year end. AtSeptember 30, 2022 , there were$1.8 million in restructured loans, of which$1.7 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans decreased$7.4 million to$5.2 million atSeptember 30, 2022 , from$12.6 million atDecember 31, 2021 , due to commercial real estate loan upgrades offset by declines in in two construction loans. Loan charge-offs are concentrated mainly in our quin CoreCard program and indirect auto loan portfolio. The quin CoreCard program was frozen inOctober 2022 , halting future losses. We stopped originating loans from one of our indirect auto loan product offerings in 2020 in order to reduce credit risk and future charge-off activity. The balance of indirect auto loans decreased to$5.9 million atSeptember 30, 2022 from$10.6 million atDecember 31, 2021 . We believe our ALLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as ofSeptember 30, 2022 . Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated: Increase (Decrease) September 30, 2022 December 31, 2021 Amount Percent (In thousands) Real Estate: One-to-four family$ 335,067 $ 294,965$ 40,102 13.6 % Multi-family 243,256 172,409 70,847 41.1 Commercial real estate 385,272 363,299 21,973 6.0 Construction and land 217,175 224,709 (7,534 ) (3.4 ) Total real estate loans 1,180,770 1,055,382 125,388 11.9 Consumer: Home equity 50,066 39,172 10,894 27.8 Auto and other consumer 223,100 182,769 40,331 22.1 Total consumer loans 273,166 221,941 51,225 23.1 Commercial business loans 71,269 79,838 (8,569 ) (10.7 ) Total loans 1,525,205 1,357,161 168,044 12.4 Less: Net deferred loan fees 3,519 4,772 (1,253 ) (26.3 ) Premium on purchased loans, net (15,705 ) (12,995 ) (2,710 ) 20.9 Allowance for loan losses 16,273 15,124 1,149 7.6 Loans receivable, net$ 1,521,118 $ 1,350,260$ 170,858 12.7 44
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The following table represents nonperforming assets at the dates indicated.
Increase (Decrease)
September 30, 2022 December 31, 2021 Amount Percent
(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family $ 1,089 $ 494 $ 595 120.4 %
Commercial real estate 54 71 (17 ) (23.9 )
Construction and land 1,767 22 1,745 7,931.8
Total real estate loans 2,910 587 2,323 395.7
Consumer loans:
Home equity 187 282 (95 ) (33.7 )
Auto and other consumer 420 512 (92 ) (18.0 )
Total consumer loans 607 794 (187 ) (23.6 )
Total nonperforming assets $ 3,517 $ 1,381 $ 2,136 154.7
Nonaccrual and 90 days or more
past due loans as a percentage
of total loans 0.2 % 0.1 % 0.1 % 100.0
Investment securities decreased $14.8 million , or 4.3%, to $329.4 million at
September 30, 2022 , from $344.2 million at December 31, 2021 , as declines in
mark-to-market valuation, sales, normal payments and prepayment activity
outpaced purchases. The investment portfolio, including mortgage-backed
securities, had an estimated projected average life of 8.4 years as of September
30, 2022 , compared to 5.7 years as of December 31, 2021 , and had an estimated
average repricing term of 7.6 years as of September 30, 2022 , compared to 5.4
years as of December 31, 2021 , based on the interest rate environment at those
times. We believe prepayment activity is likely to slow in a rising rate
environment, extending the projected duration of our securities portfolio.
The investment portfolio was composed of 50.8% in amortizing securities at
September 30, 2022 , compared to 49.8% at December 31, 2021 . The projected
average life of our securities may vary due to prepayment activity, which,
particularly in the mortgage-backed securities portfolio, is impacted by
prevailing mortgage interest rates. 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
Deposit balances increased$24.7 million to$1.61 billion atSeptember 30, 2022 from$1.58 billion atDecember 31, 2021 . During the nine-month period endedSeptember 30, 2022 , there were increases of$106.9 million in certificates of deposits ("CDs") and$2.2 million in savings accounts offset by a$78.8 million decrease in money market accounts and a$5.6 million decrease in demand deposit accounts. Runoffs in commercial and public fund account balances of$50.3 million during the nine-month period endedSeptember 30, 2022 , was offset by increases in consumer account balances of$11.2 million and brokered CDs of$63.8 million . We utilize brokered CDs as an additional funding source in order to provide liquidity, manage cost of funds, reduce reliance on public funds deposits, and manage interest rate risk. Brokered CDs totaling$129.6 million were included in the$354.1 million balance of certificates of deposit atSeptember 30, 2022 .
FHLB advances increased 201.3% to
Equity. Total shareholders' equity decreased$33.9 million to$156.6 million for the nine months endedSeptember 30, 2022 . The Company recorded year-to-date net income of$9.6 million . The net income increase was offset by a decrease in the after-tax unrealized loss on available-for-sale investments of$41.4 million . All categories of the investment portfolio have been significantly impacted by the rising rate environment with 97.9% below book value atSeptember 30, 2022 . Year-to-date, we repurchased 131,672 shares of common stock under theOctober 2020 stock repurchase plan at an average price of$16.21 per share for a total of$2.1 million , leaving 526,698 shares remaining in the share repurchase program. 45
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Comparison of Results of Operations for the Three Months Ended
General. Net income attributable to the Company was$4.3 million for the three months endedSeptember 30, 2022 , compared to$4.2 million for the three months endedSeptember 30, 2021 . A$2.8 million increase in net interest income after provision for loan loss was offset by a$2.0 million decrease in noninterest income and a$1.4 million increase in noninterest expense. Net Interest Income. Net interest income increased$2.9 million to$18.2 million for the three months endedSeptember 30, 2022 , from$15.4 million for the three months endedSeptember 30, 2021 . This increase was mainly the result of an increase in average earning assets of$156.6 million combined with an increase to the yield on average interest-earning assets of 54 basis points to 4.45% for the three months endedSeptember 30, 2022 , compared to 3.91% for the same period in the prior year. The average cost of interest-bearing liabilities increased to 0.73% for the three months endedSeptember 30, 2022 , compared to 0.45% for the same period last year, due primarily to increases in the average balance in FHLB advances of$130.9 million in combination with higher rates paid on money market accounts, CDs and borrowings. Total cost of funds increased 23 basis points to 0.59% for the three months endedSeptember 30, 2022 , from 0.36% for the same period in 2021. The net interest margin increased 30 basis points to 3.88% for the three months endedSeptember 30, 2022 , from 3.58% for the same period in 2021, due to an improvement in our earning asset mix and expanding realized returns for both fixed and variable rate assets relative to funding costs. Interest Income. Total interest income increased$4.1 million , or 24.3%, to$20.9 million for the three months endedSeptember 30, 2022 , from$16.8 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets and improvement in the mix of assets. Interest and fees on loans receivable increased$3.2 million , to$17.8 million for the three months endedSeptember 30, 2022 , from$14.6 million for the three months endedSeptember 30, 2021 , primarily due to an increase in the average balance of net loans receivable of$189.7 million compared to the prior year. Average loan yields were 4.75% and 4.47% for the three months endedSeptember 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 September 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,484,615 4.75 % $ 1,294,877 4.47 % $ 3,197
Investment securities 348,281 3.21 365,014 2.32 679
FHLB stock 9,269 6.08 4,061 4.01 101
Interest-earning deposits
in banks 17,231 2.72 38,810 0.18 100
Total interest-earning
assets $ 1,859,396 4.45 % $ 1,702,762 3.91 % $ 4,077
Interest Expense. Total interest expense increased $1.2 million , or
85.9%, to $2.7 million for the three months ended September 30, 2022 , compared
to $1.4 million for the three months ended September 30, 2021 , due to an
increase in borrowing costs of $824,000 primarily related to additional FHLB
borrowings in the current period along with an increase in interest expense on
deposits of $401,000 given a 12 basis point increase in the average cost of
interest-bearing deposits. The average balance of interest-bearing deposits
increased $45.5 million , or 3.9%, to $1.22 billion for the three months ended
September 30, 2022 , from $1.18 billion for the three months ended September 30,
2021 , due to core deposit growth in new and existing market areas.
During the three months ended September 30, 2022 , interest expense increased on
certificates of deposit and money market accounts due to increases in the
average balances of $21.7 million and $3.6 million , respectively, along with
increases in the average rates paid of 26 basis points and 12 basis points,
compared to the three months ended September 30, 2021 . During the same period,
the average balances of interest-bearing demand and savings accounts
increased $10.4 million and $9.7 million , respectively, with a 1 basis
point increase in the average rate paid on interest-bearing demand and a 1 basis
point decrease in the average rate paid on savings accounts, resulting in
comparatively minor changes to interest expense. The average cost of
interest-bearing deposit products increased to 0.41% for the three months ended
September 30, 2022 , from 0.29% for the three months ended September 30, 2021 ,
due in large part to the expiration of promotional rates offered on CD
products. Borrowing costs increased due to increases in both the average balance
and cost of overnight FHLB advances, which are more sensitive to Federal Reserve
Bank rate increases, compared to the same period in 2021.
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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 September 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Rate Outstanding Rate Interest Expense
(Dollars in thousands)
Transaction accounts $ 190,542 0.03 % $ 180,162 0.02 % $ 5
Money market accounts 556,434 0.33 552,811 0.21 177
Savings accounts 198,403 0.05 188,664 0.06 (4 )
Certificates of deposit 279,169 1.06 257,459 0.80 223
Advances 182,554 2.18 51,613 1.43 819
Subordinated debt 39,326 3.98 39,249 3.94 5
Total interest-bearing
liabilities $ 1,446,428 0.73 % $ 1,269,958 0.45 % $ 1,225
Provision for Loan Losses. The Company recorded a $750,000 loan loss provision
during the third quarter of 2022. This compares to a provision for loan losses
of $700,000 for the three months ended September 30, 2021 . The provision
reflects loan growth, higher charge-offs and an assessment of dynamic economic
conditions, offset by continued stable credit quality metrics.
The following table details activity and information related to the ALLL for the
periods shown:
Three Months Ended September 30,
2022 2021
(Dollars in thousands)
Provision for loan losses $ 750 $ 700
Net charge-offs (224 ) (45 )
Allowance for loan losses 16,273 15,243Allowance for losses as a percentage of total gross loans receivable at period end
1.1 % 1.1 %
Total nonaccrual loans 3,517 1,183
Allowance for loan losses as a percentage of
nonaccrual loans at period end 462.7 % 1288.5 %
Nonaccrual and 90 days or more past due loans as a
percentage of total loans 0.2 % 0.1 %
Total loans $ 1,525,205 $ 1,352,878
Noninterest Income. Noninterest income decreased $2.0 million , or 45.5%, to $2.3
million for the three months ended September 30, 2022 , from $4.3 million for the
three months ended September 30, 2021 . The increase in loan and deposit service
fees was primarily driven by late fee income from loans; other income reflects a
valuation increase of $231,000 recorded on our partnership fintech investments
compared to a gain of $79,000 in the same period in 2021, offset by a decline in
ARC loan fee income of $114,000 . Increases were also offset by a decline of
$576,000 in gain on sales of mortgage loans over the same period in 2021 as
rising mortgage loan rates and lack of single-family home borrowing demand
resulted in a decline in saleable loans, as well as a decline of $1.3 million
from investment securities sales as there were no sales in the current quarter
compared to the same period in 2021. The $609,000 decline in sold loan servicing
fee income over the three months ended September 30, 2021 , reflects a fair
market value decrease in the loan servicing rights asset.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 1,302 $ 1,015 $ 287 28.3 %
Sold loan servicing fees 206 815 (609 ) (74.7 )
Net gain on sale of loans 285 660 (375 ) (56.8 )
Net gain on sale of investment
securities - 1,286 (1,286 ) (100.0 )
Increase in cash surrender value of
bank-owned life insurance 221 241 (20 ) (8.3 )
Other income 320 269 51 19.0
Total noninterest income $ 2,334 $ 4,286 $ (1,952 ) (45.5 )%
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Noninterest Expense. Noninterest expense increased$1.4 million , or 10.3%, to$15.4 million for the three months endedSeptember 30, 2022 , compared to$13.9 million for the three months endedSeptember 30, 2021 . The increase over the third quarter of 2021 was due to higherQuin Ventures expenses, mainly related to compensation and advertising, and reflects increases in Bank compensation expense as well as other costs associated with our expansion of two new retail locations, technology enhancements for data and digital banking, and higher professional fees.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
Three Months Ended September 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 9,045 $ 8,713 $ 332 3.8 %
Data processing 1,778 1,568 210 13.4
Occupancy and equipment 1,499 1,106 393 35.5
Supplies, postage, and telephone 322 279 43 15.4
Regulatory assessments and state taxes 365 335 30 9.0
Advertising 645 547 98 17.9
Professional fees 695 422 273 64.7
FDIC insurance premium 219 134 85 63.4
Other expense 807 830 (23 ) (2.8 )
Total noninterest expense $ 15,375 $ 13,934 $ 1,441 10.3 %
Provision for Income Tax. An income tax expense of $818,000 was recorded for the
three months ended September 30, 2022 , compared to $946,000 for the three months
ended September 30, 2021 . There was a year-over-year decrease in income before
taxes of $591,000 reflecting the decrease in pre-tax income. For additional
information, see Note 6 of the Notes to Consolidated Financial Statements
contained in Item 1 of this Form 10-Q.
Comparison of Results of Operations for the Nine Months Ended
General. Net income attributable to the Company was$9.6 million for the nine months endedSeptember 30, 2022 , compared to$10.3 million for the nine months endedSeptember 30, 2021 . A$8.5 million increase in net interest income after provision for loan loss was offset by a$3.9 million decrease in noninterest income and a$7.4 million increase in noninterest expense. Net Interest Income. Net interest income increased$8.5 million to$50.9 million for the nine months endedSeptember 30, 2022 , from$42.5 million for the nine months endedSeptember 30, 2021 . This increase was mainly the result of an increase in average earning assets of$193.6 million . The yield on average interest-earning assets increased 35 basis points to 4.16% for the nine months endedSeptember 30, 2022 , compared to 3.81% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, and an increase in yields earned on investment securities. The average cost of interest-bearing liabilities increased to 0.55% for the nine months endedSeptember 30, 2022 , compared to 0.44% for the same period last year, due primarily to an increase in the average balance of borrowings related to additional FHLB advances. Total cost of funds increased 9 basis points to 0.44% for the nine months endedSeptember 30, 2022 , from 0.35% for the same period in 2021. The net interest margin increased 25 basis points to 3.73% for the nine months endedSeptember 30, 2022 , from 3.48% for the same period in 2021. Interest Income. Total interest income increased$10.3 million , or 22.1%, to$56.7 million for the nine months endedSeptember 30, 2022 , from$46.5 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased$8.4 million , to$48.4 million for the nine months endedSeptember 30, 2022 , from$40.0 million for the nine months endedSeptember 30, 2021 , primarily due to an increase in the average balance of net loans receivable of$209.0 million compared to the prior year, coupled with an increase in average loan yields to 4.56% for the nine months endedSeptember 30, 2022 , from 4.42% for the same period in 2021. The yield earned on investment securities also increased 67 basis points to 2.91% compared to the same period in 2021. 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:
Nine Months Ended September 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Yield Outstanding Yield Interest Income
(Dollars in thousands)
Loans receivable, net $ 1,418,734 4.56 % $ 1,209,710 4.42 % $ 8,407
Investment securities 358,419 2.91 376,463 2.24 1,511
FHLB stock 7,605 5.50 3,982 4.43 181
Interest-earning deposits in
banks 39,976 0.68 41,024 0.15 156
Total interest-earning
assets $ 1,824,734 4.16 % $ 1,631,179
3.81 % $ 10,255
Interest Expense. Total interest expense increased $1.8 million , or 45.4%,
to $5.8 million for the nine months ended September 30, 2022 , compared to $4.0
million for the nine months ended September 30, 2021 , due to an increase in
borrowing costs of $1.7 million primarily related to additional FHLB advances.
The average balance of interest-bearing deposits increased $88.1 million , or
7.8%, to $1.22 billion for the nine months ended September 30, 2022 , from $1.14
billion for the nine months ended September 30, 2021 , due to core deposit growth
in new and existing market areas. Average deposit account balances were composed
of 78% in interest-bearing deposits and 22% in noninterest-bearing deposits at
September 30, 2022 .
During the nine months ended September 30, 2022 , interest expense decreased on
certificates of deposit due to a decrease in the average balances of $20.2
million , along with an increase in the average rates paid of 1 basis point,
compared to the nine months ended September 30, 2021 . During the same period,
the average balances of money market accounts increased $70.6 million , with a 2
basis point average rate increase, resulting in an increase to interest expense.
The average cost of interest-bearing deposit accounts decreased to 0.30% for the
nine months ended September 30, 2022 , from 0.31% for the nine months ended
September 30, 2021 , due in large part to the expiration of promotional rates and
a shift in deposit mix to higher levels of transaction accounts. Borrowing costs
increased due to increases in both the average balance and cost of FHLB advances
compared to the same period in 2021 and the issuance of subordinated debt in
March 2021 .
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
Nine Months Ended September 30,
2022 2021
Average Average Increase
Balance Balance (Decrease) in
Outstanding Rate Outstanding Rate Interest Expense
(Dollars in thousands)
Transaction accounts $ 194,568 0.04 % $ 170,482 0.02 % $ 30
Money market accounts 576,019 0.25 505,379 0.23 237
Savings accounts 196,170 0.05 182,604 0.07 (26 )
Certificates of deposit 256,508 0.80 276,748 0.79 (86 )
Advances 138,470 1.77 52,975 1.41 1,277
Subordinated debt 39,301 4.02 27,371 3.95 374
Total interest-bearing
liabilities $ 1,401,036 0.55 % $ 1,215,559 0.44 % $ 1,806
Provision for Loan Losses. The Company recorded a $1.3 million loan loss
provision during the nine months ended September 30, 2022 , compared to a
provision for loan losses of $1.5 million for the nine months ended September
30, 2021 . The provision reflects loan growth and changing economic conditions,
offset by stable credit quality metrics.
The following table details activity and information related to the ALLL for the
periods shown:
Nine Months Ended September 30,
2022 2021
(Dollars in thousands)
Provision for loan losses $ 1,250 $ 1,500
Net charge-offs (101 ) (104 )
Allowance for loan losses 16,273 15,243
Allowance for losses as a percentage of
total gross loans receivable at period end 1.1 % 1.1 %
Total nonaccrual loans 3,517 1,183
Allowance for loan losses as a percentage of nonaccrual loans at period end 462.7 % 1288.5 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.2 % 0.1 % Total loans$ 1,525,205 $ 1,352,878 49
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Noninterest Income. Noninterest income decreased$3.9 million , or 35.9%, to$7.0 million for the nine months endedSeptember 30, 2022 , from$10.9 million for the nine months endedSeptember 30, 2021 . The year-over-year change in loan and deposit service fees included increases in commercial loan late fees of$292,000 , business deposit account fee income of$174,000 , deposit account overdraft fees of$131,000 and deposit account interchange fee income of$74,000 . Other income increased due to higher ARC loan fee income of$228,000 in the current year-to-date period compared to the same period in 2021 andQuin Ventures subscription fee income of$130,000 , offset by a year-over-year decrease of$237,000 in the recorded value of our partnership fintech investments. Increases in fee income and other income were offset by a decline of$2.5 million in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home loan demand continue to dampen mortgage loan sales, and a decline of$2.3 million in investment securities sales during the current year compared to the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars inthousands)
Loan and deposit service fees $ 3,566 $ 2,853$ 713 25.0 % Sold loan servicing fees 665 858 (193 ) (22.5 ) Net gain on sale of loans 769 3,014 (2,245 ) (74.5 ) Net gain on sale of investment securities 118 2,410 (2,292 ) (95.1 ) Increase in cash surrender value of bank-owned life insurance 686 727 (41 ) (5.6 ) Other income 1,155 1,000 155 15.5 Total noninterest income $ 6,959 $ 10,862$ (3,903 ) (35.9 )% Noninterest Expense. Noninterest expense increased$7.4 million , or 18.7%, to$47.2 million for the nine months endedSeptember 30, 2022 , compared to$39.7 million for the nine months endedSeptember 30, 2021 .Quin Ventures launched the Credit Builder product during the second quarter of 2022 and, as a result, a portion of the costs which were previously capitalized to software during the development phase were expensed.Additional Quin Ventures expenses resulted in increases to advertising, compensation, depreciation and data processing. Noninterest expenses attributable toQuin Ventures for the nine months endedSeptember 30, 2022 , totaled$3.9 million . We expect expenses related toQuin Ventures to decline in future quarters. The Bank also recorded increases over the same period in 2021 in compensation expense as we added staff to manage the company and enhance data and fintech infrastructure, as well as costs associated with expanding our footprint with two new locations. The Bank also invested in technology enhancements for core and digital banking products to support digital initiatives and customer relationship management tools. 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:
Nine Months Ended September 30, Increase (Decrease)
2022 2021 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 27,583 $ 24,567 $ 3,016 12.3 %
Data processing 5,420 4,426 994 22.5
Occupancy and equipment 4,098 3,139 959 30.6
Supplies, postage, and telephone 1,043 876 167 19.1
Regulatory assessments and state taxes 1,167 897 270 30.1
Advertising 2,802 1,484 1,318 88.8
Professional fees 1,883 1,588 295 18.6
FDIC insurance premium 653 450 203 45.1
Other expense 2,520 2,308 212 9.2
Total noninterest expense $ 47,169 $ 39,735 $ 7,434 18.7 %
Provision for Income Tax. An income tax expense of $1.8 million was recorded for
the nine months ended September 30, 2022 , compared to $2.1 million for the nine
months ended September 30, 2021 . There was a year-over-year decrease in income
before taxes of $2.6 million ; however, the expense recorded for the nine months
ended September 30, 2021 , included a tax accrual true-up. The current year
provision includes accruals for both federal and state income taxes, resulting
in a higher effective tax rate. The provision for state income tax began in the
second quarter of 2022 with respect to certain states in which we have employees
and collateral for loans, thereby creating nexus in those states for income tax
purposes. For additional information, see Note 6 of the Notes to Consolidated
Financial Statements contained in Item 1 of this Form 10-Q.
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Average Balances, Interest and Average Yields/Cost
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as ofSeptember 30, 2022 and 2021. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield. Three Months Ended September 30, 2022 2021 Average Interest Average Interest Balance Earned/ Yield/ Balance Earned/ Yield/ Outstanding Paid Rate Outstanding Paid Rate (Dollars in thousands) Interest-earning assets: Loans receivable, net (1)$ 1,484,615 $ 17,778 4.75 %$ 1,294,877 $ 14,581 4.47 % Investment securities 348,281 2,817 3.21 365,014 2,138 2.32 FHLB dividends 9,269 142 6.08 4,061 41 4.01 Interest-earning deposits in banks 17,231 118 2.72 38,810 18 0.18 Total interest-earning assets (2) 1,859,396 20,855 4.45 1,702,762 16,778 3.91 Noninterest-earning assets 137,369 107,781 Total average assets$ 1,996,765 $ 1,810,543 Interest-bearing liabilities: Interest-bearing demand deposits$ 190,542 $ 16 0.03$ 180,162 $ 11 0.02 Money market accounts 556,434 468 0.33 552,811 291 0.21 Savings accounts 198,403 24 0.05 188,664 28 0.06 Certificates of deposit 279,169 743 1.06 257,459 520 0.80 Total interest-bearing deposits (3) 1,224,548 1,251 0.41 1,179,096 850 0.29 Advances 182,554 1,005 2.18 51,613 186 1.43 Subordinated debt 39,326 395 3.98 39,249 390 3.94 Total interest-bearing liabilities 1,446,428 2,651 0.73 1,269,958 1,426 0.45 Noninterest-bearing deposits (3) 342,944 314,677 Other noninterest-bearing liabilities 39,129 35,144 Total average liabilities 1,828,501 1,619,779 Average equity 168,264 190,764 Total average liabilities and equity$ 1,996,765 $ 1,810,543 Net interest income$ 18,204 $ 15,352 Net interest rate spread 3.72 3.46 Net earning assets$ 412,968 $ 432,804 Net interest margin (4) 3.88 3.58 Average interest-earning assets to average interest-bearing liabilities 128.6 % 134.1 % (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.32% and 0.23% for the three months endedSeptember 30, 2022 and 2021, respectively. (4) Net interest income divided by average interest-earning assets. 51
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Nine Months Ended September 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) $ 1,418,734 $ 48,395 4.56 % $ 1,209,710 $ 39,988 4.42 %
Total investment
securities 358,419 7,807 2.91 376,463 6,296 2.24
FHLB dividends 7,605 313 5.50 3,982 132 4.43
Interest-earning
deposits in banks 39,976 202 0.68 41,024 46 0.15
Total interest-earning
assets (2) 1,824,734 56,717 4.16 1,631,179 46,462 3.81
Noninterest-earning
assets 129,004 100,662
Total average assets $ 1,953,738 $ 1,731,841
Interest-bearing
liabilities:
Interest-bearing
demand deposits (3) $ 194,568 $ 58 0.04 $ 170,482 $ 28 0.02
Money market accounts 576,019 1,089 0.25 505,379 852 0.23
Savings accounts 196,170 76 0.05 182,604 102 0.07
Certificates of
deposit 256,508 1,541 0.80 276,748 1,627 0.79
Total interest-bearing
deposits 1,223,265 2,764 0.30 1,135,213 2,609 0.31
Advances 138,470 1,837 1.77 52,975 560 1.41
Subordinated debt 39,301 1,183 4.02 27,371 809 3.95
Total interest-bearing
liabilities 1,401,036 5,784 0.55 1,215,559 3,978 0.44
Noninterest-bearing
deposits (3) 338,745 300,903
Other
noninterest-bearing
liabilities 36,934 27,666
Total average
liabilities 1,776,715 1,544,128
Average equity 177,023 187,713
Total average
liabilities and equity $ 1,953,738 $ 1,731,841
Net interest income $ 50,933 $ 42,484
Net interest rate
spread 3.60 3.37
Net earning assets $ 423,698 $ 415,620
Net interest margin
(4) 3.73 3.48
Average
interest-earning
assets to average
interest-bearing
liabilities 130.2 % 134.2 %
(1) The average loans receivable, net balances include nonaccrual loans.
(2) Includes interest-earning deposits (cash) at other financial institutions.
(3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.24% for each of the
nine months ended September 30, 2022 and 2021.
(4) Net interest income divided by average interest-earning assets.
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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 Nine Months Ended
September 30, 2022 vs. 2021 September 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 $ 2,144$ 1,053 $ 3,197 $ 6,916$ 1,491 $ 8,407 Investments (98 ) 777 679 (302 ) 1,813 1,511 FHLB stock 53 48 101 120 61 181 Other (1) (10 ) 110 100 (1 ) 157 156 Total interest-earning assets $ 2,089$ 1,988 $ 4,077 $ 6,733$ 3,522 $ 10,255 Interest-bearing liabilities: Interest-bearing demand deposits $ 1 $ 4 $ 5 $ 4$ 26 $ 30 Money market accounts 2 175 177 119 118 237 Savings accounts 1 (5 ) (4 ) 8 (34 ) (26 ) Certificates of deposit 44 179 223 (119 ) 33 (86 ) Advances 472 347 819 904 373 1,277 Subordinated debt 1 4 5 353 21 374 Total interest-bearing liabilities $ 521$ 704 $ 1,225 $ 1,269$ 537 $ 1,806 Net change in interest income $ 1,568$ 1,284 $ 2,852 $ 5,464$ 2,985 $ 8,449
(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 nine months endedSeptember 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 AtSeptember 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$ 242,591 $ 94,966 $ 16,568 $ -$ 354,125 FHLB advances 176,000 30,000 25,000 10,000 241,000 Line of credit 12,000 - - - 12,000 Subordinated debt obligation - - - 39,338 39,338 Operating leases 814 1,728 1,781 4,150 8,473 Borrower taxes and insurance 2,224 - - - 2,224 Deferred compensation 82 87 79 753 1,001 Total contractual obligations$ 433,711 $ 126,781 $ 43,428 $ 54,241 $ 658,161
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 1 Year After 3 Years
Within Through Through Beyond Total Amounts
1 Year 3 Years 5 Years 5 Years Committed
(In thousands)
Commitments to originate
loans:
Fixed-rate $ 363 $ - $ - $ - $ 363
Variable-rate 350 - - - 350
Unfunded commitments under
lines of credit or existing
loans 78,989 35,841 6,032 110,346 231,208
Standby letters of credit 566 58 - 200 824
Total commitments $ 80,268 $ 35,899 $ 6,032 $ 110,546 $ 232,745
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. AtSeptember 30, 2022 , cash and cash equivalents totaling$103.7 million and unpledged securities classified as available-for-sale with a market value of$235.8 million provided additional sources of liquidity. The Bank pledged collateral of$503.7 million to support borrowings from the FHLB and has an established borrowing arrangement with theFederal Reserve Bank of San Francisco , for which available-for-sale securities with a market value of$9.0 million were pledged as ofSeptember 30, 2022 . First Northwest has a$20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
At
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Certificates of deposit due within one year as ofSeptember 30, 2022 , totaled$242.6 million , or 68.5% of certificates of deposit with a weighted-average rate of 1.74%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates were in decline. 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. AtSeptember 30, 2022 , the Company, on an unconsolidated basis, had liquid assets of$1.8 million . In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments to limited partnership investments. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. AtSeptember 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 AtSeptember 30, 2022 , shareholders' equity totaled$156.6 million , or 7.5% of total assets. Our book value per share of common stock was$15.69 atSeptember 30, 2022 , compared to$19.10 atDecember 31, 2021 .
At
The following table provides the capital requirements and actual results for
First Fed at
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) $ 210,720 10.5 % $ 80,308 4.0 % $ 100,385 5.0 %
Common equity tier I (to
risk-weighted assets) $ 210,720 12.6 75,308 4.5 108,779 6.5
Tier I risk-based capital
(to risk-weighted assets) $ 210,720 12.6 100,411 6.0 133,881 8.0
Total risk-based capital
(to risk-weighted assets) $ 227,286 13.6 133,881 8.0 167,352 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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