FNWB 10-Q Quarterly Report Sept. 30, 2022

FIRST NORTHWEST BANCORP

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fnwb20220930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _____ to _____

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)


Washington		46-1259100
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. Number)

105 West 8th Street , Port Angeles , Washington		98362
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:		( 360 ) 457-0461

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

Title of each class:		Trading Symbol(s):		Name of each exchange on which registered:
Common Stock, par value $0.01 per share		FNWB		The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer	☐	Accelerated filer	☐	Emerging growth company	☐
Non-accelerated filer	☒	Smaller reporting company	☒

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 3, 2022, there were 9,949,057 shares of common stock, $0.01 par value per share, outstanding.

Table of Contents

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS

PART 1 - FINANCIAL INFORMATION
	Page
Item 1 - Financial Statements (Unaudited)	3

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	56

Item 4 - Controls and Procedures	56

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	57

Item 1A - Risk Factors	57

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3 - Defaults Upon Senior Securities	58

Item 4 - Mine Safety Disclosures	58

Item 5 - Other Information	58

Item 6 - Exhibits	58

SIGNATURES	59

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

	September 30, 2022			December 31, 2021
ASSETS
Cash and due from banks	$	22,784		$	13,868
Interest-earning deposits in banks		80,879			112,148
Investment securities available for sale, at fair value		329,436			344,212
Loans held for sale		263			760
Loans receivable (net of allowance for loan losses of $ 16,273 and $ 15,124 )		1,521,118			1,350,260
Federal Home Loan Bank (FHLB) stock, at cost		11,961			5,196
Accrued interest receivable		6,655			5,289
Premises and equipment, net		20,841			19,830
Servicing rights on sold loans, net		—			3,282
Servicing rights on sold loans, at fair value		3,872			—
Bank-owned life insurance, net		40,003			39,318
Equity and partnership investments		13,990			3,571
Goodwill and other intangible assets, net		1,173			1,183
Prepaid expenses and other assets		38,466			22,164

Total assets	$	2,091,441		$	1,921,081


LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits	$	1,605,235		$	1,580,580
Borrowings		292,338			119,280
Accrued interest payable		105			393
Accrued expenses and other liabilities		34,940			29,240
Advances from borrowers for taxes and insurance		2,224			1,108

Total liabilities		1,934,842			1,730,601

Shareholders' Equity
Preferred stock, $ 0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding		—			—
Common stock, $ 0.01 par value, authorized 75,000,000 shares; issued and outstanding 9,978,041 shares at September 30, 2022, and 9,972,698 shares at December 31, 2021		100			100
Additional paid-in capital		97,924			96,131
Retained earnings		110,107			103,014
Accumulated other comprehensive (loss) income, net of tax		( 41,023	)		288
Unearned employee stock ownership plan (ESOP) shares		( 8,077	)		( 8,572	)

Total parent's shareholders' equity		159,031			190,961
Noncontrolling interest in Quin Ventures, Inc.		( 2,432	)		( 481	)

Total shareholders' equity		156,599			190,480

Total liabilities and shareholders' equity	$	2,091,441		$	1,921,081

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans receivable	$	17,778	$	14,581	$	48,395	$	39,988
Interest on investment securities		2,817		2,138		7,807		6,296
Interest on deposits and other		118		18		202		46
FHLB dividends		142		41		313		132
Total interest income		20,855		16,778		56,717		46,462

INTEREST EXPENSE
Deposits		1,251		850		2,764		2,609
Borrowings		1,400		576		3,020		1,369
Total interest expense		2,651		1,426		5,784		3,978

Net interest income		18,204		15,352		50,933		42,484
PROVISION FOR LOAN LOSSES		750		700		1,250		1,500
Net interest income after provision for loan losses		17,454		14,652		49,683		40,984

NONINTEREST INCOME
Loan and deposit service fees		1,302		1,015		3,566		2,853
Sold loan servicing fees		206		815		665		858
Net gain on sale of loans		285		660		769		3,014
Net gain on sale of investment securities		—		1,286		118		2,410
Increase in cash surrender value of bank-owned life insurance		221		241		686		727
Other income		320		269		1,155		1,000
Total noninterest income		2,334		4,286		6,959		10,862

NONINTEREST EXPENSE
Compensation and benefits		9,045		8,713		27,583		24,567
Data processing		1,778		1,568		5,420		4,426
Occupancy and equipment		1,499		1,106		4,098		3,139
Supplies, postage, and telephone		322		279		1,043		876
Regulatory assessments and state taxes		365		335		1,167		897
Advertising		645		547		2,802		1,484
Professional fees		695		422		1,883		1,588
FDIC insurance premium		219		134		653		450
Other expense		807		830		2,520		2,308
Total noninterest expense		15,375		13,934		47,169		39,735

INCOME BEFORE PROVISION FOR INCOME TAXES		4,413		5,004		9,473		12,111

PROVISION FOR INCOME TAXES		818		946		1,839		2,082

NET INCOME		3,595		4,058		7,634		10,029
Net loss attributable to noncontrolling interest in Quin Ventures, Inc.		696		120		1,951		265

NET INCOME ATTRIBUTABLE TO PARENT	$	4,291	$	4,178	$	9,585	$	10,294

Basic and diluted earnings per common share	$	0.47	$	0.44	$	1.04	$	1.09

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands) (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021

NET INCOME	$	3,595		$	4,058		$	7,634		$	10,029

Other comprehensive (loss) income:
Unrealized holding losses on investments available for sale arising during the period		( 15,954	)		( 2,057	)		( 52,283	)		( 1,164	)
Income tax benefit related to unrealized holding losses		3,350			432			10,979			245
Unrecognized defined benefit ("DB") plan prior service cost		—			—			—			( 2,210	)
Income tax benefit related to DB plan prior service cost		—			—			—			465
Amortization of unrecognized DB plan prior service cost		37			36			110			78
Income tax provision related to amortization of DB plan prior service cost		( 9	)		( 7	)		( 24	)		( 18	)
Reclassification adjustment for net (gains) losses on sales of securities realized in income		—			( 1,286	)		( 118	)		( 2,410	)
Income tax benefit related to reclassification adjustment on sales of securities		—			270			25			506

Other comprehensive loss, net of tax		( 12,576	)		( 2,612	)		( 41,311	)		( 4,508	)

COMPREHENSIVE (LOSS) INCOME		( 8,981	)		1,446			( 33,677	)		5,521

Comprehensive loss attributable to noncontrolling interest		( 696	)		( 120	)		( 1,951	)		( 265	)

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT	$	( 8,285	)	$	1,566		$	( 31,726	)	$	5,786

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended September 30, 2022 and 2021

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

	Common Stock						Additional Paid-in			Retained			Unearned ESOP			Accumulated Other Comprehensive Income (Loss),			Noncontrolling			Total Shareholders'
	Shares			Amount			Capital			Earnings			Shares			Net of Tax			Interest			Equity

BALANCE, June 30, 2021		10,205,867		$	102		$	97,463		$	96,573		$	( 8,901	)	$	3,546		$	( 190	)	$	188,593

Net income											4,178									( 120	)		4,058
Common stock repurchased		( 137,953	)		—			( 1,378	)		( 1,084	)											( 2,462	)
Restricted stock award forfeitures net of grants		( 5,903	)		—			—															—
Restricted stock awards canceled		( 11,134	)		—			( 199	)														( 199	)
Other comprehensive loss, net of tax																	( 2,612	)					( 2,612	)
Share-based compensation expense								433															433
ESOP shares committed to be released								77						165									242
Cash dividends declared ($ 0.06 per share)											( 609	)											( 609	)

BALANCE, September 30, 2021		10,050,877		$	102		$	96,396		$	99,058		$	( 8,736	)	$	934		$	( 310	)	$	187,444


BALANCE, June 30, 2022		9,950,172		$	100		$	96,479		$	107,000		$	( 8,242	)	$	( 28,447	)	$	( 1,736	)	$	165,154

Net income											4,291									( 696	)		3,595
Common stock issued		115,777			1			1,868			—												1,869
Common stock repurchased		( 79,054	)		—			( 790	)		( 491	)											( 1,281	)
Restricted stock award forfeitures net of grants		( 3,350	)		( 1	)		1															—
Restricted stock awards canceled		( 5,504	)		—			( 89	)														( 89	)
Other comprehensive loss, net of tax																	( 12,576	)					( 12,576	)
Share-based compensation expense								404															404
ESOP shares committed to be released								51						165									216
Cash dividends declared ($ 0.07 per share)											( 693	)											( 693	)

BALANCE, September 30, 2022		9,978,041		$	100		$	97,924		$	110,107		$	( 8,077	)	$	( 41,023	)	$	( 2,432	)	$	156,599

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2022 and 2021

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

	Common Stock						Additional Paid-in			Retained			Unearned ESOP			Accumulated Other Comprehensive Income (Loss),			Noncontrolling			Total Shareholders'
	Shares			Amount			Capital			Earnings			Shares			Net of Tax			Interest			Equity

BALANCE, December 31, 2020		10,247,185		$	102		$	97,412		$	92,657		$	( 9,230	)	$	5,442		$	—		$	186,383

Net income											10,294									( 265	)		10,029
Common stock issued and initial investment in Quin Ventures		29,719			1			498			( 44	)								( 45	)		410
Common stock repurchased		( 291,932	)		( 2	)		( 2,916	)		( 2,018	)											( 4,936	)
Restricted stock award grants net of forfeitures		78,993			1			( 1	)														—
Restricted stock awards canceled		( 13,088	)		—			( 232	)														( 232	)
Other comprehensive loss, net of tax																	( 4,508	)					( 4,508	)
Share-based compensation expense								1,443															1,443
ESOP shares committed to be released								192						494									686
Cash dividends declared ($ 0.18 per share)											( 1,831	)											( 1,831	)

BALANCE, September 30, 2021		10,050,877		$	102		$	96,396		$	99,058		$	( 8,736	)	$	934		$	( 310	)	$	187,444


BALANCE, December 31, 2021		9,972,698		$	100		$	96,131		$	103,014		$	( 8,572	)	$	288		$	( 481	)	$	190,480

Net income											9,585									( 1,951	)		7,634
Common stock issued		115,777			1			1,868			—												1,869
Common stock repurchased		( 131,672	)		( 1	)		( 1,315	)		( 824	)											( 2,140	)
Restricted stock award grants net of forfeitures		37,068			—			—															—
Restricted stock awards canceled		( 15,830	)		—			( 311	)														( 311	)
Other comprehensive loss, net of tax																	( 41,311	)					( 41,311	)
Reclassification resulting from change in accounting method											424												424
Share-based compensation expense								1,294															1,294
ESOP shares committed to be released								257						495									752
Cash dividends declared ($ 0.21 per share)											( 2,092	)											( 2,092	)

BALANCE, September 30, 2022		9,978,041		$	100		$	97,924		$	110,107		$	( 8,077	)	$	( 41,023	)	$	( 2,432	)	$	156,599

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before noncontrolling interest	$	7,634		$	10,029
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,547			1,032
Amortization of core deposit intangible		10			2
Amortization and accretion of premiums and discounts on investments, net		1,280			1,252
Accretion of deferred loan fees and purchased premiums, net		619			754
Amortization of debt issuance costs		58			38
Change in fair value of sold loan servicing rights		91			—
Additions to servicing rights on sold loans, net		( 143	)		( 720	)
Amortization of servicing rights on sold loans, net		—			( 90	)
Net (decrease) increase in the valuation allowance on servicing rights on sold loans		—			( 4	)
Provision for loan losses		1,250			1,500
Allocation of ESOP shares		546			503
Share-based compensation expense		1,294			1,943
Gain on sale of loans, net		( 769	)		( 3,014	)
Gain on sale of securities available for sale, net		( 118	)		( 2,410	)
Increase in cash surrender value of life insurance, net		( 686	)		( 727	)
Origination of loans held for sale		( 22,272	)		( 86,456	)
Proceeds from loans held for sale		23,538			90,899
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable		( 1,366	)		1,191
Increase in prepaid expenses and other assets		( 4,191	)		( 14,473	)
Decrease in accrued interest payable		( 288	)		( 24	)
Increase in accrued expenses and other liabilities		5,680			10,230

Net cash from operating activities		13,714			11,455

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		( 78,409	)		( 125,909	)
Proceeds from maturities, calls, and principal repayments of securities available for sale		26,937			52,071
Proceeds from sales of securities available for sale		12,685			109,829
(Purchase) redemption of FHLB stock		( 6,765	)		1,580
Net increase in loans receivable		( 172,727	)		( 205,411	)
Purchase of premises and equipment, net		( 2,556	)		( 3,976	)
Capital contributions to equity and partnership investments		( 7,628	)		—
Capital contributions to low-income housing tax credit partnerships		( 23	)		—
Capital contributions to historic tax credit partnerships		( 1,829	)		—
Net cash acquired from branch acquisition		—			63,545

Net cash from investing activities		( 230,315	)		( 108,271	)

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	24,655		$	124,532
Proceeds from long-term FHLB advances		—			10,000
Repayment of long-term FHLB advances		—			( 10,000	)
Net increase (decrease) in short-term FHLB advances		161,000			( 49,977	)
Proceeds from issuance of subordinated debt, net		—			39,223
Net increase (decrease) in line of credit		12,000			—
Net increase in advances from borrowers for taxes and insurance		1,116			1,002
Dividends paid		( 2,072	)		( 1,831	)
Restricted stock awards canceled		( 311	)		( 232	)
Repurchase of common stock		( 2,140	)		( 4,936	)

Net cash from financing activities		194,248			107,781

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		( 22,353	)		10,965

CASH AND CASH EQUIVALENTS, beginning of period		126,016			65,155

CASH AND CASH EQUIVALENTS, end of period	$	103,663		$	76,120

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	6,072		$	4,002
Income taxes	$	2,954		$	2,890
Prior unrecognized service cost of defined benefit plan transferred to single-employer plan	$	—		$	2,718

NONCASH INVESTING ACTIVITIES
Change in unrealized loss on securities available for sale	$	( 52,401	)	$	( 3,573	)
Cumulative adjustment to servicing right asset due to election of fair value option	$	538		$	—
Lease liabilities arising from obtaining right-of-use assets	$	—		$	1,412

BUSINESS COMBINATION (see Note 12)
Fair value of assets acquired	$	—		$	1,340
Fair value of liabilities assumed	$	—		$	65,947

See selected notes to the consolidated financial statements.

Table of Contents

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation and Critical Accounting Policies

Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").

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

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

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

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

On August 5, 2022, First Northwest's election to be treated as a financial holding company became effective, allowing the Company to engage in activities that are financial in nature or incidental to financial activities.

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Recently adopted accounting pronouncements

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

In January 2021, the FASB issued ASU No. 2021 - 01, Reference Rate Reform (Topic 848 ): Scope . ASU No. 2021 - 01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU No. 2021 - 01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. This ASU was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021 - 01 did not have a material impact on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted

Credit Losses

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

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

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

The Company is evaluating the provisions of ASU No. 2016 - 13, ASU No. 2019 - 04 and ASU No. 2019 - 05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third -party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date, which is anticipated to be January 1, 2023. The Bank began running a parallel analysis comparing actual ALLL results to potential CECL results with the June 2022 quarter end and will continue running parallels through the remainder of 2022. Initial results indicate a moderate increase to the reserve; however, the modeling effort is ongoing with final decisions regarding valuation criteria for each segment yet to be made.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Pronouncements

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

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

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

In June 2022, the FASB issued ASU No. 2022 - 03, Fair Value Measurement (Topic 820 )—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately. Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 03 will have on its consolidated financial statements and related disclosures.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 - Securities

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

			Gross		Gross			Estimated
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	120,380	$	—	$	( 24,250	)	$	96,130
U.S. Treasury notes		2,465		—		( 110	)		2,355
International agency issued bonds (Agency bonds)		1,953		—		( 270	)		1,683
Corporate issued debt securities (Corporate debt)		60,754		—		( 4,589	)		56,165
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)		90,940		2		( 12,711	)		78,231
Non-agency issued mortgage-backed securities (MBS non-agency)		102,637		—		( 7,765	)		94,872

Total securities available for sale	$	379,129	$	2	$	( 49,695	)	$	329,436

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

			Gross		Gross			Estimated
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	110,497	$	3,207	$	( 340	)	$	113,364
Agency bonds		1,947		—		( 27	)		1,920
Corporate issued asset-backed securities (ABS corporate)		14,556		—		( 67	)		14,489
Corporate debt		58,906		1,450		( 567	)		59,789
U.S. Small Business Administration securities (SBA)		14,404		276		—			14,680
Mortgage-backed securities:
MBS agency		80,877		248		( 1,163	)		79,962
MBS non-agency		60,317		71		( 380	)		60,008

Total securities available for sale	$	341,504	$	5,252	$	( 2,544	)	$	344,212

There were no securities classified as held-to-maturity at September 30, 2022 and December 31, 2021 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	( 16,638	)	$	72,717	$	( 7,612	)	$	23,113	$	( 24,250	)	$	95,830
U.S. Treasury notes		( 110	)		2,355		—			—		( 110	)		2,355
Agency bonds		—			—		( 270	)		1,683		( 270	)		1,683
Corporate debt		( 2,272	)		33,701		( 2,317	)		22,464		( 4,589	)		56,165
Mortgage-backed securities:
MBS agency		( 5,896	)		47,543		( 6,815	)		27,891		( 12,711	)		75,434
MBS non-agency		( 4,894	)		66,940		( 2,871	)		27,932		( 7,765	)		94,872

Total available for sale	$	( 29,810	)	$	223,256	$	( 19,885	)	$	103,083	$	( 49,695	)	$	326,339

	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	( 306	)	$	23,125	$	( 34	)	$	1,475	$	( 340	)	$	24,600
Agency bonds		( 27	)		1,920		—			—		( 27	)		1,920
ABS corporate		( 67	)		10,976		—			—		( 67	)		10,976
Corporate debt		( 333	)		18,890		( 234	)		9,752		( 567	)		28,642
SBA		—			—		—			69		—			69
Mortgage-backed securities:
MBS agency		( 713	)		39,029		( 450	)		12,802		( 1,163	)		51,831
MBS non-agency		( 374	)		32,849		( 6	)		5,505		( 380	)		38,354

Total available for sale	$	( 1,820	)	$	126,789	$	( 724	)	$	29,603	$	( 2,544	)	$	156,392

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At September 30, 2022 and December 31, 2021 , there were 183 and 76 investment securities in an unrealized loss position, respectively.

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

There were no OTTI losses during the three and nine months ended September 30, 2022 and 2021 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	September 30, 2022
	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(In thousands)
Mortgage-backed securities:
Due within one year	$	6,316	$	6,239
Due after one through five years		37,243		35,999
Due after five through ten years		13,549		12,252
Due after ten years		136,469		118,613

Total mortgage-backed securities		193,577		173,103

All other investment securities:
Due within one year		—		—
Due after one through five years		18,741		16,999
Due after five through ten years		66,251		60,092
Due after ten years		100,560		79,242

Total all other investment securities		185,552		156,333

Total investment securities	$	379,129	$	329,436

	December 31, 2021
	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(In thousands)
Mortgage-backed securities:
Due within one year	$	7,827	$	7,832
Due after one through five years		24,347		24,371
Due after five through ten years		8,466		8,391
Due after ten years		100,554		99,376

Total mortgage-backed securities		141,194		139,970

All other investment securities:
Due within one year		—		—
Due after one through five years		6,391		6,289
Due after five through ten years		79,679		80,807
Due after ten years		114,240		117,146

Total all other investment securities		200,310		204,242

Total investment securities	$	341,504	$	344,212

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FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022			2021
	(In thousands)
Proceeds from sales	$	—	$	64,394		$	12,685		$	109,829
Gross realized gains		—		1,627			128			2,827
Gross realized losses		—		( 341	)		( 10	)		( 417	)

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:

	September 30, 2022			December 31, 2021
	(In thousands)
Real Estate:
One-to-four family	$	335,067		$	294,965
Multi-family		243,256			172,409
Commercial real estate		385,272			363,299
Construction and land		217,175			224,709
Total real estate loans		1,180,770			1,055,382

Consumer:
Home equity		50,066			39,172
Auto and other consumer		223,100			182,769
Total consumer loans		273,166			221,941

Commercial business loans		71,269			79,838

Total loans		1,525,205			1,357,161

Less:
Net deferred loan fees		3,519			4,772
Premium on purchased loans, net		( 15,705	)		( 12,995	)
Allowance for loan losses		16,273			15,124

Total loans receivable, net	$	1,521,118		$	1,350,260

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	At or For the Three Months Ended September 30, 2022
	One-to-four family		Multi-family		Commercial real estate			Construction and land			Home equity		Auto and other consumer			Commercial business		Unallocated		Total
	(In thousands)
ALLL:
Beginning balance	$	3,026	$	2,168	$	4,154		$	2,550		$	486	$	2,367		$	680	$	316	$	15,747
Provision for (recapture of) loan losses		188		164		( 45	)		( 36	)		9		428			14		28		750
Charge-offs		—		—		—			—			—		( 265	)		—		—		( 265	)
Recoveries		—		—		—			—			12		29			—		—		41
Ending balance	$	3,214	$	2,332	$	4,109		$	2,514		$	507	$	2,559		$	694	$	344	$	16,273

	At or For the Nine Months Ended September 30, 2022
	One-to-four family			Multi-family		Commercial real estate		Construction and land			Home equity		Auto and other consumer			Commercial business		Unallocated			Total
	(In thousands)
ALLL:
Beginning balance	$	3,184		$	1,816	$	3,996	$	2,672		$	407	$	2,221		$	470	$	358		$	15,124
(Recapture of) provision for loan losses		( 2	)		516		113		( 160	)		71		644			82		( 14	)		1,250
Charge-offs		—			—		—		—			—		( 475	)		—		—			( 475	)
Recoveries		32			—		—		2			29		169			142		—			374
Ending balance	$	3,214		$	2,332	$	4,109	$	2,514		$	507	$	2,559		$	694	$	344		$	16,273

	At September 30, 2022
	One-to-four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,214	$	2,332	$	4,109	$	2,514	$	507	$	2,559	$	694	$	344	$	16,273
General reserve		3,182		2,332		4,109		2,513		504		2,552		694		344		16,230
Specific reserve		32		—		—		1		3		7		—		—		43

Total loans	$	335,067	$	243,256	$	385,272	$	217,175	$	50,066	$	223,100	$	71,269	$	—	$	1,525,205
Loans collectively evaluated (1)		332,263		243,256		385,218		215,408		49,852		222,834		71,269		—		1,520,100
Loans individually evaluated (2)		2,804		—		54		1,767		214		266		—		—		5,105

^{(

1

)} Loans collectively evaluated for general reserves.

^{(

2

)} Loans individually evaluated for specific reserves.

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FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	At or For the Three Months Ended September 30, 2021
	One-to-four family			Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer			Commercial business		Unallocated		Total
	(In thousands)
ALLL:
Beginning balance	$	3,356		$	1,816	$	3,674	$	2,221	$	393	$	2,368		$	464	$	296	$	14,588
(Recapture of) provision for loan losses		( 117	)		101		278		260		24		58			26		70		700
Charge-offs		—			—		—		—		—		( 421	)		—		—		( 421	)
Recoveries		—			—		—		2		—		374			—		—		376
Ending balance	$	3,239		$	1,917	$	3,952	$	2,483	$	417	$	2,379		$	490	$	366	$	15,243

	At or For the Nine Months Ended September 30, 2021
	One-to-four family			Multi-family		Commercial real estate		Construction and land		Home equity			Auto and other consumer			Commercial business		Unallocated		Total
	(In thousands)
ALLL:
Beginning balance	$	3,469		$	1,764	$	3,420	$	1,461	$	368		$	2,642		$	429	$	294	$	13,847
(Recapture of) provision for loan losses		( 236	)		153		532		1,016		44			( 142	)		61		72		1,500
Charge-offs		—			—		—		—		( 12	)		( 801	)		—		—		( 813	)
Recoveries		6			—		—		6		17			680			—		—		709
Ending balance	$	3,239		$	1,917	$	3,952	$	2,483	$	417		$	2,379		$	490	$	366	$	15,243

	At December 31, 2021
	One-to-four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,184	$	1,816	$	3,996	$	2,672	$	407	$	2,221	$	470	$	358	$	15,124
General reserve		3,159		1,816		3,996		2,672		402		2,138		470		358		15,011
Specific reserve		25		—		—		—		5		83		—		—		113

Total loans	$	294,965	$	172,409	$	363,299	$	224,709	$	39,172	$	182,769	$	79,838	$	—	$	1,357,161
Loans collectively evaluated (1)		292,708		172,409		363,228		224,687		38,839		182,257		79,838		—		1,353,966
Loans individually evaluated (2)		2,257		—		71		22		333		512		—		—		3,195

^{(

1

)} Loans collectively evaluated for general reserves.

^{(

2

)} Loans individually evaluated for specific reserves.

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

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

	September 30, 2022						December 31, 2021
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded:
One-to-four family	$	77	$	115	$	—	$	212	$	247	$	—
Commercial real estate		54		151		—		71		177		—
Construction and land		1,748		1,765		—		—		24		—
Home equity		—		—		—		26		59		—
Auto and other consumer		238		243		—		—		77		—
Total		2,117		2,274		—		309		584		—

With an allowance recorded:
One-to-four family		2,727		2,871		32		2,045		2,245		25
Construction and land		19		19		1		22		22		—
Home equity		214		216		3		307		329		5
Auto and other consumer		28		28		7		512		512		83
Total		2,988		3,134		43		2,886		3,108		113

Total impaired loans:
One-to-four family		2,804		2,986		32		2,257		2,492		25
Commercial real estate		54		151		—		71		177		—
Construction and land		1,767		1,784		1		22		46		—
Home equity		214		216		3		333		388		5
Auto and other consumer		266		271		7		512		589		83
Total	$	5,105	$	5,408	$	43	$	3,195	$	3,692	$	113

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

	Three Months Ended				Nine Months Ended
	September 30, 2022				September 30, 2022
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	211	$	1	$	259	$	1
Commercial real estate		56		—		63		—
Construction and land		583		1		194		1
Home equity		—		—		3		—
Auto and other consumer		239		5		246		14
Total		1,089		7		765		16

With an allowance recorded:
One-to-four family		2,258		51		2,138		120
Commercial real estate		—		—		7		—
Construction and land		18		—		21		—
Home equity		232		3		273		8
Auto and other consumer		33		1		104		2
Total		2,541		55		2,543		130

Total impaired loans:
One-to-four family		2,469		52		2,397		121
Commercial real estate		56		—		70		—
Construction and land		601		1		215		1
Home equity		232		3		276		8
Auto and other consumer		272		6		350		16
Total	$	3,630	$	62	$	3,308	$	146

Interest income recognized on a cash basis on impaired loans for the three and nine months ended September 30, 2022 , was $ 42,000 and $ 126,000 , respectively.

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

	Three Months Ended				Nine Months Ended
	September 30, 2021				September 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	217	$	3	$	221	$	9
Multi-family		—		—		125		—
Commercial real estate		1,200		18		1,081		55
Home equity		31		—		34		1
Auto and other consumer		47		3		39		5
Total		1,495		24		1,500		70

With an allowance recorded:
One-to-four family		2,199		46		2,357		110
Commercial real estate		17		—		162		—
Construction and land		24		2		25		3
Home equity		122		3		117		—
Auto and other consumer		464		6		715		17
Total		2,826		57		3,376		130

Total impaired loans:
One-to-four family		2,416		49		2,578		119
Multi-family		—		—		125		—
Commercial real estate		1,217		18		1,243		55
Construction and land		24		2		25		3
Home equity		153		3		151		1
Auto and other consumer		511		9		754		22
Total	$	4,321	$	81	$	4,876	$	200

Interest income recognized on a cash basis on impaired loans for the three and nine months ended September 30, 2021 , was $ 65,000 and $ 183,000 , respectively.

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

	September 30, 2022		December 31, 2021
	(In thousands)
One-to-four family	$	1,089	$	494
Commercial real estate		54		71
Construction and land		1,767		22
Home equity		187		282
Auto and other consumer		266		512

Total nonaccrual loans	$	3,363	$	1,381

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. At September 30, 2022 , $ 154,000 of purchased loans serviced by others were past due 90 days or more and still accruing interest. There were no loans past due 90 days or more and still accruing interest at December 31, 2021 .

The following table presents the recorded investment in past due loans, by class, as of September 30, 2022 :

	30-59 Days		60-89 Days		90 Days or More		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	1,529	$	—	$	623	$	2,152	$	332,915	$	335,067
Multi-family		—		—		—		—		243,256		243,256
Commercial real estate		—		—		—		—		385,272		385,272
Construction and land		—		—		1,750		1,750		215,425		217,175
Total real estate loans		1,529		—		2,373		3,902		1,176,868		1,180,770

Consumer:
Home equity		—		—		—		—		50,066		50,066
Auto and other consumer		1,514		366		154		2,034		221,066		223,100
Total consumer loans		1,514		366		154		2,034		271,132		273,166

Commercial business loans		4		—		—		4		71,265		71,269

Total loans	$	3,047	$	366	$	2,527	$	5,940	$	1,519,265	$	1,525,205

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The following table presents the recorded investment in past due loans, by class, as of December 31, 2021 :

	30-59 Days		60-89 Days		90 Days or More		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	786	$	—	$	—	$	786	$	294,179	$	294,965
Multi-family		—		—		—		—		172,409		172,409
Commercial real estate		—		—		—		—		363,299		363,299
Construction and land		293		—		—		293		224,416		224,709
Total real estate loans		1,079		—		—		1,079		1,054,303		1,055,382

Consumer:
Home equity		83		—		—		83		39,089		39,172
Auto and other consumer		469		368		99		936		181,833		182,769
Total consumer loans		552		368		99		1,019		220,922		221,941

Commercial business loans		7		—		—		7		79,831		79,838

Total loans	$	1,638	$	368	$	99	$	2,105	$	1,355,056	$	1,357,161

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

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

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

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The following table represents the internally assigned grade as of September 30, 2022 , by class of loans:

	Pass		Watch		Special Mention		Substandard		Total
	(In thousands)
Real Estate:
One-to-four family	$	330,386	$	3,358	$	—	$	1,323	$	335,067
Multi-family		227,505		15,751		—		—		243,256
Commercial real estate		344,907		28,514		10,526		1,325		385,272
Construction and land		201,238		402		13,465		2,070		217,175
Total real estate loans		1,104,036		48,025		23,991		4,718		1,180,770

Consumer:
Home equity		49,558		307		14		187		50,066
Auto and other consumer		221,890		847		107		256		223,100
Total consumer loans		271,448		1,154		121		443		273,166

Commercial business loans		64,308		6,610		351		—		71,269

Total loans	$	1,439,792	$	55,789	$	24,463	$	5,161	$	1,525,205

The following table represents the internally assigned grade as of December 31, 2021 , by class of loans:

	Pass		Watch		Special Mention		Substandard		Total
	(In thousands)
Real Estate:
One-to-four family	$	291,421	$	2,727	$	53	$	764	$	294,965
Multi-family		153,704		18,705		—		—		172,409
Commercial real estate		326,444		22,850		3,057		10,948		363,299
Construction and land		215,262		295		9,130		22		224,709
Total real estate loans		986,831		44,577		12,240		11,734		1,055,382

Consumer:
Home equity		38,739		83		—		350		39,172
Auto and other consumer		181,356		835		65		513		182,769
Total consumer loans		220,095		918		65		863		221,941

Commercial business loans		79,616		222		—		—		79,838

Total loans	$	1,286,542	$	45,717	$	12,305	$	12,597	$	1,357,161

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

	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	1,089	$	333,978	$	335,067
Multi-family		—		243,256		243,256
Commercial real estate		54		385,218		385,272
Construction and land		1,767		215,408		217,175

Consumer:
Home equity		187		49,879		50,066
Auto and other consumer		420		222,680		223,100

Commercial business		—		71,269		71,269

Total loans	$	3,517	$	1,521,688	$	1,525,205

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

	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	494	$	294,471	$	294,965
Multi-family		—		172,409		172,409
Commercial real estate		71		363,228		363,299
Construction and land		22		224,687		224,709

Consumer:
Home equity		282		38,890		39,172
Auto and other consumer		512		182,257		182,769

Commercial business		—		79,838		79,838

Total loans	$	1,381	$	1,355,780	$	1,357,161

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

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

	September 30, 2022		December 31, 2021
	(In thousands)
Total TDR loans	$	1,771	$	1,843
Allowance for loan losses related to TDR loans		18		21
Total nonaccrual TDR loans		29		29

There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three and nine months ended September 30, 2022 or 2021 .

There were no TDR loans that incurred a payment default within 12 months of the restructure date during the three and nine months ended September 30, 2022 or 2021 .

No additional funds were committed to be advanced in connection with TDR loans at September 30, 2022 .

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

	September 30, 2022
	Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	1,714	$	29	$	1,743
Home equity		28		—		28

Total TDR loans	$	1,742	$	29	$	1,771

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Note 4 - Deposits

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at September 30, 2022 and December 31, 2021 , were $ 96.4 million and $ 75.1 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:

	September 30, 2022					December 31, 2021
	Amount		Weighted-Average Interest Rate			Amount		Weighted-Average Interest Rate
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	342,808		0.00	%	$	343,932		0.00	%
Interest-bearing demand deposits		192,504		0.01	%		196,970		0.01	%
Money market accounts		519,018		0.37	%		597,815		0.21	%
Savings accounts		196,780		0.05	%		194,620		0.05	%
Certificates of deposit		354,125		1.62	%		247,243		0.62	%

Total deposits	$	1,605,235		0.48	%	$	1,580,580		0.19	%

Brokered certificates of deposits of $ 129.6 million and $ 65.7 million are included in the September 30, 2022 and December 31, 2021 certificates of deposit totals above, respectively.

Maturities of certificates at the dates indicated are as follows:

	September 30, 2022		December 31, 2021
	(In thousands)
Within one year or less	$	242,591	$	153,472
After one year through two years		51,403		54,970
After two years through three years		43,563		17,620
After three years through four years		8,374		14,358
After four years through five years		8,194		6,823

Total certificates of deposit	$	354,125	$	247,243

At September 30, 2022 and December 31, 2021 , deposits included $ 99.3 million and $ 134.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $ 55.4 million and $ 67.9 million were pledged as collateral for these deposits at September 30, 2022 and December 31, 2021 , respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at September 30, 2022 and December 31, 2021 , were funds held by federally recognized tribes totaling $ 14.4 million and $ 33.4 million, respectively. Investment securities with a carrying value of $ 29.3 million and $ 40.9 million were pledged as collateral for these deposits at September 30, 2022 and December 31, 2021 , respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(In thousands)
Demand deposits	$	16	$	11	$	58	$	28
Money market accounts		468		291		1,089		852
Savings accounts		24		28		76		102
Certificates of deposit		743		520		1,541		1,627

Total interest expense on deposits	$	1,251	$	850	$	2,764	$	2,609

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(Unaudited)

Note 5 - Borrowings

First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 40 % of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements.

First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until paid. First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of funds. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 711.0 million and $ 699.6 million at September 30, 2022 and December 31, 2021 , respectively.

First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco ("FRB") to utilize the discount window for short-term borrowing. Available borrowing capacity was $ 8.6 million and $ 17.3 million at September 30, 2022 and December 31, 2021 , respectively. No funds have been borrowed to date. Investment securities with a carrying value of $ 9.0 million and $ 17.2 million were pledged to the FRB at September 30, 2022 and December 31, 2021 , respectively.

On March 25, 2021, the Company completed a private placement of $ 40.0 million of 3.75 % fixed-to-floating rate subordinated notes due 2031 (the “Notes”) to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $ 39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company used the net proceeds of the offering for general corporate purposes and provided $ 20.0 million to the Bank as Tier 1 capital.

On May 20, 2022, First Northwest entered into a borrowing arrangement with NexBank for a $ 20.0 million revolving line of credit. Borrowings are secured by a blanket lien on First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments. The line of credit matures on May 19, 2023 .

The following table sets forth information regarding our borrowings at the end of and during the nine months ended September 30, 2022 . The table includes both long- and short-term borrowings.

	FHLB Long-Term Advances			FHLB Overnight Variable-Rate Advances			FHLB Short-Term Fixed-Rate Advances			Line of Credit			Subordinated Debt, net
	(Dollars in thousands)
Balance outstanding	$	80,000		$	141,000		$	20,000		$	12,000		$	39,338
Maximum outstanding at any month-end		80,000			141,000			30,000			12,000			39,338
Average monthly outstanding during the period		80,000			39,993			14,689			3,788			39,301
Weighted-average daily interest rates
Annual		1.52	%		1.85	%		1.76	%		5.67	%		4.03	%
Period End		1.52	%		2.85	%		1.93	%		6.75	%		4.02	%

The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at September 30, 2022 are as follows:

	Amount		Weighted- Average Interest Rate
	(Dollars in thousands)
Within one year or less	$	15,000		1.54	%
After one year through two years		15,000		1.47
After two years through three years		15,000		1.35
After three years through four years		15,000		1.49
After four years through five years		10,000		1.63
After five years		10,000		1.76
Total FHLB long-term advances	$	80,000		1.52	%

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The following table sets forth information regarding our borrowings at the end of and during the year ended December 31, 2021 . The table includes both long- and short-term borrowings.

	FHLB Long-Term Advances			FHLB Overnight Variable-Rate Advances			Subordinated Debt, net
	(Dollars in thousands)
Balance outstanding	$	80,000		$	—		$	39,280
Maximum outstanding at any month-end		80,000			40,000			40,000
Average monthly outstanding during the period		52,500			5,207			30,370
Weighted-average daily interest rates
Annual		1.46	%		0.30	%		3.96	%
Period End		1.52	%		0.31	%		3.01	%

Note 6 - Federal Taxes on Income

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

The effective tax rates were 19.4 % and 17.2 % for the nine months ended September 30, 2022 and 2021 , respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2022 and 2021 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. Additionally, a tax accrual true-up was recorded in the first quarter of 2021, which reduced the prior year provision and resulted in a lower effective tax rate. In the second quarter of 2022, the Company began accruing a provision for income tax for certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. The additional accrual for state income tax results in a higher effective tax rate.

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Note 7 - Earnings per Common Share

The two -class method is used for computing basic and diluted earnings per share. Under the two -class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021 .

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
	(In thousands, except share data)
Net income:
Net income available to common shareholders	$	4,291		$	4,178		$	9,585		$	10,294
Earnings allocated to participating securities		( 35	)		( 130	)		( 92	)		( 352	)
Earnings allocated to common shareholders	$	4,256		$	4,048		$	9,493		$	9,942

Basic:
Weighted average common shares outstanding		9,955,322			10,168,417			9,979,152			10,193,680
Weighted average unvested restricted stock awards		( 212,930	)		( 296,563	)		( 231,253	)		( 324,159	)
Weighted average unallocated ESOP shares		( 648,571	)		( 701,530	)		( 661,670	)		( 714,768	)
Total basic weighted average common shares outstanding		9,093,821			9,170,324			9,086,229			9,154,753

Diluted:
Basic weighted average common shares outstanding		9,093,821			9,170,324			9,086,229			9,154,753
Dilutive restricted stock awards		44,302			83,508			69,584			97,527
Total diluted weighted average common shares outstanding		9,138,123			9,253,832			9,155,813			9,252,280

Basic earnings per common share	$	0.47		$	0.44		$	1.04		$	1.09

Diluted earnings per common share	$	0.47		$	0.44		$	1.04		$	1.09

Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At September 30, 2022 and 2021 , antidilutive shares as calculated under the treasury stock method totaled 2,617 and 0 , respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 - Employee Benefits

Employee Stock Ownership Plan

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

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46 %. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. A principal and interest payment of $835,000 was made by the ESOP during the nine months ended September 30, 2022 .

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

Compensation expense related to the ESOP for the three months ended September 30, 2022 and 2021 , was $ 216,000 and $ 242,000 , respectively. Compensation expense related to the ESOP for the nine months ended September 30, 2022 and 2021 , was $ 752,000 and $ 686,000 , respectively.

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

	September 30, 2022		December 31, 2021
	(Dollars in thousands)
Allocated shares		386,285		333,396
Committed to be released shares		13,221		26,442
Unallocated shares		648,523		688,191

Total ESOP shares issued		1,048,029		1,048,029

Fair value of unallocated shares	$	10,441	$	13,901

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(Unaudited)

Note 9 - Stock-based Compensation

In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ( "2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 . As of September 30, 2022 , there were 300,869 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.

As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made. As of September 30, 2022 , there were no shares available for grant under the 2015 EIP. At this date, there are 72,520 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.

There were 55,443 and 96,205 shares of restricted stock awarded, respectively, during the nine months ended September 30, 2022 and 2021 . Awarded shares of restricted stock vest ratably over periods ranging from one to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period.

For the three months ended September 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 404,000 and $ 433,000 , respectively. Included in the compensation expense for the three months ended September 30, 2022 and 2021 , was directors' equity compensation of $ 50,000 and $ 64,000 , respectively.

For the nine months ended September 30, 2022 and 2021 , total compensation expense for the equity incentive plans was $ 1.3 million and $ 1.4 million, respectively. Included in the compensation expense for the nine months ended September 30, 2022 and 2021 , was directors' equity compensation of $ 189,000 and $ 324,000 , respectively.

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

	For the Three Months Ended
	September 30, 2022
	Shares			Weighted-Average Grant Date Fair Value
Non-vested at July 1, 2022		240,054		$	17.13
Granted		2,100			16.20
Vested		( 25,972	)		15.48
Canceled (1)		( 5,504	)		15.48
Forfeited		( 5,450	)		14.85

Non-vested at September 30, 2022		205,228		$	17.43

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

	For the Nine Months Ended
	September 30, 2022
	Shares			Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2022		236,432		$	16.19
Granted		55,443			21.28
Vested		( 52,442	)		16.50
Canceled (1)		( 15,830	)		16.50
Forfeited		( 18,375	)		16.54

Non-vested at September 30, 2022		205,228		$	17.43

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

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(Unaudited)

As of September 30, 2022 , there was $ 2.6 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 1.87 years.

Note 10 - Fair Value Accounting and Measurement

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

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

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

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

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

Level 3 - Unobservable inputs.

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

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

Securities available for sale and partnership investments : Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

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

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(Unaudited)

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

	September 30, 2022
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	4,602	$	91,528	$	—	$	96,130
U.S. Treasury notes		2,355		—		—		2,355
Agency bonds		—		1,683		—		1,683
Corporate debt		5,208		50,957		—		56,165
MBS agency		—		78,231		—		78,231
MBS non-agency		—		94,872		—		94,872
Sold loan servicing rights		—		—		3,872		3,872
Partnership investments		—		12,490		—		12,490
	$	12,165	$	329,761	$	3,872	$	345,798

	December 31, 2021
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	5,902	$	107,462	$	—	$	113,364
Agency bonds		—		1,920		—		1,920
ABS corporate		—		14,489		—		14,489
Corporate debt		6,061		53,728		—		59,789
SBA		—		14,680		—		14,680
MBS agency		—		79,962		—		79,962
MBS non-agency		—		60,008		—		60,008
Partnership investments		—		3,071		—		3,071
	$	11,963	$	335,320	$	—	$	347,283

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(Unaudited)

The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the date indicated:

September 30, 2022	Fair Value (In thousands)	Valuation Technique	Unobservable Input	Range (Weighted Average)
Sold loan servicing rights	$ 3,872	Discounted cash flow	Constant prepayment rate	6.20% - 16.07% (8.06%)
			Discount rate		11.88% - 16.38% (13.51%)

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

	As of or For the Three Months Ended September 30, 2022
	Balance at July 1, 2022		Servicing rights that result from transfers and sale of financial assets		Changes in fair value due to changes in model inputs or assumptions (1)			Total
	(In thousands)

Sold loan servicing rights	$	3,865	$	45	$	( 38	)	$	3,872
(1) Represents changes due to collection/realization of expected cash flows and curtailments.

	As of or For the Nine Months Ended September 30, 2022
	Election of Fair Value Option for Servicing Rights at January 1, 2022		Servicing rights that result from transfers and sale of financial assets		Changes in fair value due to changes in model inputs or assumptions (1)			Total
	(In thousands)

Sold loan servicing rights	$	3,820	$	143	$	( 91	)	$	3,872
(1) Represents changes due to collection/realization of expected cash flows and curtailments.

	As of or For the Nine Months Ended September 30, 2021
	Balance at January 1, 2021		Transfers Out of Level 3 (1)			Purchases		Unrealized		Total
	(In thousands)
Securities available for sale
Corporate debt	$	2,540	$	( 2,540	)	$	—	$	—	$	—
MBS non-agency		6,372		( 6,372	)		—		—		—
	$	8,912	$	( 8,912	)	$	—	$	—	$	—
(1) Transferred from Level 3 to Level 2 after obtaining observable market data.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	September 30, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	5,105	$	5,105

	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	3,195	$	3,195

At September 30, 2022 and December 31, 2021 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:

	September 30, 2022
					Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	103,663	$	103,663	$	103,663	$	—	$	—
Investment securities available for sale		329,436		329,436		12,165		317,271		—
Loans held for sale		263		263		—		263		—
Loans receivable, net		1,521,118		1,460,472		—		—		1,460,472
FHLB stock		11,961		11,961		—		11,961		—
Accrued interest receivable		6,655		6,655		—		6,655		—
Sold loan servicing rights, at fair value		3,872		3,872		—		—		3,872
Partnership investments		12,490		12,490		—		12,490		—

Financial liabilities
Demand deposits	$	1,251,110	$	1,251,110	$	1,251,110	$	—	$	—
Time deposits		354,125		344,911		—		—		344,911
FHLB Borrowings		241,000		234,470		—		—		234,470
Line of Credit		12,000		12,034		—		—		12,034
Subordinated debt, net		39,338		37,192		—		—		37,192
Accrued interest payable		105		105		—		105		—

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(Unaudited)

	December 31, 2021
					Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	126,016	$	126,016	$	126,016	$	—	$	—
Investment securities available for sale		344,212		344,212		11,963		332,249		—
Loans held for sale		760		760		—		760		—
Loans receivable, net		1,350,260		1,328,589		—		—		1,328,589
FHLB stock		5,196		5,196		—		5,196		—
Accrued interest receivable		5,289		5,289		—		5,289		—
Sold loan servicing rights, net		3,282		3,820		—		—		3,820
Partnership investments		3,071		3,071		—		3,071		—

Financial liabilities
Demand deposits		1,333,337	$	1,333,337	$	1,333,337	$	—	$	—
Time deposits		247,243		247,217		—		—		247,217
FHLB Borrowings		80,000		80,192		—		—		80,192
Subordinated debt, net		39,280		39,144		—		—		39,144
Accrued interest payable		393		393		—		393		—

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

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

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Note 11 - Change in Accumulated Other Comprehensive Income ("AOCI")

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

	Unrealized Gains and Losses on Available-for-Sale Securities			Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization			Total
		(In thousands)

BALANCE, June 30, 2021	$	5,260		$	( 1,714	)	$	3,546
Other comprehensive loss before reclassification		( 1,625	)		—			( 1,625	)
Amounts reclassified from accumulated other comprehensive income		( 1,016	)		29			( 987	)
Net other comprehensive (loss) income		( 2,641	)		29			( 2,612	)
BALANCE, September 30, 2021	$	2,619		$	( 1,685	)	$	934

BALANCE, June 30, 2022	$	( 26,653	)	$	( 1,794	)	$	( 28,447	)
Other comprehensive loss before reclassification		( 12,604	)		—			( 12,604	)
Amounts reclassified from accumulated other comprehensive income		—			28			28
Net other comprehensive (loss) income		( 12,604	)		28			( 12,576	)
BALANCE, September 30, 2022	$	( 39,257	)	$	( 1,766	)	$	( 41,023	)


BALANCE, December 31, 2020	$	5,442		$	—		$	5,442
Other comprehensive loss before reclassification		( 919	)		( 1,745	)		( 2,664	)
Amounts reclassified from accumulated other comprehensive income		( 1,904	)		60			( 1,844	)
Net other comprehensive loss		( 2,823	)		( 1,685	)		( 4,508	)
BALANCE, September 30, 2021	$	2,619		$	( 1,685	)	$	934

BALANCE, December 31, 2021	$	2,140		$	( 1,852	)	$	288
Other comprehensive loss before reclassification		( 41,304	)		—			( 41,304	)
Amounts reclassified from accumulated other comprehensive income		( 93	)		86			( 7	)
Net other comprehensive (loss) income		( 41,397	)		86			( 41,311	)
BALANCE, September 30, 2022	$	( 39,257	)	$	( 1,766	)	$	( 41,023	)

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(Unaudited)

N ote 12 - Business Combination

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

The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction consists largely of a premium paid for the deposit accounts.

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

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

	At July 23, 2021
	Book Value			Fair Value Adjustment			Estimated Fair Value
	(In thousands)

Cash consideration transferred							$	63,545

Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Core deposit intangible ("CDI")	$	—		$	126		$	126
Premises and equipment		459			—			459
Accrued interest receivable and other assets		755			—			755
Total identifiable assets acquired		1,214			126			1,340

Liabilities assumed
Deposits	$	65,096		$	( 229	)	$	64,867
Accrued expenses and other liabilities		1,080			—			1,080
Total liabilities assumed		66,176			( 229	)		65,947
Total identifiable net liabilities assumed		( 64,962	)		355			( 64,607	)
Goodwill recognized							$	1,062

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

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

Forward-Looking Statements

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

	•	statements of our goals, intentions and expectations;
	•	statements regarding our business plans, prospects, growth and operating strategies;
	•	statements regarding the quality of our loan and investment portfolios;
	•	estimates of our risks and future costs and benefits; and
	•	statements concerning the 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 Russia's military action in Ukraine, including the broader impacts to financial markets and economic 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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General

First Northwest Bancorp, a Washington 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 in Quin Ventures, Inc., a fintech joint venture formed in April 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 in First Fed and Quin Ventures.

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

First Northwest's limited partnership investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM 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 in Meriwether Group Capital Hero Fund LP ("Hero Fund"), a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. In September 2022, First Northwest completed an additional purchase and now holds a 33.3% interest in The Meriwether Group, LLC, a modern-day merchant bank focusing on providing entrepreneurs with resources to help them succeed. In October 2022, the Company completed an additional purchase and now holds a 25% equity interest in Meriwether Group Capital, LLC, which provides financial advice for borrowers and capital for the Hero Fund. The Meriwether Group, LLC, also holds a 20% interest in Meriwether 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.

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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 September 30, 2022 and December 31, 2021

Assets . Total assets increased to $2.09 billion at September 30, 2022, from $1.92 billion at December 31, 2021.

Cash and cash equivalents decreased by $22.4 million, or 17.7%, to $103.7 million as of September 30, 2022, compared to $126.0 million as of December 31, 2021. Excess cash was deployed into the investment and loan portfolios as the Bank continued to build earning assets.

Net loans, excluding loans held for sale, increased $170.9 million to $1.52 billion at September 30, 2022, from $1.35 billion at December 31, 2021. During the nine months ended September 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 of Bankers 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 at September 30, 2022, from $224.7 million at December 31, 2021. Our construction loans are geographically dispersed throughout western Washington with two loans in Oregon and two loans in Idaho. 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. At September 30, 2022, acquisition-renovation loans of $18.8 million were included in the construction loan total compared to $51.1 million at December 31, 2021. These commercial acquisition-renovation loans represent financing primarily for the acquisition of multi-family properties with a construction component used for the renovation of common areas and specific units of the building. Given the construction component of these loans, we are required to report them as construction under regulatory guidelines; however, we consider these loans to be lower risk than typical ground-up construction projects.

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

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

September 30, 2022	North Olympic Peninsula (1)			Puget Sound 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.

December 31, 2021	North Olympic Peninsula (1)		Puget Sound 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 ended September 30, 2022, the Company originated $478.7 million of loans, of which $320.6 million, or 66.9%, were originated in the Puget Sound region, $94.7 million, or 19.8%, in the North Olympic Peninsula, $41.1 million, or 8.6%, in other areas throughout Washington 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 throughout the United States during the nine months ended September 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 at September 30, 2022.

Our ALLL increased to $16.3 million at September 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 both September 30, 2022 and December 31, 2021.

Nonperforming loans increased $2.1 million, or 154.7%, to $3.5 million at September 30, 2022, from $1.4 million at December 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% at September 30, 2022, up from 0.1% at December 31, 2021. The ALLL as a percentage of nonperforming loans decreased to 463% at September 30, 2022, from 1095% at December 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.

At September 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 at September 30, 2022, from $12.6 million at December 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 in October 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 at September 30, 2022 from $10.6 million at December 31, 2021. We believe our ALLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of September 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

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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 $1.93 billion at September 30, 2022, from $1.73 billion at December 31, 2021, primarily due to an increase in borrowing of $173.0 million.

Deposit balances increased $24.7 million to $1.61 billion at September 30, 2022 from $1.58 billion at December 31, 2021. During the nine-month period ended September 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 ended September 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 at September 30, 2022.

FHLB advances increased 201.3% to $241.0 million at September 30, 2022, from $80.0 million at December 31, 2021. We increased short-term advances as strong loan demand outpaced deposit growth.

Equity . Total shareholders' equity decreased $33.9 million to $156.6 million for the nine months ended September 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 at September 30, 2022. Year-to-date, we repurchased 131,672 shares of common stock under the October 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.

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Comparison of Results of Operations for the Three Months Ended September 30, 2022 and 2021

General. Net income attributable to the Company was $4.3 million for the three months ended September 30, 2022, compared to $4.2 million for the three months ended September 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 ended September 30, 2022, from $15.4 million for the three months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022, from $14.6 million for the three months ended September 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 ended September 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 Balance Outstanding		Yield			Average Balance Outstanding		Yield			Increase (Decrease) in 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 Balance Outstanding		Rate			Average Balance Outstanding		Rate			Increase (Decrease) in 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			15,243
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

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 ended September 30, 2022, compared to $13.9 million for the three months ended September 30, 2021. The increase over the third quarter of 2021 was due to higher Quin 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 September 30, 2022 and 2021

General. Net income attributable to the Company was $9.6 million for the nine months ended September 30, 2022, compared to $10.3 million for the nine months ended September 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 ended September 30, 2022, from $42.5 million for the nine months ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 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 ended September 30, 2022, from $40.0 million for the nine months ended September 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 ended September 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.

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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 Balance Outstanding		Yield			Average Balance Outstanding		Yield			Increase (Decrease) in 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 Balance Outstanding		Rate			Average Balance Outstanding		Rate			Increase (Decrease) in 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

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Noninterest Income. Noninterest income decreased $3.9 million, or 35.9%, to $7.0 million for the nine months ended September 30, 2022, from $10.9 million for the nine months ended September 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 and Quin 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 in thousands)
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 ended September 30, 2022, compared to $39.7 million for the nine months ended September 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 to Quin Ventures for the nine months ended September 30, 2022, totaled $3.9 million. We expect expenses related to Quin 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 of September 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 ended September 30, 2022 and 2021, respectively.

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

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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
	Volume			Rate			Total Increase (Decrease)			Volume			Rate			Total Increase (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 ended September 30, 2022 and the year ended December 31, 2021, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

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Contractual Obligations

At September 30, 2022, our scheduled maturities of contractual obligations were as follows:

	Within		After 1 Year Through		After 3 Years 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 September 30, 2022:

	Amount of Commitment Expiration
	Within		After 1 Year Through		After 3 Years 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. At September 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 the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $9.0 million were pledged as of September 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 September 30, 2022, we had $713,000 in loan commitments outstanding and $232.0 million in undisbursed loans and standby letters of credit, including $137.6 million in undisbursed construction loan commitments.

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Certificates of deposit due within one year as of September 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. At September 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. At September 30, 2022, First Northwest had contributed $8.0 million in partial fulfillment of its commitment to extend $15.0 million to Quin Ventures, Inc. under a capital financing agreement and related promissory note.

Capital Resources

At September 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 at September 30, 2022, compared to $19.10 at December 31, 2021.

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

The following table provides the capital requirements and actual results for First Fed at September 30, 2022.

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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

(b) Changes in Internal Controls.

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

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2021.

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

(a)

On September 2, 2022, First Northwest Bancorp (the “Company”) issued 115,777 shares of the Company’s common stock in the second closing under a Membership Interest Purchase Agreement dated June 30, 2022, as amended effective September 2, 2022, among the Company and the individual members of The Meriwether Group LLC (“Meriwether”). The shares had a total value of approximately $1,869,321 at the time of issuance and were issued to the individual members of Meriwether as partial consideration for the Company’s purchase of a portion of their limited liability company interests in Meriwether. In exchange for the 115,777 shares of the Company’s common stock, together with approximately $458,410 in cash, the Company received limited liability company interests totaling 28.33% of the percentage interests in Meriwether, bringing the Company’s total percentage interest in Meriwether to 33.33%. The shares were issued in reliance on the exemption from registration provided in Section 4(a)(2) of the Securities Act of 1933, as amended.

(b)	Not applicable.

(c)	The following table summarizes common stock repurchases during the three months ended September 30, 2022:


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans (2)		Maximum Number of Shares that May Yet Be Repurchased Under the Plans

July 1, 2022 - July 31, 2022		23,671	$	16.14		19,863		585,889
August 1, 2022 - August 31, 2022		30,066		16.22		29,462		556,427
September 1, 2022 - September 30, 2022		30,821		16.09		29,729		526,698
Total		84,558	$	16.15		79,054

(1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 3,808 shares, 604 shares, and 1,092 shares, respectively, for the periods indicated.
(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock issued and outstanding as of October 27, 2020. As of September 30, 2022, a total of 496,722 shares, or 48.5% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $16.83 per share, leaving 526,698 shares available for future purchases.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit No.	Exhibit Description	Filed Herewith	Form	Original Exhibit No.	Filing Date
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act	X
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive (Loss) Income; (4) Consolidated Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

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

	FIRST NORTHWEST BANCORP

Date: November 10, 2022	/s/ Matthew P. Deines

	Matthew P. Deines
	President, Chief Executive Officer and Director
	(Principal Executive Officer)


Date: November 10, 2022	/s/ Geraldine L. Bullard

	Geraldine L. Bullard
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Part I - Financial Information Item 1. Financial Statements (unaudited)Note 1 - Basis Of Presentation and Critical Accounting Policies Note 2 - Securities Note 3 - Loans Receivable Note 4 - Deposits Note 5 - Borrowings Note 6 - Federal Taxes on Income Note 7 - Earnings Per Common Share Note 8 - Employee Benefits Note 9 - Stock-based Compensation Note 10 - Fair Value Accounting and Measurement Note 11- Change in Accumulated Other Comprehensive Income ("aoci")Note 12- Business Combination Item 2: Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act

FNWB 10-Q Quarter ended Sept. 30, 2022

Exhibits