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 | |
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| For the quarterly period ended June 30, 2022 |
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from _____ to _____ |
Commission File Number: 001-36741
FIRST NORTHWEST BANCORP
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(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) |
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| 105 West 8th Street, Port Angeles, Washington |
| 98362 |
| (Address of principal executive offices) |
| (Zip Code) |
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| 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 August 5, 2022, there were 9,926,501 shares of common stock, $0.01 par value per share, outstanding.
FORM 10-Q
TABLE OF CONTENTS
| PART 1 - FINANCIAL INFORMATION |
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| Item 1 - Financial Statements (Unaudited) |
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| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4 - Controls and Procedures |
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| PART II - OTHER INFORMATION |
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| Item 1 - Legal Proceedings |
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| Item 1A - Risk Factors |
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| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds |
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| Item 3 - Defaults Upon Senior Securities |
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| Item 4 - Mine Safety Disclosures |
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| Item 5 - Other Information |
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| Item 6 - Exhibits |
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| SIGNATURES |
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."
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share information) (Unaudited)
| June 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 19,006 | $ | 13,868 | ||||
| Interest-earning deposits in banks | 68,789 | 112,148 | ||||||
| Investment securities available for sale, at fair value | 353,144 | 344,212 | ||||||
| Loans held for sale | 696 | 760 | ||||||
| Loans receivable (net of allowance for loan losses of $ and $) | 1,461,552 | 1,350,260 | ||||||
| Federal Home Loan Bank (FHLB) stock, at cost | 10,402 | 5,196 | ||||||
| Accrued interest receivable | 5,802 | 5,289 | ||||||
| Premises and equipment, net | 21,291 | 19,830 | ||||||
| Servicing rights on sold loans, net | — | 3,282 | ||||||
| Servicing rights on sold loans, at fair value | 3,865 | — | ||||||
| Bank-owned life insurance, net | 39,783 | 39,318 | ||||||
| Goodwill and other intangible assets, net | 1,176 | 1,183 | ||||||
| Prepaid expenses and other assets | 46,126 | 25,735 | ||||||
| Total assets | $ | 2,031,632 | $ | 1,921,081 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Deposits | $ | 1,580,724 | $ | 1,580,580 | ||||
| Borrowings | 249,319 | 119,280 | ||||||
| Accrued interest payable | 461 | 393 | ||||||
| Accrued expenses and other liabilities | 35,040 | 29,240 | ||||||
| Advances from borrowers for taxes and insurance | 934 | 1,108 | ||||||
| Total liabilities | 1,866,478 | 1,730,601 | ||||||
| Shareholders' Equity | ||||||||
| Preferred stock, $ par value, authorized shares, shares issued or outstanding | — | — | ||||||
| Common stock, $ par value, authorized shares; issued and outstanding shares at June 30, 2022, and shares at December 31, 2021 | 100 | 100 | ||||||
| Additional paid-in capital | 96,479 | 96,131 | ||||||
| Retained earnings | 107,000 | 103,014 | ||||||
| Accumulated other comprehensive (loss) income, net of tax | (28,447 | ) | 288 | |||||
| Unearned employee stock ownership plan (ESOP) shares | (8,242 | ) | (8,572 | ) | ||||
| Total parent's shareholders' equity | 166,890 | 190,961 | ||||||
| Noncontrolling interest in Quin Ventures, Inc. | (1,736 | ) | (481 | ) | ||||
| Total shareholders' equity | 165,154 | 190,480 | ||||||
| Total liabilities and shareholders' equity | $ | 2,031,632 | $ | 1,921,081 | ||||
See selected notes to the consolidated financial statements.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| INTEREST INCOME | ||||||||||||||||
| Interest and fees on loans receivable | $ | 16,081 | $ | 12,866 | $ | 30,617 | $ | 25,407 | ||||||||
| Interest on investment securities | 2,715 | 2,124 | 4,990 | 4,158 | ||||||||||||
| Interest on deposits and other | 46 | 15 | 84 | 28 | ||||||||||||
| FHLB dividends | 119 | 46 | 171 | 91 | ||||||||||||
| Total interest income | 18,961 | 15,051 | 35,862 | 29,684 | ||||||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Deposits | 796 | 825 | 1,513 | 1,759 | ||||||||||||
| Borrowings | 922 | 577 | 1,620 | 793 | ||||||||||||
| Total interest expense | 1,718 | 1,402 | 3,133 | 2,552 | ||||||||||||
| Net interest income | 17,243 | 13,649 | 32,729 | 27,132 | ||||||||||||
| PROVISION FOR LOAN LOSSES | 500 | 300 | 500 | 800 | ||||||||||||
| Net interest income after provision for loan losses | 16,743 | 13,349 | 32,229 | 26,332 | ||||||||||||
| NONINTEREST INCOME | ||||||||||||||||
| Loan and deposit service fees | 1,091 | 1,001 | 2,264 | 1,838 | ||||||||||||
| Sold loan servicing fees | 27 | 13 | 459 | 43 | ||||||||||||
| Net gain on sale of loans | 231 | 1,017 | 484 | 2,354 | ||||||||||||
| Net (loss) gain on sale of investment securities | (8 | ) | 1,124 | 118 | 1,124 | |||||||||||
| Increase in cash surrender value of bank-owned life insurance | 213 | 242 | 465 | 486 | ||||||||||||
| Other income | 668 | 475 | 835 | 731 | ||||||||||||
| Total noninterest income | 2,222 | 3,872 | 4,625 | 6,576 | ||||||||||||
| NONINTEREST EXPENSE | ||||||||||||||||
| Compensation and benefits | 9,735 | 8,559 | 18,538 | 15,854 | ||||||||||||
| Data processing | 1,870 | 1,525 | 3,642 | 2,858 | ||||||||||||
| Occupancy and equipment | 1,432 | 1,004 | 2,599 | 2,033 | ||||||||||||
| Supplies, postage, and telephone | 408 | 355 | 721 | 597 | ||||||||||||
| Regulatory assessments and state taxes | 441 | 301 | 802 | 562 | ||||||||||||
| Advertising | 1,370 | 492 | 2,157 | 937 | ||||||||||||
| Professional fees | 629 | 644 | 1,188 | 1,166 | ||||||||||||
| FDIC insurance premium | 211 | 168 | 434 | 316 | ||||||||||||
| Other expense | 867 | 659 | 1,713 | 1,478 | ||||||||||||
| Total noninterest expense | 16,963 | 13,707 | 31,794 | 25,801 | ||||||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES | 2,002 | 3,514 | 5,060 | 7,107 | ||||||||||||
| PROVISION FOR INCOME TAXES | 467 | 663 | 1,021 | 1,136 | ||||||||||||
| NET INCOME | 1,535 | 2,851 | 4,039 | 5,971 | ||||||||||||
| Net loss attributable to noncontrolling interest in Quin Ventures, Inc. | 953 | 145 | 1,255 | 145 | ||||||||||||
| NET INCOME ATTRIBUTABLE TO PARENT | $ | 2,488 | $ | 2,996 | $ | 5,294 | $ | 6,116 | ||||||||
| Basic and diluted earnings per common share | $ | 0.27 | $ | 0.32 | $ | 0.58 | $ | 0.64 | ||||||||
See selected notes to the consolidated financial statements.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands) (Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| NET INCOME | $ | 1,535 | $ | 2,851 | $ | 4,039 | $ | 5,971 | ||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Unrealized holding (losses) gains on investments available for sale arising during the period | (16,875 | ) | 5,321 | (36,329 | ) | 893 | ||||||||||
| Income tax benefit (provision) related to unrealized holding (losses) gains | 3,545 | (1,117 | ) | 7,629 | (187 | ) | ||||||||||
| 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 | 36 | 42 | 73 | 42 | ||||||||||||
| Income tax provision related to amortization of DB plan prior service cost | (7 | ) | (11 | ) | (15 | ) | (11 | ) | ||||||||
| Reclassification adjustment for net losses (gains) on sales of securities realized in income | 8 | (1,124 | ) | (118 | ) | (1,124 | ) | |||||||||
| Income tax benefit (provision) related to reclassification adjustment on sales of securities | (1 | ) | 236 | 25 | 236 | |||||||||||
| Other comprehensive (loss) income, net of tax | (13,294 | ) | 3,347 | (28,735 | ) | (1,896 | ) | |||||||||
| COMPREHENSIVE (LOSS) INCOME | (11,759 | ) | 6,198 | (24,696 | ) | 4,075 | ||||||||||
| Comprehensive loss attributable to noncontrolling interest | (953 | ) | (145 | ) | (1,255 | ) | (145 | ) | ||||||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT | $ | (10,806 | ) | $ | 6,343 | $ | (23,441 | ) | $ | 4,220 | ||||||
See selected notes to the consolidated financial statements.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended June 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, March 31, 2021 | 10,195,644 | $ | 102 | $ | 96,499 | $ | 94,363 | $ | (9,065 | ) | $ | 199 | $ | — | $ | 182,098 | ||||||||||||||||
| Net income | 2,996 | (145 | ) | 2,851 | ||||||||||||||||||||||||||||
| Common stock issued and initial investment in Quin Ventures | 29,719 | 1 | 498 | (44 | ) | (45 | ) | 410 | ||||||||||||||||||||||||
| Common stock repurchased | (18,142 | ) | (2 | ) | (180 | ) | (129 | ) | (311 | ) | ||||||||||||||||||||||
| Restricted stock award grants net of forfeitures | — | 1 | (1 | ) | — | |||||||||||||||||||||||||||
| Restricted stock awards canceled | (1,354 | ) | — | (22 | ) | (22 | ) | |||||||||||||||||||||||||
| Other comprehensive income, net of tax | 3,347 | 3,347 | ||||||||||||||||||||||||||||||
| Share-based compensation expense | 606 | 606 | ||||||||||||||||||||||||||||||
| ESOP shares committed to be released | 63 | 164 | 227 | |||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | (613 | ) | (613 | ) | ||||||||||||||||||||||||||||
| BALANCE, June 30, 2021 | 10,205,867 | $ | 102 | $ | 97,463 | $ | 96,573 | $ | (8,901 | ) | $ | 3,546 | $ | (190 | ) | $ | 188,593 | |||||||||||||||
| BALANCE, March 31, 2022 | 10,003,622 | $ | 100 | $ | 96,473 | $ | 105,546 | $ | (8,407 | ) | $ | (15,153 | ) | $ | (783 | ) | $ | 177,776 | ||||||||||||||
| Net income | 2,488 | (953 | ) | 1,535 | ||||||||||||||||||||||||||||
| Common stock repurchased | (52,618 | ) | (1 | ) | (525 | ) | (333 | ) | (859 | ) | ||||||||||||||||||||||
| Restricted stock award grants net of forfeitures | 575 | 1 | (1 | ) | — | |||||||||||||||||||||||||||
| Restricted stock awards canceled | (1,407 | ) | — | (27 | ) | (27 | ) | |||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (13,294 | ) | (13,294 | ) | ||||||||||||||||||||||||||||
| Share-based compensation expense | 479 | 479 | ||||||||||||||||||||||||||||||
| ESOP shares committed to be released | 80 | 165 | 245 | |||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | (701 | ) | (701 | ) | ||||||||||||||||||||||||||||
| BALANCE, June 30, 2022 | 9,950,172 | $ | 100 | $ | 96,479 | $ | 107,000 | $ | (8,242 | ) | $ | (28,447 | ) | $ | (1,736 | ) | $ | 165,154 | ||||||||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 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 | 6,116 | (145 | ) | 5,971 | ||||||||||||||||||||||||||||
| Common stock issued and initial investment in Quin Ventures | 29,719 | 1 | 498 | (44 | ) | (45 | ) | 410 | ||||||||||||||||||||||||
| Common stock repurchased | (153,979 | ) | (2 | ) | (1,538 | ) | (934 | ) | (2,474 | ) | ||||||||||||||||||||||
| Restricted stock award grants net of forfeitures | 84,896 | 1 | (1 | ) | — | |||||||||||||||||||||||||||
| Restricted stock awards canceled | (1,954 | ) | — | (33 | ) | (33 | ) | |||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (1,896 | ) | (1,896 | ) | ||||||||||||||||||||||||||||
| Share-based compensation expense | 1,010 | 1,010 | ||||||||||||||||||||||||||||||
| ESOP shares committed to be released | 115 | 329 | 444 | |||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | (1,222 | ) | (1,222 | ) | ||||||||||||||||||||||||||||
| BALANCE, June 30, 2021 | 10,205,867 | $ | 102 | $ | 97,463 | $ | 96,573 | $ | (8,901 | ) | $ | 3,546 | $ | (190 | ) | $ | 188,593 | |||||||||||||||
| BALANCE, December 31, 2021 | 9,972,698 | $ | 100 | $ | 96,131 | $ | 103,014 | $ | (8,572 | ) | $ | 288 | $ | (481 | ) | $ | 190,480 | |||||||||||||||
| Net income | 5,294 | (1,255 | ) | 4,039 | ||||||||||||||||||||||||||||
| Common stock repurchased | (52,618 | ) | (1 | ) | (525 | ) | (333 | ) | (859 | ) | ||||||||||||||||||||||
| Restricted stock award grants net of forfeitures | 40,418 | 1 | (1 | ) | — | |||||||||||||||||||||||||||
| Restricted stock awards canceled | (10,326 | ) | — | (222 | ) | (222 | ) | |||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (28,735 | ) | (28,735 | ) | ||||||||||||||||||||||||||||
| Reclassification resulting from change in accounting method | 424 | 424 | ||||||||||||||||||||||||||||||
| Share-based compensation expense | 890 | 890 | ||||||||||||||||||||||||||||||
| ESOP shares committed to be released | 206 | 330 | 536 | |||||||||||||||||||||||||||||
| Cash dividends declared ($ per share) | (1,399 | ) | (1,399 | ) | ||||||||||||||||||||||||||||
| BALANCE, June 30, 2022 | 9,950,172 | $ | 100 | $ | 96,479 | $ | 107,000 | $ | (8,242 | ) | $ | (28,447 | ) | $ | (1,736 | ) | $ | 165,154 | ||||||||||||||
See selected notes to the consolidated financial statements.
| FIRST NORTHWEST BANCORP AND SUBSIDIARY |
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| CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| (In thousands) (Unaudited) |
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income before noncontrolling interest | $ | 4,039 | $ | 5,971 | ||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation and amortization | 983 | 665 | ||||||
| Amortization of core deposit intangible | 7 | — | ||||||
| Amortization and accretion of premiums and discounts on investments, net | 898 | 787 | ||||||
| Accretion of deferred loan fees and purchased premiums, net | 571 | 108 | ||||||
| Amortization of debt issuance costs | 39 | 18 | ||||||
| Change in fair value of sold loan servicing rights | 53 | — | ||||||
| Additions to servicing rights on sold loans, net | (98 | ) | (569 | ) | ||||
| Amortization of servicing rights on sold loans, net | — | 290 | ||||||
| Net increase in the valuation allowance on servicing rights on sold loans | — | 19 | ||||||
| Provision for loan losses | 500 | 800 | ||||||
| Allocation of ESOP shares | 404 | 325 | ||||||
| Share-based compensation expense | 890 | 1,010 | ||||||
| Gain on sale of loans, net | (484 | ) | (2,354 | ) | ||||
| Gain on sale of securities available for sale, net | (118 | ) | (1,124 | ) | ||||
| Increase in cash surrender value of life insurance, net | (465 | ) | (486 | ) | ||||
| Origination of loans held for sale | (16,487 | ) | (63,887 | ) | ||||
| Proceeds from loans held for sale | 17,035 | 67,927 | ||||||
| Change in assets and liabilities: | ||||||||
| (Increase) decrease in accrued interest receivable | (513 | ) | 1,017 | |||||
| Increase in prepaid expenses and other assets | (3,854 | ) | (9,457 | ) | ||||
| Increase in accrued interest payable | 68 | 402 | ||||||
| Increase in accrued expenses and other liabilities | 5,788 | 3,604 | ||||||
| Net cash from operating activities | 9,256 | 5,066 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of securities available for sale | (78,409 | ) | (94,145 | ) | ||||
| Proceeds from maturities, calls, and principal repayments of securities available for sale | 19,565 | 42,612 | ||||||
| Proceeds from sales of securities available for sale | 12,685 | 45,435 | ||||||
| (Purchase) redemption of FHLB stock | (5,206 | ) | 380 | |||||
| Net increase in loans receivable | (112,363 | ) | (105,279 | ) | ||||
| Purchase of premises and equipment, net | (2,442 | ) | (2,267 | ) | ||||
| Capital contributions to equity investments | (6,979 | ) | — | |||||
| Capital contributions to historic tax credit partnerships | (1,829 | ) | — | |||||
| Net cash from investing activities | (174,978 | ) | (113,264 | ) | ||||
See selected notes to the consolidated financial statements.
| FIRST NORTHWEST BANCORP AND SUBSIDIARY |
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| CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| (In thousands) (Unaudited) |
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net increase in deposits | $ | 144 | $ | 108,221 | ||||
| Proceeds from long-term FHLB advances | 10,000 | 10,000 | ||||||
| Repayment of long-term FHLB advances | — | (10,000 | ) | |||||
| Net increase (decrease) in short-term FHLB advances | 112,000 | (19,977 | ) | |||||
| Proceeds from issuance of subordinated debt, net | — | 39,223 | ||||||
| Net increase (decrease) in line of credit | 8,000 | — | ||||||
| Net (decrease) increase in advances from borrowers for taxes and insurance | (174 | ) | 27 | |||||
| Dividends paid | (1,388 | ) | (1,222 | ) | ||||
| Restricted stock awards canceled | (222 | ) | (33 | ) | ||||
| Repurchase of common stock | (859 | ) | (2,474 | ) | ||||
| Net cash from financing activities | 127,501 | 123,765 | ||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (38,221 | ) | 15,567 | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 126,016 | 65,155 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 87,795 | $ | 80,722 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the year for: | ||||||||
| Interest on deposits and borrowings | $ | 3,065 | $ | 2,150 | ||||
| Income taxes | $ | 1,110 | $ | 2,640 | ||||
| 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 | $ | (36,447 | ) | $ | (232 | ) | ||
| Cumulative adjustment to servicing right asset due to election of fair value option | $ | 538 | $ | — | ||||
| Lease liabilities arising from obtaining right-of-use assets | $ | — | $ | 672 | ||||
See selected notes to the consolidated financial statements.
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.
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 borrowing 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 six months ended June 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. As of June 30, 2022, the Bank has been running a parallel analysis comparing actual ALLL results to potential CECL results. Initial results indicate a modest increase to the reserve; however, the modeling effort is ongoing with final decisions regarding valuation criteria for each segment yet to be made.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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 June 30, 2022 are summarized as follows:
| Gross | Gross | Estimated | ||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Available for Sale | ||||||||||||||||
| Municipal bonds | $ | 120,655 | $ | 7 | $ | (16,614 | ) | $ | 104,048 | |||||||
| U.S. Treasury notes | 2,462 | — | (42 | ) | 2,420 | |||||||||||
| International agency issued bonds (Agency bonds) | 1,951 | — | (189 | ) | 1,762 | |||||||||||
| Corporate issued debt securities (Corporate debt) | 60,805 | 54 | (2,882 | ) | 57,977 | |||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. government agency issued mortgage-backed securities (MBS agency) | 93,924 | 7 | (8,135 | ) | 85,796 | |||||||||||
| Non-agency issued mortgage-backed securities (MBS non-agency) | 107,086 | — | (5,945 | ) | 101,141 | |||||||||||
| Total securities available for sale | $ | 386,883 | $ | 68 | $ | (33,807 | ) | $ | 353,144 | |||||||
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 June 30, 2022 and December 31, 2021.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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 June 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 | $ | (15,096 | ) | $ | 96,927 | $ | (1,518 | ) | $ | 6,369 | $ | (16,614 | ) | $ | 103,296 | |||||||||
| U.S. Treasury notes | (42 | ) | 2,420 | — | — | (42 | ) | 2,420 | ||||||||||||||||
| Agency bonds | (189 | ) | 1,762 | — | — | (189 | ) | 1,762 | ||||||||||||||||
| Corporate debt | (2,017 | ) | 38,198 | (865 | ) | 11,225 | (2,882 | ) | 49,423 | |||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| MBS agency | (4,669 | ) | 59,577 | (3,466 | ) | 23,138 | (8,135 | ) | 82,715 | |||||||||||||||
| MBS non-agency | (4,502 | ) | 86,342 | (1,443 | ) | 14,799 | (5,945 | ) | 101,141 | |||||||||||||||
| Total available for sale | $ | (26,515 | ) | $ | 285,226 | $ | (7,292 | ) | $ | 55,531 | $ | (33,807 | ) | $ | 340,757 | |||||||||
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 December 31, 2021:
| 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 June 30, 2022 and December 31, 2021, there were 179 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 six months ended June 30, 2022 and 2021.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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.
| June 30, 2022 | ||||||||
| Available-for-Sale | ||||||||
| Amortized Cost | Estimated Fair Value | |||||||
| (In thousands) | ||||||||
| Mortgage-backed securities: | ||||||||
| Due within one year | $ | 7,815 | $ | 7,644 | ||||
| Due after one through five years | 37,351 | 36,318 | ||||||
| Due after five through ten years | 15,849 | 14,879 | ||||||
| Due after ten years | 139,995 | 128,096 | ||||||
| Total mortgage-backed securities | 201,010 | 186,937 | ||||||
| All other investment securities: | ||||||||
| Due within one year | — | — | ||||||
| Due after one through five years | 8,751 | 8,044 | ||||||
| Due after five through ten years | 75,117 | 70,876 | ||||||
| Due after ten years | 102,005 | 87,287 | ||||||
| Total all other investment securities | 185,873 | 166,207 | ||||||
| Total investment securities | $ | 386,883 | $ | 353,144 | ||||
| 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 | ||||
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 June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Proceeds from sales | $ | 2,233 | $ | 45,435 | $ | 12,685 | $ | 45,435 | ||||||||
| Gross realized gains | — | 1,200 | 128 | 1,200 | ||||||||||||
| Gross realized losses | (8 | ) | (76 | ) | (10 | ) | (76 | ) | ||||||||
Note 3 - Loans Receivable
Loans receivable consisted of the following at the dates indicated:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | ||||||||
| Real Estate: | ||||||||
| One-to-four family | $ | 309,191 | $ | 294,965 | ||||
| Multi-family | 221,337 | 172,409 | ||||||
| Commercial real estate | 381,279 | 363,299 | ||||||
| Construction and land | 214,394 | 224,709 | ||||||
| Total real estate loans | 1,126,201 | 1,055,382 | ||||||
| Consumer: | ||||||||
| Home equity | 46,993 | 39,172 | ||||||
| Auto and other consumer | 220,865 | 182,769 | ||||||
| Total consumer loans | 267,858 | 221,941 | ||||||
| Commercial business loans | 71,218 | 79,838 | ||||||
| Total loans | 1,465,277 | 1,357,161 | ||||||
| Less: | ||||||||
| Net deferred loan fees | 3,670 | 4,772 | ||||||
| Premium on purchased loans, net | (15,692 | ) | (12,995 | ) | ||||
| Allowance for loan losses | 15,747 | 15,124 | ||||||
| Total loans receivable, net | $ | 1,461,552 | $ | 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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 June 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 | $ | 3,039 | $ | 2,092 | $ | 4,038 | $ | 2,481 | $ | 405 | $ | 2,229 | $ | 526 | $ | 317 | $ | 15,127 | ||||||||||||||||||
| (Recapture of) provision for loan losses | (13 | ) | 76 | 116 | 69 | 81 | 160 | 12 | (1 | ) | 500 | |||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | (73 | ) | — | — | (73 | ) | |||||||||||||||||||||||||
| Recoveries | — | — | — | — | — | 51 | 142 | — | 193 | |||||||||||||||||||||||||||
| Ending balance | $ | 3,026 | $ | 2,168 | $ | 4,154 | $ | 2,550 | $ | 486 | $ | 2,367 | $ | 680 | $ | 316 | $ | 15,747 | ||||||||||||||||||
| At or For the Six Months Ended June 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 | (190 | ) | 352 | 158 | (124 | ) | 62 | 216 | 68 | (42 | ) | 500 | ||||||||||||||||||||||||
| Charge-offs | — | — | — | — | — | (210 | ) | — | — | (210 | ) | |||||||||||||||||||||||||
| Recoveries | 32 | — | — | 2 | 17 | 140 | 142 | — | 333 | |||||||||||||||||||||||||||
| Ending balance | $ | 3,026 | $ | 2,168 | $ | 4,154 | $ | 2,550 | $ | 486 | $ | 2,367 | $ | 680 | $ | 316 | $ | 15,747 | ||||||||||||||||||
| At June 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 | $ | 3,026 | $ | 2,168 | $ | 4,154 | $ | 2,550 | $ | 486 | $ | 2,367 | $ | 680 | $ | 316 | $ | 15,747 | ||||||||||||||||||
| General reserve | 3,004 | 2,168 | 4,154 | 2,550 | 482 | 2,355 | 680 | 316 | 15,709 | |||||||||||||||||||||||||||
| Specific reserve | 22 | — | — | — | 4 | 12 | — | — | 38 | |||||||||||||||||||||||||||
| Total loans | $ | 309,191 | $ | 221,337 | $ | 381,279 | $ | 214,394 | $ | 46,993 | $ | 220,865 | $ | 71,218 | $ | — | $ | 1,465,277 | ||||||||||||||||||
| Loans collectively evaluated (1) | 306,835 | 221,337 | 381,219 | 214,372 | 46,714 | 220,582 | 71,218 | — | 1,462,277 | |||||||||||||||||||||||||||
| Loans individually evaluated (2) | 2,356 | — | 60 | 22 | 279 | 283 | — | — | 3,000 | |||||||||||||||||||||||||||
| (1) Loans collectively evaluated for general reserves. | |||||||||||||||||||||||||||||||||||
| (2) Loans individually evaluated for specific reserves. |
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| At or For the Three Months Ended June 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 | $ | 3,416 | $ | 1,822 | $ | 3,629 | $ | 1,890 | $ | 379 | $ | 2,337 | $ | 483 | $ | 309 | $ | 14,265 | ||||||||||||||||||
| (Recapture of) provision for loan losses | (60 | ) | (6 | ) | 45 | 330 | 26 | (3 | ) | (19 | ) | (13 | ) | 300 | ||||||||||||||||||||||
| Charge-offs | — | — | — | — | (12 | ) | (151 | ) | — | — | (163 | ) | ||||||||||||||||||||||||
| Recoveries | — | — | — | 1 | — | 185 | — | — | 186 | |||||||||||||||||||||||||||
| Ending balance | $ | 3,356 | $ | 1,816 | $ | 3,674 | $ | 2,221 | $ | 393 | $ | 2,368 | $ | 464 | $ | 296 | $ | 14,588 | ||||||||||||||||||
| At or For the Six Months Ended June 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 | (119 | ) | 52 | 254 | 756 | 20 | (200 | ) | 35 | 2 | 800 | |||||||||||||||||||||||||
| Charge-offs | — | — | — | — | (12 | ) | (380 | ) | — | — | (392 | ) | ||||||||||||||||||||||||
| Recoveries | 6 | — | — | 4 | 17 | 306 | — | — | 333 | |||||||||||||||||||||||||||
| Ending balance | $ | 3,356 | $ | 1,816 | $ | 3,674 | $ | 2,221 | $ | 393 | $ | 2,368 | $ | 464 | $ | 296 | $ | 14,588 | ||||||||||||||||||
| 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:
| June 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 | $ | 355 | $ | 392 | $ | — | $ | 212 | $ | 247 | $ | — | ||||||||||||
| Commercial real estate | 60 | 154 | — | 71 | 177 | — | ||||||||||||||||||
| Construction and land | — | 17 | — | — | 24 | — | ||||||||||||||||||
| Home equity | — | — | — | 26 | 59 | — | ||||||||||||||||||
| Auto and other consumer | 244 | 249 | — | — | 77 | — | ||||||||||||||||||
| Total | 659 | 812 | — | 309 | 584 | — | ||||||||||||||||||
| With an allowance recorded: | ||||||||||||||||||||||||
| One-to-four family | 2,001 | 2,148 | 22 | 2,045 | 2,245 | 25 | ||||||||||||||||||
| Construction and land | 22 | 22 | — | 22 | 22 | — | ||||||||||||||||||
| Home equity | 279 | 282 | 4 | 307 | 329 | 5 | ||||||||||||||||||
| Auto and other consumer | 39 | 39 | 12 | 512 | 512 | 83 | ||||||||||||||||||
| Total | 2,341 | 2,491 | 38 | 2,886 | 3,108 | 113 | ||||||||||||||||||
| Total impaired loans: | ||||||||||||||||||||||||
| One-to-four family | 2,356 | 2,540 | 22 | 2,257 | 2,492 | 25 | ||||||||||||||||||
| Commercial real estate | 60 | 154 | — | 71 | 177 | — | ||||||||||||||||||
| Construction and land | 22 | 39 | — | 22 | 46 | — | ||||||||||||||||||
| Home equity | 279 | 282 | 4 | 333 | 388 | 5 | ||||||||||||||||||
| Auto and other consumer | 283 | 288 | 12 | 512 | 589 | 83 | ||||||||||||||||||
| Total | $ | 3,000 | $ | 3,303 | $ | 38 | $ | 3,195 | $ | 3,692 | $ | 113 | ||||||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | Six Months Ended | |||||||||||||||
| June 30, 2022 | June 30, 2022 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| (In thousands) | ||||||||||||||||
| With no allowance recorded: | ||||||||||||||||
| One-to-four family | $ | 356 | $ | 6 | $ | 283 | $ | 8 | ||||||||
| Commercial real estate | 63 | — | 65 | — | ||||||||||||
| Construction and land | — | 1 | — | 1 | ||||||||||||
| Home equity | — | — | 5 | — | ||||||||||||
| Auto and other consumer | 247 | 5 | 249 | 9 | ||||||||||||
| Total | 666 | 12 | 602 | 18 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| One-to-four family | 2,128 | 39 | 2,079 | 72 | ||||||||||||
| Commercial real estate | 21 | — | 11 | — | ||||||||||||
| Construction and land | 22 | 1 | 22 | 1 | ||||||||||||
| Home equity | 284 | 4 | 293 | 7 | ||||||||||||
| Auto and other consumer | 61 | 1 | 139 | 2 | ||||||||||||
| Total | 2,516 | 45 | 2,544 | 82 | ||||||||||||
| Total impaired loans: | ||||||||||||||||
| One-to-four family | 2,484 | 45 | 2,362 | 80 | ||||||||||||
| Commercial real estate | 84 | — | 76 | — | ||||||||||||
| Construction and land | 22 | 2 | 22 | 2 | ||||||||||||
| Home equity | 284 | 4 | 298 | 7 | ||||||||||||
| Auto and other consumer | 308 | 6 | 388 | 11 | ||||||||||||
| Total | $ | 3,182 | $ | 57 | $ | 3,146 | $ | 100 | ||||||||
Interest income recognized on a cash basis on impaired loans for the three and six months ended June 30, 2022, was $41,000 and $100,000, respectively.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2021 | |||||||||||||||
| Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
| (In thousands) | ||||||||||||||||
| With no allowance recorded: | ||||||||||||||||
| One-to-four family | $ | 221 | $ | 4 | $ | 223 | $ | 6 | ||||||||
| Multi-family | 93 | — | 187 | — | ||||||||||||
| Commercial real estate | 832 | 18 | 1,022 | 37 | ||||||||||||
| Home equity | 34 | — | 35 | 1 | ||||||||||||
| Auto and other consumer | 35 | 3 | 35 | 4 | ||||||||||||
| Total | 1,215 | 25 | 1,502 | 48 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| One-to-four family | 2,365 | 49 | 2,437 | 87 | ||||||||||||
| Commercial real estate | 410 | — | 234 | — | ||||||||||||
| Construction and land | 24 | 2 | 25 | 3 | ||||||||||||
| Home equity | 119 | 4 | 115 | 6 | ||||||||||||
| Auto and other consumer | 816 | 15 | 840 | 19 | ||||||||||||
| Total | 3,734 | 70 | 3,651 | 115 | ||||||||||||
| Total impaired loans: | ||||||||||||||||
| One-to-four family | 2,586 | 53 | 2,660 | 93 | ||||||||||||
| Multi-family | 93 | — | 187 | — | ||||||||||||
| Commercial real estate | 1,242 | 18 | 1,256 | 37 | ||||||||||||
| Construction and land | 24 | 2 | 25 | 3 | ||||||||||||
| Home equity | 153 | 4 | 150 | 7 | ||||||||||||
| Auto and other consumer | 851 | 18 | 875 | 23 | ||||||||||||
| Total | $ | 4,949 | $ | 95 | $ | 5,153 | $ | 163 | ||||||||
Interest income recognized on a cash basis on impaired loans for the three and six months ended June 30, 2021, was $74,000 and $142,000, respectively.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | ||||||||
| One-to-four family | $ | 626 | $ | 494 | ||||
| Commercial real estate | 60 | 71 | ||||||
| Construction and land | 22 | 22 | ||||||
| Home equity | 251 | 282 | ||||||
| Auto and other consumer | 282 | 512 | ||||||
| Total nonaccrual loans | $ | 1,241 | $ | 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. There were no loans past due 90 days or more and still accruing interest at June 30, 2022 and December 31, 2021.
The following table presents the recorded investment in past due loans, by class, as of June 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 | $ | 340 | $ | — | $ | 151 | $ | 491 | $ | 308,700 | $ | 309,191 | ||||||||||||
| Multi-family | — | — | — | — | 221,337 | 221,337 | ||||||||||||||||||
| Commercial real estate | — | — | — | — | 381,279 | 381,279 | ||||||||||||||||||
| Construction and land | — | 1,751 | 22 | 1,773 | 212,621 | 214,394 | ||||||||||||||||||
| Total real estate loans | 340 | 1,751 | 173 | 2,264 | 1,123,937 | 1,126,201 | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Home equity | — | — | 27 | 27 | 46,966 | 46,993 | ||||||||||||||||||
| Auto and other consumer | 1,175 | 142 | 13 | 1,330 | 219,535 | 220,865 | ||||||||||||||||||
| Total consumer loans | 1,175 | 142 | 40 | 1,357 | 266,501 | 267,858 | ||||||||||||||||||
| Commercial business loans | — | — | — | — | 71,218 | 71,218 | ||||||||||||||||||
| Total loans | $ | 1,515 | $ | 1,893 | $ | 213 | $ | 3,621 | $ | 1,461,656 | $ | 1,465,277 | ||||||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 | 369 | 99 | 937 | 181,832 | 182,769 | ||||||||||||||||||
| Total consumer loans | 552 | 369 | 99 | 1,020 | 220,921 | 221,941 | ||||||||||||||||||
| Commercial business loans | 7 | — | — | 7 | 79,831 | 79,838 | ||||||||||||||||||
| Total loans | $ | 1,638 | $ | 369 | $ | 99 | $ | 2,106 | $ | 1,355,055 | $ | 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table represents the internally assigned grade as of June 30, 2022, by class of loans:
| Pass | Watch | Special Mention | Substandard | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Real Estate: | ||||||||||||||||||||
| One-to-four family | $ | 305,457 | $ | 2,841 | $ | — | $ | 893 | $ | 309,191 | ||||||||||
| Multi-family | 205,515 | 15,822 | — | — | 221,337 | |||||||||||||||
| Commercial real estate | 349,422 | 19,945 | 3,796 | 8,116 | 381,279 | |||||||||||||||
| Construction and land | 196,281 | 13,834 | 2 | 4,277 | 214,394 | |||||||||||||||
| Total real estate loans | 1,056,675 | 52,442 | 3,798 | 13,286 | 1,126,201 | |||||||||||||||
| Consumer: | ||||||||||||||||||||
| Home equity | 46,442 | 300 | — | 251 | 46,993 | |||||||||||||||
| Auto and other consumer | 219,994 | 468 | 119 | 284 | 220,865 | |||||||||||||||
| Total consumer loans | 266,436 | 768 | 119 | 535 | 267,858 | |||||||||||||||
| Commercial business loans | 69,757 | 1,096 | 365 | — | 71,218 | |||||||||||||||
| Total loans | $ | 1,392,868 | $ | 54,306 | $ | 4,282 | $ | 13,821 | $ | 1,465,277 | ||||||||||
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 | ||||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table represents the credit risk profile based on payment activity as of June 30, 2022, by class of loans:
| Nonperforming | Performing | Total | ||||||||||
| (In thousands) | ||||||||||||
| Real Estate: | ||||||||||||
| One-to-four family | $ | 626 | $ | 308,565 | $ | 309,191 | ||||||
| Multi-family | — | 221,337 | 221,337 | |||||||||
| Commercial real estate | 60 | 381,219 | 381,279 | |||||||||
| Construction and land | 22 | 214,372 | 214,394 | |||||||||
| Consumer: | ||||||||||||
| Home equity | 251 | 46,742 | 46,993 | |||||||||
| Auto and other consumer | 282 | 220,583 | 220,865 | |||||||||
| Commercial business | — | 71,218 | 71,218 | |||||||||
| Total loans | $ | 1,241 | $ | 1,464,036 | $ | 1,465,277 | ||||||
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 | ||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | ||||||||
| Total TDR loans | $ | 1,788 | $ | 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 six months ended June 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 six months ended June 30, 2022 or 2021.
No additional funds were committed to be advanced in connection with TDR loans at June 30, 2022.
The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status:
| June 30, 2022 | ||||||||||||
| Accrual | Nonaccrual | Total | ||||||||||
| (In thousands) | ||||||||||||
| One-to-four family | $ | 1,730 | $ | 29 | $ | 1,759 | ||||||
| Home equity | 29 | — | 29 | |||||||||
| Total TDR loans | $ | 1,759 | $ | 29 | $ | 1,788 | ||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Deposits
The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at June 30, 2022 and December 31, 2021, were $76.0 million and $75.1 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||||
| Amount | Weighted-Average Interest Rate | Amount | Weighted-Average Interest Rate | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Noninterest-bearing demand deposits | $ | 336,311 | 0.00 | % | $ | 343,932 | 0.00 | % | ||||||||
| Interest-bearing demand deposits | 192,114 | 0.01 | % | 196,970 | 0.01 | % | ||||||||||
| Money market accounts | 587,747 | 0.27 | % | 597,815 | 0.21 | % | ||||||||||
| Savings accounts | 195,029 | 0.05 | % | 194,620 | 0.05 | % | ||||||||||
| Certificates of deposit | 269,523 | 0.73 | % | 247,243 | 0.62 | % | ||||||||||
| Total deposits | $ | 1,580,724 | 0.23 | % | $ | 1,580,580 | 0.19 | % | ||||||||
Maturities of certificates at the dates indicated are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (In thousands) | ||||||||
| Within one year or less | $ | 169,555 | $ | 153,472 | ||||
| After one year through two years | 58,667 | 54,970 | ||||||
| After two years through three years | 20,487 | 17,620 | ||||||
| After three years through four years | 12,827 | 14,358 | ||||||
| After four years through five years | 7,987 | 6,823 | ||||||
| Total certificates of deposit | $ | 269,523 | $ | 247,243 | ||||
Brokered certificates of deposits of $85.7 million and $65.7 million are included in the June 30, 2022 and December 31, 2021 certificate of deposits totals above, respectively.
At June 30, 2022 and December 31, 2021, deposits included $118.6 million and $134.1 million, respectively, in public fund deposits. Investment securities with a carrying value of $60.2 million and $67.9 million were pledged as collateral for these deposits at June 30, 2022 and December 31, 2021, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.
Interest on deposits by type for the periods shown was as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Demand deposits | $ | 25 | $ | 10 | $ | 42 | $ | 17 | ||||||||
| Money market accounts | 323 | 275 | 621 | 561 | ||||||||||||
| Savings accounts | 26 | 34 | 52 | 74 | ||||||||||||
| Certificates of deposit | 422 | 506 | 798 | 1,107 | ||||||||||||
| Total interest expense on deposits | $ | 796 | $ | 825 | $ | 1,513 | $ | 1,759 | ||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $648.1 million and $699.6 million at June 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 $8.7 million and $17.3 million at June 30, 2022 and December 31, 2021, respectively. No funds have been borrowed to date. Investment securities with a carrying value of $9.3 million and $17.2 million were pledged to the FRB at June 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 six months ended June 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 | $ | 90,000 | $ | 102,000 | $ | 10,000 | $ | 8,000 | $ | 39,319 | ||||||||||
| Maximum outstanding at any month-end | 90,000 | 102,000 | 20,000 | 8,000 | 39,319 | |||||||||||||||
| Average monthly outstanding during the period | 83,333 | 43,300 | 8,333 | 1,333 | 39,288 | |||||||||||||||
| Weighted-average daily interest rates | ||||||||||||||||||||
| Annual | 1.54 | % | 0.69 | % | 0.71 | % | 4.78 | % | 4.05 | % | ||||||||||
| Period End | 1.59 | % | 1.40 | % | 1.74 | % | 5.25 | % | 4.05 | % | ||||||||||
The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at June 30, 2022 are as follows:
| Weighted- Average Interest Rate | Amount | |||||||
| (Dollars in thousands) | ||||||||
| Within one year or less | 1.76 | % | $ | 20,000 | ||||
| After one year through two years | 1.47 | 15,000 | ||||||
| After two years through three years | 1.46 | 20,000 | ||||||
| After three years through four years | 1.49 | 15,000 | ||||||
| After four years through five years | 1.63 | 10,000 | ||||||
| After five years | 1.76 | 10,000 | ||||||
| Total FHLB long-term advances | 1.59 | % | $ | 90,000 | ||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 20.2% and 16.0% for the six months ended June 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 six months ended June 30, 2022 and 2021.
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (In thousands, except share data) | ||||||||||||||||
| Net income: | ||||||||||||||||
| Net income available to common shareholders | $ | 2,488 | $ | 2,996 | $ | 5,294 | $ | 6,116 | ||||||||
| Earnings allocated to participating securities | (25 | ) | (116 | ) | (55 | ) | (218 | ) | ||||||||
| Earnings allocated to common shareholders | $ | 2,463 | $ | 2,880 | $ | 5,239 | $ | 5,898 | ||||||||
| Basic: | ||||||||||||||||
| Weighted average common shares outstanding | 9,849,265 | 10,215,223 | 9,846,086 | 10,208,110 | ||||||||||||
| Weighted average unvested restricted stock awards | (92,626 | ) | (367,940 | ) | (95,390 | ) | (340,786 | ) | ||||||||
| Weighted average unallocated ESOP shares | (661,745 | ) | (714,706 | ) | (668,323 | ) | (721,211 | ) | ||||||||
| Total basic weighted average common shares outstanding | 9,094,894 | 9,132,577 | 9,082,373 | 9,146,113 | ||||||||||||
| Diluted: | ||||||||||||||||
| Basic weighted average common shares outstanding | 9,094,894 | 9,132,577 | 9,082,373 | 9,146,113 | ||||||||||||
| Dilutive restricted stock awards | 71,237 | 118,554 | 84,942 | 106,200 | ||||||||||||
| Total diluted weighted average common shares outstanding | 9,166,131 | 9,251,131 | 9,167,315 | 9,252,313 | ||||||||||||
| Basic earnings per common share | $ | 0.27 | $ | 0.32 | $ | 0.58 | $ | 0.64 | ||||||||
| Diluted earnings per common share | $ | 0.27 | $ | 0.32 | $ | 0.58 | $ | 0.64 | ||||||||
Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At June 30, 2022 and December 31, 2021, antidilutive shares as calculated under the treasury stock method totaled 1,186 and 979, respectively.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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 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 six months ended June 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 June 30, 2022 and 2021, was $245,000 and $227,000, respectively. Compensation expense related to the ESOP for the six months ended June 30, 2022 and 2021, was $536,000 and $444,000, respectively.
Shares issued to the ESOP as of the dates indicated are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (Dollars in thousands) | ||||||||
| Allocated shares | 386,285 | 333,396 | ||||||
| Committed to be released shares | — | 26,442 | ||||||
| Unallocated shares | 661,744 | 688,191 | ||||||
| Total ESOP shares issued | 1,048,029 | 1,048,029 | ||||||
| Fair value of unallocated shares | $ | 10,323 | $ | 13,901 | ||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 June 30, 2022, there were 300,219 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 June 30, 2022, there were no shares available for grant under the 2015 EIP. At this date, there are 89,900 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.
There were 53,343 and 84,896 shares of restricted stock awarded, respectively, during the six months ended June 30, 2022 and 2021. Awarded shares of restricted stock vest ratably over periods ranging from to 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 June 30, 2022 and 2021, total compensation expense for the equity incentive plans was $479,000 and $606,000, respectively. Included in the compensation expense for the three months ended June 30, 2022 and 2021, was directors' compensation of $84,000 and $169,000, respectively.
For the six months ended June 30, 2022 and 2021, total compensation expense for the equity incentive plans was $890,000 and $1.0 million, respectively. Included in the compensation expense for the six months ended June 30, 2022 and 2021, was directors' compensation of $139,000 and $260,000, respectively.
The following tables provide a summary of changes in non-vested restricted stock awards for the period shown:
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2022, there was $3.1 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 2.06 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 Equity 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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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:
| June 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 | $ | 4,979 | $ | 99,069 | $ | — | $ | 104,048 | ||||||||
| U.S. Treasury notes | 2,420 | — | — | 2,420 | ||||||||||||
| Agency bonds | — | 1,762 | — | 1,762 | ||||||||||||
| Corporate debt | 5,431 | 52,546 | — | 57,977 | ||||||||||||
| MBS agency | — | 85,796 | — | 85,796 | ||||||||||||
| MBS non-agency | — | 101,141 | — | 101,141 | ||||||||||||
| Sold loan servicing rights | — | — | 3,865 | 3,865 | ||||||||||||
| Equity investments | — | 9,952 | — | 9,952 | ||||||||||||
| $ | 12,830 | $ | 350,266 | $ | 3,865 | $ | 366,961 | |||||||||
| 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 | ||||||||||||
| Equity investments | — | 3,071 | — | 3,071 | ||||||||||||
| $ | 11,963 | $ | 335,320 | $ | — | $ | 347,283 | |||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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:
| June 30, 2022 | Fair Value (In thousands) | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
| Sold loan servicing rights | $3,865 | Discounted cash flow | Constant prepayment rate | ||||||||
| Discount rate | |||||||||||
The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates indicated:
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.
FIRST NORTHWEST BANCORP AND SUBSIDIARY
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:
| June 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Impaired loans | $ | — | $ | — | $ | 3,000 | $ | 3,000 | ||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Impaired loans | $ | — | $ | — | $ | 3,195 | $ | 3,195 | ||||||||
At June 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:
| June 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 | $ | 87,795 | $ | 87,795 | $ | 87,795 | $ | — | $ | — | ||||||||||
| Investment securities available for sale | 353,144 | 353,144 | 12,830 | 340,314 | — | |||||||||||||||
| Loans held for sale | 696 | 696 | — | 696 | — | |||||||||||||||
| Loans receivable, net | 1,461,552 | 1,420,881 | — | — | 1,420,881 | |||||||||||||||
| FHLB stock | 10,402 | 10,402 | — | 10,402 | — | |||||||||||||||
| Accrued interest receivable | 5,802 | 5,802 | — | 5,802 | — | |||||||||||||||
| Sold loan servicing rights, at fair value | 3,865 | 3,865 | — | — | 3,865 | |||||||||||||||
| Equity investments | 9,952 | 9,952 | — | 9,952 | — | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Demand deposits | $ | 1,311,201 | $ | 1,311,201 | $ | 1,311,201 | $ | — | $ | — | ||||||||||
| Time deposits | 269,523 | 263,637 | — | — | 263,637 | |||||||||||||||
| FHLB Borrowings | 202,000 | 197,505 | — | — | 197,505 | |||||||||||||||
| Line of Credit | 8,000 | 8,017 | — | — | 8,017 | |||||||||||||||
| Subordinated debt, net | 39,319 | 38,303 | — | — | 38,303 | |||||||||||||||
| Accrued interest payable | 461 | 461 | — | 461 | — | |||||||||||||||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 | |||||||||||||||
| Equity 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 June 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.
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, March 31, 2021 | $ | 1,944 | $ | — | $ | 1,944 | ||||||
| Other comprehensive income before reclassification | 4,204 | — | 4,204 | |||||||||
| Amounts reclassified from accumulated other comprehensive income | (888 | ) | 31 | (857 | ) | |||||||
| Net other comprehensive income | 3,316 | 31 | 3,347 | |||||||||
| BALANCE, June 30, 2021 | $ | 5,260 | $ | 31 | $ | 5,291 | ||||||
| BALANCE, March 31, 2022 | $ | (13,330 | ) | $ | (1,823 | ) | $ | (15,153 | ) | |||
| Other comprehensive loss before reclassification | (13,330 | ) | — | (13,330 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income | 7 | 29 | 36 | |||||||||
| Net other comprehensive (loss) income | (13,323 | ) | 29 | (13,294 | ) | |||||||
| BALANCE, June 30, 2022 | $ | (26,653 | ) | $ | (1,794 | ) | $ | (28,447 | ) | |||
| BALANCE, December 31, 2020 | $ | 5,442 | $ | — | $ | 5,442 | ||||||
| Other comprehensive income (loss) before reclassification | 706 | (1,745 | ) | (1,039 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income | (888 | ) | 31 | (857 | ) | |||||||
| Net other comprehensive loss | (182 | ) | (1,714 | ) | (1,896 | ) | ||||||
| BALANCE, June 30, 2021 | $ | 5,260 | $ | (1,714 | ) | $ | 3,546 | |||||
| BALANCE, December 31, 2021 | $ | 2,140 | $ | (1,852 | ) | $ | 288 | |||||
| Other comprehensive loss before reclassification | (28,700 | ) | — | (28,700 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive income | (93 | ) | 58 | (35 | ) | |||||||
| Net other comprehensive (loss) income | (28,793 | ) | 58 | (28,735 | ) | |||||||
| BALANCE, June 30, 2022 | $ | (26,653 | ) | $ | (1,794 | ) | $ | (28,447 | ) | |||
FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 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 of years. 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 actions taken by governmental authorities in response to inflationary pressures, the COVID-19 pandemic, and climate change; | |
| • |
a decrease in the market demand for loans that we originate for sale; |
|
| • |
our ability to control operating costs and expenses; |
|
| • |
whether our management team can implement our operational strategy, including but not limited to our efforts to achieve loan and revenue growth; |
|
| • |
our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related cost savings within expected time frames; |
|
| • |
our ability to successfully execute on growth strategies related to our entry into new markets; |
|
| • |
our ability to develop user-friendly digital applications to serve existing customers and attract new customers; |
|
| • |
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; |
|
| • |
changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; |
|
| • |
increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies; |
|
| • |
our ability to attract and retain deposits; |
|
| • |
changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas; |
|
| • |
results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings; |
|
| • |
legislative or regulatory changes that adversely affect our business; |
|
| • |
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; |
|
| • | the impacts related to or resulting from 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.
General
First Northwest Bancorp, a Washington corporation, is the bank holding company for First Fed Bank. The Company also has a controlling interest in Quin Ventures, Inc., a joint venture formed in April 2021, and limited partnership investments. First Northwest's business activities are generally limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures.
First Fed Bank is a community-oriented financial institution serving western Washington with offices in Clallam, Jefferson, King, Kitsap, and Whatcom counties. We have twelve full-service branches and two business centers. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a fully array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology (“fintech”) companies to develop and deploy digitally focused financial solutions to meet customers’ needs on a broader scale. Lending activities include the origination of first lien one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and more recently have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.
Quin Ventures is a fintech focused on financial wellness and lifestyle protection products for consumers nationwide. First Northwest's limited partnership investments include Canapi Ventures Fund, L.P., BankTech Ventures, L.P., and JAM FINTOP Blockchain, L.P. These limited partnerships invest in fintech-related business with a focus on developing digital solutions applicable to the banking industry. In addition, First Northwest has invested in Meriwether Group Capital Hero Fund LP, a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.
First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.
Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.
An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our ALLL. A recapture of previously recognized provision for loan losses may be added to net income as credit metrics improve, such as a loan's risk rating, increased property values, improvements in the economic environment, or receipt of recoveries of amounts previously charged off.
Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.
Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. We anticipate continued improvements in commercial and consumer activity and the U.S. economy as COVID-related restrictions continue to be removed.
We recognize that our business and consumer customers experience varying degrees of financial distress, which may continue through the remainder of 2022, as new COVID-19 variant infections increase, together with the potential for new mandatory restrictions. If commercial activity slows, it may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic and resulting supply chain issues have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hospitality, restaurant and food services, and lessors of commercial real estate to hospitality, restaurant, and retail establishments, all of which were significantly impacted by the COVID-19 pandemic. At June 30, 2022, the Company’s exposure as a percent of the total loan portfolio to these industries was 3.1%, 0.3%, and 3.8%, respectively. We continue to monitor these customers closely.
We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.
We provided assistance to many small businesses applying for the SBA's Paycheck Protection Program ("PPP") funding. We processed $32.2 million of loans for 515 customers through the initial round of SBA PPP funding during 2020 with an average loan amount of $63,000. We processed $35.0 million of loans for 427 customers during the second round of SBA PPP funding with an average loan amount of $82,000. Payments by borrowers on these loans can be deferred up to six months after the date the loan forgiveness application is processed, and interest, at 1%, will continue to accrue during the deferment period. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As of June 30, 2022, $32.2 million, or 100.0%, of the first-round loans were forgiven and $32.7 million, or 93.4%, of second-round loans were forgiven.
Critical Accounting Policies
Effective January 1, 2022, the Bank elected to measure servicing rights using the fair value method of accounting. We record servicing rights on loans originated and subsequently sold into the secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans. Servicing rights are measured at fair value at each reporting date with the change reported in earnings. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.
There were no other material changes to the critical accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Comparison of Financial Condition at June 30, 2022 and December 31, 2021
Assets. Total assets increased to $2.03 billion at June 30, 2022 from $1.92 billion at December 31, 2021.
Cash and cash equivalents decreased by $38.2 million, or 30.3%, to $87.8 million as of June 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 $111.3 million to $1.46 billion at June 30, 2022, from $1.35 billion at December 31, 2021. During the six months ended June 30, 2022, multi-family loans increased $48.9 million through new originations along with $3.7 million of acquisition-renovation construction and $2.8 million of commercial construction loans converted into amortizing loans. Auto and other consumer loans increased $38.1 million, as a result of a $16.0 million purchase of a pool of manufactured home loans, $5.4 million in individual manufactured home loan purchases, a net increase in auto loans of $7.7 million, and an increase in quin Credit Builder loans of $6.4 million, offset by payment activity. One- to four-family residential loans increased $14.2 million as $12.0 million in residential construction loans converted to amortizing loans and new originations exceeded payment of loans. Commercial business loans decreased $8.6 million, mainly as the result of a decrease in Northpointe Mortgage Participation Program ("Northpointe") of $26.3 million and PPP loans paid off year-to-date totaling $12.8 million, offset by $10.2 million in SBA loan originations, $6.9 million of Bankers Healthcare Group loan purchases, $6.8 million of Water Station Program loans and draws on existing loans. Our participation in the Northpointe program is based on current funding needs of the program. Given the slowdown in the mortgage market, as well as recent funding raises by Northpointe, we do not anticipate significant activity in the near term.
Construction and land loans decreased $10.3 million, or 4.6%, to $214.4 million at June 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 our construction projects. We continue to monitor the projects currently in our portfolio to determine the impact of supply chain issues and inflation on completion. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. At June 30, 2022, acquisition-renovation loans of $27.1 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.
The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
| June 30, 2022 |
North Olympic Peninsula (1) |
Puget Sound Region (2) |
Other Washington |
Oregon |
Idaho |
Total |
||||||||||||||||||
| (In thousands) |
||||||||||||||||||||||||
| Construction Commitment |
||||||||||||||||||||||||
| One- to four-family residential |
$ | 42,889 | $ | 69,665 | $ | 7,157 | $ | — | $ | — | $ | 119,711 | ||||||||||||
| Multi-family residential |
— | 151,823 | 6,098 | 415 | 3,592 | 161,928 | ||||||||||||||||||
| Commercial acquisition-renovation |
1,638 | 27,965 | — | — | — | 29,603 | ||||||||||||||||||
| Commercial real estate |
8,931 | 41,876 | — | 540 | — | 51,347 | ||||||||||||||||||
| Total commitment |
$ | 53,458 | $ | 291,329 | $ | 13,255 | $ | 955 | $ | 3,592 | $ | 362,589 | ||||||||||||
| Construction Funds Disbursed |
||||||||||||||||||||||||
| One- to four-family residential |
$ | 15,749 | $ | 30,293 | $ | 2,170 | $ | — | $ | — | $ | 48,212 | ||||||||||||
| Multi-family residential |
— | 84,192 | 2,714 | 32 | 2,308 | 89,246 | ||||||||||||||||||
| Commercial acquisition-renovation |
1,396 | 25,707 | — | — | — | 27,103 | ||||||||||||||||||
| Commercial real estate |
7,179 | 32,352 | — | 11 | — | 39,542 | ||||||||||||||||||
| Total disbursed |
$ | 24,324 | $ | 172,544 | $ | 4,884 | $ | 43 | $ | 2,308 | $ | 204,103 | ||||||||||||
| Undisbursed Commitment |
||||||||||||||||||||||||
| One- to four-family residential |
$ | 27,140 | $ | 39,372 | $ | 4,987 | $ | — | $ | — | $ | 71,499 | ||||||||||||
| Multi-family residential |
— | 67,631 | 3,384 | 383 | 1,284 | 72,682 | ||||||||||||||||||
| Commercial acquisition-renovation |
242 | 2,258 | — | — | — | 2,500 | ||||||||||||||||||
| Commercial real estate |
1,752 | 9,524 | — | 529 | — | 11,805 | ||||||||||||||||||
| Total undisbursed |
$ | 29,134 | $ | 118,785 | $ | 8,371 | $ | 912 | $ | 1,284 | $ | 158,486 | ||||||||||||
| Land Funds Disbursed |
||||||||||||||||||||||||
| One- to four-family residential |
$ | 3,409 | $ | 3,120 | $ | 329 | $ | — | $ | — | $ | 6,858 | ||||||||||||
| Commercial real estate |
— | 3,433 | — | — | — | 3,433 | ||||||||||||||||||
| Total disbursed for land |
$ | 3,409 | $ | 6,553 | $ | 329 | $ | — | $ | — | $ | 10,291 | ||||||||||||
| (1) Includes Clallam and Jefferson counties. |
| (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties. |
| 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 | ||||||||||
During the six months ended June 30, 2022, the Company originated $337.9 million of loans, of which $230.9 million, or 68.3%, were originated in the Puget Sound region, $65.0 million, or 19.2%, in the North Olympic Peninsula, $18.1 million, or 5.4%, in other areas throughout Washington State, and $24.0 million, or 7.1%, in other states. The Company purchased an additional $31.6 million in auto loans and $24.0 million in manufactured home loans during the six months ended June 30, 2022. We will continue to evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.
Our ALLL increased to $15.8 million at June 30, 2022, as a $500,000 loan loss provision was recorded for the six-month period. Net recoveries were $123,000 for the six-month period. The loan loss provision is made to account for growth in the loan portfolio, adjusted for qualitative factors. We continue to monitor the economic impact of the COVID-19 pandemic, which is reflected in the qualitative factor adjustments. The ALLL as a percentage of total loans was 1.1% at both June 30, 2022 and December 31, 2021.
Nonperforming loans decreased $140,000, or 10.1%, to $1.2 million at June 30, 2022, from $1.4 million at December 31, 2021, reflecting improvements in nonperforming auto and other consumer loans of $230,000, home equity loans of $31,000 and commercial real estate loans of $11,000, offset by a deterioration in one- to four-family loans of $132,000. Nonperforming loans to total loans was 0.1% at both June 30, 2022 and December 31, 2021. The ALLL as a percentage of nonperforming loans increased to 1269% at June 30, 2022, from 1095% at December 31, 2021.
At June 30, 2022, there were $1.8 million in restructured loans, of which $1.76 million were performing in accordance with their modified payment terms and are accruing loans. Classified loans increased $1.2 million to $13.8 million at June 30, 2022, from $12.6 million at December 31, 2021, due to an improvement in commercial real estate offset by declines in in two construction relationships.
Loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We stopped originating loans from one of our indirect auto loan product offerings in 2020 in order to reduce credit risk and future charge-off activity. The balance of indirect auto loans decreased to $7.1 million at June 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 June 30, 2022.
Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated:
| Increase (Decrease) |
||||||||||||||||
| June 30, 2022 |
December 31, 2021 |
Amount |
Percent |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Real Estate: |
||||||||||||||||
| One-to-four family |
$ | 309,191 | $ | 294,965 | $ | 14,226 | 4.8 | % | ||||||||
| Multi-family |
221,337 | 172,409 | 48,928 | 28.4 | ||||||||||||
| Commercial real estate |
381,279 | 363,299 | 17,980 | 4.9 | ||||||||||||
| Construction and land |
214,394 | 224,709 | (10,315 | ) | (4.6 | ) | ||||||||||
| Total real estate loans |
1,126,201 | 1,055,382 | 70,819 | 6.7 | ||||||||||||
| Consumer: |
||||||||||||||||
| Home equity |
46,993 | 39,172 | 7,821 | 20.0 | ||||||||||||
| Auto and other consumer |
220,865 | 182,769 | 38,096 | 20.8 | ||||||||||||
| Total consumer loans |
267,858 | 221,941 | 45,917 | 20.7 | ||||||||||||
| Commercial business loans |
71,218 | 79,838 | (8,620 | ) | (10.8 | ) | ||||||||||
| Total loans |
1,465,277 | 1,357,161 | 108,116 | 8.0 | ||||||||||||
| Less: |
||||||||||||||||
| Net deferred loan fees |
3,670 | 4,772 | (1,102 | ) | (23.1 | ) | ||||||||||
| Premium on purchased loans, net |
(15,692 | ) | (12,995 | ) | (2,697 | ) | 20.8 | |||||||||
| Allowance for loan losses |
15,747 | 15,124 | 623 | 4.1 | ||||||||||||
| Loans receivable, net |
$ | 1,461,552 | $ | 1,350,260 | $ | 111,292 | 8.2 | |||||||||
The following table represents nonperforming assets at the dates indicated.
| Increase (Decrease) |
||||||||||||||||
| June 30, 2022 |
December 31, 2021 |
Amount |
Percent |
|||||||||||||
| (In thousands) |
||||||||||||||||
| Nonperforming loans: |
||||||||||||||||
| Real estate loans: |
||||||||||||||||
| One- to four-family |
$ | 626 | $ | 494 | $ | 132 | 26.7 | % | ||||||||
| Commercial real estate |
60 | 71 | (11 | ) | (15.5 | ) | ||||||||||
| Construction and land |
22 | 22 | — | — | ||||||||||||
| Total real estate loans |
708 | 587 | 121 | 20.6 | ||||||||||||
| Consumer loans: |
||||||||||||||||
| Home equity |
251 | 282 | (31 | ) | (11.0 | ) | ||||||||||
| Auto and other consumer |
282 | 512 | (230 | ) | (44.9 | ) | ||||||||||
| Total consumer loans |
533 | 794 | (261 | ) | (32.9 | ) | ||||||||||
| Total nonperforming assets |
$ | 1,241 | $ | 1,381 | $ | (140 | ) | (10.1 | ) | |||||||
| Nonaccrual and 90 days or more past due loans as a percentage of total loans |
0.1 | % | 0.1 | % | 0.0 | % | — | |||||||||
Investment securities increased $8.9 million, or 2.6%, to $353.1 million at June 30, 2022, from $344.2 million at December 31, 2021, due to the purchase of securities, partially offset by sales, normal payments and prepayment activity. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 8.2 years as of June 30, 2022, compared to 5.7 years as of December 31, 2021, and had an estimated average repricing term of 7.6 years as of June 30, 2022, compared to 5.4 years as of December 31, 2021, based on the interest rate environment at those times. We believe prepayment activity is likely to slow in a rising rate environment, extending the projected duration of our securities portfolio.
The investment portfolio was composed of 48.0% in amortizing securities at June 30, 2022, compared to 43.0% at December 31, 2021. The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is impacted by prevailing mortgage interest rates. Management maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets; however, we may continue to purchase investment securities as a source of additional interest income. Securities are sold to provide liquidity, improve long-term portfolio yields, reduce LIBOR risk, and manage duration in the portfolio. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Liabilities. Total liabilities increased to $1.87 billion at June 30, 2022, from $1.73 billion at December 31, 2021, primarily due to an increase in borrowing of $130.0 million.
Deposit balances remained flat at $1.58 billion for both June 30, 2022 and December 31, 2021. During the six-month period ended June 30, 2022, there were increases of $22.3 million in certificates of deposits ("CDs") and $409,000 in savings accounts offset by a $10.0 million decrease in money market accounts and a $12.5 million decrease in demand deposit accounts. A runoff in commercial and public fund account balances of $45.5 million during the six-month period ended June 30, 2022, was offset by increases in consumer account balances of $21.4 million and brokered CDs of $20.0 million. We utilize brokered CDs as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and manage interest rate risk. Brokered CDs totaling $85.7 million were included in the $269.5 million balance of certificates of deposit at June 30, 2022.
FHLB advances increased 152.5% to $202.0 million at June 30, 2022, from $80.0 million at December 31, 2021. We increased short-term advances as strong loan demand was outpaced by a lack of deposit growth.
Equity. Total shareholders' equity decreased $25.3 million to $165.2 million for the six months ended June 30, 2022. The Company recorded year-to-date net income of $5.3 million. The net income increase was offset by a decrease in the after-tax unrealized loss on available-for-sale investments of $28.8 million. All categories of the investment portfolio have been significantly impacted by the rising rate environment.
Comparison of Results of Operations for the Three Months Ended June 30, 2022 and 2021
General. Net income attributable to the Company was $2.5 million for the three months ended June 30, 2022, compared to $3.0 million for the three months ended June 30, 2021. A $3.4 million increase in net interest income after provision for loan loss was offset by a $1.7 million decrease in noninterest income and a $3.3 million increase in noninterest expense.
Net Interest Income. Net interest income increased $3.6 million to $17.2 million for the three months ended June 30, 2022, from $13.7 million for the three months ended June 30, 2021. This increase was mainly the result of an increase in average earning assets of $196.4 million. The yield on average interest-earning assets increased 46 basis points to 4.14% for the three months ended June 30, 2022, compared to 3.68% for the same period in the prior year, due to increases in yields earned on investment securities and the loan portfolio, higher average loan balances improved the earning asset mix.
The average cost of interest-bearing liabilities increased to 0.49% for the three months ended June 30, 2022, compared to 0.46% for the same period last year, due primarily to increases in average balances in advances of $97.2 million and interest-bearing deposits of $90.4 million. Total cost of funds increased 2 basis points to 0.39% for the three months ended June 30, 2022, from 0.37% for the same period in 2021. The net interest margin increased 43 basis points to 3.77% for the three months ended June 30, 2022, from 3.34% for the same period in 2021 due to an improvement in our earning asset mix and higher market rates for both fixed and variable rate assets.
Interest Income. Total interest income increased $3.9 million, or 26.0%, to $19.0 million for the three months ended June 30, 2022, from $15.1 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets and change in the mix of assets. Interest and fees on loans receivable increased $3.2 million, to $16.1 million for the three months ended June 30, 2022, from $12.9 million for the three months ended June 30, 2021, primarily due to an increase in the average balance of net loans receivable of $239.4 million compared to the prior year. Average loan yields were 4.48% and 4.30% for the three months ended June 30, 2022 and 2021, respectively.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
| Three Months Ended June 30, |
||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||
| Average Balance Outstanding |
Yield |
Average Balance Outstanding |
Yield |
Increase (Decrease) in Interest Income |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Loans receivable, net |
$ | 1,439,714 | 4.48 | % | $ | 1,200,273 | 4.30 | % | $ | 3,215 | ||||||||||
| Investment securities |
367,662 | 2.96 | 395,685 | 2.15 | 591 | |||||||||||||||
| FHLB stock |
8,190 | 5.83 | 4,074 | 4.53 | 73 | |||||||||||||||
| Interest-earning deposits in banks |
20,636 | 0.89 | 39,750 | 0.15 | 31 | |||||||||||||||
| Total interest-earning assets |
$ | 1,836,202 | 4.14 | % | $ | 1,639,782 | 3.68 | % | $ | 3,910 | ||||||||||
Interest Expense. Total interest expense increased $316,000, or 22.5%, to $1.7 million for the three months ended June 30, 2022, compared to $1.4 million for the three months ended June 30, 2021, due to an increase in borrowing costs of $345,000 primarily related to additional FHLB borrowings in the current period, offset by a decrease in interest expense on deposits of $29,000 resulting from a 3 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $90.4 million, or 8.0%, to $1.22 billion for the three months ended June 30, 2022, from $1.13 billion for the three months ended June 30, 2021, due to core deposit growth in new and existing market areas as well as purchasing the Bellevue branch in July of 2021.
During the three months ended June 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $29.9 million, along with a decrease in the average rates paid of 5 basis points, compared to the three months ended June 30, 2021. During the same period, the average balances of money market and savings accounts increased $82.9 million and $10.0 million, respectively, with no change in the average rate paid on money market accounts and a decrease of 2 basis points for savings accounts, resulting in comparatively minor changes to interest expense. Interest-bearing demand account average balances increased $27.4 million and the average rate paid increased 3 basis points, resulting in a minor increase to interest expense. The average cost of interest-bearing deposit products decreased to 0.26% for the three months ended June 30, 2022, from 0.29% for the three months ended June 30, 2021, due in large part to the expiration of promotional rates and a shift in deposit mix to higher levels of interest-bearing and noninterest-bearing transaction accounts which carry lower rates than non-transaction accounts. Borrowing costs increased due to increases in both the average balance and cost of FHLB advances, which are more sensitive to Federal Reserve Bank rate increases, compared to the same period in 2021.
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
| Three Months Ended June 30, |
||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||
| Average Balance Outstanding |
Rate |
Average Balance Outstanding |
Rate |
Increase (Decrease) in Interest Expense |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Transaction accounts |
$ | 197,071 | 0.05 | % | $ | 169,681 | 0.02 | % | $ | 15 | ||||||||||
| Money market accounts |
584,162 | 0.22 | 501,237 | 0.22 | 48 | |||||||||||||||
| Savings accounts |
195,345 | 0.05 | 185,336 | 0.07 | (8 | ) | ||||||||||||||
| Certificates of deposit |
247,310 | 0.68 | 277,218 | 0.73 | (84 | ) | ||||||||||||||
| Advances |
149,145 | 1.42 | 51,917 | 1.41 | 344 | |||||||||||||||
| Subordinated debt |
39,294 | 4.03 | 39,276 | 4.02 | 1 | |||||||||||||||
| Total interest-bearing liabilities |
$ | 1,412,327 | 0.49 | % | $ | 1,224,665 | 0.46 | % | $ | 316 | ||||||||||
Provision for Loan Losses. The Company recorded a $500,000 loan loss provision during the second quarter of 2022. This compares to a provision for loan losses of $300,000 for the three months ended June 30, 2021. The provision reflects loan growth and changing economic conditions, offset by stable credit quality metrics.
The following table details activity and information related to the ALLL for the periods shown:
| Three Months Ended June 30, |
||||||||
| 2022 |
2021 |
|||||||
| (Dollars in thousands) |
||||||||
| Provision for loan losses |
$ | 500 | $ | 300 | ||||
| Net recoveries |
120 | 23 | ||||||
| Allowance for loan losses |
15,747 | 14,588 | ||||||
| Allowance for losses as a percentage of total gross loans receivable at period end |
1.1 | % | 1.2 | % | ||||
| Total nonaccrual loans |
1,241 | 1,784 | ||||||
| Allowance for loan losses as a percentage of nonaccrual loans at period end |
1268.9 | % | 817.7 | % | ||||
| Nonaccrual and 90 days or more past due loans as a percentage of total loans |
0.1 | % | 0.1 | % | ||||
| Total loans |
$ | 1,465,277 | $ | 1,256,145 | ||||
Noninterest Income. Noninterest income decreased $1.7 million, or 42.6%, to $2.2 million for the three months ended June 30, 2022, from $3.9 million for the three months ended June 30, 2021. Other income increased due to higher adjustable-rate conversion ("ARC") loan fee income of $193,000 in the current period compared to the same period in 2021 and Quin Ventures subscription fee income of $118,000, offset by a valuation decrease of $31,000 recorded on our limited partnership fintech investments compared to a gain of $82,000 in the same period in 2021. Increases in other income were offset by a decline of $820,000 in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory resulted in a decline in mortgage loan production, as well as a decline of $1.1 million from investment securities sales in the current quarter compared to the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
| Three Months Ended June 30, |
Increase (Decrease) |
|||||||||||||||
| 2022 |
2021 |
Amount |
Percent |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Loan and deposit service fees |
$ | 1,091 | $ | 1,001 | $ | 90 | 9.0 | % | ||||||||
| Sold loan servicing fees |
27 | 13 | 14 | 107.7 | ||||||||||||
| Net gain on sale of loans |
231 | 1,017 | (786 | ) | (77.3 | ) | ||||||||||
| Net (loss) gain on sale of investment securities |
(8 | ) | 1,124 | (1,132 | ) | (100.7 | ) | |||||||||
| Increase in cash surrender value of bank-owned life insurance |
213 | 242 | (29 | ) | (12.0 | ) | ||||||||||
| Other income |
668 | 475 | 193 | 40.6 | ||||||||||||
| Total noninterest income |
$ | 2,222 | $ | 3,872 | $ | (1,650 | ) | (42.6 | )% | |||||||
Noninterest Expense. Noninterest expense increased $3.3 million, or 23.8%, to $17.0 million for the three months ended June 30, 2022, compared to $13.7 million for the three months ended June 30, 2021. Quin Ventures launched the Credit Builder product during the current quarter and, as a result, the compensation, software licensing, professional fees and administrative expenses which were previously capitalized as software development costs are now being expensed. Additional Quin Ventures expenses totaling $1.5 million were recorded in advertising, compensation, depreciation and data processing during the current quarter. Noninterest expenses attributable to Quin Ventures for the three months ended June 30, 2022, totaled $2.1 million. The Bank also recorded increases over the same quarter in 2021 in compensation expense as well as costs associated with expanding our footprint with two new locations, technology enhancements for core and digital banking products, and higher FDIC insurance premiums.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
| Three Months Ended June 30, |
Increase (Decrease) |
|||||||||||||||
| 2022 |
2021 |
Amount |
Percent |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Compensation and benefits |
$ | 9,735 | $ | 8,559 | $ | 1,176 | 13.7 | % | ||||||||
| Data processing |
1,870 | 1,525 | 345 | 22.6 | ||||||||||||
| Occupancy and equipment |
1,432 | 1,004 | 428 | 42.6 | ||||||||||||
| Supplies, postage, and telephone |
408 | 355 | 53 | 14.9 | ||||||||||||
| Regulatory assessments and state taxes |
441 | 301 | 140 | 46.5 | ||||||||||||
| Advertising |
1,370 | 492 | 878 | 178.5 | ||||||||||||
| Professional fees |
629 | 644 | (15 | ) | (2.3 | ) | ||||||||||
| FDIC insurance premium |
211 | 168 | 43 | 25.6 | ||||||||||||
| Other expense |
867 | 659 | 208 | 31.6 | ||||||||||||
| Total noninterest expense |
$ | 16,963 | $ | 13,707 | $ | 3,256 | 23.8 | % | ||||||||
Provision for Income Tax. An income tax expense of $467,000 was recorded for the three months ended June 30, 2022, compared to $663,000 for the three months ended June 30, 2021. There was a year-over-year decrease in income before taxes of $1.5 million. The current period provision includes accruals for both federal and state income taxes resulting in a higher effective tax rate. The provision for state income tax began in the second quarter of 2022 with respect to certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. For additional information, see Note 6 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021
General. Net income attributable to the Company was $5.3 million for the six months ended June 30, 2022, compared to $6.1 million for the six months ended June 30, 2021. A $5.6 million increase in net interest income after provision for loan loss was offset by a $2.0 million decrease in noninterest income and a $6.0 million increase in noninterest expense.
Net Interest Income. Net interest income increased $5.6 million to $32.7 million for the six months ended June 30, 2022, from $27.1 million for the six months ended June 30, 2021. This increase was mainly the result of an increase in average earning assets of $212.3 million. The yield on average interest-earning assets increased 25 basis points to 4.00% for the six months ended June 30, 2022, compared to 3.75% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, as well as an increase in yields earned on investment securities.
The average cost of interest-bearing liabilities increased to 0.46% for the six months ended June 30, 2022, compared to 0.43% for the same period last year, due primarily to an increase in the average balance of borrowings related to additional FHLB advances, partially offset by a decrease in rates on interest-bearing deposits of 7 basis points. Total cost of funds increased 2 basis points to 0.37% for the six months ended June 30, 2022, from 0.35% for the same period in 2021. The net interest margin increased 22 basis points to 3.65% for the six months ended June 30, 2022, from 3.43% for the same period in 2021.
Interest Income. Total interest income increased $6.2 million, or 20.8%, to $35.9 million for the six months ended June 30, 2022, from $29.7 million for the comparable period in 2021, primarily due to an increase in the average balances on interest-earning assets. Interest and fees on loans receivable increased $5.2 million, to $30.6 million for the six months ended June 30, 2022, from $25.4 million for the six months ended June 30, 2021, primarily due to an increase in the average balance of net loans receivable of $218.8 million compared to the prior year, coupled with an increase in average loan yields to 4.46% for the six months ended June 30, 2022, from 4.39% for the same period in 2021.
The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
| Six Months Ended June 30, |
||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||
| Average Balance Outstanding |
Yield |
Average Balance Outstanding |
Yield |
Increase (Decrease) in Interest Income |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Loans receivable, net |
$ | 1,385,248 | 4.46 | % | $ | 1,166,422 | 4.39 | % | $ | 5,210 | ||||||||||
| Investment securities |
363,572 | 2.77 | 382,283 | 2.19 | 832 | |||||||||||||||
| FHLB stock |
6,758 | 5.10 | 3,942 | 4.66 | 80 | |||||||||||||||
| Interest-earning deposits in banks |
51,537 | 0.33 | 42,150 | 0.13 | 56 | |||||||||||||||
| Total interest-earning assets |
$ | 1,807,115 | 4.00 | % | $ | 1,594,797 | 3.75 | % | $ | 6,178 | ||||||||||
Interest Expense. Total interest expense increased $581,000, or 22.8%, to $3.1 million for the six months ended June 30, 2022, compared to $2.6 million for the six months ended June 30, 2021, due to an increase in borrowing costs of $827,000 primarily related to additional FHLB advances, offset by a decrease in interest expense on deposits of $246,000 resulting from a 7 basis point decrease in the average cost of interest-bearing deposits. The average balance of interest-bearing deposits increased $109.7 million, or 9.9%, to $1.22 billion for the six months ended June 30, 2022, from $1.11 billion for the six months ended June 30, 2021, due to core deposit growth in new and existing market areas as well as purchasing the Bellevue branch in July of 2021. Average deposit account balances were comprised of 78% interest-bearing deposits and 22% noninterest-bearing deposits at June 30, 2022.
During the six months ended June 30, 2022, interest expense decreased on certificates of deposit due to a decrease in the average balances of $41.6 million, along with a decrease in the average rates paid of 12 basis points, compared to the six months ended June 30, 2021. During the same period, the average balances of money market and savings accounts increased $104.7 million and $15.5 million, respectively, with an average rate decrease of 3 basis points and 3 basis points, respectively, resulting in comparatively minor changes to interest expense. Interest-bearing demand account average balances increased $31.1 million and the average rate increased 2 basis points, resulting in a minor increase to interest expense. The average cost of interest-bearing deposit products decreased to 0.25% for the six months ended June 30, 2022, from 0.32% for the six months ended June 30, 2021, due in large part to the expiration of promotional rates and a shift in deposit mix to higher levels of transaction accounts. Borrowing costs increased due to increases in both the average balance and cost of FHLB advances compared to the same period in 2021 and the issuance of subordinated debt in March 2021.
The following table details average balances, cost of funds and the change in interest expense for the periods shown:
| Six Months Ended June 30, |
||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||
| Average Balance Outstanding |
Rate |
Average Balance Outstanding |
Rate |
Increase (Decrease) in Interest Expense |
||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||
| Transaction accounts |
$ | 196,615 | 0.04 | % | $ | 165,562 | 0.02 | % | $ | 25 | ||||||||||
| Money market accounts |
585,974 | 0.21 | 481,269 | 0.24 | 60 | |||||||||||||||
| Savings accounts |
195,034 | 0.05 | 179,524 | 0.08 | (22 | ) | ||||||||||||||
| Certificates of deposit |
244,989 | 0.66 | 286,552 | 0.78 | (309 | ) | ||||||||||||||
| Advances |
116,062 | 1.44 | 53,667 | 1.41 | 457 | |||||||||||||||
| Subordinated debt |
39,288 | 4.05 | 21,334 | 3.96 | 370 | |||||||||||||||
| Total interest-bearing liabilities |
$ | 1,377,962 | 0.46 | % | $ | 1,187,908 | 0.43 | % | $ | 581 | ||||||||||
Provision for Loan Losses. The Company recorded a $500,000 loan loss provision during the six months ended June 30, 2022, compared to a provision for loan losses of $800,000 for the six months ended June 30, 2021. The provision reflects loan growth and changing economic conditions, offset by stable credit quality metrics.
The following table details activity and information related to the ALLL for the periods shown:
| Six Months Ended June 30, |
||||||||
| 2022 |
2021 |
|||||||
| (Dollars in thousands) |
||||||||
| Provision for loan losses |
$ | 500 | $ | 800 | ||||
| Net recoveries (charge-offs) |
123 | (59 | ) | |||||
| Allowance for loan losses |
15,747 | 14,588 | ||||||
| Allowance for losses as a percentage of total gross loans receivable at period end |
1.1 | % | 1.2 | % | ||||
| Total nonaccrual loans |
1,241 | 1,784 | ||||||
| Allowance for loan losses as a percentage of nonaccrual loans at period end |
1268.9 | % | 817.7 | % | ||||
| Nonaccrual and 90 days or more past due loans as a percentage of total loans |
0.1 | % | 0.1 | % | ||||
| Total loans |
$ | 1,465,277 | $ | 1,256,145 | ||||
Noninterest Income. Noninterest income decreased $2.0 million, or 29.7%, to $4.6 million for the six months ended June 30, 2022, from $6.6 million for the six months ended June 30, 2021. The year-over-year change in servicing fee income included increases in commercial loan late fees of $132,000, deposit account interchange fee income of $107,000 and business deposit account fee income of $89,000. Servicing fee income on sold loans increased $257,000 due to the change in the fair value of the servicing asset and a $124,000 increase in Main Street Lending Program servicing fee income. Other income increased due to higher ARC loan fee income of $394,000 in the current period compared to the same period in 2021 and Quin Ventures subscription fee income of $118,000, offset by a year-over-year decrease of $389,000 in the recorded value on our limited partnership fintech investments which were negatively impacted by market volatility. Increases in fee income and other income were offset by a decline of $1.9 million in gain on sales of mortgage loans over the same period in 2021 as rising mortgage loan rates and lack of single-family home inventory continue to dampen mortgage loan production, and a decline of $1.0 million in investment securities sales during the current year compared to the same period in 2021.
The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
| Six Months Ended June 30, |
Increase (Decrease) |
|||||||||||||||
| 2022 |
2021 |
Amount |
Percent |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Loan and deposit service fees |
$ | 2,264 | $ | 1,838 | $ | 426 | 23.2 | % | ||||||||
| Sold loan servicing fees |
459 | 43 | 416 | 967.4 | ||||||||||||
| Net gain on sale of loans |
484 | 2,354 | (1,870 | ) | (79.4 | ) | ||||||||||
| Net (loss) gain on sale of investment securities |
118 | 1,124 | (1,006 | ) | (89.5 | ) | ||||||||||
| Increase in cash surrender value of bank-owned life insurance |
465 | 486 | (21 | ) | (4.3 | ) | ||||||||||
| Other income |
835 | 731 | 104 | 14.2 | ||||||||||||
| Total noninterest income |
$ | 4,625 | $ | 6,576 | $ | (1,951 | ) | (29.7 | )% | |||||||
Noninterest Expense. Noninterest expense increased $6.0 million, or 23.2%, to $31.8 million for the six months ended June 30, 2022, compared to $25.8 million for the six months ended June 30, 2021. Quin Ventures launched the Credit Builder product during the current quarter and, as a result, the compensation, software licensing, professional fees and administrative expenses which were previously capitalized as software development costs are now being expensed. Additional Quin Ventures expenses totaling $1.5 million were recorded in advertising, compensation, depreciation and data processing. Noninterest expenses attributable to Quin Ventures for the six months ended June 30, 2022, totaled $2.7 million. The Bank also recorded increases over the same period in 2021 in compensation expense as we added staff to manage the company and build up data and fintech infrastructures, as well as costs associated with expanding our footprint with two new locations. The Bank also invested in technology enhancements for core and digital banking products to support digital initiatives and customer relationship management tools. Regulatory assessments and state taxes were higher due to an increase in taxable income compared to the same period in 2021 combined with an accrual for regulatory exams in the current year.
The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
| Six Months Ended June 30, |
Increase (Decrease) |
|||||||||||||||
| 2022 |
2021 |
Amount |
Percent |
|||||||||||||
| (Dollars in thousands) |
||||||||||||||||
| Compensation and benefits |
$ | 18,538 | $ | 15,854 | $ | 2,684 | 16.9 | % | ||||||||
| Data processing |
3,642 | 2,858 | 784 | 27.4 | ||||||||||||
| Occupancy and equipment |
2,599 | 2,033 | 566 | 27.8 | ||||||||||||
| Supplies, postage, and telephone |
721 | 597 | 124 | 20.8 | ||||||||||||
| Regulatory assessments and state taxes |
802 | 562 | 240 | 42.7 | ||||||||||||
| Advertising |
2,157 | 937 | 1,220 | 130.2 | ||||||||||||
| Professional fees |
1,188 | 1,166 | 22 | 1.9 | ||||||||||||
| FDIC insurance premium |
434 | 316 | 118 | 37.3 | ||||||||||||
| Other expense |
1,713 | 1,478 | 235 | 15.9 | ||||||||||||
| Total noninterest expense |
$ | 31,794 | $ | 25,801 | $ | 5,993 | 23.2 | % | ||||||||
Provision for Income Tax. An income tax expense of $1.0 million was recorded for the six months ended June 30, 2022, compared to $1.1 million for the six months ended June 30, 2021. There was a year-over-year decrease in income before taxes of $2.1 million; however, the expense recorded for the six months ended June 30, 2021, included a tax accrual true-up. The current year provision includes accruals for both federal and state income taxes resulting in a higher effective tax rate. The provision for state income tax began in the second quarter of 2022 with respect to certain states in which we have employees and collateral for loans, thereby creating nexus in those states for income tax purposes. For additional information, see Note 6 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
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 June 30, 2022 and 2021. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield.
| Three Months Ended June 30, |
||||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
| Balance |
Earned/ |
Yield/ |
Balance |
Earned/ |
Yield/ |
|||||||||||||||||||
| Outstanding |
Paid |
Rate |
Outstanding |
Paid |
Rate |
|||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans receivable, net (1) |
$ | 1,439,714 | $ | 16,081 | 4.48 | % | $ | 1,200,273 | $ | 12,866 | 4.30 | % | ||||||||||||
| Investment securities |
367,662 | 2,715 | 2.96 | 395,685 | 2,124 | 2.15 | ||||||||||||||||||
| FHLB dividends |
8,190 | 119 | 5.83 | 4,074 | 46 | 4.53 | ||||||||||||||||||
| Interest-earning deposits in banks |
20,636 | 46 | 0.89 | 39,750 | 15 | 0.15 | ||||||||||||||||||
| Total interest-earning assets (2) |
1,836,202 | 18,961 | 4.14 | 1,639,782 | 15,051 | 3.68 | ||||||||||||||||||
| Noninterest-earning assets |
127,463 | 97,581 | ||||||||||||||||||||||
| Total average assets |
$ | 1,963,665 | $ | 1,737,363 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 197,071 | $ | 25 | 0.05 | $ | 169,681 | $ | 10 | 0.02 | ||||||||||||||
| Money market accounts |
584,162 | 323 | 0.22 | 501,237 | 275 | 0.22 | ||||||||||||||||||
| Savings accounts |
195,345 | 26 | 0.05 | 185,336 | 34 | 0.07 | ||||||||||||||||||
| Certificates of deposit |
247,310 | 422 | 0.68 | 277,218 | 506 | 0.73 | ||||||||||||||||||
| Total interest-bearing deposits |
1,223,888 | 796 | 0.26 | 1,133,472 | 825 | 0.29 | ||||||||||||||||||
| Advances |
149,145 | 527 | 1.42 | 51,917 | 183 | 1.41 | ||||||||||||||||||
| Subordinated debt |
39,294 | 395 | 4.03 | 39,276 | 394 | 4.02 | ||||||||||||||||||
| Total interest-bearing liabilities |
1,412,327 | 1,718 | 0.49 | 1,224,665 | 1,402 | 0.46 | ||||||||||||||||||
| Noninterest-bearing deposits |
344,827 | 304,483 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
32,927 | 22,062 | ||||||||||||||||||||||
| Total average liabilities |
1,790,081 | 1,551,210 | ||||||||||||||||||||||
| Average equity |
173,584 | 186,153 | ||||||||||||||||||||||
| Total average liabilities and equity |
$ | 1,963,665 | $ | 1,737,363 | ||||||||||||||||||||
| Net interest income |
$ | 17,243 | $ | 13,649 | ||||||||||||||||||||
| Net interest rate spread |
3.65 | 3.22 | ||||||||||||||||||||||
| Net earning assets |
$ | 423,875 | $ | 415,117 | ||||||||||||||||||||
| Net interest margin (3) |
3.77 | 3.34 | ||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
130.0 | % | 133.9 | % | ||||||||||||||||||||
| (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets. |
|||||||||||||||||||||
| Six Months Ended June 30, |
||||||||||||||||||||||||
| 2022 |
2021 |
|||||||||||||||||||||||
| Average |
Interest |
Average |
Interest |
|||||||||||||||||||||
| Balance |
Earned/ |
Yield/ |
Balance |
Earned/ |
Yield/ |
|||||||||||||||||||
| Outstanding |
Paid |
Rate |
Outstanding |
Paid |
Rate |
|||||||||||||||||||
| (Dollars in thousands) |
||||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans receivable, net (1) |
$ | 1,385,248 | $ | 30,617 | 4.46 | % | $ | 1,166,422 | $ | 25,407 | 4.39 | % | ||||||||||||
| Total investment securities |
363,572 | 4,990 | 2.77 | 382,283 | 4,158 | 2.19 | ||||||||||||||||||
| FHLB dividends |
6,758 | 171 | 5.10 | 3,942 | 91 | 4.66 | ||||||||||||||||||
| Interest-earning deposits in banks |
51,537 | 84 | 0.33 | 42,150 | 28 | 0.13 | ||||||||||||||||||
| Total interest-earning assets (2) |
1,807,115 | 35,862 | 4.00 | 1,594,797 | 29,684 | 3.75 | ||||||||||||||||||
| Noninterest-earning assets |
124,753 | 97,040 | ||||||||||||||||||||||
| Total average assets |
$ | 1,931,868 | $ | 1,691,837 | ||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 196,615 | $ | 42 | 0.04 | $ | 165,562 | $ | 17 | 0.02 | ||||||||||||||
| Money market accounts |
585,974 | 621 | 0.21 | 481,269 | 561 | 0.24 | ||||||||||||||||||
| Savings accounts |
195,034 | 52 | 0.05 | 179,524 | 74 | 0.08 | ||||||||||||||||||
| Certificates of deposit |
244,989 | 798 | 0.66 | 286,552 | 1,107 | 0.78 | ||||||||||||||||||
| Total interest-bearing deposits |
1,222,612 | 1,513 | 0.25 | 1,112,907 | 1,759 | 0.32 | ||||||||||||||||||
| Advances |
116,062 | 831 | 1.44 | 53,667 | 374 | 1.41 | ||||||||||||||||||
| Subordinated debt |
39,288 | 789 | 4.05 | 21,334 | 419 | 3.96 | ||||||||||||||||||
| Total interest-bearing liabilities |
1,377,962 | 3,133 | 0.46 | 1,187,908 | 2,552 | 0.43 | ||||||||||||||||||
| Noninterest-bearing deposits |
336,611 | 293,902 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
35,820 | 23,865 | ||||||||||||||||||||||
| Total average liabilities |
1,750,393 | 1,505,675 | ||||||||||||||||||||||
| Average equity |
181,475 | 186,162 | ||||||||||||||||||||||
| Total average liabilities and equity |
$ | 1,931,868 | $ | 1,691,837 | ||||||||||||||||||||
| Net interest income |
$ | 32,729 | $ | 27,132 | ||||||||||||||||||||
| Net interest rate spread |
3.54 | 3.32 | ||||||||||||||||||||||
| Net earning assets |
$ | 429,153 | $ | 406,889 | ||||||||||||||||||||
| Net interest margin (3) |
3.65 | 3.43 | ||||||||||||||||||||||
| Average interest-earning assets to average interest-bearing liabilities |
131.1 | % | 134.3 | % | ||||||||||||||||||||
| (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets. |
|||||||||||||||||||||
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
| Three Months Ended |
Six Months Ended |
|||||||||||||||||||||||
| June 30, 2022 vs. 2021 |
June 30, 2022 vs. 2021 |
|||||||||||||||||||||||
| Increase (Decrease) Due to |
Increase (Decrease) Due to |
|||||||||||||||||||||||
| Volume |
Rate |
Total Increase (Decrease) |
Volume |
Rate |
Total Increase (Decrease) |
|||||||||||||||||||
| (In thousands) |
(In thousands) |
|||||||||||||||||||||||
| Interest-earning assets: |
||||||||||||||||||||||||
| Loans receivable, net |
$ | 2,568 | $ | 647 | $ | 3,215 | $ | 4,746 | $ | 464 | $ | 5,210 | ||||||||||||
| Investments |
(150 | ) | 741 | 591 | (203 | ) | 1,035 | 832 | ||||||||||||||||
| FHLB stock |
46 | 27 | 73 | 65 | 15 | 80 | ||||||||||||||||||
| Other (1) |
(7 | ) | 38 | 31 | 6 | 50 | 56 | |||||||||||||||||
| Total interest-earning assets |
$ | 2,457 | $ | 1,453 | $ | 3,910 | $ | 4,614 | $ | 1,564 | $ | 6,178 | ||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 2 | $ | 13 | $ | 15 | $ | 3 | $ | 22 | $ | 25 | ||||||||||||
| Money market accounts |
46 | 2 | 48 | 122 | (62 | ) | 60 | |||||||||||||||||
| Savings accounts |
2 | (10 | ) | (8 | ) | 6 | (28 | ) | (22 | ) | ||||||||||||||
| Certificates of deposit |
(55 | ) | (29 | ) | (84 | ) | (161 | ) | (148 | ) | (309 | ) | ||||||||||||
| Advances |
343 | 1 | 344 | 435 | 22 | 457 | ||||||||||||||||||
| Subordinated debt |
— | 1 | 1 | 353 | 17 | 370 | ||||||||||||||||||
| Total interest-bearing liabilities |
$ | 338 | $ | (22 | ) | $ | 316 | $ | 758 | $ | (177 | ) | $ | 581 | ||||||||||
| Net change in interest income |
$ | 2,119 | $ | 1,475 | $ | 3,594 | $ | 3,856 | $ | 1,741 | $ | 5,597 | ||||||||||||
| (1) Includes interest-earning deposits (cash) at other financial institutions. |
|||||||||
Off-Balance Sheet Activities
In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the six months ended June 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.
Contractual Obligations
At June 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 |
$ | 169,555 | $ | 79,154 | $ | 20,814 | $ | — | $ | 269,523 | ||||||||||
| FHLB advances |
132,000 | 35,000 | 25,000 | 10,000 | 202,000 | |||||||||||||||
| Line of credit |
8,000 | — | — | — | 8,000 | |||||||||||||||
| Subordinated debt obligation |
— | — | — | 39,319 | 39,319 | |||||||||||||||
| Operating leases |
808 | 1,710 | 1,779 | 4,376 | 8,673 | |||||||||||||||
| Borrower taxes and insurance |
934 | — | — | — | 934 | |||||||||||||||
| Deferred compensation |
104 | 326 | 73 | 496 | 999 | |||||||||||||||
| Total contractual obligations |
$ | 311,401 | $ | 116,190 | $ | 47,666 | $ | 54,191 | $ | 529,448 | ||||||||||
Commitments and Off-Balance Sheet Arrangements
The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 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 |
$ | 1,334 | $ | — | $ | — | $ | — | $ | 1,334 | ||||||||||
| Variable-rate |
1,705 | — | — | — | 1,705 | |||||||||||||||
| Unfunded commitments under lines of credit or existing loans |
82,930 | 34,400 | 10,469 | 122,512 | 250,311 | |||||||||||||||
| Standby letters of credit |
613 | — | — | 200 | 813 | |||||||||||||||
| Total commitments |
$ | 86,582 | $ | 34,400 | $ | 10,469 | $ | 122,712 | $ | 254,163 | ||||||||||
Liquidity Management
Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.
Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.
Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2022, cash and cash equivalents totaling $87.8 million and unpledged securities classified as available-for-sale with a market value of $252.0 million provided additional sources of liquidity. The Bank pledged collateral of $459.2 million to support borrowings from the FHLB and has an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $9.3 million were pledged as of June 30, 2022. First Northwest has a borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.
At June 30, 2022, we had $3.0 million in loan commitments outstanding and $251.1 million in undisbursed loans and standby letters of credit, including $158.5 million in undisbursed construction loan commitments.
Certificates of deposit due within one year as of June 30, 2022, totaled $169.6 million, or 62.9% of certificates of deposit with a weighted-average rate of 0.70%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates were in decline. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.
The Company is a separate legal entity from the Bank and provides for its own liquidity. At June 30, 2022, the Company, on an unconsolidated basis, had liquid assets of $1.5 million. In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments to limited partnership investments. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. At June 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 June 30, 2022, shareholders' equity totaled $165.2 million, or 8.1% of total assets. Our book value per share of common stock was $16.60 at June 30, 2022, compared to $19.10 at December 31, 2021.
At June 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 June 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) |
$ | 205,397 | 10.4 | % | $ | 78,894 | 4.0 | % | $ | 98,617 | 5.0 | % | ||||||||||||
| Common equity tier I (to risk-weighted assets) |
$ | 205,397 | 12.7 | 72,985 | 4.5 | 105,423 | 6.5 | |||||||||||||||||
| Tier I risk-based capital (to risk-weighted assets) |
$ | 205,397 | 12.7 | 97,313 | 6.0 | 129,751 | 8.0 | |||||||||||||||||
| Total risk-based capital (to risk-weighted assets) |
$ | 221,464 | 13.7 | 129,751 | 8.0 | 162,189 | 10.0 | |||||||||||||||||
In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles 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.
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 June 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 June 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.
PART II - OTHER INFORMATION
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.
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) |
Not applicable. |
| (b) |
Not applicable. |
| (c) |
The following table summarizes common stock repurchases during the three months ended June 30, 2022: |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
| Exhibit No. |
Exhibit Description |
Filed Herewith |
Form |
Original Exhibit No. |
Filing Date |
| 3.1 | Amended and Restated Articles of Incorporation of First Northwest Bancorp, as amended June 3, 2022 | X | |||
| 3.2 | Bylaws of First Northwest Bancorp, as amended effective June 3, 2022 | X | |||
| 4.1 | Description of Common Stock | X | |||
| 10.1 | Loan Agreement, dated as of May 20, 2022, by and between First Northwest Bancorp and NexBank | 8-K | 10.1 | 5/27/2022 | |
| 10.2 | Security Agreement, dated as of May 20, 2022, by and between First Northwest Bancorp and NexBank | 8-K | 10.2 | 5/27/2022 | |
| 10.3 | Revolving Credit Note dated May 20, 2022, of First Northwest Bancorp | 8-K | 10.3 | 5/27/2022 | |
| 10.4* | Severance and Release Agreement with Kelly A. Liske, effective June 30, 2022 | 8-K | 10.1 | 7/19/2022 | |
| 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 June 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) | ||||
| * | Denotes a management contract or compensatory plan or arrangement. | ||||
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: August 12, 2022 |
/s/ Matthew P. Deines |
|
|
|
|
|
Matthew P. Deines |
|
|
President, Chief Executive Officer and Director |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
| Date: August 12, 2022 |
/s/ Geraldine L. Bullard |
|
|
|
|
|
Geraldine L. Bullard |
|
|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
Exhibit 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FIRST NORTHWEST BANCORP
ARTICLE I
Name
The name of the corporation is First Northwest Bancorp (the “Corporation”).
ARTICLE II
Duration
The duration of the Corporation is perpetual.
ARTICLE III
Purpose and Powers
The purpose for which the Corporation is organized is to act as a bank holding company and to transact all other lawful business for which corporations may be incorporated under the Washington Business Corporation Act (the “WBCA”). The Corporation shall have all and may exercise all the express, implied and incidental powers of a corporation organized under the WBCA.
ARTICLE IV
Capital Stock
The total number of shares of all classes of capital stock which the Corporation has authority to issue is 80,000,000, of which 75,000,000 shall be common stock of par value of $0.01 per share, and of which 5,000,000 shall be serial preferred stock of par value of $0.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of the shareholders, except to the extent that such approval is required by governing law, rule or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the stated par value per share. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. Upon authorization by its Board of Directors, the Corporation may issue its own shares in exchange for or in conversion of its outstanding shares or distribute its own shares, pro rata to its shareholders or the shareholders of one or more classes or series, to effectuate stock dividends or splits, and any such transaction shall not require consideration.
Except as expressly provided by applicable law, these Amended and Restated Articles of Incorporation or by any resolution of the Board of Directors designating and establishing the terms of any series of preferred stock, no holders of any class or series of capital stock shall have any right to vote as a separate class or series or to vote more than one vote per share. The shareholders of the Corporation shall not be entitled to cumulative voting in any election of directors.
A description of the different classes and series (if any) of the Corporation’s capital stock and a statement of the designations, and the relative rights, preferences, limitations and voting powers of the shares of each class and series (if any) of capital stock are as follows:
A. Common Stock. On matters on which holders of common stock are entitled to vote, each holder of shares of common stock shall be entitled to one vote for each share held by such holder.
Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the Board of Directors.
In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Corporation available for distribution remaining after: (i) payment or provision for payment of the Corporation’s debts and liabilities; (ii) distributions or provision for distributions in settlement of the liquidation account established for certain depositors of First Fed Bank (“First Fed”) in connection with First Fed’s mutual-to-stock conversion; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution or winding up of the Corporation. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.
B. Serial Preferred Stock. The Board of Directors of the Corporation is authorized by resolution or resolutions from time to time adopted to provide for the issuance of preferred stock in series and to fix and state the voting powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of any of the following:
(a) The distinctive serial designation and the number of shares constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares or such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and, if so convertible or exchangeable, the conversion price(s), or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;
(h) The price or other consideration for which the shares of such series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.
Each share of each series of preferred stock shall have the same relative rights as and be identical in all respects with all other shares of the same series.
C. 1. Notwithstanding any other provision of these Articles of Incorporation, in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of shareholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of common stock (“Limit”), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit, unless a majority of the Whole Board (as hereinafter defined) shall have by resolution granted in advance such entitlement or permission. The number of votes which may be cast by any record owner by virtue of the provisions hereof in respect of common stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all common stock owned by such person would be entitled to cast after giving effect to the provisions hereof, multiplied by a fraction, the numerator of which is the number of shares of such class or series which are both beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of common stock beneficially owned by such person owning shares in excess of the Limit.
2. The following definitions shall apply to this Section C of this Article IV.
(a) “Affiliate” shall have the meaning ascribed to it in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of these Articles of Incorporation.
(b) “Beneficial ownership” shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or provision thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of these Articles of Incorporation; provided, however, that a person shall, in any event, also be deemed the “beneficial owner” of any common stock:
(i) which such person or any of its Affiliates beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction which is described in any one or more of subparagraphs A(1)(a) through (h) of Article IX hereof or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise), or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of shareholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such Affiliate is otherwise deemed the beneficial owner); or
(iii) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; and provided further, however, that (i) no director or officer of the Corporation (or any Affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any common stock beneficially owned by any other such director or officer (or any Affiliate thereof), and (ii) neither any employee stock ownership or similar plan of the Corporation or any subsidiary of the Corporation, nor any trustee with respect thereto or any Affiliate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes hereof, to beneficially own any common stock held under any such plan. For purposes of computing the percentage beneficial ownership of common stock of a person, the outstanding common stock shall include shares deemed owned by such person through application of this subsection but shall not include any other common stock which may be issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding common stock shall include only common stock then outstanding and shall not include any common stock which may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.
(c) A “person” shall mean any individual, firm, corporation or other entity.
(d) “Whole Board” shall mean the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors.
3. The Board of Directors shall have the power to construe and apply the provisions of this Section C and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (i) the number of shares of common stock beneficially owned by any person, (ii) whether a person is an Affiliate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section C to the given facts or (v) any other matter relating to the applicability or effect of this Section C.
4. The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own common stock in excess of the Limit (or holds of record common stock beneficially owned by any person in excess of the Limit) supply the Corporation with complete information as to (i) the record owner(s) of all shares beneficially owned by such person who is reasonably believed to own shares in excess of the Limit and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be required of such person.
5. Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Section C) entitled to be cast by the holders of shares of capital stock of the Corporation shall constitute a quorum at all meetings of the shareholders, and every reference in these Articles of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for shareholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock.
6. Any constructions, applications or determinations made by the Board of Directors pursuant to this Section C in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the Corporation and its shareholders.
7. In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section C shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its shareholders that each such remaining provision (or portion thereof) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, including shareholders owning an amount of stock over the Limit, notwithstanding any such finding.
ARTICLE V
Preemptive Rights
Holders of the capital stock of the Corporation shall not be entitled to preemptive rights with respect to any shares of the Corporation which may be issued.
ARTICLE VI
Directors
A. Number. The Corporation shall be under the direction of a Board of Directors. The number of directors shall be as provided in the Corporation’s Bylaws, but in no event shall be fewer than five nor more than 15.
B. Election and Term. At each annual meeting of shareholders, the shareholders shall elect the directors to hold office until the next annual meeting of shareholders and until their respective successors are elected and qualified.
C. Vacancies. Any vacancy occurring in the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors, whether or not there remains a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for a term which expires at the next shareholders’ meeting at which directors are elected. A directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term continuing only until the next election of directors by the shareholders.
ARTICLE VII
Removal of Directors
Notwithstanding any other provisions of these Amended and Restated Articles of Incorporation or the Corporation’s Bylaws (and notwithstanding the fact that some lesser percentage may be specified by law, these Amended and Restated Articles of Incorporation or the Corporation’s Bylaws), any director or the entire Board of Directors may be removed only for cause and only by the affirmative vote of the holders of at least 80% of the total votes eligible to be cast at a special meeting of shareholders called for the purpose of removing the director. For purpose of this Article VII, “cause” shall mean fraudulent or dishonest acts, a gross abuse of authority in discharge of duties to the Corporation, or acts that are detrimental or hostile to the interests of the Corporation.
ARTICLE VIII
Notice for Shareholder Nominations and Proposals
A. Nominations for the election of directors and proposals for any new business to be taken up at any annual meeting of shareholders may be made by the Board of Directors of the Corporation or by any shareholder of the Corporation entitled to vote generally in the election of directors. In order for a shareholder of the Corporation to make any such nominations and/or proposals, said shareholder shall give notice thereof in writing, that is received by the Secretary of the Corporation not less than 90 days or more than 120 days prior to any such annual meeting; provided, however, that subject to the next succeeding sentence of this Section A, if the meeting is convened more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year’s annual meeting, or if no annual meeting was held in the preceding year, notice by the shareholder must be received not later than the close of business on the later of (i) the 90th day before such annual meeting and (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall an adjournment or postponement of an annual meeting for which notice has been given commence a new time period for the giving of notice by a shareholder under this Section A. The term “public announcement” shall mean disclosure (i) in a press release reported by a national news service or (ii) in a document publicly filed or furnished by the Corporation with the U.S. Securities and Exchange Commission. Each such notice given by a shareholder with respect to nominations for election of directors shall set forth: (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation that are beneficially owned by each such nominee, (iv) such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee pursuant to Regulation 14A of the General Rules and Regulations of the Securities Exchange Act of 1934, including, without limitation, such person’s written consent to being named in the proxy statement as a nominee and to serving as a director, if elected, (v) as to the shareholder giving such notice (a) the shareholder’s name and address as they appear on the Corporation’s books and (b) the class and number of shares of the Corporation that are beneficially owned by such shareholder, (vi) any potential transaction with the Corporation under consideration by the shareholder giving notice or the shareholder’s nominee, and (vii) any other information that would be required to be disclosed in a proxy statement or other filings in connection with solicitations of proxies for, as applicable, the proposal and/or the shareholder’s nominee(s) for election as director(s) in a contested election required to be filed pursuant to Section 14 of the Securities Exchange Act of 1934. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation.
B. Each such notice given by a shareholder to the Secretary with respect to business proposals to bring before a meeting shall set forth in writing as to each matter: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) the class and number of shares of the Corporation that are beneficially owned by the shareholder; and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Amended and Restated Articles of Incorporation to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article.
C. The Chair of the annual meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the foregoing procedure, and, if the Chair should so determine, the defective nomination or proposal shall be disregarded.
D. At any special meeting of shareholders, only business within the purpose or purposes described in the Corporation’s notice of the meeting may be conducted at the meeting.
ARTICLE IX
Approval of Certain Business Combinations
The shareholder vote required to approve Business Combinations (as hereinafter defined) shall be as set forth in this section.
A. 1. Except as otherwise expressly provided in this Article IX, the affirmative vote of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote thereon separately, the affirmative vote of the holders of at least 80% of the outstanding shares of each such class or series), and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person (as hereinafter defined), shall be required to authorize any of the following:
(a) any merger or consolidation of the Corporation with or into a Related Person;
(b) any sale, lease, exchange, transfer or other disposition, including without limitation, a mortgage, or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets of the Corporation (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person with or into the Corporation or a subsidiary of the Corporation;
(d) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a subsidiary of the Corporation;
(e) the issuance of any securities of the Corporation or a subsidiary of the Corporation to a Related Person in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value exceeding 25% of the total consolidated assets of the Corporation except pursuant to an employee benefit plan of the Corporation or any subsidiary of the Corporation;
(f) the acquisition by the Corporation or a subsidiary of the Corporation of any securities of a Related Person;
(g) any reclassification of the common stock of the Corporation, or any recapitalization involving the common stock of the Corporation which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of the Corporation’s common stock, or of outstanding securities convertible into the Corporation’s common stock, directly or indirectly held by any Related Person (a “Disproportionate Transaction”); provided, however, that no such transaction shall be deemed a Disproportionate Transaction if the increase in the proportionate ownership of the Related Person as a result of such transaction is no greater than the increase experienced by the other security holders generally;
(h) any liquidation or dissolution of the Corporation proposed by or on behalf of any Related Person; and
(i) any agreement, contract or other arrangement providing for any of the transactions described in this Article IX.
2. Such affirmative vote shall be required notwithstanding any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange which might otherwise permit a lesser vote or no vote.
3. The term “Business Combination” as used in this Article IX shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (i) above.
B. The provisions of Part A of this Article IX shall not be applicable to any particular Business Combination, which shall require only such affirmative vote as is required by any other provision of these Articles of Incorporation, any provision of law, or any agreement with any regulatory agency or national securities exchange, if such particular Business Combination shall have been approved by two-thirds of the Continuing Directors (as hereinafter defined); provided, however, that such approval shall only be effective if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) is present.
C. For the purposes of this Article IX the following definitions apply:
1. The term “Related Person” shall mean and include (a) any individual, corporation, partnership or other person or entity which together with its “affiliates” (as that term is defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934), that “beneficially owns” (as that term is defined in Rule 13d-3 of the General Rules and Regulations under the Securities Act of 1934) in the aggregate 10% or more of the outstanding shares of the common stock of the Corporation (excluding tax-qualified benefit plans of the Corporation); and (b) any “affiliate” (as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of any such individual, corporation, partnership or other person or entity. Without limitation, any shares of the common stock of the Corporation which any Related Person has the right to acquire pursuant to any agreement, or upon exercise or conversion rights, warrants or options, or otherwise, shall be deemed “beneficially owned” by such Related Person.
2. The term “Substantial Part” shall mean more than 25% of the total assets of the Corporation or of a subsidiary, as applicable (in the case of a transaction under subparagraph A.1(b) of this Article IX), or of a Related Person (in the case of a transaction under subparagraph A.1(d) of this Article IX) as of the end of its most recent fiscal year prior to when the determination is made.
3. The term “Continuing Director” shall mean any member of the Board of Directors of the Corporation who is unaffiliated with the Related Person and was a member of the Board of Directors prior to the time the Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with the Related Person and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors.
4. The term “Continuing Director Quorum” shall mean seventy-five percent (75%) of the Continuing Directors capable of exercising the powers conferred on them.
D. Nothing contained in this Article IX shall be construed to relieve a Related Person from any fiduciary obligation imposed by law. In addition, nothing contained in this Article IX shall prevent any shareholders of the Corporation from objecting to any Business Combination and from demanding any appraisal rights which may be available to such shareholder.
E. No amendment, alteration, change or repeal of any provision of the Article IX may be effected unless it is approved at a meeting of the Corporation’s shareholders called for that purpose. Notwithstanding any other provision of these Articles of Incorporation, the affirmative vote of the holders of not less than 80% of the outstanding shares entitled to vote thereon shall be required to amend, alter, change, or repeal, directly or indirectly, any provision of this Article IX; provided, however, that the preceding provisions of this Part E shall not be applicable to any amendment to this Article IX if such amendment receives this affirmative vote required by law and any other provisions of these Articles of Incorporation and if such amendment has been approved by a majority of the Continuing Directors.
ARTICLE X
Evaluation of Business Combinations and Other Transactions
In connection with the exercise of its judgment in determining what is in the best interests of the Corporation and of the shareholders, when evaluating (and making any recommendation to the Corporation’s shareholders with regard to) a Business Combination (as defined in Article IX), a tender or exchange offer or any other actual or proposed transaction that would or may involve a change in control of the Corporation (whether by purchases of shares of stock or any other securities of the Corporation in the open market, or otherwise, tender offer, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of the assets of the Corporation, proxy solicitation or otherwise), the Board of Directors of the Corporation, in addition to considering the adequacy of the amount to be paid in connection with any such transaction, may consider all of the following factors and any other factors which it deems relevant: (i) the social and economic effects of the transaction on the Corporation and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which the Corporation and its subsidiaries operate or are located; (ii) the business and financial condition and earnings prospects of the acquiring person or entity, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition and other likely financial obligations of the acquiring person or entity and the possible effect of such conditions upon the Corporation and its subsidiaries and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; and (iii) the competence, experience, and integrity of the acquiring person or entity and its or their management.
ARTICLE XI
Limitation of Directors’ Liability
To the fullest extent permitted by the WBCA, a director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except for liability of the director for acts or omissions that involve: (i) intentional misconduct by the director; (ii) a knowing violation of law by the director; (iii) conduct violating RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation); or (iv) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If the WBCA is amended in the future to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the full extent permitted by the WBCA, as so amended, without any requirement or further action by shareholders. An amendment or repeal of this Article XI shall not adversely affect any right or protection of a director of the Corporation existing at the time of such amendment or repeal.
ARTICLE XII
Indemnification
The Corporation shall indemnify and advance expenses to its directors, officers, agents and employees as follows:
A. Directors and Officers. In all circumstances and to the full extent permitted by the WBCA, the Corporation shall indemnify any person who is or was a director or officer of the Corporation and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (including an action by or in the right of the Corporation), by reason of the fact that said person is or was a director or officer of the Corporation, against expenses, judgments, fines, and amounts paid in settlement and incurred in connection with such action, suit or proceeding. However, such indemnity shall not apply to: (a) acts or omissions of the director or officer in connection with a proceeding by or in the right of the Corporation in which the director or officer is finally adjudged liable to the Corporation; (b) conduct of the director or officer finally adjudged to violate RCW Section 23B.08.310 (relating to unlawful distributions by the Corporation) or (c) any transaction with respect to which it was finally adjudged that such director or officer personally received a benefit in money, property or services to which the director or officer was not legally entitled. Any indemnification payments made pursuant to this Section A of this Article XII are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)) and the regulations promulgated thereunder by the Federal Deposit Insurance Corporation (12 C.F.R. Part 359). The Corporation shall advance expenses incurred in a proceeding for such persons pursuant to the terms set forth in a separate directors’ resolution or contract.
B. Implementation. The Board of Directors may take such action as is necessary to carry out these indemnification and expense advancement provisions. It is expressly empowered to adopt, approve and amend from time to time such bylaws, resolutions, contracts or further indemnification and expense advancement arrangements as may be permitted by law, implementing these provisions. Such bylaws, resolutions, contracts or further arrangements shall include, but not be limited to, implementing the manner in which determinations as to any indemnity or advancement of expenses shall be made.
C. Survival of Indemnification Rights. No amendment or repeal of this Article XII shall apply to or have any effect on any right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal.
D. Employees and Agents. The Corporation may, by action of the Board of Directors, provide indemnification and pay expenses in advance of the final disposition of a proceeding to employees and agents of the Corporation with the same scope and effect as the provisions of this Article XII with respect to the indemnification and advancement of expenses of directors and officers of the Corporation or pursuant to rights granted under, or provided by, the WBCA or otherwise.
E. Service for Other Entities. The indemnification and advancement of expenses provided under this Article XII shall apply to directors, officers, employees or agents of the Corporation for both (a) service in such capacities for the Corporation and (b) service at the Corporation’s request as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. A person is considered to be serving an employee benefit plan at the Corporation’s request if such person’s duties to the Corporation also impose duties on, or otherwise involve services by, the director to the plan or to participants in or beneficiaries of the plan.
F. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liability asserted against said person and incurred in such capacity or arising out of the individual’s status as such, whether or not the Corporation would have had the power to indemnify said person against such liability under the provisions of this bylaw and the WBCA.
G. Other Rights. The indemnification provided by this section shall not be deemed exclusive of any other right to which those indemnified may be entitled under any other bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such an office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee or agent and shall inure to the benefit of the heirs executors, and administrators of such person.
ARTICLE XIII
Special Meeting of Shareholders
Special meetings of the shareholders for any purpose or purposes may be called only by the Chief Executive Officer or by the Board of Directors. The right of shareholders of the Corporation to call special meetings is specifically denied.
ARTICLE XIV
Repurchase of Shares
The Corporation may from time to time, pursuant to authorization by the Board of Directors of the Corporation and without action by the shareholders, purchase or otherwise acquire shares of any class, bonds, debentures, notes, scrip, warrants, obligations, evidences of indebtedness or other securities of the Corporation in such manner, upon such terms, and in such amounts as the Board of Directors shall determine; subject, however, to such limitations or restrictions, if any, as are contained in the express terms of any class of shares of the Corporation outstanding at the time of the purchase or acquisition in question or as are imposed by law.
ARTICLE XV
Amendment of Bylaws
In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation by a majority vote of the directors, based on the number of directors fixed in accordance with the Bylaws, including any vacancies. Notwithstanding any other provision of these Amended and Restated Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding that some lesser percentage may be specified by law), the Bylaws shall not be adopted, repealed, altered, amended or rescinded by the shareholders of the Corporation except by the vote of the holders of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), or, as set forth above, by the Board of Directors.
ARTICLE XVI
Amendment of Articles of Incorporation
The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in these Amended and Restated Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in Articles II, III, IV (other than a change to the number of authorized shares of the Corporation’s capital stock), V, VI, VII, VIII, IX (except as provided in Part E. of Article IX), X, XI, XII, XIII, XIV, XV, XVI, XVII, XVIII and this Article XVI of these Articles of Incorporation may not be repealed, altered, amended or rescinded in any respect unless the same is approved by the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by each separate voting group entitled to vote thereon, cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting).
ARTICLE XVII
Shareholder Vote Required on Certain Matters
If shareholder approval of any of the following matters is required under the WBCA, such matter may be approved by a majority of the votes in each voting group (except as otherwise provided in Article XVI of these Amended and Restated Articles of Incorporation) entitled to be cast on such matter: (a) amendment to these Amended and Restated Articles of Incorporation, (b) a plan of merger or share exchange of the Corporation with any other corporation; (c) the sale, lease, exchange, or other disposition, whether in one transaction or a series of transactions, by the Corporation of all or substantially all of the Corporation’s property other than in the usual and regular course of business; or (d) the dissolution of the Corporation. This Article is intended to reduce the voting requirements otherwise prescribed by the WBCA with respect to the foregoing matters.
ARTICLE XVIII
Limitation of Separate Class Voting to Extent Permitted by Law
Except to the extent expressly provided in the preferences, limitations, voting powers, and relative rights set forth in these Amended and Restated Articles of Incorporation or any amendment thereto with respect to a particular class or series of shares, the holders of each outstanding class or series of shares of the Corporation are not entitled to vote as a separate voting group: (a) on any amendment to these Amended and Restated Articles of Incorporation with respect to which such class or series would otherwise be entitled under RCW 23B.10.040(1)(a), (e), or (f) to vote as a separate voting group, (b) on any plan of merger or share exchange with respect to which such class or series would otherwise be entitled under RCW 23B.11.035 to vote as a separate voting group, or (c) on any transaction pursuant to RCW 23B.12.020.
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IN WITNESS WHEREOF, the Corporation has caused these Amended and Restated Articles of Incorporation to be executed this 25TH day of May, 2022.
| /s/ Matthew P. Deines |
|
Matthew P. Deines |
|
President and Chief Executive Officer |
Exhibit 3.2
BYLAWS
OF
FIRST NORTHWEST BANCORP
ARTICLE I
Principal Office
SECTION 1. Principal Office. The principal office and place of business of the corporation in the state of Washington shall be located in the City of Port Angeles, Clallam County.
SECTION 2. Other Offices. The corporation may have such other offices as the Board of Directors (the "Board") may designate or the business of the corporation may require from time to time.
ARTICLE II
Shareholders
SECTION 1. Place of Meetings. All annual and special meetings of the shareholders shall be held at the principal office of the corporation or at such other place within or outside the State of Washington as the Board may determine.
SECTION 2. Annual Meeting. A meeting of the shareholders of the corporation for the election of Directors and for the transaction of any other business of the corporation shall be held at a date and time as the Board may determine.
SECTION 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes shall be called in accordance with the procedures set forth in the Articles of Incorporation. Only business within the purpose or purposes described in the meeting notice may be conducted at a special meeting of the shareholders.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with rules prescribed by the presiding officer of the meeting, unless otherwise prescribed by these Bylaws. The Board shall designate, when present, either the Chairperson of the Board or the President to preside at such meetings.
SECTION 5. Notice of Meeting. Notice in writing or by electronic transmission, in either case in accordance with Section 23B.01.410 of the Revised Code of Washington, stating the place, date and time of the meeting and, in the case of a special meeting of shareholders, a description of the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting, by or at the direction of the Chairperson of the Board, the Vice-Chairperson, the President, or the Secretary calling the meeting, to each shareholder of record entitled to vote at such meeting; provided, however, that notice of a shareholders meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of assets pursuant to Section 23B.12.020 of the Revised Code of Washington or any successor statutory provision, or the dissolution of the corporation, shall be given no fewer than 20 nor more than 60 days before the meeting date. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the corporation as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. When any shareholders' meeting, either annual or special, is adjourned for 120 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the date, time and place of any meeting adjourned for less than 120 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.
SECTION 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board shall fix, in advance, a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 70 days, and in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the day before the date on which the first notice of the meeting is delivered or the date on which the resolution of the Board declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment of the meeting, unless the Board fixes a new record date, which it must do if the meeting is adjourned more than 120 days after the date is fixed for the original meeting.
SECTION 7. Voting Lists. At least 10 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. This list of shareholders shall be kept on file at the principal office of the corporation or at a place identified in the meeting notice in the city where the meeting will be held and shall be subject to inspection by any shareholder, the shareholder’s agent or the shareholder’s attorney at any time during regular business hours and at the shareholder’s expense, for a period of 10 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder, the shareholder’s agent or the shareholder’s attorney at any time during the meeting or any adjournment. The original stock transfer book shall be prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this Bylaw shall not affect the validity of any action taken at the meeting.
SECTION 8. Quorum. A majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a quorum is present or represented at a meeting, a majority of those present or represented may transact any business which comes before the meeting, unless a greater percentage is required by law, the Articles of Incorporation, or these Bylaws. If less than a quorum of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting in accordance with the original meeting notice.
SECTION 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by a duly authorized attorney in fact or by any other means of voting by proxy permitted under the Washington Business Corporation Act (or any successor law), including, without limitation, via electronic transmission. Proxies solicited on behalf of management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the Directors then in office or by a committee of the Board appointed in accordance with Article IV, Section 1. All proxies shall be filed with the Secretary of the corporation before or at the commencement of meetings. An appointment of a proxy is valid for eleven months unless a longer period is expressly provided in the appointment. An appointment of a proxy is revocable by the shareholder unless the appointment indicates that it is irrevocable and the appointment is coupled with an interest.
SECTION 10. Voting. Except as otherwise provided in the Articles of Incorporation or by law, each outstanding share of capital stock of the corporation shall be entitled to one vote on each matter voted on at a shareholders' meeting. Unless otherwise provided in the Articles of Incorporation, law, or these Bylaws, if a quorum exists, any action, other than the election of Directors, is approved by a voting group if the votes cast within the voting group favoring the action exceed the votes cast within the group opposing the action. In any election of Directors the candidates elected are those receiving the largest number of votes cast by the shares entitled to vote in the election, up to the number of Directors to be elected by such shares.
SECTION 11. Acceptance of Votes. If the name signed on a vote, consent, waiver or proxy appointment does not correspond to the name of a shareholder of the corporation, the corporation may accept the vote, consent, waiver or proxy appointment and give effect to it as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer, partner or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian or conservator representing the shareholder; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder; (iv) the name signed purports to be that of a pledgee, beneficial owner or attorney-in-fact of the shareholder; or (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of its execution.
SECTION 12. Action by Shareholders Without Meeting. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.
ARTICLE III
Board of Directors
SECTION 1. General Powers. All corporate powers shall be exercised by, or under authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board. The Board shall annually elect a Chairperson of the Board and a Vice-Chairperson from among its members and shall designate, when present, either the Chairperson or the Vice-Chairperson to preside at its meetings.
SECTION 2. Chairperson and Vice-Chairperson.
(a) Board Chairperson. The Chairperson of the Board shall be nominated and elected in accordance with the procedure described in this section. At least thirty (30) days before the regularly scheduled Board meeting that immediately precedes the annual organizational meeting of the Board, the Nominating and Corporate Governance Committee shall meet and prepare a report recommending a nominee or nominees for Chairperson to be submitted to the Board at said regular meeting. Other nominations may be made by the Directors in attendance at said meeting. The Chairperson shall be elected at the annual organizational meeting from among the nominees so designated. The term of office of the Chairperson shall be one (1) year, or until the Chairperson’s successor is elected and qualified.
(b) Board Vice-Chairperson. The Vice-Chairperson of the Board shall be nominated and elected in accordance with the procedure described in this section. At least thirty (30) days before the regularly scheduled Board meeting that immediately precedes the annual organizational meeting of the Board, the Nominating and Corporate Governance Committee shall meet and prepare a report recommending a nominee or nominees for Vice-Chairperson to be submitted to the Board at said regular meeting. The then-current Chairperson may submit recommendations to the Nominating and Corporate Governance Committee for consideration. Other nominations may be made by the Directors in attendance at said meeting. Immediately following election of the Chairperson, the Vice-Chairperson shall be elected at the annual organizational meeting from among the nominees so designated.
The Vice-Chairperson shall communicate regularly with the Chairperson and the Chief Executive Officer of the corporation, so as to be fully apprised of the business of the corporation and adequately prepared to succeed to the duties of the Chairperson if events so require. The Vice-Chairperson shall perform all duties of the Chairperson in the event the office of Chairperson shall become vacant or if the Chairperson is unavailable to perform necessary duties of the office for more than 14 days due to disability or otherwise. The Vice-Chairperson shall continue to perform such duties and serve in all respects as Board Chairperson until such time as a new Chairperson is elected. The Vice-Chairperson shall perform such additional duties as may be requested by the Chairperson.
SECTION 3. Number, Term and Election. Subject to the limitations on the number of Directors set forth in the Articles of Incorporation, the number of Directors of the corporation shall be fixed from time to time exclusively by resolution adopted by the Board. Directors shall be elected by ballot each year at the annual meeting of shareholders. Directors shall serve until the next annual meeting of shareholders and until their respective successors are elected and qualified.
SECTION 4. Regular and Special Meetings. Regular meetings of the Board will be held on the dates and at the times and places determined by resolution of the Board. The annual organizational meeting of the Board shall be held immediately after the annual shareholders’ meeting at the same location at which such meeting was held or, if not held at that time, as soon as practicable thereafter at the date, time, and location specified in the notice of such meeting.
Special meetings of the Board may be called by or at the request of the Chairperson, the President, or one-third of the Directors then in office. The persons authorized to call special meetings of the Board may fix any place, within or outside the State of Washington, as the place for holding any special meeting of the Board called by such persons.
Any or all Directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all Directors participating can hear each other during the meeting. A Director participating in a meeting by this means is deemed to be present in person at the meeting.
SECTION 5. Notice of Special Meetings. Notice in writing or by electronic transmission, in either case in accordance with Section 23B.01.410 of the Revised Code of Washington, of the date, time and place of any special meeting shall be given to each Director at least two days prior thereto delivered personally, by electronic transmission (provided that the Director has consented to receive an electronically transmitted notice either (i) in the form of a record and has designated in the consent the address, location or system to which such notice may be electronically transmitted or (ii) by any other means permitted under Section 23B.01.410 of the Revised Code of Washington) or by facsimile or at least five days previous thereto delivered by mail at the address at which the Director is most likely to be reached. If mailed to the address at which the Director is most likely to be reached, such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage thereon prepaid. Any Director may waive notice of any meeting by a writing filed with the Secretary. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director at the beginning of the meeting, or promptly upon arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action approved at the meeting. Neither the business to be transacted at, nor the purpose of, any meeting of the Board need be specified in the notice or waiver of notice of such meeting.
SECTION 6. Quorum. A majority of the number of Directors fixed in accordance with Section 3 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III.
SECTION 7. Manner of Acting. The act of the majority of the Directors present at a meeting or adjourned meeting at which a quorum is present shall be the act of the Board, unless a greater number is prescribed by law, the Articles of Incorporation, or these Bylaws.
SECTION 8. Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if one or more consents describing the action so taken are executed by each Director either before or after the action becomes effective, and delivered to the corporation for inclusion in the minutes or filing with the corporate records, which consents are set forth either (a) in an executed record or (b) if the corporation has designated an address, location, or system to which the consents may be electronically transmitted and the consent is electronically transmitted to the designated address, location, or system, in an executed electronically transmitted record.
SECTION 9. Resignation. Any Director may resign at any time by delivering notice in the form of an executed resignation to the Board, the Chairperson, the President or the Secretary. A notice of resignation is effective when the resignation is delivered unless the resignation specifies a later effective date, or an effective date determined upon the happening of an event or events.
SECTION 10. Vacancies. Vacancies occurring in the Board may be filled only in accordance with the procedures set forth in the Articles of Incorporation.
SECTION 11. Compensation. The Directors will be entitled to receive such reasonable compensation for their services as Directors and as members of any committee appointed by the Board, as well as for attendance at meetings, as may be fixed by the Board, and may be reimbursed by the corporation for ordinary and reasonable expenses incurred in the performance of their duties.
SECTION 12. Presumption of Assent. A Director of the corporation who is present at a meeting of the Board at which corporate action is approved shall be deemed to have assented to the action taken unless (a) the Director objects at the beginning of the meeting, or promptly upon the Director's arrival, to holding it or transacting business at the meeting; (b) the Director's dissent or abstention as to the action is entered in the minutes of the meeting; or (c) the Director delivers notice of the Director's dissent or abstention as to the action to the presiding officer of the meeting before adjournment or to the corporation within a reasonable time after adjournment of the meeting. Such right to dissent or abstain shall not apply to a Director who voted in favor of such action.
SECTION 13. Performance of Duties. A Director shall perform all duties as a Director, including the duties as a member or any committee of the Board, in good faith, in a manner reasonably believed to be in the best interest of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances. In performing such duties, a Director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (i) one or more officers or employees of the corporation or its subsidiaries whom the Director reasonably believes to be reliable and competent in the matters presented; (ii) legal counsel, public accountants or other persons as to matters which the Director reasonably believes to be within such person's professional or expert competence; or (iii) a committee of the Board on which the Director does not serve, which committee the Director reasonably believes to merit confidence. However, a Director shall not be considered to be acting in good faith if said Director has knowledge concerning the matter in question that would cause such reliance to be unwarranted.
SECTION 14. Additional Qualifications. Each Director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the corporation, excluding any shares that the Director has received pursuant to the corporation’s benefit programs. A person shall not be a Director of the corporation if that individual: (i) is not a resident of the United States; (ii) has been adjudicated a bankrupt or has taken the benefit of any insolvency law or has made a general assignment for the benefit of creditors; (iii) has suffered a judgment for a sum of money which has remained unsatisfied after all legal proceedings have been of record or unsecured on appeal for a period of more than three months; (iv)is prohibited from participating in the affairs of any insured depository institution pursuant to Section 19 of the Federal Deposit Insurance Act or otherwise is deemed not qualified to serve as a Director of the corporation or any of its subsidiaries by a banking agency that regulates the corporation or any of its subsidiaries; or (v) with the exception of any wholly owned subsidiaries of the corporation, is a Director of a bank, trust company, or national banking association, a majority of the Board of Directors of which are Directors of this corporation.
SECTION 15. Mandatory Retirement. A Director is required to retire from the Board effective as of the first annual shareholders' meeting after attaining seventy-five (75) years of age.
ARTICLE IV
Committees of the Board of Directors
SECTION 1. Appointment. The Board may, by resolution adopted by the greater of a majority of the Board then in office and the number of Directors required to take action in accordance with these Bylaws, create one or more committees, each consisting of two (2) or more Directors, to serve at the pleasure of the Board. All committee members are to be appointed by resolution adopted by the greater of a majority of the Directors then in office and the number of Directors required to take action in accordance with these Bylaws. The then-current Chairperson of the Nominating and Corporate Governance Committee may submit recommendations for committee members for consideration prior to the appointment of committee members. Among the committees created by the Board, one committee will be established as the Executive Committee, consisting of at least three (3) Directors.
SECTION 2. Authority. Any committee created by the Board shall have all the authority of the Board, except to the extent, if any, that such authority shall be limited by the Board; and except also that no committee shall have the authority of the Board to: approve a distribution except according to a general formula or method prescribed by the Board; approve or propose to shareholders a corporate action that the Washington Business Corporation Act (or any successor law) requires be approved by shareholders; fill vacancies on the Board or on any of its committees; amend the corporation’s Articles of Incorporation in a manner that does not require shareholder approval; adopt, amend, or repeal these Bylaws; approve a plan of merger not requiring shareholder approval; or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board may authorize a committee, or a senior executive officer of the corporation, to do so within limits specifically prescribed by the Board.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of a committee shall hold office until a successor is appointed by the Board.
SECTION 4. Meetings. Unless the Board shall otherwise provide, regular meetings of any committee shall be at such times and places as are determined by the Board, or by any such committee. Special meetings of any such committee may be held at the principal executive office of the corporation, or at any place which has been designated from time to time by resolution of such committee or by consent of all members thereof, and may be called by any member thereof upon notice stating the place, date, and hour of the meeting, which notice shall be given in the manner provided for the giving of notice to Directors of the time and place of special meetings of the Board in Article III, Section 4, or waived in the manner provided in Article III, Section 5.
Any or all members of a committee may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all members participating can hear each other during the meeting. A committee member participating in a meeting by this means is deemed to be present in person at the meeting.
SECTION 5. Quorum. A majority of the members of a committee shall constitute a quorum for the transaction of any business at a meeting thereof, and action of a committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
SECTION 6. Action Without a Meeting. Any action required or permitted to be taken by any committee at a meeting may be taken without a meeting if one or more consents setting forth the action so taken are executed by each member of the committee either before or after the action becomes effective, and delivered to the corporation for inclusion in the minutes or filing with the corporate records, each of which consent is set forth either (a) in an executed record or (b) if the corporation has designated an address, location, or system to which the consents may be electronically transmitted and the consent is electronically transmitted to the designated address, location, or system, in an executed electronically transmitted record.
SECTION 7. Vacancies. Any vacancy in a committee may be filled as soon as practicable by the greater of a majority of the Directors then in office and the number of Directors required to take action in accordance with these Bylaws.
SECTION 8. Resignations and Removal. Any member of a committee may be removed at any time with or without cause by resolution adopted by a majority of the Directors then in office. Any member of a committee may resign from the committee at any time by delivering notice in the form of an executed resignation to the Board, the Chairperson of the Board, the President or the Secretary. A notice of resignation is effective when the resignation is delivered unless the resignation specifies a later effective date, or an effective date determined upon the happening of an event or events.
SECTION 9. Procedure. Unless the Board otherwise provides, each committee may fix its own rules of procedure which shall not be inconsistent with these Bylaws or with any charter adopted by the Board for the committee. The committee shall keep regular minutes of its proceedings and report the same to the Board for its information at the meeting held next after the proceedings shall have occurred.
ARTICLE V
Officers
SECTION 1. Positions. The officers of the corporation shall include a President, one or more vice presidents, a Secretary and a Treasurer, each of whom shall be appointed by the Board. The Board may also designate the Chairperson of the Board as an officer. The President shall be the Chief Executive Officer unless the Board determines otherwise. The offices of the Secretary and Treasurer may be held by the same person and a vice president may also be either the Secretary or the Treasurer. The Board of Directors may designate one or more vice presidents as executive vice president or senior vice president. The Board may also elect or authorize the appointment of such other officers as the business of the corporation may require. The officers shall have such authority and perform such duties as the Board may from time to time authorize or determine. In the absence of action by the Board, the officers shall have such powers and duties as generally pertain to their respective offices.
SECTION 2. Election and Term of Office. The officers of the corporation shall be elected annually by the Board at the first meeting of the Board held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor shall have been duly elected and qualified or until death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The Board may authorize the corporation to enter into an employment contract with any officer in accordance with applicable law. Any officer of the corporation who also serves as a Director of the corporation, shall resign as a Director effective with such resignation, removal, disqualification or otherwise, as an officer of the corporation.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of the Board, whenever, in its judgment, the best interests of the corporation will be served by doing so. Removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person removed. Election or appointment of an officer will not of itself create contract rights.
SECTION 4. Vacancies. At the recommendation and nomination of the President, a vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the Board giving due regard to the recommendations of the President and no officer shall be prevented from receiving such remuneration by reason of also being a Director of the corporation.
SECTION 6. Secretary. The Secretary shall prepare and maintain full and correct records of all meetings of the shareholders and of the Board. The Secretary shall promptly inform the Board of Governors of the Federal Reserve System in writing of any change in the address of the office of the corporation or the location of its principal records. The Secretary shall perform such other duties as directed to perform by resolution of the Board not inconsistent with applicable law, regulations and these Bylaws.
The Board may appoint one or more Assistant Secretaries, and may authorize them, under the direction of the Secretary of the corporation, to perform any of the duties entrusted to, and delegated by, the Secretary.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. Except as otherwise prescribed by these Bylaws with respect to certificates for shares, the Board may authorize any officer, employee, or agent of the corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name, unless authorized by the Board. Such authority may be general or confined to specific instances.
SECTION 3. Checks, Drafts, Etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness in the name of the corporation shall be signed by one or more officers, employees, or agents of the corporation in such manner as shall from time to time be determined by the Board.
SECTION 4. Deposits. All funds of the corporation not otherwise employed shall be deposits from time to time to the credit of the corporation in any of its duly authorized depositories as the Board may select.
SECTION 5. Contracts with Directors and Officers. To the fullest extent authorized by and in conformance with Washington law, the corporation may enter into contracts with and otherwise transact business as vendor, purchaser, or otherwise, with its Directors, officers, employees and shareholders and with corporations, associations, firms, and entities in which they are or may become interested as Directors, officers, shareholders, or otherwise, as freely as though such interest did not exist, except that no loans shall be made by the corporation secured by its shares, other than a loan made by the corporation to a tax-qualified employee stock ownership plan of the corporation or any of its affiliates. In the absence of fraud, the fact that any Director, officer, employee, shareholder, or any corporation, association, firm or other entity of which any Director, officer, employee or shareholder is interested, is in any way interested in any transaction or contract shall not make the transaction or contract void or voidable, or require the Director, officer, employee or shareholder to account to the corporation for any profits therefrom if the transaction or contract is or shall be authorized, ratified, or approved by (i) the vote of a majority of the Directors then in office excluding any interested Director or Directors, (ii) the written consent of the holders of a majority of the shares entitled to vote, or (iii) a general resolution approving the acts of the Directors and officers adopted at a shareholders meeting by vote of the holders of the majority of the shares entitled to vote. All loans to officers and Directors shall be subject to Federal and state laws and regulations. Nothing herein contained shall create or imply any liability in the circumstances above described or prevent the authorization, ratification or approval of such transactions or contracts in any other manner.
SECTION 6. Shares of Another Corporation. Shares of another corporation held by this corporation may be voted by the President or any vice president, or by proxy appointment form executed by either of them, unless the Board by resolution shall designate some other person to vote the shares.
ARTICLE VII
Shares of Capital Stock and Their Transfer
SECTION 1. Certificates for Shares and Uncertificated Shares. Certificates representing shares of capital stock of the corporation shall be in such form as shall be determined by the Board and consistent with applicable law. Such certificates shall be signed by the Chief Executive Officer, if any, the President, any vice president or by any other officer of the corporation authorized by the Board, attested by the Secretary or an Assistant Secretary. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the corporation itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for the like number of shares has been surrendered and canceled, except that in case of a lost or destroyed certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board may prescribe. Notwithstanding the foregoing, the Board may provide by resolution or resolutions that some or all of the shares of any or all classes or series of the corporation’s stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by certificates until such certificate is surrendered to the corporation. In addition, notwithstanding the adoption of any such resolution providing for uncertificated shares, every holder of capital stock of the corporation theretofore represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate for shares of capital stock of the corporation signed by, or in the name of the corporation as set forth above, certifying the number of shares owned by such shareholder in the corporation.
SECTION 2. Transfer of Shares. Stock of the corporation shall be transferable in the manner prescribed by applicable law and in these Bylaws. Transfers of stock shall be made on the books of the corporation, and in the case of certificated shares of stock, only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; or, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such person’s attorney lawfully constituted in writing, and upon payment of all necessary transfer taxes and compliance with appropriate procedures for transferring shares in uncertificated form; provided, however, that such surrender and endorsement, compliance or payment of taxes shall not be required in any case in which the officers of the corporation shall determine to waive such requirement. With respect to certificated shares of stock, every certificate exchanged, returned or surrendered to the corporation shall be marked “Cancelled,” with the date of cancellation, by the Secretary or Assistant Secretary of the corporation or the transfer agent thereof. No transfer of stock shall be valid as against the corporation for any purpose until it shall have been entered in the stock records of the corporation by an entry showing from and to whom transferred.
SECTION 3. Certification of Beneficial Ownership. The Board may adopt by resolution a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of such shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with such procedure, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification.
SECTION 4. Lost Certificates. The Board may direct a new certificate or uncertificated shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issuance of a new certificate or uncertificated shares, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or the owner’s legal representative, to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the corporation shall end on the last day of December of each year. The corporation shall be subject to an annual audit as of the end of its fiscal year by the independent public accountants appointed by and responsible to the Board.
ARTICLE IX
Dividends
Subject to the terms of the corporation's Articles of Incorporation and the laws of the State of Washington, the Board may, from time to time, declare, and the corporation may pay, dividends upon its outstanding shares of capital stock.
ARTICLE X
Amendments
In accordance with the corporation's Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the shareholders of the corporation only by vote of not less than a majority of the outstanding shares of capital stock of the corporation entitled to vote generally in the election of Directors (considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, the Board may repeal, alter, amend or rescind these Bylaws by a majority vote of the Directors, based on the number of directors fixed in accordance with these Bylaws, including any vacancies.
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Amended this 25th day of May, 2022.
Exhibit 4.1
DESCRIPTION OF FIRST NORTHWEST BANCORP
COMMON STOCK
As of June 30, 2022, First Northwest Bancorp (“FNWB,” “we,” “us” or “our”) had common stock as the only class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The statements made below include summaries of certain provisions contained in our Amended and Restated Articles of Incorporation (“Articles”) and Bylaws in effect as of June 30, 2022. This summary does not purport to be complete and is qualified in its entirety by reference to the Articles and Bylaws.
General
Our authorized capital stock consists of 75,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share. As of June 30, 2022, we had no shares of preferred stock outstanding. Our Board of Directors (the “Board”) is authorized, without further shareholder action, to issue preferred stock with such designations, preferences and rights as the Board may determine.
Our common stock is listed for trading on The NASDAQ Global Market under the symbol “FNWB.”
Our shareholders do not have preemptive rights to subscribe to any additional securities that may be issued. Each share of our common stock has the same relative rights and is identical in all respects to every other share of our common stock. In the event of liquidation, dissolution or winding up of FNWB, the holders of our common stock would be entitled to receive, after payment or provision for payment of all of FNWB’s debts and liabilities, all remaining assets available for distribution. If preferred stock is issued, the holders thereof may have priority over the holders of our common stock in the event of liquidation or dissolution.
Dividend Rights
Dividends may be paid on our common stock as and when declared by the Board out of funds legally available for the payment of dividends. The Board may issue preferred stock that is entitled to such dividend rights as the Board may determine, including priority over the common stock in the payment of dividends.
Voting Rights
All voting rights are currently vested in the holders of our common stock, with each share being entitled to one vote on all matters.
Election of Directors
The Articles provide that each director shall be elected at each annual meeting of shareholders to serve until the next annual meeting or until their respective successor is elected and qualified.
Limitation on Voting of Certain Shares
The Articles provide that a record owner of any outstanding common stock that is beneficially owned by a person who, as of any record date for the determination of shareholders entitled or permitted to vote on any matter, beneficially owns more than 10% of the then outstanding shares of common stock (the “Limit”), shall not be entitled to vote with respect to shares held in excess of the Limit, unless a majority of the whole board (defined as the total number of directors which FNWB would have if there were no vacancies on the Board) shall have by resolution given advance approval of such entitlement or permission.
Potential “Anti-Takeover” Provisions
Article IX of our Articles requires that specified transactions with a “Related Person”, referred to as a “Business Combination”, be approved by (i) at least 80% of the voting power of the then outstanding shares and (ii) at least a majority of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a Related Person, unless such transaction is approved by two-thirds of our “Continuing Directors” (as defined in the Articles). A Related Person is generally defined as a person or entity that beneficially owns 10% or more of the outstanding shares of our common stock or is an “affiliate” of FNWB as defined in Rule 12b-2 of the Exchange Act.
Our Articles also provide that the Board, when evaluating a Business Combination or similar transaction, may consider any other factors that it deems relevant, including the social and economic effects of the transaction on FNWB and its subsidiaries, employees, depositors, loan and other customers, creditors and other elements of the communities in which FNWB and its subsidiaries operate or are located, in addition to the adequacy of the amount to be paid in connection with any such transaction.
Under our Articles, the right of shareholders to call special shareholder meetings is specifically denied. Also, the adoption, amendment or repeal of our Bylaws by our shareholders requires the affirmative vote of the holders of not less than 80% of the outstanding shares of our capital stock entitled to vote generally in the election of directors, treated as one class. Our Articles, other than those specifying our name and the number of authorized shares of our capital stock, generally may be amended only by the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by each separate voting group entitled to vote thereon.
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Matthew P. Deines, President, Chief Executive Officer and Director of First Northwest Bancorp, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of First Northwest Bancorp; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); |
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a. |
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data information; and |
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b. |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: August 12, 2022 |
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/s/Matthew P. Deines |
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Matthew P. Deines President, Chief Executive Officer and Director (Principal Executive Officer) |
EXHIBIT 31.2
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Geraldine Bullard, Executive Vice President and Chief Financial Officer of First Northwest Bancorp, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of First Northwest Bancorp; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fiscal fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions); |
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a. |
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data information; and |
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b. |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: August 12, 2022 |
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/s/Geraldine Bullard |
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Geraldine Bullard Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32
Certification of Chief Executive Officer and Chief Financial Officer of First Northwest Bancorp
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, for the quarter ended June 30, 2022, that:
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1. |
the report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in the report. |
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/s/Matthew P. Deines |
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/s/Geraldine Bullard |
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Matthew P. Deines President, Chief Executive Officer and Director (Principal Executive Officer) |
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Geraldine Bullard Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Dated: August 12, 2022