FIRST NORTHWEST BANCORP: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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 objectives, intentions and expectations;

• statements regarding our business plans, prospects, growth and

strategies;

• statements regarding the quality of our loan and investment portfolios;

• estimates of our risks and future costs and benefits; and

• statements regarding 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 the loans and potential adverse changes in the

the credit quality of the loans in our portfolio, particularly with regard to

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;

• reduced market demand for the loans 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 obtain loans and income

growth;

• our ability to successfully execute a merger and/or acquisition

strategies and integrate all assets, liabilities,

customers, systems and management personnel in our operations and our

ability to achieve related cost savings within the expected time frame;

• our ability to successfully execute growth strategies related to our

entry into new markets;

• our ability to develop user-friendly digital applications to serve

existing customers and attracting new customers;

• the use of estimates to determine the fair value of certain of our assets,

whose estimates may turn out to be erroneous and lead to

valuation declines;

• the evolution of general interest rate levels and the relative

differences between short and long-term interest rates, interest on deposits

rates, our net interest margin and funding sources;

• increased competitive pressures among financial services companies,

in particular from non-traditional banking entities such as challenger

banks, fintechs and tech mega-companies;

• our ability to attract and retain deposits;

• changes in consumption, borrowing and saving habits, resulting in

decline in demand for banking products and services, particularly in

recession affecting 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;

• interruptions, security breaches or other adverse events, failures or

interruptions or attacks on our computer systems or

third-party vendors who perform many of our critical processing

functions;

• the impacts related to or resulting from Russia military action in

Ukraineincluding broader impacts on financial markets and

conditions;

• any failure of major third-party providers to fulfill their obligations of

we; and

• other economic, competitive, governmental, regulatory and technical aspects

        factors affecting our operations, pricing, products and services and
        other risks described elsewhere in our filings with the Securities and
        Exchange Commission, including this Form 10-Q and our Annual Report on
        Form 10-K for the year ended December 31, 2021.




Further, statements about the potential effects of the COVID-19 pandemic on the
Bank's businesses and financial results and condition may constitute
forward-looking statements and are subject to the risk that the actual effects
may differ, possibly materially, from what is reflected in those forward-looking
statements due to factors and future developments that are uncertain,
unpredictable and in many cases beyond the Bank's control, including the direct
and indirect impact of the ongoing pandemic on the Bank, its customers and third
parties. These developments could have an adverse impact on our financial
position and our results of operations.



Any of the forward-looking statements that we make in this report and in other
statements we make may turn out to be wrong because of inaccurate assumptions we
might make, because of the factors illustrated above or because of other factors
that we cannot anticipate or predict. Any forward-looking statements are based
upon management's beliefs and assumptions at the time they are made. We
undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update
the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise.
Due to these risks, uncertainties and assumptions, the forward-looking
statements discussed in this report might not occur, and you should not put
undue reliance on any forward-looking statements.



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General



First Northwest Bancorp, a Washington corporation, is 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.





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We have taken deliberate actions to ensure that we have the balance sheet
strength to serve our clients and communities, including increases in liquidity
and managing our assets and liabilities in order to maintain a strong capital
position; however, future economic conditions are subject to significant
uncertainty. While uncertainty still exists, we believe we are well-positioned
to operate effectively through the present economic environment.



We provided assistance to many small businesses applying for the SBA's Paycheck
Protection Program ("PPP") funding. We processed $32.2 million of loans for 515
customers through the initial round of SBA PPP funding during 2020 with an
average loan amount of $63,000. We processed $35.0 million of loans for
427 customers during the second round of SBA PPP funding with an average loan
amount of $82,000. Payments by borrowers on these loans can be deferred up to
six months after the date the loan forgiveness application is processed, and
interest, at 1%, will continue to accrue during the deferment period. Loans can
be forgiven in whole or part (up to full principal and any accrued interest). We
partnered with a third-party financial technology provider to assist our
borrowers with the loan forgiveness application process. As of June 30, 2022,
$32.2 million, or 100.0%, of the first-round loans were forgiven and
$32.7 million, or 93.4%, of second-round loans were forgiven.



Critical Accounting Policies



Effective January 1, 2022, the Bank elected to measure servicing rights using
the fair value method of accounting. We record servicing rights on loans
originated and subsequently sold into the secondary market. We stratify our
capitalized servicing rights based on the type, term and interest rates of the
underlying loans. Servicing rights are measured at fair value at each reporting
date with the change reported in earnings. The value is determined through a
discounted cash flow analysis, which uses interest rates, prepayment speeds and
delinquency rate assumptions as inputs. All of these assumptions require a
significant degree of management judgment. If our assumptions prove to be
incorrect, the value of our mortgage servicing rights could be negatively
affected.



There were no other material changes to the critical accounting policies from
those disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2021.




Comparison of the financial situation at June 30, 2022 and December 31, 2021

Assets. Total assets increased to $2.03 billion at June 30, 2022 of $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.



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The following tables present our construction commitments by type and geographic concentration on the dates indicated:



                         North Olympic      Puget Sound
June 30, 2022            Peninsula (1)       Region (2)       Other Washington        Oregon         Idaho         Total
                                                                  (In thousands)
Construction
Commitment
One- to four-family
residential              $       42,889     $     69,665     $            7,157     $        -     $       -     $ 119,711
Multi-family
residential                           -          151,823                  6,098            415         3,592       161,928
Commercial
acquisition-renovation            1,638           27,965                      -              -             -        29,603
Commercial real estate            8,931           41,876                      -            540             -        51,347
Total commitment         $       53,458     $    291,329     $           13,255     $      955     $   3,592     $ 362,589

Construction Funds
Disbursed
One- to four-family
residential              $       15,749     $     30,293     $            2,170     $        -     $       -     $  48,212
Multi-family
residential                           -           84,192                  2,714             32         2,308        89,246
Commercial
acquisition-renovation            1,396           25,707                      -              -             -        27,103
Commercial real estate            7,179           32,352                      -             11             -        39,542
Total disbursed          $       24,324     $    172,544     $            4,884     $       43     $   2,308     $ 204,103

Undisbursed Commitment
One- to four-family
residential              $       27,140     $     39,372     $            4,987     $        -     $       -     $  71,499
Multi-family
residential                           -           67,631                  3,384            383         1,284        72,682
Commercial
acquisition-renovation              242            2,258                      -              -             -         2,500
Commercial real estate            1,752            9,524                      -            529             -        11,805
Total undisbursed        $       29,134     $    118,785     $            8,371     $      912     $   1,284     $ 158,486

Land Funds Disbursed
One- to four-family
residential              $        3,409     $      3,120     $              329     $        -     $       -     $   6,858
Commercial real estate                -            3,433                      -              -             -         3,433
Total disbursed for
land                     $        3,409     $      6,553     $              329     $        -     $       -     $  10,291




(1) Includes Clallam and Jefferson counties.
(2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom,
and Island counties.




                             North Olympic     Puget Sound
December 31, 2021            Peninsula (1)      Region (2)       Other Washington        Oregon         Total
                                                               (In thousands)
Construction Commitment
One- to four-family
residential                  $      32,785     $     57,050     $            4,430     $        -     $   94,265
Multi-family residential                 -          182,151                  4,095          8,435        194,681
Commercial
acquisition-renovation               2,938           36,536                 16,638              -         56,112
Commercial real estate              12,489           50,372                  2,535              -         65,396
Total commitment             $      48,212     $    326,109     $           27,698     $    8,435     $  410,454

Construction Funds
Disbursed
One- to four-family
residential                  $      10,242     $     28,929     $              562     $        -     $   39,733
Multi-family residential                 -           79,707                  2,414          7,534         89,655
Commercial
acquisition-renovation               2,449           32,789                 15,861              -         51,099
Commercial real estate               3,486           29,484                  2,701              -         35,671
Total disbursed              $      16,177     $    170,909     $           21,538     $    7,534     $  216,158

Undisbursed Commitment
One- to four-family
residential                  $      22,543     $     28,121     $            3,868     $        -     $   54,532
Multi-family residential                 -          102,444                  1,681            901        105,026
Commercial
acquisition-renovation                 489            3,747                    777              -          5,013
Commercial real estate               9,003           20,888                   (166 )            -         29,725
Total undisbursed            $      32,035     $    155,200     $            6,160     $      901     $  194,296

Land Funds Disbursed
One- to four-family
residential                  $       3,502     $      3,556     $              191     $        -     $    7,249
Commercial real estate                   -            1,302                      -              -          1,302
Total disbursed for land     $       3,502     $      4,858     $              191     $        -     $    8,551




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During the six months 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




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The following table represents non-performing assets as of the dates indicated.

                                                                                   Increase (Decrease)
                                   June 30, 2022       December 31, 2021        Amount            Percent
                                              (In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family               $           626     $               494     $       132              26.7 %
Commercial real estate                         60                      71             (11 )           (15.5 )
Construction and land                          22                      22               -                 -
Total real estate loans                       708                     587             121              20.6

Consumer loans:
Home equity                                   251                     282             (31 )           (11.0 )
Auto and other consumer                       282                     512            (230 )           (44.9 )
Total consumer loans                          533                     794            (261 )           (32.9 )

Total nonperforming assets        $         1,241     $             1,381     $      (140 )           (10.1 )

Nonaccrual and 90 days or more
past due loans as a percentage
of total loans                                0.1 %                   0.1 %           0.0 %               -




Investment securities increased $8.9 million, or 2.6%, to $353.1 million at June
30, 2022, from $344.2 million at December 31, 2021, due to the purchase of
securities, partially offset by sales, normal payments and prepayment activity.
The investment portfolio, including mortgage-backed securities, had an estimated
projected average life of 8.2 years as of June 30, 2022, compared to 5.7 years
as of December 31, 2021, and had an estimated average repricing term of 7.6
years as of June 30, 2022, compared to 5.4 years as of December 31, 2021, based
on the interest rate environment at those times. We believe prepayment activity
is likely to slow in a rising rate environment, extending the projected duration
of our securities portfolio.



The investment portfolio was composed of 48.0% in amortizing securities at June
30, 2022, compared to 43.0% at December 31, 2021. The projected average life of
our securities may vary due to prepayment activity, which, particularly in the
mortgage-backed securities portfolio, is impacted by prevailing mortgage
interest rates. Management maintains a focus on enhancing the mix of earning
assets by originating loans as a percentage of earning assets; however, we may
continue to purchase investment securities as a source of additional interest
income. Securities are sold to provide liquidity, improve long-term portfolio
yields, reduce LIBOR risk, and manage duration in the portfolio. For additional
information, see Note 2 of the Notes to Consolidated Financial Statements
contained in Item 1 of this Form 10-Q.



Liabilities. Total liabilities increased to $1.87 billion at June 30, 2022, from
$1.73 billion at December 31, 2021, primarily due to an increase in borrowing
of $130.0 million.



Deposit balances remained flat at $1.58 billion for both June 30,
2022 and December 31, 2021. During the six-month period ended June 30, 2022,
there were increases of $22.3 million in certificates of deposits ("CDs")
and $409,000 in savings accounts offset by a $10.0 million decrease in money
market accounts and a $12.5 million decrease in demand deposit accounts. A
runoff in commercial and public fund account balances of $45.5 million during
the six-month period ended June 30, 2022, was offset by increases in consumer
account balances of $21.4 million and brokered CDs of $20.0 million. We utilize
brokered CDs as an additional funding source in order to manage our cost of
funds, reduce our reliance on public funds deposits, and manage interest rate
risk. Brokered CDs totaling $85.7 million were included in the $269.5 million
balance of certificates of deposit at June 30, 2022.



FHLB advances increased 152.5% to $202.0 million at June 30, 2022, from $80.0
million at December 31, 2021. We increased short-term advances as strong loan
demand was outpaced by a lack of deposit growth.



Equity. Total shareholders' equity decreased $25.3 million to $165.2 million for
the six months ended June 30, 2022. The Company recorded year-to-date net income
of $5.3 million. The net income increase was offset by a decrease in the
after-tax unrealized loss on available-for-sale investments of $28.8 million.
All categories of the investment portfolio have been significantly impacted by
the rising rate environment.



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Comparison of operating results 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 the average earning asset balances, associated returns, and resulting changes in interest income for the periods indicated:



                                               Three Months Ended June 30,
                                          2022                             2021
                                 Average                          Average                           Increase
                                 Balance                          Balance                         (Decrease) in
                               Outstanding        Yield         Outstanding        Yield         Interest Income
                                                            (Dollars in thousands)
Loans receivable, net         $   1,439,714           4.48 %   $   1,200,273           4.30 %   $           3,215
Investment securities               367,662           2.96           395,685           2.15                   591
FHLB stock                            8,190           5.83             4,074           4.53                    73
Interest-earning deposits
in banks                             20,636           0.89            39,750           0.15                    31
Total interest-earning
assets                        $   1,836,202           4.14 %   $   1,639,782           3.68 %   $           3,910




Interest Expense. Total interest expense increased $316,000, or 22.5%, to $1.7
million for the three months ended June 30, 2022, compared to $1.4 million for
the three months ended June 30, 2021, due to an increase in borrowing costs
of $345,000 primarily related to additional FHLB borrowings in the current
period, offset by a decrease in interest expense on deposits
of $29,000 resulting from a 3 basis point decrease in the average cost of
interest-bearing deposits. The average balance of interest-bearing deposits
increased $90.4 million, or 8.0%, to $1.22 billion for the three months ended
June 30, 2022, from $1.13 billion for the three months ended June 30, 2021, due
to core deposit growth in new and existing market areas as well as purchasing
the Bellevue branch in July of 2021.



During the three months ended June 30, 2022, interest expense decreased on
certificates of deposit due to a decrease in the average balances of $29.9
million, along with a decrease in the average rates paid of 5 basis points,
compared to the three months ended June 30, 2021. During the same period, the
average balances of money market and savings accounts increased $82.9
million and $10.0 million, respectively, with no change in the average rate paid
on money market accounts and a decrease of 2 basis points for savings accounts,
resulting in comparatively minor changes to interest expense. Interest-bearing
demand account average balances increased $27.4 million and the average rate
paid increased 3 basis points, resulting in a minor increase to interest
expense. The average cost of interest-bearing deposit products decreased
to 0.26% for the three months ended June 30, 2022, from 0.29% for the three
months ended June 30, 2021, due in large part to the expiration of promotional
rates and a shift in deposit mix to higher levels of interest-bearing and
noninterest-bearing transaction accounts which carry lower rates than
non-transaction accounts. Borrowing costs increased due to increases in both the
average balance and cost of FHLB advances, which are more sensitive to Federal
Reserve Bank rate increases, compared to the same period in 2021.



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The following table details the average balances, cost of funds and change in interest charges for the periods indicated:


                                               Three Months Ended June 30,
                                          2022                             2021
                                                                                                  Increase
                                 Average                          Average                        (Decrease)
                                 Balance                          Balance                       in Interest
                               Outstanding         Rate         Outstanding         Rate          Expense
                                                          (Dollars in thousands)
Transaction accounts          $     197,071           0.05 %   $     169,681           0.02 %   $         15
Money market accounts               584,162           0.22           501,237           0.22               48
Savings accounts                    195,345           0.05           185,336           0.07               (8 )
Certificates of deposit             247,310           0.68           277,218           0.73              (84 )
Advances                            149,145           1.42            51,917           1.41              344
Subordinated debt                    39,294           4.03            39,276           4.02                1
Total interest-bearing
liabilities                   $   1,412,327           0.49 %   $   1,224,665           0.46 %   $        316




Provision for Loan Losses. The Company recorded a $500,000 loan loss provision
during the second quarter of 2022. This compares to a provision for loan losses
of $300,000 for the three months ended June 30, 2021. The provision reflects
loan growth and changing economic conditions, offset by stable credit quality
metrics.



The following table details activity and information related to the ALLL for the
periods shown:



                                                            Three Months Ended June 30,
                                                              2022                2021
                                                              (Dollars in thousands)
Provision for loan losses                                $           500      $        300
Net recoveries                                                       120                23
Allowance for loan losses                                         15,747            14,588

Allowance for losses as a percentage of total gross loans receivable at end of period

                                       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 presents a detailed analysis of the variations of the components of non-interest income for the periods indicated:


                                           Three Months Ended June 30,           Increase (Decrease)
                                            2022                2021            Amount         Percent
                                                             (Dollars in thousands)
Loan and deposit service fees           $       1,091       $       1,001     $        90            9.0 %
Sold loan servicing fees                           27                  13              14          107.7
Net gain on sale of loans                         231               1,017            (786 )        (77.3 )
Net (loss) gain on sale of investment
securities                                         (8 )             1,124          (1,132 )       (100.7 )
Increase in cash surrender value of
bank-owned life insurance                         213                 242             (29 )        (12.0 )
Other income                                      668                 475             193           40.6
Total noninterest income                $       2,222       $       3,872     $    (1,650 )        (42.6 )%






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Noninterest Expense. Noninterest expense increased $3.3 million, or 23.8%,
to $17.0 million for the three months 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 non-interest expense for the periods indicated:



                                             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 operating results 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.





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The following table compares the average earning asset balances, associated returns, and resulting changes in interest income for the periods indicated:


                                               Six Months Ended June 30,
                                          2022                           2021
                                  Average                        Average                         Increase
                                  Balance                        Balance                       (Decrease) in
                                Outstanding       Yield        Outstanding       Yield        Interest Income
                                                           (Dollars in thousands)
Loans receivable, net          $   1,385,248         4.46 %   $   1,166,422         4.39 %   $           5,210
Investment securities                363,572         2.77           382,283         2.19                   832
FHLB stock                             6,758         5.10             3,942         4.66                    80
Interest-earning deposits in
banks                                 51,537         0.33            42,150         0.13                    56
Total interest-earning
assets                         $   1,807,115         4.00 %   $   1,594,797
        3.75 %   $           6,178




Interest Expense. Total interest expense increased $581,000, or 22.8%, to $3.1
million for the six months ended June 30, 2022, compared to $2.6 million for the
six months ended June 30, 2021, due to an increase in borrowing costs
of $827,000 primarily related to additional FHLB advances, offset by a decrease
in interest expense on deposits of $246,000 resulting from a 7 basis point
decrease in the average cost of interest-bearing deposits. The average balance
of interest-bearing deposits increased $109.7 million, or 9.9%, to $1.22 billion
for the six months ended June 30, 2022, from $1.11 billion for the six months
ended June 30, 2021, due to core deposit growth in new and existing market areas
as well as purchasing the Bellevue branch in July of 2021. Average deposit
account balances were comprised of 78% interest-bearing deposits and 22%
noninterest-bearing deposits at June 30, 2022.



During the six months ended June 30, 2022, interest expense decreased on
certificates of deposit due to a decrease in the average balances of $41.6
million, along with a decrease in the average rates paid of 12 basis points,
compared to the six months ended June 30, 2021. During the same period, the
average balances of money market and savings accounts increased $104.7 million
and $15.5 million, respectively, with an average rate decrease of 3 basis points
and 3 basis points, respectively, resulting in comparatively minor changes to
interest expense. Interest-bearing demand account average balances increased
$31.1 million and the average rate increased 2 basis points, resulting in a
minor increase to interest expense. The average cost of interest-bearing deposit
products decreased to 0.25% for the six months ended June 30, 2022, from 0.32%
for the six months ended June 30, 2021, due in large part to the expiration of
promotional rates and a shift in deposit mix to higher levels of transaction
accounts. Borrowing costs increased due to increases in both the average balance
and cost of FHLB advances compared to the same period in 2021 and the issuance
of subordinated debt in March 2021.



The following table details the average balances, cost of funds and change in interest charges for the periods indicated:



                                               Six Months Ended June 30,
                                          2022                           2021
                                                                                               Increase
                                  Average                        Average                      (Decrease)
                                  Balance                        Balance                     in Interest
                                Outstanding        Rate        Outstanding        Rate         Expense
                                                         (Dollars in thousands)
Transaction accounts           $     196,615         0.04 %   $     165,562         0.02 %   $         25
Money market accounts                585,974         0.21           481,269         0.24               60
Savings accounts                     195,034         0.05           179,524         0.08              (22 )
Certificates of deposit              244,989         0.66           286,552         0.78             (309 )
Advances                             116,062         1.44            53,667         1.41              457
Subordinated debt                     39,288         4.05            21,334         3.96              370
Total interest-bearing
liabilities                    $   1,377,962         0.46 %   $   1,187,908         0.43 %   $        581




Provision for Loan Losses. The Company recorded a $500,000 loan loss provision
during the six months ended June 30, 2022, compared to a provision for loan
losses of $800,000 for the six months ended June 30, 2021. The provision
reflects loan growth and changing economic conditions, offset by stable credit
quality metrics.



The following table details activity and information related to the ALLL for the
periods shown:

                                                          Six Months Ended June 30,
                                                            2022              2021
                                                           (Dollars in thousands)
Provision for loan losses                              $          500     $        800
Net recoveries (charge-offs)                                      123              (59 )
Allowance for loan losses                                      15,747           14,588

Allowance for losses as a percentage of total gross loans receivable at end of period

                                    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




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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 presents a detailed analysis of the variations of the components of non-interest income for the periods indicated:


                                         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 non-interest expense for the periods indicated:



                                             Six Months Ended June 30,              Increase (Decrease)
                                             2022                2021            Amount            Percent
                                                               (Dollars in thousands)
Compensation and benefits                $      18,538       $      15,854     $     2,684              16.9 %
Data processing                                  3,642               2,858             784              27.4
Occupancy and equipment                          2,599               2,033             566              27.8
Supplies, postage, and telephone                   721                 597             124              20.8
Regulatory assessments and state taxes             802                 562             240              42.7
Advertising                                      2,157                 937           1,220             130.2
Professional fees                                1,188               1,166              22               1.9
FDIC insurance premium                             434                 316             118              37.3
Other expense                                    1,713               1,478             235              15.9
Total noninterest expense                $      31,794       $      25,801     $     5,993              23.2 %




Provision for Income Tax. An income tax expense of $1.0 million was recorded for
the six months ended June 30, 2022, compared to $1.1 million for the six months
ended June 30, 2021. There was a year-over-year decrease in income before taxes
of $2.1 million; however, the expense recorded for the six months ended June 30,
2021, included a tax accrual true-up. The current year provision includes
accruals for both federal and state income taxes resulting in a higher effective
tax rate. The provision for state income tax began in the second quarter of 2022
with respect to certain states in which we have employees and collateral for
loans, thereby creating nexus in those states for income tax purposes. For
additional information, see Note 6 of the Notes to Consolidated Financial
Statements contained in Item 1 of this Form 10-Q.



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Average balances, interest and average returns/costs



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) Average loans receivable, net balances include outstanding loans. (2) Includes remunerated deposits (cash) with other financial institutions. (3) Net interest income divided by average interest-earning assets.





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                                                         Six Months Ended June 30,
                                            2022                                           2021
                           Average         Interest                       Average         Interest
                           Balance         Earned/         Yield/         Balance         Earned/         Yield/
                         Outstanding         Paid           Rate        Outstanding         Paid           Rate
                                                          (Dollars in thousands)
Interest-earning
assets:
Loans receivable, net
(1)                      $  1,385,248     $   30,617           4.46 %   $  1,166,422     $   25,407           4.39 %
Total investment
securities                    363,572          4,990           2.77          382,283          4,158           2.19
FHLB dividends                  6,758            171           5.10            3,942             91           4.66
Interest-earning
deposits in banks              51,537             84           0.33           42,150             28           0.13
Total interest-earning
assets (2)                  1,807,115         35,862           4.00        1,594,797         29,684           3.75
Noninterest-earning
assets                        124,753                                         97,040
Total average assets     $  1,931,868                                   $  1,691,837

Interest-bearing
liabilities:
Interest-bearing
demand deposits          $    196,615     $       42           0.04     $    165,562     $       17           0.02
Money market accounts         585,974            621           0.21          481,269            561           0.24
Savings accounts              195,034             52           0.05          179,524             74           0.08
Certificates of
deposit                       244,989            798           0.66          286,552          1,107           0.78
Total interest-bearing
deposits                    1,222,612          1,513           0.25        1,112,907          1,759           0.32
Advances                      116,062            831           1.44           53,667            374           1.41
Subordinated debt              39,288            789           4.05           21,334            419           3.96
Total interest-bearing
liabilities                 1,377,962          3,133           0.46        1,187,908          2,552           0.43
Noninterest-bearing
deposits                      336,611                                        293,902
Other
noninterest-bearing
liabilities                    35,820                                         23,865
Total average
liabilities                 1,750,393                                      1,505,675
Average equity                181,475                                        186,162
Total average
liabilities and equity   $  1,931,868                                   $  1,691,837

Net interest income                       $   32,729                                     $   27,132
Net interest rate
spread                                                         3.54                                           3.32
Net earning assets       $    429,153                                   $    406,889
Net interest margin
(3)                                                            3.65                                           3.43
Average
interest-earning
assets to average
interest-bearing
liabilities                     131.1 %                                        134.3 %



(1) Average loans receivable, net balances include outstanding loans. (2) Includes remunerated deposits (cash) with other financial institutions. (3) Net interest income divided by average interest-earning assets.

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Rate/Volume Analysis



The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate
multiplied by old volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.





                               Three Months Ended                                         Six Months Ended
                             June 30, 2022 vs. 2021                                    June 30, 2022 vs. 2021
                           Increase (Decrease) Due to                                Increase (Decrease) Due to
                                                              Total Increase                                            Total Increase
                             Volume               Rate          (Decrease)             Volume               Rate          (Decrease)
                                           (In thousands)                                            (In thousands)
Interest-earning
assets:
Loans receivable, net   $          2,568        $     647     $         3,215     $          4,746        $     464     $         5,210
Investments                         (150 )            741                 591                 (203 )          1,035                 832
FHLB stock                            46               27                  73                   65               15                  80
Other (1)                             (7 )             38                  31                    6               50                  56
Total
interest-earning
assets                  $          2,457        $   1,453     $         3,910     $          4,614        $   1,564     $         6,178

Interest-bearing
liabilities:
Interest-bearing
demand deposits         $              2        $      13     $            15     $              3        $      22     $            25
Money market accounts                 46                2                  48                  122              (62 )                60
Savings accounts                       2              (10 )                (8 )                  6              (28 )               (22 )
Certificates of
deposit                              (55 )            (29 )               (84 )               (161 )           (148 )              (309 )
Advances                             343                1                 344                  435               22                 457
Subordinated debt                      -                1                   1                  353               17                 370
Total
interest-bearing
liabilities             $            338        $     (22 )   $           316     $            758        $    (177 )   $           581

Net change in
interest income         $          2,119        $   1,475     $         3,594     $          3,856        $   1,741     $         5,597



(1) Includes remunerated deposits (cash) with 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.



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Contractual Obligations



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



                                                          After 3
                                       After 1 Year        Years
                          Within         Through          Through          Beyond         Total
                          1 Year         3 Years          5 Years         5 Years        Balance
                                                      (In thousands)

Certificates of
deposit                 $  169,555     $     79,154     $     20,814     $        -     $  269,523
FHLB advances              132,000           35,000           25,000         10,000        202,000
Line of credit               8,000                -                -              -          8,000
Subordinated debt
obligation                       -                -                -         39,319         39,319
Operating leases               808            1,710            1,779          4,376          8,673
Borrower taxes and
insurance                      934                -                -              -            934
Deferred compensation          104              326               73            496            999
Total contractual
obligations             $  311,401     $    116,190     $     47,666     $   54,191     $  529,448



Off-balance sheet commitments and arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks at June 30, 2022:


                                                      Amount of Commitment Expiration
                                                                After 3
                                             After 1 Year        Years
                                Within         Through          Through          Beyond        Total Amounts
                                1 Year         3 Years          5 Years         5 Years          Committed
                                                              (In thousands)
Commitments to originate
loans:
Fixed-rate                    $    1,334     $          -     $          -     $        -     $         1,334
Variable-rate                      1,705                -                -              -               1,705
Unfunded commitments under
lines of credit or existing
loans                             82,930           34,400           10,469        122,512             250,311
Standby letters of credit            613                -                -            200                 813
Total commitments             $   86,582     $     34,400     $     10,469     $  122,712     $       254,163






Liquidity Management



Liquidity is the ability to meet current and future financial obligations of a
short-term and long-term nature. Our primary sources of funds consist of deposit
inflows, loan repayments, maturities and sales of securities, and borrowings
from the FHLB. While maturities and scheduled amortization of loans and
securities are usually predictable sources of funds, deposit flows, calls of
investment securities and borrowed funds, and prepayments on loans and
investment securities are greatly influenced by general interest rates, economic
conditions and competition, which can cause those sources of funds to fluctuate.



Management regularly adjusts our investments in liquid assets based on an assessment of expected loan demand, expected deposit flows, available yields on deposits and interest-bearing securities, and the objectives of our interest rate risk policies. interest and investment.



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.



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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.



To June 30, 2022the Bank exceeded all regulatory capital requirements and was considered “well capitalized” FDIC regulatory capital guidelines.



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



                                                              Minimum Capital                 Minimum Required to be
                                      Actual                    Requirements                     Well-Capitalized
                               Amount        Ratio         Amount           Ratio         Amount                 Ratio
                                                           (Dollars in thousands)
Tier I leverage capital (to
average assets)               $ 205,397         10.4 %   $   78,894             4.0 %   $    98,617                     5.0 %
Common equity tier I (to
risk-weighted assets)         $ 205,397         12.7         72,985             4.5         105,423                     6.5
Tier I risk-based capital
(to risk-weighted assets)     $ 205,397         12.7         97,313             6.0         129,751                     8.0
Total risk-based capital
(to risk-weighted assets)     $ 221,464         13.7        129,751             8.0         162,189                    10.0




In order to avoid limitations on paying dividends, engaging in share
repurchases, and paying discretionary bonuses, the Bank must maintain common
equity tier 1 capital ("CET1") at an amount greater than the required minimum
levels plus a capital conservation buffer of 2.5%.



Effect of inflation and price change



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



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