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. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: •potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 ("COVID-19") and any governmental or societal responses thereto; •the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our allowance for loan and lease losses; •changes in general economic conditions, either nationally or in our market areas, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions; 37 -------------------------------------------------------------------------------- •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; •uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the transition away from LIBOR toward new interest rate benchmarks; •fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; •results of examinations of us by the
Federal Reserve Bank of San Francisco("FRB") and our bank subsidiary by the Federal Deposit Insurance Corporation("FDIC"), the Washington State Department of Financial Institutions, Division of Banks("DFI") or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our allowance for loan and lease losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; •our ability to pay dividends on our common stock; •our ability to attract and retain deposits; •our ability to control operating costs and expenses; •the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; •difficulties in reducing risk associated with the loans on our balance sheet; •staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; •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; •our ability to retain key members of our senior management team; •our ability to execute a branch expansion strategy; •our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; •our ability to manage loan delinquency rates; •costs and effects of litigation, including settlements and judgments; •increased competitive pressures among financial services companies; •changes in consumer spending, borrowing and savings habits; •legislative or regulatory changes that adversely affect our business, including as a result of COVID-19; •the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; •the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets, including market liquidity; •inability of key third-party providers to perform their obligations to us; •changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; •the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; and •other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and other risks detailed in our Form 10-K for the year ended December 31, 2021("2021 Form 10-K") and our other reports filed with the U.S. Securities and Exchange Commission("SEC"). Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements. As used throughout this report, the terms "Company", "we", "our", or "us" refer to First Financial Northwest, Inc.and its consolidated subsidiaries, including First Financial Northwest Bankand First Financial Diversified Corporation. 38 --------------------------------------------------------------------------------
First Financial Northwest Bank("the Bank") is a wholly-owned subsidiary of First Financial Northwest, Inc.("the Company") and, as such, comprises substantially all of the activity for the Company. First Financial Northwest Bankwas a community-based savings bank until February 4, 2016, when the Bank converted to a Washingtonchartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsapcounties, Washington, through its full-service banking office and headquarters in Renton, Washington, as well as seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington. The Bank's business consists predominantly of attracting deposits from the general public, combined with borrowing from the FHLB and raising funds in the wholesale market (which may include brokered deposits), then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. The Bank's strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in 12 to 24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans and consumer classic car loans that are outside of our primary market area. Through our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 47 other states and the District of Columbia, with the largest concentrations at September 30, 2022, in California, Oregon, Texas, Floridaand Alabamaof $38.0 million, $14.1 million, $12.0 million, $10.1 millionand $8.0 million, respectively. The Bank's strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. The Bank has created a SBA department, and has affiliated with a SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming a SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans or equipment financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well. Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income and net interest margin. First Financial Northwest Bankis currently slightly liability-sensitive, meaning our interest-earning liabilities reprice at a faster rate than our interest-bearing assets. During 2022, we continued to see quarterly improvements in the net interest margin. During the quarter ended September 30, 2022, net interest margin was 3.65%, compared to 3.33% in the same quarter last year. Since March 2022, in response to inflation, the Federal Open Market Committee("FOMC") of the Federal Reserve Systemhas increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25%. If the FOMCcontinues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent communications and interest rate forecasts, we expect the Company's loan yields and yields from variable rate interest earning assets will continue to improve, albeit at a potentially slower pace than the anticipated rate of increase in the cost of interest-bearing liabilities. An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth or an increase in probable loan losses. 39 -------------------------------------------------------------------------------- Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of BOLI, and revenue earned on our wealth management services. This income is increased or partially offset by any net gain or loss on sales of investment securities. Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, including commissions and bonuses, payroll taxes, expenses for retirement, and other employee benefits. Professional fees include legal services, auditing and accounting services, computer support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities. Also included in noninterest expense is the change to the Company's unfunded commitment reserve which is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.
Information related to COVID-19
The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As of
September 30, 2022, all Bank branches are open with normal hours. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.
Critical accounting policies
Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern the ALLL, the valuation of OREO, and the calculation of deferred taxes, the right-of-use asset and lease liability on our operating leases, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies in the 2021 Form 10-K. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the 2021 Form 10-K. 40 --------------------------------------------------------------------------------
Comparison of the financial situation at
Total assets were
$1.48 billionat September 30, 2022, an increase of 4.1%, from $1.43 billionat December 31, 2021. The following table details the $58.0 millionnet change in the composition of our assets at September 30, 2022from December 31, 2021. Balance at Balance at September 30, December 31, Change from 2022 2021 December 31, 2021 Percent Change (Dollars in thousands) Cash on hand and in banks $ 9,684 $ 7,246 $ 2,43833.6 % Interest-earning deposits with banks 15,227 66,145 (50,918) (77.0) Investments available-for-sale, at fair value 221,278 168,948 52,330 31.0 Investments held-to-maturity, at amortized cost 2,438 2,432 6 0.2 Loans receivable, net 1,143,348 1,103,461 39,887 3.6 FHLB stock, at cost 7,712 5,465 2,247 41.1 Accrued interest receivable 6,261 5,285 976 18.5 Deferred tax assets, net 2,355 850 1,505 177.1 Premises and equipment, net 21,608 22,440 (832) (3.7) BOLI, net 36,064 35,210 854 2.4 Prepaid expenses and other assets 13,605 3,628 9,977 275.0 ROU, net 3,260 3,646 (386) (10.6) Goodwill 889 889 - - Core deposit intangible, net 582 684 (102) (14.9) Total assets $ 1,484,311 $ 1,426,329 $ 57,9824.1 % Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco("FRB"), decreased by $50.9 millionduring the nine months ended September 30, 2022. Excess cash earning a nominal yield was deployed into higher yielding loans receivable and securities. Investments available-for-sale. Our investments available-for-sale portfolio increased by $52.3 millionduring the nine months ended September 30, 2022. During this period, the Bank purchased available-for-sale investment securities that included $40.0 millionof fixed rate U.S. Treasurybonds with remaining maturities of approximately two years. In addition, the Bank purchased $37.8 millionof mortgage-backed securities, $3.0 millionof asset-backed securities, $4.0 millionin corporate securities, and $5.2 millionin Community Reinvestment Act qualified municipal and mortgage-backed securities. During the nine months ended September 30, 2022, $1.0 millionof investments available-for-sale were called, $2.8 millionmatured, and there were no sales. The effective duration of the investments available-for-sale at September 30, 2022was 3.59%, compared to 3.54% at December 31, 2021. Effective duration measures the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank's portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank's investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change. Loans receivable. Net loans receivable increased $40.0 millionduring the nine months ended September 30, 2022, primarily due to growth in one-to-four family residential, multifamily and consumer loans of $64.3 million, $2.6 million, and $12.8 million, respectively. Partially offsetting these increases, construction/land loans decreased $20.8 million, business loans decreased $14.5 milliondue primarily to a $9.6 milliondecrease in PPP loans combined with a $3.7 milliondecrease in aircraft loans, and commercial real estate loans decreased $5.9 million. A total of $20.7 millionof multifamily construction/land loans 41 -------------------------------------------------------------------------------- converted to permanent multi-family loans in accordance with the loan's terms during the nine months ended September 30, 2022. At September 30, 2022and December 31, 2021, the Bank's construction/land loans totaled 49.1% and 59.7% of total capital plus surplus, respectively, and total non-owner occupied commercial real estate was 354.6% and 384.0% of total capital plus surplus, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and construction/land loans, should not exceed 550% of total capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total capital plus surplus. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review. The following table presents a breakdown of our multifamily, commercial and construction loans by collateral type at September 30, 2022and December 31, 2021. Total commercial real estate loans and construction/land loans are net of $0and $46.4 millionof LIP, respectively, at September 30, 2022, as compared to $89,000and $43.3 millionof LIP, respectively, at December 31, 2021. September 30, 2022 December 31, 2021 % of Total in % of Total in Amount Portfolio Amount Portfolio (In thousands) Multifamily residential $ 132,755 100.0 % $ 130,146100.0 % Non-residential: Retail 137,417 33.2 % 138,463 33.0 % Office 84,768 20.5 90,727 21.6 Hotel / motel 56,715 13.7 64,854 15.5 Storage 34,069 8.3 32,990 7.9 Mobile home park 23,531 5.7 20,636 4.9 Warehouse 19,934 4.8 17,724 4.2 Nursing home 12,452 3.0 12,713 3.0 Other non-residential 44,600 10.8 41,310 9.9 Total non-residential 413,486 100.0 % 419,417 100.0 % Construction/land: One-to-four family residential 41,606 57.3 % 34,677 37.1 % Multifamily 15,500 21.3 37,194 39.8 Commercial - - 6,189 6.6 Land 15,518 21.4 15,395 16.5 Total construction/land 72,624 100.0 % 93,455 100.0 % Total multifamily residential, non-residential and construction/land loans $ 618,865 $ 643,018Included in total construction/land loans at September 30, 2022, are $15.5 millionof multifamily loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. At December 31, 2021, construction/land loans included $37.2 millionof multifamily loans and $6.2 millionof commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. 42 -------------------------------------------------------------------------------- To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank originates and purchases loans and utilize loan participations with the underlying collateral located within areas of Washington Stateoutside our primary market area or in other states. The Bank's goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank's underwriting and risk guidelines. During the nine months ended September 30, 2022, the Bank purchased $40.3 millionof loans and loan participations to borrowers located in Washingtonand other states, including $9.1 millionof commercial real estate loans, $2.9 millionof one-to-four family residential loans, $5.9 millionof business loans and $22.5 millionof consumer loans secured by classic/collectible automobiles. The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas of Washington, in California, and in other states. At September 30, 2022, total loans secured by collateral located in Californiarepresented 3.3% of our total loans, and total loans secured by collateral located outside the states of Californiaand Washingtonrepresented 10.3% of our total loans. The following table details geographic concentrations in our loan portfolio: At September 30, 2022 One-to-Four Family Commercial Residential Multifamily Real Estate Construction/Land Business Consumer Total (In thousands) King County $ 345,427 $ 75,577 $ 249,488$ 71,137 $ 21,667 $ 9,178 $ 772,474Pierce County 41,788 10,548 27,297 - 255 941 80,829 Snohomish County 33,252 7,542 14,225 860 4,352 948 61,179 Kitsap County 4,672 5 732 - - - 5,409 Other Washington Counties 16,563 27,590 34,651 627 238 1,322 80,991 California 820 9,573 17,978 - - 9,626 37,997 Outside Washington and California (1) 6,913 1,920 69,115 - 5,542 35,604 119,094 Total loans $ 449,435 $ 132,755 $ 413,486$ 72,624 $ 32,054 $ 57,619 $ 1,157,973_______________ (1) Includes loans in Oregon, Texas, Floridaand Alabamaof $14.1 million, $11.9 million, $10.1 millionand $8.0 million, respectively, and loans in 42 other states and the District of Columbia. The ALLL decreased to $14.7 millionat September 30, 2022, from $15.7 millionat December 31, 2021, and represented 1.27% and 1.40% of total loans receivable at September 30, 2022, and December 31, 2021, respectively. The ALLL consists of two components, the general allowance and the specific allowance. The ALLL decrease was primarily due to a $900,0000recapture of provision for loan losses during the nine months ended September 30, 2022, reflecting a decrease in the general allowance. The ALLL general allowance primarily decreased as a result of $14.4 millionof loans downgraded to substandard, resulting in these loans removed from the calculation of the general allowance for loan losses. An individual analysis of these loans for required specific reserves was instead performed which indicated no additional specific allowance was needed. The $14.4 millionof downgrades included a $6.4 millionparticipation interest in commercial loans secured by medical rehabilitation facilities and a $6.3 millionparticipation interest in a loan secured by a senior housing/assisted living facility previously downgraded to special mention in the quarter ended March 31, 2022. Each of these loans were negatively impacted by the COVID-19 pandemic. In addition, a $1.7 millionmultifamily loan was downgraded based on a financial review of the borrower, who also has multiple other previously downgraded substandard loans. Changes in the composition of our loan portfolio also impacted the ALLL, with growth in one-to-four family residential, consumer and multifamily loans and a decline in construction/land loans impacting the analysis. The $1.2 millionbalance of PPP loans was omitted from the ALLL calculation at September 30, 2022, as these loans are fully guaranteed by the SBA. Management expects that the remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn will reimburse the Bank for the amount forgiven. 43 --------------------------------------------------------------------------------
We believe that the ALLL at
September 30, 2022, was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Part 1, Item 1A of our 2021 Form 10-K. As we work with our borrowers who face difficult financial circumstances, we explore various options available to minimize our risk of loss. At times, the best option for our customers and the Bank is to modify the loan for a period of time, usually one year or less. Certain loan modifications are accounted for as TDRs. These modifications have included a reduction in interest rate on the loan for a period of time, advancing the maturity date of the loan, or allowing interest-only payments for a specific time frame. These modifications are granted only when there is a reasonable and attainable restructured loan plan that has been agreed to by the borrower and is considered to be in the Bank's best interest.
The following table presents a breakdown of our TDRs on the dates indicated, which were all efficient and in a situation of regularization:
September 30, 2022 December 31, 2021 Nine Month Change (Dollars in thousands) Performing TDRs: One-to-four family residential $ 1,825 $ 2,107 $ (282) Total TDRs $ 1,825 $ 2,107 $ (282) % TDRs classified as performing 100.0 %
Our TDRs decreased
$282,000at September 30, 2022, compared to December 31, 2021as a result of principal repayments. At September 30, 2022, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at September 30, 2022, totaled $648,000and was secured by non-owner occupied one-to-four family properties located in Pierce County. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At September 30, 2022, past due loans totaled $406,000, representing 0.04% of total loans receivable. At December 31, 2021, past due loans totaled $255,000, representing 0.02% of total loans receivable. Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. Our credit quality remains strong as nonaccrual (nonperforming) loans remained low at $232,000, representing 0.02% of total assets at September 30, 2022. There were no nonaccrual loans at December 31, 2021. We will continue to focus our efforts on working with borrowers to bring any past due loans current. By taking ownership of the underlying collateral if needed, we can generally convert non-earning assets into earning assets on a more timely basis than may otherwise be the case. Our success in this area is reflected by our low nonperforming assets. 44 -------------------------------------------------------------------------------- OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At September 30, 2022, and December 31, 2021, the Bank had no OREO properties and no real estate secured loans in the foreclosure process. Intangible assets. The balance of goodwill was $889,000at both September 30, 2022and December 31, 2021. Goodwillwas calculated as the excess purchase price of the branches acquired in August 2017(the "Branch Acquisition") over the fair value of the assets acquired and liabilities assumed. The core deposit intangible ("CDI") recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing demand, interest-bearing demand, savings, and money market accounts. The CDI balance was $582,000at September 30, 2022and $684,000at December 31, 2021. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. The CDI amortizes into noninterest expense on an accelerated basis over ten years.
Deposits. The deposit accounts consisted of the following:
Balance at Balance at September 30, December 31, Change from 2022 2021 December 31, 2021 Percent Change (Dollars in thousands) Noninterest-bearing demand
$ 118,842 $ 117,751 $ 1,0910.9 % Interest-bearing demand 95,767 97,907 $ (2,140)(2.2) Savings 24,625 23,146 $ 1,4796.4 Money market 572,137 624,543 $ (52,406)(8.4) Certificates of deposit, retail 268,528 294,127 $ (25,599)(8.7) Brokered deposits 69,537 $ - $ 69,537- $ 1,149,436 $ 1,157,474 $ (8,038)(0.7) During the first nine months of 2022, deposits decreased $8.0 millionto $1.15 billionat September 30, 2022, compared to $1.16 billionat December 31, 2021. Declines in money market accounts and retail certificates of deposit of $52.4 millionand $25.6 million, respectively, were partially offset by $44.5 millionof brokered certificates of deposit and $25.0 millionof brokered interest-bearing demand deposits. We increased our reliance on brokered deposits and wholesale funds this year to fund the reduction in deposits and assets growth. The Bank continues to consider multiple funding alternatives in addition to customer deposits, including wholesale markets, brokered deposits, and the national deposit market.
Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, to leverage our balance sheet and to supplement our deposits. Total FHLB advances were
$150.0 millionand $95.0 millionat September 30, 2022, and December 31, 2021, respectively. At September 30, 2022, the Bank's advances included $55.0 millionof overnight advances and $35.0 millionof fixed-rate three-month advances that renew quarterly, and $60.0 millionof fixed-rate one-month advances that renew monthly. The $95.0 millionof one-month and three-month advances are utilized in cash flow hedge agreements, as described below. At September 30, 2022, all of our FHLB advances were due to reprice in less than two months. Cash Flow Hedge. To assist in our interest rate risk management efforts, the Bank has entered into multiple interest rate swap agreements with qualified institutions. Each interest rate swap agreement qualifies as a cash flow hedge of the variability of future interest payments attributable to the changes in one-month or three-month LIBOR rates. The objective of the cash flow hedge is to offset the variability of cash flows due to the rollover of the Bank's FHLB, or other fixed rate advances, for one-month or three-months, respectively, for the term of the agreement. The agreements allow for a substitute index to be used if LIBOR is unavailable. The following table presents details of the Bank's interest rate swap agreements as of September 30, 2022. For each interest rate swap agreement listed, the Bank has secured a fixed-rate FHLB advance for the notional amount that reprices at the same frequency as the corresponding interest rate swap. The Bank pays a fixed interest rate to the counterparty and in return, 45 -------------------------------------------------------------------------------- receives a floating interest rate based on the index noted in the table below. The original term of these interest rate swap agreements range from four to eight years. Fixed rate paid to Index rate received Notional amount Start Date Maturity Date counterparty from counterparty Repricing Frequency (Dollars in thousands) $ 15,000 9/27/2019 9/27/2024 1.440 % 1-month LIBOR monthly 10,000 11/20/2019 11/20/2023 1.585 3-month LIBOR quarterly 15,000 3/2/2020 3/2/2026 0.911 1-month LIBOR monthly 15,000 3/2/2020 3/2/2027 0.937 1-month LIBOR monthly 15,000 3/2/2020 3/2/2028 0.984 1-month LIBOR monthly 15,000 10/25/2021 10/25/2028 0.793 3-month LIBOR quarterly 10,000 10/25/2021 10/25/2029 0.800 3-month LIBOR quarterly A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At September 30, 2022and December 31, 2021, we recognized fair value assets of $11.1 millionand $1.5 million, respectively, as a result of the increase in market value of the interest rate swap agreements. The Bank has confirmed its adherence to the Interbank Offered Rate Fallbacks Protocol ("Protocol") as published by the International Swaps and Derivatives Association("ISDA") to prepare for the cessation of LIBOR by June 30, 2023. The Protocol, effective January 25, 2021, provides a mechanism for parties to bilaterally amend their existing derivative transaction to incorporate ISDA's fallback terms, providing for a clear transition from LIBOR to SOFR. Stockholders' Equity. Total stockholders' equity had virtually no change, remaining at $157.9 millionat both September 30, 2022and December 31, 2021. Stockholders' equity during the nine months ended September 30, 2022, reflects net income of $10.0 millionpartially offset by dividends paid of $3.2 million, $2.0 millionin stock based compensation and share repurchases totaling $1.4 million. In addition, stockholders' equity was adversely impacted by unrealized losses in securities available-for-sale of $19.2 millionand unrealized gains on the fair value of cash flow hedges of $9.6 million, reflecting increases in market interest rates during the period, resulting in a $7.6 millionaccumulated other comprehensive loss, net of tax. As part of the strategy to increase shareholder value, the Company's Board of Directors authorized a stock repurchase plan that began on February 18, 2022, and expired on September 16, 2022, for the repurchase of up to 455,000 shares. At September 30, 2022, the Company had repurchased 61,913 shares under this repurchase plan at an average price of $16.22per share. On September 28, 2022, the Company's Board of Directors approved another stock repurchase plan authorizing the repurchase of up to 5% of the Company's outstanding stock, or approximately 456,000 shares. This plan will commence on or about October 31, 2022and will expire no later than March 17, 2023.
The following table shows the cash dividends paid per share and the corresponding payout ratio for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Dividend declared per common share $ 0.12
$ 0.11$ 0.36 $ 0.33Dividend payout ratio (1) 27.4 % 32.4 % 32.4 % 32.7 % ______________
(1) Dividends paid per common share divided by basic earnings per common share.
Comparison of operating results for the three months ended
General. Net income for the three months ended
September 30, 2022, was $3.9 million, or $0.43per diluted share compared to $3.2 million, or $0.34per diluted share for the three months ended September 30, 2021. Net income increased $747,000primarily due to a $2.0 millionincrease in interest income that more than offset a $675,000increase in interest expense. In addition, a $400,000recapture of provision for loan losses was recognized for the three months ended September 30, 2022, as compared to a $100,000provision for loan losses for the three months ended September 30, 2021. Partially offsetting these improvements, noninterest expense increased $681,000.
Net interest income. Net interest income for the three months ended
for the three months ended
Interest income increased by
$2.0 millionfor the three months ended September 30, 2022, as compared to the same period in 2021, including a $1.1 millionincrease in loan interest income due to an increase in average loan yields and an increase of $38.1 millionin the average balance of loans receivable between the periods. The average loan yield increased to 4.77% for the three months ended September 30, 2022, from 4.54% for the three months ended September 30, 2021. The increase in the average yield on loans was largely due to the impact of interest rates on variable rate loans as well as new loans being originated at higher interest rates. Interest income from investment securities increased $791,000, primarily due to an increase in the average yield of both taxable and non-taxable investment securities and secondarily to a $37.0 millionincrease in the average balance of taxable investment securities. The average yield of taxable securities increased 126 basis points to 2.98% while the average yield on non-taxable securities increased 41 basis points to 2.22% for the three months ended September 30, 2022, as compared to the same quarter in 2021. The increase in average yields on investment securities during the current quarter, reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher to market interest rates and the purchase of higher yielding securities in 2022. Interest income from interest-earning deposits increased $101,000for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. During these comparative periods, the average yield increased to 2.02% for the three months ended September 30, 2022, from 0.14% for the three months ended September 30, 2021. The higher average yield from these deposits was primarily a result of increases to the target range for federal funds between periods. Excess cash was invested in higher interest-earning assets, resulting in a $44.1 milliondecrease in the average balance of interest-earning deposits for the three months ended September 30, 2022, as compared to the same period in 2021. The increase in interest income was partially offset by a $675,000increase in deposit interest expense for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. The average rate paid on interest-bearing deposits increased to 0.87% for the three months ended September 30, 2022, as compared to 0.63% for the three months ended September 30, 2021, primarily attributed to increases in cost of money market accounts due to recent market interest rate increases and the utilization of higher cost brokered deposits. The average balance of interest-bearing deposits increased $39.5 millionfor the three months ended September 30, 2022, as compared to the same period in 2021 primarily reflecting a $69.5 millionincrease in the average balance of brokered deposit and a $23.8 millionincrease in money market accounts, partially offset by a $49.2 milliondecrease in the average balance of retail certificates of deposit. Interest expense from borrowings decreased $39,000for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, primarily due to a decrease of $14.7 millionin the average balance which was partially offset by a six basis point increase in cost. At September 30, 2022, our borrowings are comprised of $95.0 millionof FHLB advances matched to fixed-rate interest rate swap agreements, and $55.0 millionin overnight advances obtained this quarter. The Company's net interest margin increased to 3.65% for the three months ended September 30, 2022, from 3.33% for the three months ended September 30, 2021. This increase was primarily due to the 50 basis point increase in the average yield on interest-earning assets outpacing the 22 basis point increase in the average cost of interest bearing liabilities between periods. These increases reflect higher market interest rates due to recent increases in the target range for federal funds, including a 150 basis points increase during the third quarter of 2022, to a range of 3.00% to 3.25%. For more information on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of this report. 47 -------------------------------------------------------------------------------- The following table presents the effects of changing rates and volumes on our net interest income during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume are allocated proportionately to the changes in rate and volume. Three
Net Change in Interest Rate Volume Total (In thousands) Interest-earning assets: Loans receivable, net
$ 674 $ 436 $ 1,110Investment securities, taxable 625 160 785 Investment securities, non-taxable 24 (18) 6 Interest-earning deposits with banks 116 (15) 101 FHLB stock 6 (7) (1) Total net change in income on interest-earning assets 1,445 556 2,001 Interest-bearing liabilities: Interest-bearing demand 131 (1) 130 Savings - - - Money market 533 17 550 Certificates of deposit, retail (122) (184) (306) Brokered deposits 340 - 340 Borrowings 14 (53) (39) Total net change in expense on interest-bearing liabilities 896 (221) 675 Total net change in net interest income $ 549 $ 777 $ 1,32648
-------------------------------------------------------------------------------- The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended
September 30, 2022and 2021. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield. Three Months Ended September 30, 2022 2021 Average Interest Yield / Average Interest Yield / Balance Earned / Paid Cost Balance Earned / Paid Cost (Dollars in thousands) Assets Loans receivable, net $ 1,132,233 $ 13,6184.77 % $ 1,094,124 $ 12,5084.54 % Investment securities, taxable 197,228 1,480 2.98 160,230 695
Investment securities, non-taxable 23,016 129 2.22 27,031 123
Interest-earning deposits with banks 24,565 125 2.02 68,618 24 0.14 FHLB stock 5,923 83 5.56 6,465 84 5.15 Total interest-earning assets 1,382,965 15,435 4.43 1,356,468 13,434 3.93 Noninterest earning assets 87,851 80,333 Total average assets
$ 1,470,816 $ 1,436,801Liabilities and Stockholders' Equity Interest-bearing demand $ 102,377 $ 1510.59 % $ 108,578 $ 210.08 % Savings 24,619 2 0.03 22,939 2 0.03 Money market 592,331 959 0.64 568,494 409 0.29 Certificates of deposit, retail 267,300 874 1.30 316,529 1,180 1.48 Brokered deposits 69,452 340 1.94 - - - Total interest-bearing deposits 1,056,079 2,326 0.87 1,016,540 1,612 0.63 Borrowings 105,272 392 1.48 120,000 431 1.42 Total interest-bearing liabilities 1,161,351 2,718 0.93 1,136,540 2,043
Noninterest bearing liabilities 150,950 138,369 Average equity 158,515 161,892 Total average liabilities and equity
$ 1,470,816 $ 1,436,801Net interest income $ 12,717 $ 11,391Net interest margin 3.65 % 3.33 % Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, management's experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. Specific allowances result when management performs an impairment analysis on a loan when management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this impairment analysis, if the recorded investment in the loan is less than the market value of the collateral less costs to sell ("market value"), a specific allowance is 49 -------------------------------------------------------------------------------- established in the ALLL for the loan. The amount of the specific allowance is computed using current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This analysis is inherently subjective as it relies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from predictions. Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Loans classified as a TDR due to the borrower being granted a rate concession are analyzed by discounted cash flow analysis. The amount of the specific allowance on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the recorded investment in the loan. During the three months ended September 30, 2022, management evaluated the adequacy of the ALLL and concluded that a $400,000recapture of provision for loan losses was appropriate. This recapture was primarily attributed to the downgrade to substandard of a $6.3 millionparticipant interest in a loan secured by a senior housing/assisted living facility previously downgraded to special mention in the quarter ended March 31, 2022. This loan was analyzed for impairment to determine if a specific allowance was required. The analysis concluded that no losses were anticipated, resulting in a decrease to the general allowance which offset the increase due to our loan growth, resulting in the recapture of provision for loan losses. In comparison, a $100,000of provision for loan losses was made in the three months ended September 30, 2021. For more information, see Note 5 - Loans Receivable--ALLL. Noninterest Income. Noninterest income decreased $221,000to $778,000for the quarter ended September 30, 2022, as compared to the quarter ended September 30, 2021.
The following table presents a detailed analysis of the variations in the components of non-interest income:
Three Months Three Months Change from Three Ended September Ended September Months Ended 30, 2022 30, 2021 September 30, 2021 Percent Change (Dollars in thousands) BOLI income $ 243 $ 377 $ (134) (35.5) % Wealth management revenue 89 64 25 39.1 Deposit related fees 245 228 17 7.5 Loan related fees 195 300 (105) (35.0) Other 6 30 (24) (80.0) Total noninterest income $ 778 $ 999 $ (221) (22.1) During the three months ended
September 30, 2022, as compared to the three months ended September 30, 2021, BOLI income decreased $134,000, as $161,000in death benefits proceeds was recognized in the three months ended September 30, 2021. Also contributing to the decrease in noninterest income was the $105,000decrease in loan related fees, including a $131,000decrease in loan prepayment fees. Noninterest Expense. Noninterest expense increased $681,000to $9.0 millionfor the three months ended September 30, 2022, from $8.3 millionfor the three months ended September 30, 2021. 50
The following table presents a detailed analysis of the variations of the components of non-interest expenses:
Change from Three Three Months Ended Three Months Ended Months Ended September 30, 2022 September 30, 2021 September 30, 2021 Percent Change (Dollars in thousands) Salaries and employee benefits $ 5,417 $ 4,856 $ 561 11.6 % Occupancy and equipment 1,188 1,116 72 6.5 Professional fees 549 502 47 9.4 Data processing 675 626 49 7.8 Regulatory assessments 105 121 (16) (13.2) Insurance and bond premiums 112 106 6 5.7 Marketing 92 64 28 43.8 Other general and administrative 876 942 (66) (7.0) Total noninterest expense $ 9,014 $ 8,333 $ 681 8.2 During the three months ended
September 30, 2022, salaries and employee benefits increased $561,000as compared to the three months ended September 30, 2021, primarily due to higher than normal vacancies in staffing in the year ago quarter as 10 open positions were filled during the current quarter and higher incentive commissions were paid for one-to-four family residential loan originations. Occupancy and equipment expense increased $72,000, due primarily to the $64,000increase in facilities and equipment maintenance. Other general and administrative expenses decreased $66,000, due primarily to a $207,000loss on sale of OREO properties for the three months ended September 30, 2021, which offset increased postage, subscription, conference attendance, and business entertainment related expenses this quarter as business generating opportunities continue to increase.
Federal income tax expense. The provision for federal income tax has been increased to
for the same period in 2021, mainly due to a
Comparison of operating results for the nine months ended
General. Net income for the nine months ended
September 30, 2022was $10.0 million, or $1.10per diluted share as compared to net income of $9.5 million, or $0.99per diluted share for the nine months ended September 30, 2021. The increase in net income was primarily the result of a $2.5 millionimprovement in net interest income and a $600,000increase in the recapture of provision for loan losses outpacing the $2.3 millionincrease in noninterest expense and $208,000decline in noninterest income between the periods. Net Interest Income. Net interest income for the nine months ended September 30, 2022was $35.9 million, as compared to $33.4 millionfor the same period in 2021, due to both increases in interest income and decreases in interest expense between the periods. Interest income increased by $1.4 millionfor the nine months ended September 30, 2022, as compared to the same period in 2021, including a $1.2 millionincrease from investment securities. The average loan yield decreased slightly to 4.52% for the nine months ended September 30, 2022, compared to 4.61% in the nine months ended September 30, 2021. The $785,000adverse impact to interest income from this decrease in the average yield on loans was more than offset by an increase of $906,000resulting from the $26.2 millionincrease in average loan balances. The average loan yield for the nine months ended September 30, 2021, was positively impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling $1.6 millionas compared to $247,000in the current nine month period. In addition, the prior year period included $394,000in interest and late charges received from the payoff of a $2.0 millionnonperforming loan. Interest income from investment securities increased $1.2 million, primarily as a result of an increase in both the average yield and average balance of taxable investment securities. The average yield of taxable securities increased 64 basis points to 2.48% for the nine months ended September 30, 2022, from 1.84% for the nine months ended September 30, 2021. The average balance of taxable investment securities increased $21.9 millionfor the nine months ended September 30, 2022, as compared to the same period in 2021. 51 -------------------------------------------------------------------------------- Interest income from interest-earning deposits had a $128,000increase for the nine months ended September 30, 2022, as compared to the same period in 2021, with an increase in average yield to 0.76% from 0.11%, partially offset by a $29.7 milliondecrease in the average balance of these deposits between periods. Deposit interest expense decreased by $800,000for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The average cost of interest-bearing deposits decreased 12 basis points between the periods primarily due to a shift in balances from higher cost certificates of deposit into money market accounts. Interest expense for retail certificates of deposit decreased $2.0 milliondue to a decrease of $81.9 millionin the average balance and a 46 basis point reduction in the average cost between periods. Partially offsetting this improvement, interest expense on money market accounts increased $609,000due primarily to a nine basis point increase in the average cost and an increase of $77.1 millionin the average balance between periods. Further, brokered deposit interest expense totaled $381,000in the nine months ended September 30, 2022, compared to none in the prior year period. During the nine months ended September 30, 2022, we supplemented our funding needs with an average balance of $28.4 millionof brokered deposits. Interest expense on borrowings declined $257,000for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The average cost of borrowings decreased to 1.32% for the nine months ended September 30, 2022, from 1.41% for the nine months ended September 30, 2021, and the average balance decreased by $18.4 millionbetween periods. Reductions in both the average balance and cost of borrowings were primarily due to the repayment of $25.0 millionin FHLB advances due to a maturing interest rate swap agreement, and the $25.0 millionof fixed rate FHLB advances secured at lower rates upon the onset of $25.0 millionof previously contracted forward-starting interest rate swap agreements in October 2021. The Company's net interest margin increased to 3.54% for the nine months ended September 30, 2022, from 3.34% for the nine months ended September 30, 2021. This increase was due primarily to the improvement in both interest income from interest-earning assets and interest expense from interest-bearing liabilities, as outlined above. For more information on this, see "How We Measure the Risk of Interest Rate Changes" in Item 3 of this Form 10-Q. 52 --------------------------------------------------------------------------------
The following table details the change in net interest income due to changes in yield or cost, or changes in the average balance of the related asset or liability:
Net Change in Interest Rate Volume Total (In thousands) Interest-earning assets: Loans receivable, net
Investment securities, taxable 838 301 1,139 Investment securities, non-taxable 38 (2) 36 Interest-earning deposits with banks 153 (25) 128 FHLB stock 7 (26) (19) Total net change in income on interest-earning assets 251 1,154 1,405
Interest-bearing demand 154 (3) 151 Savings - 1 1 Money market 431 178 609 Certificates of deposit, retail (945) (1,041) (1,986) Brokered deposits 381 - 381 Borrowings (63) (194) (257) Total net change in expense on interest-bearing liabilities (42) (1,059) (1,101) Total net change in net interest income
$ 293 $ 2,213 $ 2,50653
-------------------------------------------------------------------------------- The following table compares detailed average balances, associated yields and rates, and the resulting changes in interest and dividend income or expense for the nine months ended
September 30, 2022and 2021. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield. Nine Months Ended September 30, 20222021 Interest Interest Average Balance
Return or cost earned/paid Average balance Return or cost earned/paid
(Dollars in thousands)
Loans receivable, net
$ 1,121,642 $ 37,8934.52 % $ 1,095,380 $ 37,7724.61 % Investment securities, taxable 173,562 3,225 2.48 151,646 2,086 1.84 Investment securities, non-taxable 23,532 370 2.10 23,660 334 1.89 Interest-earning deposits with banks 32,051 181 0.76 61,722 53 0.11 FHLB stock 5,767 228 5.29 6,454 247 5.12 Total interest-earning assets 1,356,554 41,897 4.13 1,338,862 40,492 4.04 Noninterest earning assets 85,575 79,674 Total average assets $ 1,442,129 $ 1,418,536Liabilities and Stockholders' Equity Interest-bearing demand $ 102,509 $ 2210.29 % $ 106,857 $ 700.09 % Savings 23,856 5 0.03 21,201 4 0.03 Money market 602,742 1,825 0.40 525,615 1,216 0.31 Certificates of deposit, retail 274,813 2,550 1.24 356,707 4,536 1.70 Brokered deposits 28,407 381 1.79 - - - Total interest-bearing deposits 1,032,327 4,982 0.65 1,010,380 5,826 0.77 Borrowings 101,740 1,006 1.32 120,165 1,263 1.41 Total interest-bearing liabilities 1,134,067 5,988 0.71 1,130,545 7,089 0.84 Noninterest bearing liabilities 149,523 127,997 Average equity 158,539 159,994 Total average liabilities and equity $ 1,442,129 $ 1,418,536Net interest income $ 35,909 $ 33,403Net interest margin 3.54 % 3.34 % Provision for Loan Losses. During the nine months ended September 30, 2022, management evaluated the adequacy of the ALLL and concluded that a recapture of provision for loan losses in the amount of $900,000was appropriate for the period. This recapture was primarily due to $14.4 millionof loans downgraded to substandard, resulting in these loans being removed from the calculation of the general allowance for loan losses. An individual analysis of these loans for required specific reserves was instead performed which indicated no additional specific allowance was needed. For additional information, see "Comparison of Financial Condition at September 30, 2022, and December 31, 2021- Loans Receivable" discussed above. Changes in the composition of our loan portfolio, with growth in one-to-four family residential, consumer and multifamily loans and a decline in construction/land loans with over $20.0 millionof these loans converting to permanent multifamily loans during the period, and reduced balances in higher risk construction/land development loans also contributed to the recapture of provision for the nine months ended September 30, 2022. In comparison, a recapture of provision for loan losses in the amount of $300,000was recognized for the nine months ended September 30, 2021, primarily the result of downgrades to substandard of $10.5 millionof loans. These loans, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were adversely impacted by the COVID-19 pandemic and are included in substandard 54 -------------------------------------------------------------------------------- loans at September 30, 2021. Our impairment analysis on these properties showed no anticipated loss on them, resulting in a decline of general allowance and recapture of provision. For more information, see Note 5 - Loans Receivable - ALLL.
The following table presents certain credit ratios at the periods indicated and for each of the components of the calculation of the ratios.
For the nine months ended
2022 2021 (Dollars in thousands) ALLL as a percent of total loans 1.27 % 1.35 % ALLL at period end $ 14,726 $ 15,057 Total loans outstanding 1,157,973 1,117,358 Non-accrual loans as a percentage of total loans outstanding at period end 0.02 % - % Total non-accrual loans $ 232 $ - Total loans outstanding 1,157,973 1,117,358 ALLL as a percent of non-accrual loans at period end 6,347.41 % n/a ALLL at period end $ 14,726 $ 15,057 Total non-accrual loans 232 -
Net collections over the period to average outstanding loans: Residential one-family to four-family:
- % 0.05 % Net recoveries during period $ 6 $ 183 Average loans receivable, net (1) 419,839 372,679 Multifamily: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 133,552 140,172 Commercial: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 409,784 375,575 Construction/land development: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 74,738 98,031 Business: - % - % Net recoveries during period $ - $ - Average loans receivable, net (1) 32,991 68,297 Consumer: (0.07) % - % Net recoveries during period $ (37) $ - Average loans receivable, net (1) 50,738 40,626 Total loans: - % 0.02 % Net recoveries during period (31) 183 Average loans receivable, net (1) 1,121,642 1,095,380
(1) Average loans receivable, net balances, includes unearned loans and deferred charges.
55 -------------------------------------------------------------------------------- Noninterest Income. Noninterest income decreased
$208,000to $2.5 millionfor the nine months ended September 30, 2022, as compared to $2.7 millionfor the nine months ended September 30, 2021. The following table provides a detailed analysis of the changes in the components of noninterest income: Change from Nine Months Ended Nine Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2021 Percent Change (Dollars in thousands) BOLI income $ 782 $ 891 $ (109) (12.2) % Wealth management revenue 276 391 (115) (29.4) Deposit related fees 705 654 51 7.8 Loan related fees 748 714 34 4.8 Other 17 86 (69) (80.2) Total noninterest income $ 2,528 $ 2,736 $ (208) 7.6 Wealth management revenue decreased $115,000for the nine months ended September 30, 2022, as compared to the same period in 2021, primarily due to a reduction in sales, impacted in part by reduced sales personnel and staff turnover. Also contributing to the decrease in noninterest income, BOLI income decreased $109,000, primarily as a result of $161,000of death benefit proceeds received in 2021 with no similar proceeds received in 2022. Partially offsetting these decreases, deposit related fees increased $51,000primarily from debit card related service fees reflecting increased usage as businesses reopened and the economy improved in our markets. Noninterest Expense. Noninterest expense increased $2.3 millionto $26.9 millionfor the nine months ended September 30, 2022, as compared to $24.7 millionfor the same period in 2021.
The following table presents a detailed analysis of the variations of the components of non-interest expenses:
Change from Nine Months Ended Nine Months Ended Nine Months Ended September 30, 2022 September 30, 2021 September 30, 2021 Percent Change (Dollars in thousands) Salaries and employee benefits $ 16,156 $ 14,863 $ 1,293 8.7 % Occupancy and equipment 3,621 3,403 218 6.4 Professional fees 1,732 1,423 309 21.7 Data processing 2,044 2,003 41 2.0 Regulatory assessments 295 356 (61) (17.1) Insurance and bond premiums 354 341 13 3.8 Marketing 226 116 110 94.8 Other general and administrative 2,497 2,146 351 16.4 Total noninterest expense $ 26,925 $ 24,651 $ 2,274 9.2 During the nine months ended
September 30, 2022, as compared to the same period in 2021, salaries and employee benefits increased $1.3 millionprimarily due to an increase in the number of employees, with higher than normal vacancies in staffing in the year ago period, and higher incentive commissions paid for increased production of one-to-four family residential loans paid in the current period. Occupancy and equipment expense increased $218,000during the nine months ended September 30, 2022, due primarily to an $126,000increase in facilities and equipment maintenance, office improvements of $55,000, and increased lease rental expense of $41,000between the periods. Professional fees increased $309,000for the nine months ended September 30, 2022, as compared to the same prior year period, due in part to fees paid to human resources 56 -------------------------------------------------------------------------------- recruiters to attract employees in this competitive employment environment, along with $167,000in regulatory examination fees paid in the nine months ended September 30, 2022, with no comparable expenses in the nine months ended September 30, 2021. Marketing expense increased $110,000primarily due to increased marketing/promotional campaigns. Other general and administrative expense increased $351,000, due to increases in travel expenses, postage relating to the aforementioned marketing expenses, subscription and business entertainment related expenses as business generating opportunities increased this year. Partially offsetting these increases was a $61,000decrease to regulatory assessments primarily due to the true-up of estimated expenses. Federal Income Tax Expense. The federal income tax provision increased $117,000for the nine months ended September 30, 2022, primarily as a result of a $624,000increase in income before federal income taxes for the nine months ended September 30, 2022, as compared to the same period in 2021.
Cash and capital resources
We are required to have sufficient cash flow in order to maintain proper liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained. Our primary sources of funds are customer deposits, scheduled loan and investment repayments, including interest payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used to fund loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. At
September 30, 2022, the undisbursed portion of construction LIP and unused portion of lines of credit totaled $46.4 millionand $30.6 million, respectively. Certificates of deposit scheduled to mature in one year or less at September 30, 2022, totaled $174.6 million. Management's policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial Northwest Bank. We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements. When retail deposits are not sufficient to provide the funds for our assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs. During the third quarter of 2022, we supplemented our funding with $69.5 millionin brokered deposits as their rates and terms were deemed most appropriate to achieve our asset/liability objectives. At September 30, 2022, brokered deposits consisted of $44.5 millionof brokered certificates of deposit and $25.0 millionof interest-bearing demand deposits. At September 30, 2022the Bank maintained credit facilities with the FHLB totaling $654.6 million, subject to qualifying collateral limits that reduced our pledged collateral to $426.5 million, with an outstanding balance of $150.0 million. As further funding sources, we also had the ability to borrow $75.7 millionfrom the FRB, and $75.0 millionfrom unused lines of credit with other financial institutions, with no balance outstanding from these sources at September 30, 2022. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this report.
On a monthly basis, we estimate our liquidity sources and needs for the next twelve months. We also determine funding concentrations and our needs for funding sources other than deposits. This information is used by our Asset/Liability Management Committee to forecast funding needs and investment opportunities.
We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on our current capital allocation objectives, during the remainder of fiscal 2022 we expect cash expenditures of
$432,000for capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12per share, our average total dividend paid each quarter would be approximately $1.1 million, based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). At September 30, 2022, we project that our fixed commitments for the remainder of the fiscal year ending December 31, 2022, will include (i) $214,000of operating lease payments and (ii) other future obligations and accrued expenses of $23.5 million. At September 30, 2022, $95.0 millionof our $150.0 millionin FHLB borrowings were short-term and tied to interest rate swap agreements and are expected to be renewed as they mature during 2022. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months. Our total stockholders' equity was $157.9 millionat September 30, 2022. Consistent with our goal to operate a sound and profitable financial organization we actively seek to maintain the Bank as a "well capitalized" institution in accordance with regulatory standards. As of September 30, 2022, First Financial Northwest Bankexceeded all regulatory capital requirements. Regulatory capital ratios for First Financial Northwest Bankwere as follows as of September 30, 2022: Total capital to risk-weighted assets was 15.49%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 14.24%; and Tier 1 capital to total assets was 10.43%. At September 30, 2022, First Financial Northwest Bankmet the financial ratios to be considered well-capitalized under the regulatory guidelines. In addition, the Bank is required to maintain a capital conservation buffer consisting of additional Common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum regulatory capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At September 30, 2022, the Bank's capital conservation buffer was 7.49%. See Item 1. "Business - How We Are Regulated - Regulation and Supervision of First Financial Northwest Bank- Capital Requirements" included in the 2021 Form 10-K for additional information regarding regulatory capital requirements for the Bank. The Accumulated Other Comprehensive Income ("AOCI") component of capital includes a variety of items, including the value of our available-for-sale investment securities portfolio and the value of our derivative instruments, net of tax. We model various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to withstand the estimated potential fluctuations in a variety of interest rate environments.
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