What changed in this filing

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Item 1. Financial Statements

2023-08-11 compared with 2023-05-12 · 726 added, 427 removed, 2032 unchanged (36% of the section changed)

3 unchanged sentences

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

March 31, 2023

June 30, 2023

December 31, 2022

51 unchanged sentences

Common stock, $ 0.01 par value, authorized 75,000,000 shares;

issued and outstanding 9,674,055 shares at March 31, 2023, and 9,703,581 shares at December 31, 2022

issued and outstanding 9,633,496 shares at June 30, 2023, and 9,703,581 shares at December 31, 2022

Additional paid-in capital

12 unchanged sentences

Noncontrolling interest in Quin Ventures, Inc.

( 3,376 )  

Total shareholders' equity

9 unchanged sentences

Three Months Ended

Six Months Ended

INTEREST INCOME

Interest and fees on loans receivable

$ 19,504  

$ 14,536  

Interest on investment securities

2 unchanged sentences

Total interest income

23,282  

16,901  

INTEREST EXPENSE

1 unchanged sentence

Net interest income

16,305  

15,486  

Recapture of credit losses

( 500 )  

Net interest income after recapture of credit losses

16,805  

15,486  

Provision for (recapture of) credit losses

Net interest income after provision for (recapture of) credit losses

NONINTEREST INCOME

Loan and deposit service fees

Sold loan servicing fees and servicing right mark-to-market

Sold loan servicing fees and servicing rights mark-to-market

Net gain on sale of loans

Net gain on sale of investment securities

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

10 unchanged sentences

Total noninterest expense

14,871  

14,831  

Income before provision for income taxes

2 unchanged sentences

Net income attributable to parent

$ 3,528  

$ 2,806  

Basic and diluted earnings per common share

$ 0.39  

$ 0.30  

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands) (Unaudited)

Three Months Ended

Six Months Ended

$ 1,701  

$ 1,535  

Other comprehensive income (loss):

Unrealized holding gains (losses) on investments available for sale arising during the period

Income tax (provision) benefit related to unrealized holding gains (losses) on investments

$ 5,144  

$ 4,039  

Other comprehensive (loss) income:

Unrealized holding (losses) gains on investments available for sale arising during the period

( 4,152 )  

( 16,875 )  

Income tax benefit related to unrealized holding (losses) gains on investments

Amortization of unrecognized DB plan prior service cost

Income tax provision related to amortization of DB plan prior service cost

Unrealized holding (losses) gains on derivatives

( 16 )  

Income tax benefit (provision) related to unrealized holding (losses) gains on derivatives

Unrealized holding gains (losses) on derivatives

( 392 )  

Income tax (provision) benefit related to unrealized holding gains (losses) on derivatives

( 287 )  

Reclassification adjustment for net (gains) losses on sales of securities realized in income

Income tax benefit related to reclassification adjustment on sales of securities

Other comprehensive income (loss), net of tax

Comprehensive income (loss)

Income tax (provision) benefit related to reclassification adjustment on sales of securities

Other comprehensive (loss) income, net of tax

( 1,958 )  

( 13,294 )  

Comprehensive (loss) income

( 257 )  

( 11,759 )  

Comprehensive loss attributable to noncontrolling interest

( 75 )  

Comprehensive income (loss) attributable to parent

( 953 )  

( 160 )  

Comprehensive (loss) income attributable to parent

$ ( 182 )  

$ ( 10,806 )  

$ 5,781  

See selected notes to the consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended March 31, 2023 and 2022

For the Three Months Ended June 30, 2023 and 2022

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

4 unchanged sentences

Total Shareholders'

Balance at March 31, 2022

10,003,622  

$ 96,473  

$ 105,546  

$ ( 8,407 )  

$ ( 15,153 )  

$ ( 783 )  

$ 177,776  

( 953 )  

Common stock repurchased

( 52,618 )  

( 525 )  

( 333 )  

Restricted stock award grants net of forfeitures

Restricted stock awards canceled

( 1,407 )  

( 27 )  

Other comprehensive loss, net of tax

( 13,294 )  

Share-based compensation expense

ESOP shares committed to be released

Cash dividends declared ($ 0.07 per share)

( 701 )  

Balance at June 30, 2022

9,950,172  

$ 96,479  

$ 107,000  

$ ( 8,242 )  

$ ( 28,447 )  

$ ( 1,736 )  

$ 165,154  

Balance at March 31, 2023

9,674,055  

$ 95,333  

$ 114,139  

$ ( 7,749 )  

$ ( 38,108 )  

$ ( 3,376 )  

$ 160,336  

( 75 )  

Common stock repurchased

( 30,176 )  

( 301 )  

( 39 )  

Restricted stock award forfeitures net of grants

( 8,911 )  

Restricted stock awards canceled

( 1,472 )  

( 17 )  

Other comprehensive loss, net of tax

( 1,958 )  

Close out investment in Quin Ventures

( 3,451 )  

Share-based compensation expense

ESOP shares committed to be released

( 13 )  

Cash dividends declared ($ 0.07 per share)

( 675 )  

Balance at June 30, 2023

9,633,496  

$ 95,360  

$ 111,750  

$ ( 7,583 )  

$ ( 40,066 )  

$ 159,557  

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2023 and 2022

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

Additional Paid-in

Unearned ESOP

Accumulated Other Comprehensive Loss,

Noncontrolling

Total Shareholders'

Balance at December 31, 2021

6 unchanged sentences

( 1,255 )  

Common stock repurchased

( 52,618 )  

( 525 )  

( 333 )  

Restricted stock award grants net of forfeitures

10 unchanged sentences

( 1,399 )  

Balance at March 31, 2022

Balance at June 30, 2022

9,950,172  

26 unchanged sentences

( 2,951 )  

Close out investment in Quin Ventures

( 3,451 )  

Share-based compensation expense

2 unchanged sentences

( 1,354 )  

Balance at March 31, 2023

9,674,055  

Balance at June 30, 2023

9,633,496  

8 unchanged sentences

(In thousands) (Unaudited)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

Net income before noncontrolling interest

$ 3,443  

$ 2,504  

Adjustments to reconcile net income to net cash from operating activities:

3 unchanged sentences

(Accretion) amortization of deferred loan fees and purchased premiums, net

( 111 )  

Amortization of debt issuance costs

Change in fair value of sold loan servicing rights

( 269 )  

Additions to servicing rights on sold loans, net

( 68 )  

(Recapture of) provision for credit losses

( 500 )  

Allocation of ESOP shares

1 unchanged sentence

Gain on sale of loans, net

( 176 )  

Gain on sale of securities available for sale, net

Increase in cash surrender value of life insurance, net

( 226 )  

Origination of loans held for sale

( 4,812 )  

Proceeds from sale of loans held for sale

10,557  

Change in assets and liabilities:

Increase in accrued interest receivable

( 462 )  

Decrease (increase) in prepaid expenses and other assets

Increase (decrease) in accrued interest payable

Increase in accrued interest payable

Increase in accrued expenses and other liabilities

3 unchanged sentences

Proceeds from maturities, calls, and principal repayments of securities available for sale

10,718  

Proceeds from sales of securities available for sale

10,452  

Purchase of FHLB stock

( 3,921 )  

Early surrender of bank-owned life insurance policy

Net increase in loans receivable

( 32,746 )  

Purchase of premises and equipment, net

( 559 )  

Capital contributions to equity and partnership investments

Capital disbursements received from equity and partnership investments

Capital contributions to historic tax credit partnerships

Net cash used by investing activities

( 35,313 )  

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from financing activities:

Net increase (decrease) in deposits

$ 29,953  

Net increase in deposits

Proceeds from long-term FHLB advances

15,000  

Repayment of long-term FHLB advances

( 10,000 )  

Net increase in short-term FHLB advances

90,000  

65,000  

Net (decrease) increase in line of credit

( 1,000 )  

Net increase in advances from borrowers for taxes and insurance

Net decrease in advances from borrowers for taxes and insurance

Payment of dividends

( 671 )  

Restricted stock awards canceled

( 145 )  

Repurchase of common stock

( 627 )  

Net cash provided by financing activities

123,544  

33,971  

Net increase (decrease) in cash and cash equivalents

95,021  

Cash and cash equivalents at beginning of period

45,596  

126,016  

Cash and cash equivalents at end of period

$ 140,617  

$ 82,528  

Supplemental disclosures of cash flow information:

Cash paid for interest on deposits and borrowings

$ 6,924  

$ 1,795  

Cash paid for income taxes

Supplemental disclosures of noncash investing activities:

Change in unrealized gain (loss) on securities available for sale

$ 4,791  

Change in unrealized (loss) gain on cash flow hedges

$ ( 1,728 )  

Cumulative adjustment to servicing right asset due to election of fair value option

Cumulative adjustment to servicing rights asset due to election of fair value option

Cumulative effect of adoption of ASU 2016-13 Financial Instruments - Credit Losses on January 1, 2023

$ ( 3,735 )  

See selected notes to the consolidated financial statements.

15 unchanged sentences

valued at $ 225,000 and recorded a $ 1.5 million commitment receivable.

First Northwest continues to hold a controlling interest in Quin Ventures.

In June 2023, First Northwest determined that Quin Ventures was no longer a going concern.

The Company wrote off the remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods.

The noncontrolling interest in Quin Ventures balance was moved to retained earnings, with no change to total shareholders' equity as a result of the transaction.

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

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

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

First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures.

First Northwest and the Bank are collectively referred to as the "Company." For periods prior to June 30, 2023, Company references also include Quin Ventures.

First Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Fed and former controlling interest in Quin Ventures.

Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures.

7 unchanged sentences

In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included.

Operating results for the three months ended March 31, 2023 , are not necessarily indicative of the results that may be expected for future periods.

Operating results for the three and six months ended June 30, 2023 , are not necessarily indicative of the results that may be expected for future periods.

In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

1 unchanged sentence

Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for credit losses ("ACL"), fair value of financial instruments and derivatives, and deferred tax assets and liabilities.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures.

All material intercompany accounts and transactions have been eliminated in consolidation.

While First Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest for financial reporting purposes under Accounting Standards Codification 

Through June 2023, First Northwest and POM shared equal ownership in Quin Ventures;

however, it was previously determined that First Northwest had a controlling interest for financial reporting purposes under Accounting Standards Codification 

The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.

6 unchanged sentences

Measurement of Credit Losses on Financial Instruments , as amended, which replaces the incurred loss methodology with a current expected credit loss ("CECL") methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity securities.

It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments.

29 unchanged sentences

The ACL on loans ("ACLL") is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected.

Loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Loans are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The Bank records the changes in the ACLL through earnings, as a provision for credit losses on the Consolidated Statements of Income.

47 unchanged sentences

At the adoption date of ASU 2016 - 13, the unrealized losses present in the portfolio of investment securities available for sale were primarily due to decreases in market interest rates on floating rate investment securities since the purchase of the securities and the fair value of these securities was expected to recover as the securities approach their maturity dates.

The basis of management’s conclusion was that at March 31, 2023, 23.5 % of the investment securities were issued by or guaranteed by the United States government or its agencies, 31.0 % were issued and guaranteed by State and local governments and the remainder of the portfolio was invested in at least investment-grade securities.

The basis of management’s conclusion was that at January 1, 2023, 23.9 % of the investment securities were issued by or guaranteed by the United States government or its agencies, 30.0 % were issued and guaranteed by State and local governments and the remainder of the portfolio was invested in at least investment-grade securities.

As a result of the analysis, no allowance for credit losses on investment securities available for sale was recorded upon adoption.

4 unchanged sentences

Upon adoption, the adjusted beginning balance of the ACLL as a percentage of loans receivable was 1.18 % as compared to 1.04 % at December 31, 2022 under the prior incurred loss methodology.

At March 31, 2023, the ACLL as a percentage of loans receivable was 1.10 %.

At June 30, 2023 , the ACLL as a percentage of loans receivable was 1.06 %.

See Note 4  - Allowance for Credit Loss on Loans for more information.

5 unchanged sentences

The impact of this adjustment to beginning retained earnings on January 1, 2023 was $ 3.0 million, net of tax.

Troubled Debt Restructurings

In March 2022, the FASB issued ASU 2022 - 02,  

Financial Instruments - Credit Losses (Topic 326 ):

Troubled Debt Restructurings and Vintage Disclosures .

This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancing and restructuring activity by creditors when a borrower is experiencing financial difficulty.

Additionally, the ASU requires public business entities to disclose current-period gross write offs by year of origination for financing receivables and net investments in leases.

This ASU is effective upon adoption of ASU 2016 - 13.

On January 1, 2023, the Company adopted this ASU at the same time ASU 2016 - 13 was adopted.

The Company recorded gross charge-offs of $ 1.9 million in the first half of 2023 and recoveries for the same period were $ 594,000 .

See table in Note 3 for additional information.

Derivative Instruments and Hedging Activities

29 unchanged sentences

In March 2020, the FASB issued ASU No.

2020 - 04,  

Reference Rate Reform (Topic 848 ):

1 unchanged sentence

ASU 2020 - 04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, which reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

27 unchanged sentences

Note 2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at March 31, 2023 are summarized as follows:

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at June 30, 2023 are summarized as follows:

Amortized Cost

60 unchanged sentences

There were no securities classified as held-to-maturity at 

March 31, 2023  and 

June 30, 2023  and 

December 31, 2022 .

Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million and $ 2.0 million as of March 31, 2023  and 

Accrued interest receivable on available-for-sale debt securities totaled $ 2.1 million and $ 2.0 million as of June 30, 2023  and 

December 31, 2022 , respectively.

Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Balance Sheets and is excluded from the calculation of the allowance for credit losses on investment securities.

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of March 31, 2023 :

Less Than Twelve Months

11 unchanged sentences

$ 100,202  

$ 101,609  

Treasury notes

9 unchanged sentences

53,674  

55,117  

Mortgage-backed securities:

3 unchanged sentences

71,565  

74,946  

MBS non-agency

3 unchanged sentences

92,140  

( 7,695 )  

92,978  

Total available for sale

53 unchanged sentences

$ 323,783  

There were 32 available-for-sale securities with unrealized losses of less than one year, and 151  available-for-sale securities with an unrealized loss of more than one year at March 31, 2023 .

There were 8  available-for-sale securities with unrealized losses of less than one year, and 174 available-for-sale securities with an unrealized loss of more than one year at June 30, 2023 .

There were 113 available-for-sale securities with unrealized losses of less than one year, and 69  available-for-sale securities with an unrealized loss of more than one year at December 31, 2022 .

Management believes that the unrealized losses on our investment securities relate principally to the general change in interest rates, market liquidity and demand, and market volatility that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future.

We do not believe the unrealized losses on our securities are related to deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities.

The Company does not intend to sell the securities in an unrealized loss position and believes that it is unlikely that we will be required to sell these investments prior to a market price recovery or maturity. Based on the Company’s evaluation of these securities, no credit impairment was recorded at March 31, 2023 , or December 31, 2022 .

We do not believe the unrealized losses on our securities are related to a deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities.

The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated.

1 unchanged sentence

therefore, these securities are shown separately.

March 31, 2023

June 30, 2023

Available-for-Sale

74 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

1 unchanged sentence

$ 2,233  

$ 12,685  

Gross realized gains

6 unchanged sentences

Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $ 14.2 million as of 

March 31, 2023 and $ 13.2 million as of 

June 30, 2023 and $ 13.2 million as of 

December 31, 2022 .

Net loans does not include accrued interest receivable.

Net loans do 

not include accrued interest receivable.

Accrued interest receivable on loans was $ 5.4 million as of 

March 31, 2023 and $ 4.7 million as of 

June 30, 2023 and $ 4.7 million as of 

December 31, 2022 , and was reported in accrued interest receivable on the consolidated balance sheets.

The amortized cost of loans receivable, net of ACLL, consisted of the following at the dates indicated:

March 31, 2023

June 30, 2023

December 31, 2022

43 unchanged sentences

The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated:

March 31, 2023

June 30, 2023

December 31, 2022

2 unchanged sentences

Total Nonaccrual Loans

Nonaccrual (1)

Total Nonaccrual Loans (1)

(In thousands)

12 unchanged sentences

Interest income recognized on a cash basis on nonaccrual loans for the 

three months ended March 31, 2023 , was $ 9,000 .

three and six months ended June 30, 2023 , was $ 18,000  and $ 26,000 , respectively.

Prior to the implementation of CECL, the Bank categorized loans as performing or nonperforming based on payment activity.

28 unchanged sentences

There were no loans past due 90 days or more and still accruing interest at 

March 31, 2023  or 

June 30, 2023  or 

December 31, 2022 .

The following table presents the amortized cost of past due loans by segment and class as of March 31, 2023 :

The following table presents the amortized cost of past due loans by segment and class as of June 30, 2023 :

90 Days or More

5 unchanged sentences

296,561  

284,863  

Commercial real estate

72 unchanged sentences

The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of 

March 31, 2023 . Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.

June 30, 2023 , as well as gross charge-off activity for the 

six months ended June 30, 2023 . Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.

Term Loans by Year of Origination (1)  

24 unchanged sentences

15,268  

16,267  

Total multi-family

3 unchanged sentences

59,041  

296,561  

Gross charge-offs during the period

8 unchanged sentences

12,434  

27,876  

Special Mention

6 unchanged sentences

25,714  

375,961  

Gross charge-offs during the period

5 unchanged sentences

14,859  

14,871  

Total construction and land

35 unchanged sentences

33,363  

119,886  

Special Mention

5 unchanged sentences

39,589  

Gross charge-offs during the period

130,133  

Gross charge-offs during the period

124,647  

21 unchanged sentences

Total gross charge-offs during the period

$ 1,760  

$ 1,937  

( 1 ) Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.

50 unchanged sentences

The Company may increase or decrease the ACLL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral.

In cases where the loan is well-secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACLL is recorded.

Changes in the ACLL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

As of March 31, 2023 , $ 1.2  million of loans were individually evaluated with no ACLL attributed to such loans.

At March 31, 2023 , all individually evaluated loans were evaluated based on the underlying value of the collateral and 

As of June 30, 2023 , $ 1.5 million of loans were individually evaluated with no ACLL attributed to such loans.

At June 30, 2023 , all individually evaluated loans were evaluated based on the underlying value of the collateral and 

none  were evaluated using a discounted cash flow approach.

All individually evaluated loans were on nonaccrual status at March 31, 2023 .

All individually evaluated loans were on nonaccrual status at June 30, 2023 .

Collateral Dependent Loans.

 Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral.

Collateral dependent loans are evaluated individually for purposes of determining the ACLL, which is determined based on the estimated fair value of the collateral.

Estimates for costs to sell are included in the determination of the ACLL when liquidation of the collateral is anticipated.

In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACLL is recorded.

The following table summarizes collateral dependent loans by segment and collateral type as of March 31, 2023 :

The following table summarizes individually evaluated collateral dependent loans by segment and collateral type as of June 30, 2023 :

Collateral Type

9 unchanged sentences

Troubled debt restructuring.

Prior to the implementation of CECL on January 1, 2023, a loan was identified as a troubled debt restructuring ("TDR") when a loan to a borrower who was experiencing financial difficulty was modified from its original terms and conditions in such a way that the Bank granted the borrower a concession of some kind.

Prior to the implementation of CECL on January 1, 2023, a loan was identified as a TDR when a loan to a borrower who was experiencing financial difficulty was modified from its original terms and conditions in such a way that the Bank granted the borrower a concession of some kind.

First Fed had granted a variety of concessions to borrowers in the form of loan modifications.

8 unchanged sentences

There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the 

three months ended March 31, 2022 .

three and six months ended June 30, 2022 .

There were no TDR loans that incurred a payment default within 12 months of the restructure date during the 

three months ended March 31, 2022 .

three and six months ended June 30, 2022 .

The following table presents TDR loans by class by accrual and nonaccrual status at the date indicated, in accordance with pre-CECL disclosure requirements:

15 unchanged sentences

In those instances, the ACLL for a MLTB is determined through individual evaluation.

During the three months ended March 31, 2023, there were no MLTB.

During the three and six months ended June 30, 2023 , there were no MLTB.

Note 4 - Allowance for Credit Losses on Loans

13 unchanged sentences

If the present value of cash flows is less than the total recorded investment, a reserve is calculated.

For each loan segment collectively measured, the baseline loss rates are calculated using the Bank's own data and peer institution data from FFIEC Call Report filings.

The Bank evaluates the historical period on a quarterly basis.

The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan to determine the baseline loss estimate for each loan.

Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments.

Contractual cash flows are based on the amortized cost, as adjusted for balances guaranteed by governmental entities, such as the SBA or the USDA, or the unguaranteed amortized cost.

The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

1 ) management has a reasonable expectation at the reporting date that a modification agreement will be executed with an individual borrower or 2 ) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate representation of future prepayment activity.

Management reviews the adequacy of the prepayment period assumption on a quarterly basis.

The CECL methodology includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame.

Economic forecast models for the current period are uploaded to the model, which targets two forecasted macroeconomic factors, which are national GDP and unemployment figures.

Each of the forecasted DCF segments is impacted by these macroeconomic factors.

Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. The Company also considers other qualitative risk factors to adjust the estimated ACLL calculated by the above-mentioned model.

The Company established metrics to estimate the qualitative risk factor by segment based on the identified risk.

The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company.

3 unchanged sentences

The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (reversal of provision) for credit losses on the Consolidated Statements of Income.

The following table details activity in the allowance for credit losses on loans by class for the period shown:

At or For the Three Months Ended March 31, 2023

The following tables detail activity in the allowance for credit losses on loans by class for the periods shown:

At or For the Three Months Ended June 30, 2023

Adjusted Beginning Balance

Provision for (Recapture of) Credit Losses

Ending Balance

(In thousands)

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

At or For the Six Months Ended June 30, 2023

Beginning Balance

1 unchanged sentence

Adjusted Beginning Balance

(Recapture of) Provision for Credit Losses

Provision for (Recapture of) Credit Losses

Ending Balance

1 unchanged sentence

One-to-four family

$ 3,343  

$ ( 429 )  

$ 2,914  

$ ( 11 )  

$ 2,903  

( 1,449 )  

Commercial real estate

( 604 )  

( 634 )  

Construction and land

( 1,117 )  

( 11 )  

Auto and other consumer

( 954 )  

Commercial business

( 385 )  

$ 16,116  

$ 2,209  

$ 18,325  

$ ( 965 )  

$ 17,396  

The decrease in the ACLL during the three months ended March 31, 2023, of $ 930,000 is reflective of $ 944,000 in net charge-offs, partially offset by a $ 15,000  in provision for credit losses.

The provision for credit losses during the three months ended March 31, 2023, can be attributed to an improvement in the GDP assumption since the implementation of CECL at the beginning of 

Charge-offs during the three months ended March 31, 2023, were mainly concentrated in Splash purchased unsecured consumer loans, the indirect auto loan portfolio, and quin CoreCard program.

The increase in the ACLL during the three months ended June 30, 2023 , of $ 300,000 is reflective of $ 399,000  in net charge-offs.

Charge-offs during the second quarter of 2023 were mainly concentrated in unsecured consumer loans purchased through the Splash program.

The $ 315,000 provision for ACLL for the 

six months ended June 30, 2023 , is reflective of $ 1.3 million of year-to-date net charge-offs, partially offset by the provision for credit losses estimate.

The recovery of provision for credit losses during the six months ended June 30, 2023 , can be attributed to an improvement in the U.S.

gross domestic product assumption since the implementation of CECL at the beginning of 

The following table details activity in the ALLL by class for the period shown under the incurred loss methodology:

At or For the Three Months Ended March 31, 2022

At or For the Three Months Ended June 30, 2022

One-to-four family

5 unchanged sentences

Beginning balance

$ 3,184  

$ 1,816  

$ 3,996  

$ 2,672  

$ 2,221  

$ 15,124  

(Recapture of) provision for loan losses

( 177 )  

( 193 )  

( 19 )  

( 41 )  

( 137 )  

Ending balance

$ 3,039  

$ 2,092  

$ 4,038  

$ 2,481  

$ 2,229  

$ 15,127  

At or For the Six Months Ended June 30, 2022

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

(In thousands)

Beginning balance

(Recapture of) provision for loan losses

Ending balance

The following table details the ALLL and loan portfolio by class and impairment method for the period shown under the incurred loss methodology:

6 unchanged sentences

(In thousands)

$ 3,343  

$ 2,468  

$ 4,217  

$ 2,344  

$ 2,024  

$ 16,116  

General reserve

16,084  

Specific reserve

$ 343,825  

$ 253,551  

$ 390,246  

$ 194,646  

$ 52,322  

$ 222,794  

$ 76,996  

$ 1,534,380  

Loans collectively evaluated (1)

341,171  

253,551  

390,196  

194,630  

52,100  

222,702  

76,996  

1,531,346  

Loans individually evaluated (2)

7 unchanged sentences

December 31, 2022

Recorded Investment  

Unpaid Principal Balance  

Recorded Investment

Unpaid Principal Balance

Related Allowance

14 unchanged sentences

Auto and other consumer

$ 3,034  

$ 3,337  

The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the period shown under the incurred loss methodology:

Three Months Ended

March 31, 2022

Six Months Ended

June 30, 2022

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

(In thousands)

6 unchanged sentences

One-to-four family

Commercial real estate

Construction and land

5 unchanged sentences

Auto and other consumer

$ 3,112  

Interest income recognized on a cash basis on impaired loans for the 

three months ended March 31, 2022 , was $ 66,000  under the incurred loss methodology.

three and six months ended June 30, 2022 , was $ 41,000  and $ 100,000 , respectively, under the incurred loss methodology.

Allowance for Credit Losses on Unfunded Loan Commitments.

The Company maintains an ACL for off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities on the consolidated balance sheets.

The allowance for off-balance sheet commitments was $ 1.3 million at March 31, 2023 , a decrease compared to $ 1.9  million at the adoption of CECL on January 1, 2023.

The provision recapture for off-balance sheet commitments of $ 515,000  was attributable to lower unfunded commitments, primarily due to construction loan disbursements.

The allowance for off-balance sheet commitments was $ 1.3 million at June 30, 2023 , a decrease compared to $ 1.9  million at the adoption of CECL on January 1, 2023.

Included in the year-to-date provision for credit loss expense was a provision recapture for off-balance sheet commitments of $ 515,000  for both the three and 

six months ended June 30, 2023 , attributable to lower unfunded commitments, primarily due to construction loan disbursements.

Note 5  - Deposits

Deposits and weighted-average interest rates at the dates indicated are as follows:

March 31, 2023

June 30, 2023

December 31, 2022

3 unchanged sentences

Noninterest-bearing demand deposits

$ 280,475  

$ 315,083  

Interest-bearing demand deposits

179,029  

0.50 %  

193,558  

Money market accounts

374,269  

1.10 %  

473,009  

Savings accounts

260,279  

1.41 %  

200,920  

Certificates of deposit

559,070  

3.55 %  

381,685  

Total deposits

Brokered certificates of deposit of $ 134.5 million and $ 133.9 million are included in the March 31, 2023 and December 31, 2022 certificates of deposit totals above, respectively. The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at March 31, 2023 and December 31, 2022 , were $ 137.7 million and $ 96.6 million, respectively.

$ 1,653,122  

1.73 %  

$ 1,564,255  

Brokered certificates of deposit of $ 179.6 million and $ 133.9 million are included in the June 30, 2023 and December 31, 2022 certificates of deposit totals above, respectively. The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at June 30, 2023 and December 31, 2022 , were $ 157.1 million and $ 96.6 million, respectively.

Maturities of certificates at the dates indicated are as follows:

March 31, 2023

June 30, 2023

December 31, 2022

1 unchanged sentence

Within one year or less

$ 422,485  

$ 262,189  

After one year through two years

104,285  

69,967  

After two years through three years

16,339  

37,032  

After three years through four years

11,195  

After four years through five years

Total certificates of deposit

March 31, 2023 and December 31, 2022 , deposits included $ 101.4 million and $ 93.3 million, respectively, in public fund deposits.

Investment securities with a carrying value of $ 59.2 million and $ 57.1 million were pledged as collateral for these deposits at 

March 31, 2023 and December 31, 2022 , respectively.

$ 559,070  

$ 381,685  

June 30, 2023 and December 31, 2022 , deposits included $ 112.1 million and $ 93.3 million, respectively, in public fund deposits. The Bank had an outstanding letter of credit from the Federal Home Loan Bank of Des Moines ("FHLB") with a notional amount of $ 60.0  million at 

June 30, 2023 , to secure public deposits and pledged investment securities with a carrying value of $ 57.1 million were pledged as collateral for these deposits at 

December 31, 2022 .

This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at 

March 31, 2023 and December 31, 2022 , were funds held by federally recognized tribes totaling $ 18.6 million and $ 10.3 million, respectively.

June 30, 2023 and December 31, 2022 , were funds held by federally recognized tribes totaling $ 18.9 million and $ 10.3 million, respectively.

Investment securities with a carrying value of $ 21.9 million and $ 23.6 million were pledged as collateral for these deposits at 

March 31, 2023 and December 31, 2022 , respectively.

June 30, 2023 and December 31, 2022 , respectively.

This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs. 

1 unchanged sentence

Three Months Ended

Six Months Ended

(In thousands)

4 unchanged sentences

Total interest expense on deposits

$ 6,209  

$ 10,562  

$ 1,513  

Note 6  - Borrowings

6 unchanged sentences

All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 917.8 million and $ 753.7 million at 

March 31, 2023 and December 31, 2022 , respectively.

First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco ("FRB") to utilize the discount window for short-term borrowing.

June 30, 2023 and December 31, 2022 , respectively.

First Fed also has an established borrowing arrangement with the Federal Reserve Bank of San Francisco ("FRB") to utilize the discount window for short-term borrowing.

Available borrowing capacity was $ 8.7 million and $ 8.6 million at 

March 31, 2023 and December 31, 2022 , respectively. 

June 30, 2023 and December 31, 2022 , respectively. 

No funds have been borrowed to date. Investment securities with a carrying value of $ 9.2 million and $ 9.0 million were pledged to the FRB at 

March 31, 2023 and December 31, 2022 , respectively.

June 30, 2023 and December 31, 2022 , respectively.

On March 25, 2021, the Company completed a private placement of $ 40.0 million of 3.75 % fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and institutional accredited investors.

2 unchanged sentences

The Company used the net proceeds of the offering for general corporate purposes.

On May 20, 2022, First Northwest entered into a borrowing arrangement with NexBank for a $ 20.0 million revolving line of credit.

On May 20, 2022, First Northwest consummated a borrowing arrangement with NexBank for a $ 20.0 million revolving line of credit.

Borrowings are secured by a blanket lien on First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

The line of credit matures on May 19, 2023 , with the option for two 364 -day extensions.

The following table sets forth information regarding our borrowings at the end of and during the three months ended March 31, 2023 .

The line of credit matures on May 18, 2024 , with the option for one 364 -day extension.

In June 2023, First Fed established a Bank Term Funding ("BTFP") borrowing arrangement with the FRB as an additional source of liquidity.

Available borrowing capacity was $ 18.7 million at 

June 30, 2023 . 

No funds have been borrowed to date. Investment securities with a carrying value of $ 17.0 million were pledged to secure the BTFP at 

June 30, 2023 .

The following table sets forth information regarding our borrowings at the end of and during the six months ended June 30, 2023 .

The table includes both long- and short-term borrowings.

32 unchanged sentences

8.75 %  

The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at March 31, 2023  are as follows:

The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at June 30, 2023  are as follows:

Weighted- Average Interest Rate

53 unchanged sentences

The effective tax rates were 20.2 % and 

18.1 % for the three months ended March 31, 2023 and 2022 , respectively.

20.2 % for the six months ended June 30, 2023 and 2022 , respectively.

The effective tax rates differ from the statutory maximum federal tax rate for 2023  and 

2022 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance and tax-exempt interest income earned on certain investment securities and loans.

In the second quarter of 2022, the Company began accruing a provision for income tax for certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. The additional accrual for state income tax results in a higher effective tax rate.

Note 8  - Earnings per Common Share

2 unchanged sentences

The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 .

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and six months ended June 30, 2023 and 2022 .

Three Months Ended

Six Months Ended

(In thousands, except share data)

Net income available to common shareholders

$ 1,776  

$ 2,488  

$ 5,304  

$ 5,294  

Earnings allocated to participating securities

( 25 )  

( 28 )  

Earnings allocated to common shareholders

$ 1,767  

$ 2,463  

$ 5,276  

$ 5,239  

Weighted average common shares outstanding

9,667,380  

9,849,265  

9,684,673  

9,846,086  

Weighted average unvested restricted stock awards

( 139,760 )  

( 92,626 )  

( 152,474 )  

Weighted average unallocated ESOP shares

( 613,265 )  

( 661,745 )  

( 619,841 )  

Total basic weighted average common shares outstanding

8,914,355  

9,094,894  

8,912,358  

9,082,373  

Basic weighted average common shares outstanding

8,914,355  

9,094,894  

8,912,358  

9,082,373  

Dilutive restricted stock awards

17,031  

71,237  

19,759  

84,942  

Total diluted weighted average common shares outstanding

8,931,386  

9,166,131  

8,932,117  

9,167,315  

Basic earnings per common share

$ 0.20  

$ 0.27  

$ 0.59  

$ 0.58  

Diluted earnings per common share

$ 0.20  

$ 0.27  

$ 0.59  

$ 0.58  

Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive.

March 31, 2023  and 

June 30, 2023  and 

2022 , antidilutive shares as calculated under the treasury stock method totaled 

7 unchanged sentences

The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets.

No principal and interest payment was made by the ESOP during the three months ended March 31, 2023 .

A $ 835,000  principal and interest payment was made by the ESOP during the six months ended June 30, 2023 .

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations.

2 unchanged sentences

dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP for the three months ended March 31, 2023 and 2022 , was $ 187,000  and $ 291,000 , respectively.

Compensation expense related to the ESOP for the three months ended June 30, 2023 and 2022 , was $ 153,000 and $ 245,000 , respectively.

Compensation expense related to the ESOP for the six months ended June 30, 2023 and 2022 , was $ 340,000  and $ 536,000 , respectively.

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

March 31, 2023

June 30, 2023

December 31, 2022

1 unchanged sentence

Allocated shares

439,174  

386,285  

Committed to be released shares

26,442  

Unallocated shares

608,855  

635,302  

Total ESOP shares issued

1,048,029  

Fair value of unallocated shares

$ 6,929  

$ 9,758  

Note 10  - Stock-based Compensation

2 unchanged sentences

The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 .

March 31, 2023 , there were 

June 30, 2023 , there were 

290,029  total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.

As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made.

March 31, 2023 , there were no shares available for grant under the 2015 EIP.

June 30, 2023 , there were no shares available for grant under the 2015 EIP.

At this date, there are 

2 unchanged sentences

29,349  and 

42,243  shares of restricted stock awarded, respectively, during the three months ended March 31, 2023 and 2022 .

53,343  shares of restricted stock awarded, respectively, during the six months ended June 30, 2023 and 2022 .

Awarded shares of restricted stock vest ratably over periods ranging from one to five years from the date of grant provided the eligible participant remains in service to the Company.

The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period.

For the three months ended March 31, 2023 and 2022 , total compensation expense for the equity incentive plans was $ 391,000  and $ 411,000 , respectively. Included in the compensation expense for the 

three months ended March 31, 2023 and 2022 , was directors' equity compensation of $ 58,000  and $ 55,000 , respectively.

For the three months ended June 30, 2023 and 2022 , total compensation expense for the equity incentive plans was $ 358,000  and $ 479,000 , respectively. Included in the compensation expense for the three months ended June 30, 2023 and 2022 , was directors' equity compensation of $ 73,000  and $ 84,000 , respectively.

For the six months ended June 30, 2023 and 2022 , total compensation expense for the equity incentive plans was $ 749,000  and $ 890,000 , respectively. Included in the compensation expense for the 

six months ended June 30, 2023 and 2022 , was directors' equity compensation of $ 131,000  and $ 139,000 , respectively.

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

For the Three Months Ended

March 31, 2023

June 30, 2023

Weighted-Average Grant Date Fair Value

Non-vested at April 1, 2023

149,054  

$ 16.56  

( 5,753 )  

Canceled (1)  

( 1,472 )  

( 11,211 )  

Non-vested at June 30, 2023

132,918  

$ 16.50  

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares.

The surrendered shares are canceled and are unavailable for reissue.

For the Six Months Ended

June 30, 2023

Weighted-Average Grant Date Fair Value

Non-vested at January 1, 2023

Non-vested at March 31, 2023

166,839  

$ 17.78  

29,349  

( 38,453 )  

( 11,806 )  

( 13,011 )  

Non-vested at June 30, 2023

132,918  

$ 16.50  

The surrendered shares are canceled and are unavailable for reissue.

As of March 31, 2023 , there was $ 2.0 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards.

As of June 30, 2023 , there was $ 1.5 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards.

The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 

42 unchanged sentences

The following tables show the Company’s assets and liabilities measured at fair value on a recurring basis at the dates indicated:

March 31, 2023

June 30, 2023

Quoted Prices in Active Markets for Identical Assets or Liabilities

29 unchanged sentences

Interest rate swap derivative

$ 1,697  

December 31, 2022

29 unchanged sentences

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

March 31, 2023

June 30, 2023

Fair Value (In thousands)

18 unchanged sentences

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

As of or For the Three Months Ended March 31, 2023

As of or For the Three Months Ended June 30, 2023

Balance at beginning of period

Servicing rights that result from transfers and sale of financial assets

Changes in fair value due to changes in model inputs or assumptions (1)  

Balance at end of period

(In thousands)

Sold loan servicing rights

$ 4,224  

$ ( 406 )  

$ 3,825  

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

As of or For the Six Months Ended June 30, 2023

Balance at beginning of period

Servicing rights that result from transfers and sale of financial assets

Changes in fair value due to changes in model inputs or assumptions (1)

4 unchanged sentences

$ ( 137 )  

$ 3,825  

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

As of or For the Three Months Ended March 31, 2022

As of or For the Three Months Ended June 30, 2022

Balance at beginning of period

Servicing rights that result from transfers and sale of financial assets

Changes in fair value due to changes in model inputs or assumptions (1)

Balance at end of period

(In thousands)

Sold loan servicing rights

$ 4,046  

$ ( 223 )  

$ 3,865  

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

As of or For the Six Months Ended June 30, 2022

Election of Fair Value Option for Servicing Rights at January 1, 2022

6 unchanged sentences

$ ( 53 )  

$ 3,865  

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

As of or For the Three Months Ended March 31, 2023

As of or For the Six Months Ended June 30, 2023

Balance at beginning of period

Transfers Into Level 3

Unrealized Gains (Losses)

Unrealized (Losses) Gains

Balance at end of period

4 unchanged sentences

$ ( 221 )  

$ 29,378  

Partnership investments

23 unchanged sentences

$ 3,034  

March 31, 2023 and December 31, 2022 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

June 30, 2023 and December 31, 2022 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

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

March 31, 2023

June 30, 2023

Fair Value Measurements Using:

13 unchanged sentences

29,378  

Loans held for sale

Loans receivable, net

93 unchanged sentences

(In thousands)

Balance at December 31, 2021

$ 2,140  

$ ( 1,852 )  

Balance at March 31, 2022

Other comprehensive loss before reclassification

( 15,370 )  

Amounts reclassified from accumulated other comprehensive income

( 100 )  

Net other comprehensive (loss) income

( 15,470 )  

Balance at June 30, 2022

Balance at March 31, 2023

$ ( 13,330 )  

$ ( 1,823 )  

Other comprehensive loss before reclassification

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

Balance at June 30, 2023

Balance at December 31, 2021

$ ( 38,404 )  

$ ( 2,139 )  

Other comprehensive loss before reclassification

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

Balance at June 30, 2022

Balance at December 31, 2022

Other comprehensive income before reclassification

( 1,357 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive income

( 1,357 )  

Balance at March 31, 2023

$ ( 34,642 )  

$ ( 2,109 )  

$ ( 1,357 )  

N ote 13  - Derivatives and Hedging Activities

Balance at June 30, 2023

Note 13  - Derivatives and Hedging Activities

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities.

4 unchanged sentences

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

As of March 31, 2023 , the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

Line Item in the Statement of Financial Position in Which the Hedged Item is Included

At June 30, 2023 , the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges.

The Company had no fair value hedges at December 31, 2022 .

Line item in the income statement in which the hedged item is included

Carrying Amount of the Hedged Assets (Liabilities)

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)

as of March 31, 2023

(In thousands)

AFS Securities (1)

(In thousands)  

June 30, 2023

Investment securities (1)

$ 50,392  

( 1 ) These amounts include the amortized cost basis of closed portfolios of AFS securities used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period.

At March 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $59.8 million, the cumulative basis adjustments associated with these hedging relationships was $1.7 million, and the amounts of the designated hedged items were $50 million.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2023 .

Derivative Liabilities

As of March 31, 2023

At June 30, 2023 , the amortized cost basis of the closed portfolios used in these hedging relationships was $ 50.1 million, the cumulative basis adjustments associated with these hedging relationships was $ 392,000 , and the amounts of the designated hedged items were $ 50.0 million.

The following table summarizes the Company’s derivative instruments at the date indicated.

The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets”

and “Other liabilities,”

respectively, on the Consolidated Balance Sheets, as follows:

Notional Amount

Balance Sheet Location

Derivatives designated as hedging instruments

Interest Rate Products

Other Liabilities

Total derivatives designated as hedging instruments

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2023 .

There was no activity during the three months ended 

March 31, 2022 .

Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships

Interest Income

(In thousands)  

June 30, 2023

Fair value hedges:

Interest rate swaps - securities

$ 50,000  

The following table summarizes the effect of fair value and cash flow hedge accounting on the Consolidated Statements of Income for the periods shown:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

Total amounts of income and expense line items presented in the

statement of financial performance in which the effects of fair value or

cash flow hedges are recorded

The effects of fair value and cash flow hedging:

Gain or (loss) on fair value hedging relationships in Subtopic 815-20

Interest contracts

Derivatives designated as hedging instruments

Total amounts recognized in interest on investment securities

$ 3,336  

$ 2,715  

$ 6,518  

$ 4,990  

Net gains (losses) on fair value hedging relationships

Interest rate swaps - securities

Recognized on hedged items

$ ( 1,336 )  

Recognized on derivatives designated as hedging instruments

( 254 )  

Net income recognized on fair value

Credit Risk-related Contingent Features

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The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $ 50.0 million should the fair value of outstanding derivatives per counterparty be greater than $ 50.0 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements.

March 31, 2023, the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $ 1.7 million. Accordingly, the Company posted collateral of $ 1.9 million as a result of these contingent features.

As of June 30, 2023 , the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $ 351,000 . Accordingly, the Company posted collateral in the form of restricted cash of $ 2.2 million as a result of these contingent features.

Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.

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changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;

results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;

results of examinations 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;

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;

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First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities.

Non-financial investments include a controlling interest in Quin Ventures and several limited partnership investments, including a 33% interest in The Meriwether Group, LLC.

The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed and Quin Ventures.

Non-financial investments include several limited partnership investments, including a 33% interest in The Meriwether Group, LLC ("MWG").

The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed.

The Company has also entered into partnerships to strategically invest in fintech-related businesses, which may result in the development of additional investment opportunities.

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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 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 CDs for individuals and businesses.

We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit ("CDs") for individuals and businesses.

Deposits are our primary source of funding for our lending and investing activities.

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These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry.

In 2022, First Northwest acquired a 33% interest in The Meriwether Group, LLC, a boutique investment bank and consulting firm focusing on providing entrepreneurs with resources to help them succeed.

Also in 2022, the Company acquired a 25% equity interest in Meriwether Group Capital, LLC, which provides financial advice for borrowers and capital for the Meriwether Group Capital Hero Fund LP ("Hero Fund").

The Meriwether Group, LLC, also holds a 20% interest in Meriwether Group Capital, LLC.

In addition, First Northwest invested in the Hero Fund, 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.

In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed.

Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Meriwether Group Capital Hero Fund LP ("Hero Fund").

The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. MWG also holds a 20% interest in MWGC.

In addition, First Northwest has a limited partnership investment in the Hero Fund.

First Northwest is impacted 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 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 and pricing for loan funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.

Our primary source of pre-tax income is net interest income.

Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings.

Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income.

A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, gains and losses from sales of securities, and changes in value of our equity and partnership investments.

An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our loan portfolio through our ACL.

A recapture of previously recognized provision for credit losses may be added to net income as the underlying assumptions driving anticipated loss rates within the CECL model improve, such as unemployment and gross domestic product metrics, or receipt of recoveries of amounts previously charged off.

Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and other customer acquisition expenses, professional fees, expenses related to real estate and personal property owned, and other expenses.

Changes in our asset and liability mix, market and portfolio interest rates and cash flows from existing assets and liabilities affect our net interest income.

A secondary source of income for the Company is noninterest income, which includes revenue earned from providing products and services, including service charges on deposit accounts, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, gains and losses from sales of securities, and changes in the market value of our equity and partnership investments.

A recapture of previously recognized provision for credit losses may be added to net income as the underlying assumptions driving anticipated loss rates within the CECL model improve, such as the United States unemployment and gross domestic product metrics, or receipt of recoveries for amounts previously charged off.

Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and other customer acquisition expenses, legal and other professional fees, expenses related to real estate and personal property owned, and other expenses.

Critical Accounting Policies

On January 1, 2023, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, referred to as the Current Expected Credit Loss or CECL model. For additional information on CECL see "Note 1 - Basis of Presentation and Critical Accounting Policies - Recently adopted accounting pronouncements" of the Notes to the Consolidated Financial Statements included in Part I.

On January 1, 2023, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments , referred to as the Current Expected Credit Loss or CECL model.

In conjunction with the adoption of CECL, the Company also adopted ASU 2022-02, 

Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures . For additional information on these ASUs, see "Note 1 - Basis of Presentation and Critical Accounting Policies - Recently adopted accounting pronouncements" of the Notes to the Consolidated Financial Statements included in Part I.

Item 1 of this report.

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There were no other material changes to the critical accounting policies from those disclosed in the Company's 2022 Form 10-K.

Comparison of Financial Condition at March 31, 2023 and December 31, 2022

Total assets increased to $2.17 billion at March 31, 2023, from $2.04 billion at December 31, 2022.

Cash and cash equivalents increased by $95.0 million, or 208.4%, to $140.6 million as of March 31, 2023, compared to $45.6 million as of December 31, 2022.

Cash increased during the current quarter as the Bank brought on balance sheet liquidity in response to stresses within the banking industry and related concerns with respect to deposits and liquidity.

Investment securities increased $2.5 million, or 0.8%, to $329.1 million at March 31, 2023, from $326.6 million at December 31, 2022.

Improvements in the mark-to-market valuation, primarily driven by a decrease in long-term interest rates, were partially offset by normal payments and prepayment activity.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 8.1 years as of March 31, 2023, compared to 8.2 years as of December 31, 2022, and had an estimated average repricing term of 6.9 years as of March 31, 2023, compared to 7.1 years as of December 31, 2022, based on the interest rate environment at those times.

economy continues to experience a rising interest rate environment, we believe prepayment activity will slow, extending the projected duration of our securities portfolio.

The investment portfolio was composed of 50.9% in amortizing securities at March 31, 2023, compared to 50.8% at December 31, 2022.

Comparison of Financial Condition at June 30, 2023 and December 31, 2022

Total assets increased to $2.16 billion, or 5.9%, at June 30, 2023, from $2.04 billion at December 31, 2022.

Cash and cash equivalents increased by $32.7 million, or 71.7%, to $78.3 million as of June 30, 2023, compared to $45.6 million as of December 31, 2022.

Cash increased during the current year as the Bank increased balance sheet liquidity in response to stresses within the banking industry and related concerns with respect to liquidity and uncertainty around deposit retention.

Investment securities decreased $4.6 million, or 1.4%, to $322.0 million at June 30, 2023, from $326.6 million at December 31, 2022.

Normal payments and prepayment activity were partially offset by a mark-to-market valuation increase of $639,000 primarily related to an improved outlook on the municipal bond portfolio.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.8 years as of June 30, 2023, compared to 8.2 years as of December 31, 2022, and had an estimated average repricing term of 7.0 years as of June 30, 2023, compared to 7.1 years as of December 31, 2022, based on the interest rate environment at those times.

The effective duration of the investment portfolio was 5.2 years at June 30, 2023, compared to 5.1 years at December 31, 2022.

We believe prepayment activity may continue to slow if interest rates continue to rise, extending the projected duration and causing additional deterioration to the market value of our securities portfolio.

The investment portfolio was composed of 49.9% in amortizing securities at June 30, 2023, compared to 50.8% at December 31, 2022.

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.

The Company maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets;

The Company maintains a focus on enhancing the mix of earning assets by increasing loans as a percentage of earning assets;

however, we may continue to purchase investment securities as a source of additional interest income.

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For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Net loans, excluding loans held for sale, increased $30.6 million to $1.56 billion at March 31, 2023, from $1.53 billion at December 31, 2022.

During the three months ended March 31, 2023, multi-family loans increased $32.1 million through new originations totaling $9.2 million, and through $9.9 million of acquisition-renovation construction loans converting into permanent amortizing loans. Auto and other consumer loans increased $12.4 million, as a result of a $14.3 million purchase of a pool of manufactured home loans, $520,000 in individual manufactured home loan purchases and a net increase in auto loans of $741,000, offset by payment activity.

One-to-four family residential loans increased $11.0 million during the first quarter of 2023 as a result of $1.1 million in new amortizing loan originations and $18.1 million of residential construction loans that converted to permanent amortizing loans, partially offset by sales and payments received.

Home equity loans increased $1.2 million through $930,000 in new fixed-rate originations as well as draws on unfunded commitments. Commercial business loans increased $23.1 million, as a result of $10.0 million of Bankers Healthcare Group loan purchases and $13.1 million of originations and draws on existing commitments in excess of payoffs and scheduled payments.

Commercial real estate loans decreased $15.9 million, with payoffs and scheduled payments in excess of the $20.0 million from construction loans that converted into permanent amortizing loans.

Construction and land loans decreased $32.0 million, or 16.5%, to $161.7 million at March 31, 2023, from $193.7 million at December 31, 2022, with $48.0 million converting into fully amortizing loans and additional decreases from loans being paid off by other lenders, partially offset by draws on new and existing loans.

Our construction loans are geographically dispersed throughout western Washington with two loans in Oregon and two loans in Idaho.

Net loans, excluding loans held for sale, increased $89.4 million to $1.62 billion at June 30, 2023, from $1.53 billion at December 31, 2022.

During the six months ended June 30, 2023, commercial business loans increased $53.2 million, as a result of a $23.9 million funding to the Northpointe Mortgage Purchase Program ("Northpointe MPP"), $15.2 million of Bankers Healthcare Group loan purchases and $14.1 million of organic originations and draws on existing commitments in excess of payoffs and scheduled payments.

Multi-family loans increased $43.8 million through new originations totaling $19.1 million, and $32.7 million of construction loans converting into permanent amortizing loans, including $12.4 million of acquisition-renovation loans. One-to-four family residential loans increased $22.0 million during the first six months of 2023 as a result of $3.3 million in new amortizing loan originations and $38.9 million of residential construction loans that converted to permanent amortizing loans, partially offset by loan payoffs totaling $13.7 million and $7.7 million of scheduled payments received.

Auto and other consumer loans increased $15.0 million, due to a $14.3 million purchase of a pool of manufactured home loans, $1.6 million in individual manufactured home loan purchases and a net increase in auto loans of $1.5 million, offset by payment activity.

Home equity loans increased $6.0 million as a result of $3.7 million in new fixed-rate originations and $3.8 million in new home equity lines of credit, offset by payment activity. Commercial real estate loans decreased $12.9 million, with early payoffs and scheduled payments in excess of the $4.3 million from construction loans that converted into permanent amortizing loans.

Construction and land loans decreased $36.6 million, or 18.9%, to $157.1 million at June 30, 2023, from $193.7 million at December 31, 2022, with $76.0 million converting into fully amortizing loans and additional decreases from loans being paid in full, partially offset by draws on new and existing loans.

Construction loans in the portfolio are geographically dispersed throughout western Washington with two loans in Oregon and two loans in Idaho.

We manage construction lending by utilizing a licensed third-party vendor to assist us in monitoring the progress toward completion of our construction projects.

We continue to monitor the impact of supply chain challenges, inflation and consumer demand in a rising interest rate environment on completion of the projects currently in our portfolio.

We continue to monitor the impact of supply chain challenges, inflation and consumer demand in a rising interest rate environment on completion of the projects currently in the portfolio.

As of the date of this report, we have no reason to believe that any of the projects in process will not be completed.

At March 31, 2023, acquisition-renovation loans of $7.1 million were included in the construction loan total compared to $19.3 million at December 31, 2022.

At June 30, 2023, acquisition-renovation loans of $7.3 million were included in the construction loan total compared to $19.3 million at December 31, 2022.

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. At March 31, 2023, 45% of commitments were for one-to-four family residential properties, which will convert to amortizing loans upon completion.

however, we consider these loans to be lower risk than typical ground-up construction projects. At June 30, 2023, 40% of construction commitments were for one-to-four family residential properties, which are anticipated to convert into amortizing loans upon completion.

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.

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

March 31, 2023

June 30, 2023

North Olympic Peninsula (1)

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

During the three months ended March 31, 2023, the Company originated $41.3 million of organic loans, of which $27.8 million, or 67.3%, were originated in the Puget Sound region, $11.2 million, or 27.1%, in the North Olympic Peninsula, $862,000, or 2.1%, in other areas throughout Washington State, and $1.4 million, or 3.5%, in other states.

The Company purchased an additional $11.7 million in auto loans, $14.9 million in manufactured home loans, and $10.0 million in commercial business loans with collateral located throughout the United States during the three months ended March 31, 2023.

We will continue to strategically evaluate opportunities to acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.

Our total loan portfolio was composed of 81.8% organic originations and 18.2% purchased loans at March 31, 2023.

Our ACLL increased to $17.4 million at March 31, 2023, as the Company adopted CECL on January 1, 2023, recording a day-one adjusting entry of $2.2 million that was reduced by a $15,000 recapture of provision for credit loss on loans for the three-month period.

Net charge-offs were $944,000 for the three-month period. The ACL as a percentage of total loans was 1.1% at both March 31, 2023 and December 31, 2022.

Nonperforming loans increased $840,000, or 46.8%, to $2.6 million at March 31, 2023, from $1.8 million at December 31, 2022, reflecting the deterioration of a $532,000 mortgage loan, and increased delinquencies in Triad purchased manufactured home loans and Splash unsecured consumer loans.

Nonperforming loans to total loans was 0.2% at March 31, 2023, up from 0.1% at December 31, 2022.

The ACL as a percentage of nonperforming loans decreased to 661% at March 31, 2023, from 900% at December 31, 2022.

Classified loans increased $1.3 million to $18.2 million at March 31, 2023, from $16.9 million at December 31, 2022, due to the downgrade of one $537,000 single-family residential loan during the first quarter along with delinquent Triad purchased manufactured home loans totaling $320,000 and Splash unsecured consumer loans totaling $438,000.

Loan charge-offs are concentrated mainly in Splash purchased unsecured consumer loans, the indirect auto loan portfolio, and quin CoreCard program.

We have adjusted the underwriting requirements for future purchases from Splash. The quin CoreCard program was frozen in October 2022, halting future losses.

The indirect auto program was discontinued in 2020;

the related balances decreased to $3.9 million at March 31, 2023 from $4.8 million at December 31, 2022.

We believe our ACL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of March 31, 2023.

During the six months ended June 30, 2023, the Company originated $106.0 million of organic loans, of which $74.4 million, or 70.2%, were originated in the Puget Sound region, $26.4 million, or 24.9%, in the North Olympic Peninsula, $1.8 million, or 1.7%, in other areas throughout Washington State, and $3.4 million, or 3.2%, in other states.

The Company purchased an additional $22.7 million in auto loans, $15.9 million in manufactured home loans, and $15.2 million in commercial business loans with collateral located throughout the United States during the six months ended June 30, 2023.

We will continue to strategically evaluate opportunities to acquire assets through wholesale channels in order to supplement organic originations and increase net interest income.

Northpointe MPP also provides a temporary source of additional interest income but is dependent on demand for funding, with repayment of advances to this program typically occurring within 30 days or less. The total loan portfolio was composed of 79.1% organic originations and 20.9% purchased loans at June 30, 2023.

The ACLL increased to $17.3 million at June 30, 2023, as the Company adopted CECL on January 1, 2023, recording a day-one adjusting entry of $2.2 million that was increased by a $315,000 provision for credit loss on loans for the six-month period.

Net charge-offs were $1.3 million for the six-month period. The ACLL as a percentage of total loans was 1.1% at both June 30, 2023 and December 31, 2022.

Nonperforming loans increased $761,000, or 42.4%, to $2.6 million at June 30, 2023, from $1.8 million at December 31, 2022, reflecting the deterioration of three mortgage loans totaling $826,000, partially offset by payments received on other nonperforming loans.

Nonperforming loans to total loans was 0.2% at June 30, 2023, up from 0.1% at December 31, 2022.

The ACLL as a percentage of nonperforming loans decreased to 677% at June 30, 2023, down from 900% at December 31, 2022.

Classified loans increased $5.8 million to $22.7 million at June 30, 2023, from $16.9 million at December 31, 2022, due to downgrades of a $2.5 million commercial business loan, a $1.3 million commercial real estate loan, $873,000 of additional funds disbursed on a substandard commercial construction loan, $816,000 for two single-family residential loans, along with delinquent unsecured consumer loans totaling $321,000 and purchased manufactured home loans totaling $149,000.

Loan charge-offs are concentrated mainly in purchased unsecured consumer and indirect auto loans.

Efforts to minimize future losses include adjusting the underwriting criteria for future loans purchased from the Splash unsecured consumer loan program, which had loan balances of $10.0 million and $9.2 million at June 30, 2023 and December 31, 2022, respectively. The indirect auto loan program was discontinued in 2020, and the remaining loan balances under that program decreased to $3.2 million at June 30, 2023 from $4.8 million at December 31, 2022.

We believe the ACLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of June 30, 2023.

Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated :

Increase (Decrease)

March 31, 2023

June 30, 2023

December 31, 2022

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Increase (Decrease)

March 31, 2023

June 30, 2023

December 31, 2022

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Nonaccrual and 90 days or more past due loans as a percentage of total loans

Total liabilities increased to $2.01 billion at March 31, 2023, from $1.88 billion at December 31, 2022, due to an increase in deposits of $30.0 million and borrowings of $94.0 million.

Deposit balances increased $30.0 million to $1.59 billion at March 31, 2023 from $1.56 billion at December 31, 2022.

During the three-month period ended March 31, 2023, there were increases of $86.3 million in CDs and $41.2 million in savings accounts, offset by a $70.2 million decrease in money market accounts and a $27.3 million decrease in demand deposit accounts.

Commercial and public fund account balances increased $17.1 million and consumer account balances increased $12.1 million during the three-month period ended March 31, 2023. We believe the shift between categories was driven by customers seeking higher rates and additional diversification over a variety of account types.

We utilize brokered CDs as an additional funding source in order to provide liquidity, manage cost of funds, reduce reliance on public funds deposits, and manage interest rate risk.

Brokered CDs totaling $134.5 million were included in the $468.0 million balance of CDs at March 31, 2023.

FHLB advances increased 46.9% to $329.0 million at March 31, 2023, from $224.0 million at December 31, 2022. We increased short-term advances to provide additional balance sheet liquidity in response to industry uncertainty.

Total shareholders' equity increased $2.1 million to $160.3 million for the three months ended March 31, 2023.

The Company recorded year-to-date net income of $3.5 million and a decrease in the after-tax unrealized loss on available-for-sale investments of $3.7 million. Increases were partially offset by a $3.0 million decrease for the cumulative CECL adjustment, a $1.4 million decrease in the fair market value of derivatives, net of taxes and the cost of repurchased shares.

Bond values increased from the end of 2022 as the economic outlook for rising long-term rates subsided.

Year-to-date, we repurchased 44,441 shares of common stock under the October 2020 stock repurchase plan at an average price of $14.07 per share for a total of $627,000, leaving 257,586 shares remaining in the share repurchase program.

Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022

Net income attributable to the Company was $3.5 million for the three months ended March 31, 2023, compared to $2.8 million for the three months ended March 31, 2022.

A $1.3 million increase in net interest income after provision for credit losses was offset by a $69,000 decrease in noninterest income and a $40,000 increase in noninterest expense.

Total liabilities increased to $2.0 billion at June 30, 2023, from $1.88 billion at December 31, 2022, due to an increase in deposits of $88.9 million and borrowings of $18.0 million.

Deposit balances increased $88.9 million to $1.65 billion at June 30, 2023 from $1.56 billion at December 31, 2022.

During the six-month period ended June 30, 2023, CDs increased $177.4 million and savings accounts increased $59.4 million, offset by money market account decreases of $98.7 million and demand deposit account decreases of $49.1 million.

We believe the shift between categories was driven by customers seeking higher rates and diversification of their deposit balances.

We utilize brokered CDs as an additional funding source to provide liquidity, manage cost of funds, reduce reliance on FHLB advances, and manage interest rate risk.

Brokered CDs totaling $179.6 million were included in the $559.0 million balance of CDs at June 30, 2023.

Brokered CD balances increased $45.7 million, business and public fund account balances increased $35.1 million, and consumer account balances increased $8.0 million during the six-month period ended June 30, 2023.

FHLB advances increased $29.0 million, or 12.9% to $253.0 million at June 30, 2023, from $224.0 million at December 31, 2022. We increased short-term advances to provide additional balance sheet liquidity and to keep the duration of liabilities shorter relative to taking on longer term advances.

Total shareholders' equity increased $1.3 million to $159.6 million for the six months ended June 30, 2023.

The Company recorded year-to-date net income of $5.3 million and a decrease in the after-tax unrealized loss on available-for-sale investments of $725,000. Increases were partially offset by a $3.0 million decrease for the cumulative CECL adjustment, $1.4 million of dividends paid, a $308,000 decrease in the fair market value of derivatives, net of taxes and the cost of repurchased shares.

Year-to-date, we repurchased 74,617 shares of common stock under the October 2020 stock repurchase plan at an average price of $12.94 per share for a total of $968,000, leaving 227,410 shares remaining in the current share repurchase program.

Bond values increased modestly from the end of 2022 as the economic outlook for rising long-term rates subsided.

Comparison of Results of Operations for the Three Months Ended June 30, 2023 and 2022

Net income attributable to the Company was $1.8 million for the three months ended June 30, 2023, compared to $2.5 million for the three months ended June 30, 2022.

A $1.1 million decrease in net interest income after provision for credit losses and a $511,000 decrease in noninterest income was offset by a $1.8 million decrease in noninterest expense.

Net Interest Income.

Net interest income increased $819,000 to $16.3 million for the three months ended March 31, 2023, from $15.5 million for the three months ended March 31, 2022.

This increase was mainly the result of an increase in average earning assets of $131.6 million.

The yield on average interest-earning assets increased 109 basis points to 4.95% for the three months ended March 31, 2023, compared to 3.86% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, and an increase in yields earned on investment securities.

The average cost of interest-bearing liabilities increased to 1.81% for the three months ended March 31, 2023, compared to 0.43% for the same period last year, due primarily to higher rates paid on all interest-bearing deposits and advances along with increases in the average balances of CDs and additional FHLB advances.

Total cost of funds increased 119 basis points to 1.53% for the three months ended March 31, 2023, from 0.34% for the same period in 2022.

The net interest margin increased 7 basis points to 3.46% for the three months ended March 31, 2023, from 3.53% for the same period in 2022.

Net interest income decreased $1.3 million to $16.0 million for the three months ended June 30, 2023, from $17.2 million for the three months ended June 30, 2022.

This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 184 basis points to 2.33% for the three months ended June 30, 2023, compared to 0.49% for the same period in the prior year.

The decrease in net interest income was also due to an increase in the average balances of CDs and advances and higher rates paid on all deposits and advances.

The average yield on interest-earning assets increased 103 basis points to 5.17% for the three months ended June 30, 2023, compared to 4.14% for the same period last year, due primarily to higher yields on variable-rate assets and new loan fundings and an increase of net loans as a percentage of earning assets.

Total cost of funds increased 159 basis points to 1.98% for the three months ended June 30, 2023, from 0.39% for the same period in 2022.

The net interest margin decreased 52 basis points to 3.25% for the three months ended June 30, 2023, from 3.77% for the same period in 2022.

While increases in the cost of funding are currently outpacing the growth of the yield on interest-earning assets, the Company has taken measures to combat interest rate compression.

The Bank augments organic loan production with higher yielding purchased loans through relationships with loan originators.

We have also increased our focus on variable-rate lending and the Bank has entered into a fair value hedging agreement.

Interest Income.

Total interest income increased $6.4 million, or 37.8%, to $23.3 million for the three months ended March 31, 2023, from $16.9 million for the comparable period in 2022, primarily due to an increase in the average balances on interest-earning assets.

Interest and fees on loans receivable increased $5.0 million, to $19.5 million for the three months ended March 31, 2023, from $14.5 million for the three months ended March 31, 2022, primarily due to an increase in the average balance of net loans receivable of $204.1 million compared to the prior year, coupled with an increase in average loan yields to 5.16% for the three months ended March 31, 2023, from 4.43% for the same period in 2022.

The loan portfolio has grown through single-family, multi-family and commercial real estate lending as well as purchased auto and manufactured home loans.

Total interest income increased $6.5 million, or 34.3%, to $25.5 million for the three months ended June 30, 2023, from $19.0 million for the comparable period in 2022, primarily due to an increase in the average balances on interest-earning assets.

Interest and fees on loans receivable increased $5.2 million, to $21.3 million for the three months ended June 30, 2023, from $16.1 million for the three months ended June 30, 2022, primarily due to an increase in the average balance of net loans receivable of $148.2 million compared to the second quarter of 2022, coupled with an increase in average loan yields to 5.38% for the three months ended June 30, 2023, from 4.48% for the same period in 2022. The loan portfolio has grown through our renewed short-term participation in the Northpointe MPP, draws on new and existing business lines of credit, originations of multi-family real estate loans, and purchases of auto, manufactured home, and purchased Bankers Healthcare Group commercial loans.

Loan yields have increased over the prior year due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices.

The yield earned on investment securities also increased 136 basis points to 3.93% compared to the same period in 2022, as the purchase of higher-yielding investments occurred late in the first quarter of 2022 with little related increase impacting income during that quarter.

An increase in floating bond rates and slowdown in prepayment speeds, which reduces amortization of premium costs, have also positively impacted investment securities income.

The yield earned on investment securities also increased 124 basis points to 4.09% compared to the same period in 2022, as increases in floating bond rates and a slowdown in prepayment speeds, which reduces amortization of premium costs, have positively impacted investment securities income.

The yield on interest-earning deposits in banks also increased to 5.18% from 0.89% for the comparable period in 2022, given the FRB rate increases.

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

Three Months Ended March 31,

Three Months Ended June 30,

Average Balance Outstanding

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Interest Expense.

Total interest expense increased $5.6 million, or 393.1%, to $7.0 million for the three months ended March 31, 2023, compared to $1.4 million for the three months ended March 31, 2022. The increase over the first quarter of 2022 was the result of a 93 basis point increase in the cost of deposits from 0.19% one year prior along with higher volumes of CDs.

Total interest expense increased $7.8 million, or 452.5%, to $9.5 million for the three months ended June 30, 2023, compared to $1.7 million for the three months ended June 30, 2022. The increase over the second quarter of 2022 was the result of an increase in the cost of deposits to 1.54% from 0.20% in same period one year ago along with higher volumes of CDs.

A shift in the deposit mix from low-cost transaction and money market accounts to a higher volume of CDs and savings accounts resulted in higher costs of deposits.

Borrowing costs increased due to a $149.6 million increase in the average balance and a 241 basis point increase in the cost of advances, primarily FHLB advances, compared to the same period in 2022.

Average deposit account balances were composed of 81% in interest-bearing deposits and 19% in noninterest-bearing deposits at March 31, 2023, compared to 79% and 21%, respectively, at March 31, 2022. During the three months ended March 31, 2023, interest expense increased on CDs due to an increase in the average balances of $205.1 million, along with an increase in the average rates paid of 209 basis points, compared to the three months ended March 31, 2022.

During the same period, the average balances of money market accounts decreased $153.8 million, with a 52 basis point average rate increase, resulting in an increase to interest expense.

The average cost of interest-bearing deposit accounts increased to 1.37% for the three months ended March 31, 2023, from 0.24% for the three months ended March 31, 2022, due to the use of promotional products designed to retain existing deposits and generate new deposits.

The mix of retail deposit balances has shifted away from non-maturity accounts towards higher cost term certificate and savings products.

Retail CDs represented 22.8% and 11.7% of retail deposits at March 31, 2023 and 2022, respectively.

Borrowing expense increased due to an average balance increase of $113.7 million and an increase in the cost of advances, primarily FHLB advances, compared to the same period in 2022.

Average deposit account balances were composed of 83% in interest-bearing deposits and 17% in noninterest-bearing deposits at June 30, 2023, compared to 78% and 22%, respectively, at June 30, 2022. During the three months ended June 30, 2023, interest expense increased on CDs due to an increase in the average balances of $274.0 million, along with an increase in the average rates paid of 77 basis points, compared to the three months ended June 30, 2022.

During the same period, the average balances of money market accounts decreased $199.9 million, offset by a 64 basis point average rate increase, resulting in an increase to interest expense.

The average cost of interest-bearing deposit accounts increased to 1.87% for the three months ended June 30, 2023, from 0.26% for the three months ended June 30, 2022, due to changes to the deposit mix, driven by customer preferences and the use of higher rate promotional products designed to retain existing deposits and generate new deposits.

The mix of customer deposit balances shifted from non-maturity accounts towards higher cost term certificate and savings products.

Customer CDs represented 25.8% and 12.3% of customer deposits at June 30, 2023 and 2022, respectively.

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

Three Months Ended March 31,

Three Months Ended June 30,

Average Balance Outstanding

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Provision for Credit Losses.

 The Company recorded a $500,000 recapture of provision for credit losses in the three months ended March 31, 2023, reflecting a decrease in unfunded commitments during the quarter, primarily due to construction loan disbursements, as well as improvements in the underlying assumptions driving anticipated loss rates within the CECL model adopted January 1, 2023.

 The Company recorded a $300,000 provision for credit losses in the three months ended June 30, 2023, reflecting growth in the loan portfolio and additional charge-offs from the Splash unsecured consumer loan program.

This compares to a $500,000 loan loss provision for the three months ended June 30, 2022, which was estimated using the incurred loss method based on historical loss trends combined with qualitative adjustments.

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

Three Months Ended June 30,

(Dollars in thousands)

Provision for credit losses on loans

Net (charge-offs) recoveries

Allowance for credit losses on loans

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

Total nonaccrual loans

Allowance for credit losses on loans as a percentage of nonaccrual loans at period end

Nonaccrual and 90 days or more past due loans as a percentage of total loans

Noninterest Income.

Noninterest income decreased $511,000, or 23.0%, to $1.7 million for the three months ended June 30, 2023, from $2.2 million for the three months ended June 30, 2022.

The decrease was primarily due to a decline in the valuation of servicing rights of $183,000 related to the impact of paid-off loans. Saleable mortgage loan production continues to be hindered by the rise in market rates on mortgage loans and a lack of single-family home inventory compared to the same period in the prior year, resulting in a quarter-over-quarter decrease in the net gain on sale of loans of $173,000.

An increase of $260,000 in the recorded value of our equity and partnership fintech investments recorded in other income was offset by a $334,000 reduction in swap fee income.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:

Three Months Ended June 30,

Increase (Decrease)

(Dollars in thousands)

Loan and deposit service fees

Sold loan servicing fees and servicing rights mark-to-market

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

Total noninterest income

Noninterest Expense.

Noninterest expense decreased $1.8 million, or 10.3%, to $15.2 million for the three months ended June 30, 2023, compared to $17.0 million for the three months ended June 30, 2022. The reduced expenses compared to the second quarter of 2022 reflects a $2.0 million decrease related to Quin Ventures compensation, advertising and customer acquisition costs, and occupancy expenses.

Additional decreases in Bank commissions paid and compensation expense were partially offset by higher Bank professional fees and FDIC insurance premiums.

The Company continues to manage expenses, with a focus on further reducing compensation, occupancy, advertising, travel and other discretionary spending.

The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:

Three Months Ended June 30,

Increase (Decrease)

(Dollars in thousands)

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Professional fees

FDIC insurance premium

Other expense

Total noninterest expense

Provision for Income Tax.

An income tax expense of $475,000 was recorded for the three months ended June 30, 2023, compared to $467,000 for the three months ended June 30, 2022, due to a year-over-year increase in income before taxes of $174,000. The provision includes accruals for both federal and state income taxes.

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 7 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Comparison of Results of Operations for the Six Months Ended June 30, 2023 and 2022

Net income attributable to the Company was $5.3 million for the six months ended June 30, 2023, compared to $5.29 million for the six months ended June 30, 2022.

A $258,000 increase in net interest income after provision for credit losses and a $1.7 million decrease in noninterest expense were offset by a $580,000 decrease in noninterest income and a $1.1 million decrease in the net loss attributable to the noncontrolling interest in Quin Ventures.

Net Interest Income.

Net interest income decreased $442,000 to $32.3 million for the six months ended June 30, 2023, from $32.7 million for the six months ended June 30, 2022, as higher weighted-average funding costs outpaced increased loan and investment income.

Average earning assets increased $135.4 million year-over-year.

The yield on average interest-earning assets increased 106 basis points to 5.06% for the six months ended June 30, 2023, compared to 4.00% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, and an increase in yields earned on investment securities.

The average cost of interest-bearing liabilities increased to 2.08% for the six months ended June 30, 2023, compared to 0.46% for the same period last year, due primarily to higher rates paid on all interest-bearing deposits and advances along with increases in the average balances of CDs and FHLB advances.

Total cost of funds increased 139 basis points to 1.76% for the six months ended June 30, 2023, from 0.37% for the same period in 2022.

The net interest margin decreased 30 basis points to 3.35% for the six months ended June 30, 2023, from 3.65% for the same period in 2022.

Interest Income.

Total interest income increased $12.9 million, or 36.0%, to $48.8 million for the six months ended June 30, 2023, from $35.9 million for the comparable period in 2022, primarily due to an increase in yields on interest-earning assets and an increase in average net loans receivable balances.

Interest and fees on loans receivable increased $10.2 million, to $40.8 million for the six months ended June 30, 2023, from $30.6 million for the six months ended June 30, 2022, primarily due to an increase in the average balance of net loans receivable of $176.0 million compared to the prior year, coupled with an increase in average loan yields to 5.27% for the six months ended June 30, 2023, from 4.46% for the same period in 2022.

The loan portfolio saw increases in multi-family and commercial real estate lending, renewed short-term participation in Northpointe MPP, as well as additional purchased auto, manufactured home, and Bankers Healthcare Group commercial loans.

Loan yields increased over the prior year due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other variable-rate indices.

The yield earned on investment securities also increased to 4.01% compared to the same period in 2022, as the purchase of higher-yielding investments occurred late in the first quarter of 2022 with the related increase only impacting income for the second quarter of 2022.

An increase in rates on floating bonds and a slowdown in prepayment speeds, which reduces amortization of premium costs, also positively impacted investment securities income.

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

Six Months Ended June 30,

Average Balance Outstanding

Increase (Decrease) in Interest Income

(Dollars in thousands)

Loans receivable, net

Investment securities

Interest-earning deposits in banks

Total interest-earning assets

Interest Expense.

Total interest expense increased $13.3 million, or 425.7%, to $16.5 million for the six months ended June 30, 2023, compared to $3.1 million for the six months ended June 30, 2022. The increase over the first six months of 2022 was the result of a 113 basis point increase in the cost of deposits from 0.20% one year prior along with a higher volume of CD balances.

A shift in the deposit mix from low-cost transaction and money market accounts to a higher volume of CDs and savings accounts resulted in higher costs of funds on deposits.

Interest expense on borrowings increased due to a $113.7 million increase in the average balance and a 299 basis point increase in the cost of advances, primarily FHLB advances, compared to the same period in 2022.

During the six months ended June 30, 2023, interest expense on CDs increased due to higher average balances of $239.7 million, along with a 238 basis point increase in the average rates paid, compared to the six months ended June 30, 2022.

During the same period, the average balances of money market accounts decreased $176.9 million, with a 64 basis point average rate increase, resulting in an overall increase to interest expense.

The average cost of interest-bearing deposit accounts increased to 1.62% for the six months ended June 30, 2023, from 0.25% for the six months ended June 30, 2022, due to the use of promotional products designed to retain existing deposits and generate new deposits.

The mix of customer deposit balances shifted from non-maturity accounts towards higher cost CD and savings products.

Brokered CDs represented 10.9% and 5.4% of total deposits at June 30, 2023 and 2022, respectively.

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

Six Months Ended June 30,

Average Balance Outstanding

Increase (Decrease) in Interest Expense

(Dollars in thousands)

Transaction accounts

Money market accounts

Savings accounts

Certificates of deposit

Subordinated debt

Total interest-bearing liabilities

Provision for Credit Losses.

 The Company recorded a $200,000 recapture of provision for credit losses for the six months ended June 30, 2023, reflecting a year-to-date decrease in unfunded commitments primarily due to construction loan disbursements, as well as improvements in the underlying assumptions driving anticipated loss rates within the CECL model adopted January 1, 2023.

Specifically, the gross domestic product assumption metric improved since implementation at the beginning of 2023.

This compares to no loan loss provision for the three months ended March 31, 2022, which was estimated using the incurred loss method based on historical loss trends combined with qualitative adjustments.

The recapture attributable to the decrease in unfunded commitments was partially offset by a provision expense related to higher outstanding loan balances from new funding and disbursements on prior commitments.

Charged-off loan balances also contributed to the loan-related provision. This compares to a $500,000 loan loss provision for the six months ended June 30, 2022, which was estimated using the incurred loss method based on historical loss trends combined with qualitative adjustments.

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

Three Months Ended March 31,

Six Months Ended June 30,

(Dollars in thousands)

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Noninterest Income.

Noninterest income decreased $69,000, or 2.9%, to $2.3 million for the three months ended March 31, 2023, from $2.4 million for the three months ended March 31, 2022.

Other income increased due to a year-over-year increase of $107,000 in the recorded value of our equity and partnership fintech investments. Saleable mortgage loan production continues to be hindered by rising market rates on mortgage loans and a lack of single-family home inventory compared to the prior year, impacting the net gain on sale of loans.

Noninterest income decreased $580,000, or 12.5%, to $4.1 million for the six months ended June 30, 2023, from $4.6 million for the six months ended June 30, 2022.

Other income increased due to a year-over-year increase of $366,000 in the recorded value of our equity and partnership fintech investments. Saleable mortgage loan production continues to be hindered by the rise in market rates on mortgage loans and a lack of single-family home inventory compared to the prior year, resulting in a $250,000 year-over-year decrease in net gain on sale of loans.

No investment securities sales were recorded during the current year compared to the same period in 2022.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:

Three Months Ended March 31,

Six Months Ended June 30,

Increase (Decrease)

1 unchanged sentence

Loan and deposit service fees

Sold loan servicing fees and servicing right mark-to-market

Sold loan servicing fees and servicing rights mark-to-market

Net gain on sale of loans

Net gain on sale of investment securities

Net (loss) gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

1 unchanged sentence

Noninterest Expense.

Noninterest expense increased $40,000, or 0.3%, to $14.9 million for the three months ended March 31, 2023, compared to $14.8 million for the three months ended March 31, 2022. Compensation and benefits was lower due to a decrease in medical insurance and payroll tax expense as well as lower commissions and incentives paid and a reduction in workforce in the fourth quarter of 2022.

The Bank received a premium refund of $436,000 in the first quarter of 2023 and has also transitioned to a self-insured medical plan in 2023. The payroll tax expense was reduced in the first quarter of 2023 by the recognition of a portion of the Employee Retention Credit received in March 2023.

These decreases were partially offset by an increase in advertising related to strategic deposit gathering initiatives and additional corporate sponsorships.

The increase over the three months ended March 31, 2022, also reflects increases in data processing and occupancy expenses associated with building enhanced technological infrastructure.

Additionally, Quin Ventures expenses have decreased $446,000 compared to the first quarter of 2022, as a result of no Quin Ventures expense recorded for compensation, marketing, or professional fees during the first quarter of 2023.

Noninterest expense decreased $1.7 million, or 5.4%, to $30.1 million for the six months ended June 30, 2023, compared to $31.8 million for the six months ended June 30, 2022. Compensation and benefits was lower due to lower commissions and incentives paid as well as a decrease in medical insurance and payroll tax expense and a reduction in workforce in the fourth quarter of 2022.

The Bank received a medical insurance premium refund of $436,000 in the first quarter of 2023 and transitioned to a self-insured medical plan in 2023. Payroll tax expense was reduced in 2023 by the recognition of a portion of the Employee Retention Credit received in March 2023.

These decreases were partially offset by an increase in legal and consulting fees and FDIC insurance premiums.

The increase over the six months ended June 30, 2022, also reflects increases in data processing expenses associated with building enhanced technological infrastructure.

Quin Ventures expenses decreased $2.4 million compared to the same period in 2022, as a result of no Quin Ventures expense recorded for compensation, marketing, or professional fees during the first six months of 2023.

The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:

Three Months Ended March 31,

Six Months Ended June 30,

Increase (Decrease)

10 unchanged sentences

Provision for Income Tax.

An income tax expense of $825,000 was recorded for the three months ended March 31, 2023, compared to $554,000 for the three months ended March 31, 2022, due to a year-over-year increase in income before taxes of $1.2 million. The current year provision includes accruals for both federal and state income taxes, resulting in a higher effective tax rate.

An income tax expense of $1.3 million was recorded for the six months ended June 30, 2023, compared to $1.0 million for the six months ended June 30, 2022, due to a year-over-year increase in income before taxes of $1.4 million. The provision includes accruals for both federal and state income taxes.

2 unchanged sentences

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 March 31, 2023 and 2022.

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, 2023 and 2022.

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 March 31,

Three Months Ended June 30,

(Dollars in thousands)

1 unchanged sentence

Loans receivable, net (1)

Investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (2)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Total interest-bearing deposits (3)

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits (3)

Other noninterest-bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Net interest rate spread

Net earning assets

Net interest margin (4)

Average interest-earning assets to average interest-bearing liabilities

(1) The average loans receivable, net balances include nonaccrual loans.

(2) Includes interest-earning deposits (cash) at other financial institutions.

(3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.54% and 0.20% for the three months ended June 30, 2023 and 2022, respectively.

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

Six Months Ended June 30,

(Dollars in thousands)

Interest-earning assets:

Loans receivable, net (1)

Total investment securities

24 unchanged sentences

(2) Includes interest-earning deposits (cash) at other financial institutions.

(3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.12% and 0.19% for the three months ended March 31, 2023 and 2022, respectively.

(3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.33% and 0.20% for the six months ended June 30, 2023 and 2022, respectively.

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

5 unchanged sentences

Three Months Ended

March 31, 2023 vs.

Six Months Ended

June 30, 2023 vs.

Increase (Decrease) Due to

Total Increase (Decrease)

(In thousands)

Interest-earning assets:

15 unchanged sentences

requests for funding and take the form of loan commitments and lines of credit.

For the three months ended March 31, 2023 and the year ended December 31, 2022, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

For the six months ended June 30, 2023 and the year ended December 31, 2022, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

Contractual Obligations

At March 31, 2023, our scheduled maturities of contractual obligations were as follows:

At June 30, 2023, our scheduled maturities of contractual obligations were as follows:

After 1 Year Through

10 unchanged sentences

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2023:

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2023:

Amount of Commitment by Expiration

16 unchanged sentences

The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

At March 31, 2023, cash and cash equivalents totaling $140.6 million and unpledged securities classified as available-for-sale with a market value of $237.6 million provided additional sources of liquidity.

The Bank pledged collateral of $520.6 million to support borrowings from the FHLB, with a remaining borrowing capacity of $190.8 million at March 31, 2023.

The Bank also has an established borrowing arrangement with the Federal Reserve Bank of San Francisco ("FRB"), for which available-for-sale securities with a market value of $9.1 million were pledged as of March 31, 2023, with a remaining borrowing capacity of $8.7 million. First Northwest has a $20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

The remaining borrowing capacity of the NexBank line of credit was $9.0 million at March 31, 2023.

At March 31, 2023, we had $453,000 in loan commitments outstanding and $203.5 million in undisbursed loans and standby letters of credit, including $98.5 million in undisbursed construction loan commitments.

CDs due within one year as of March 31, 2023, totaled $317.0 million, or 67.7% of CDs with a weighted-average rate of 3.03%.

At June 30, 2023, cash and cash equivalents totaled $78.3 million and unpledged securities classified as available-for-sale had a market value of $290.9 million.

The Bank pledged collateral of $625.0 million to support borrowings from the FHLB, with a remaining borrowing capacity of $311.3 million at June 30, 2023.

The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $9.1 million were pledged as of June 30, 2023, with a remaining borrowing capacity of $8.7 million.

The Bank has established an additional arrangement with the FRB through the BTFP, for which available-for-sale securities with a market value of $17.1 million were pledged as of June 30, 2023, with a remaining borrowing capacity of $18.7 million.

First Northwest has a $20.0 million borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

The remaining borrowing capacity of the NexBank line of credit was $9.0 million at June 30, 2023.

At June 30, 2023, we had $16.5 million in loan commitments outstanding and $169.4 million in undisbursed loans and standby letters of credit, including $79.4 million in undisbursed construction loan commitments.

CDs due within one year as of June 30, 2023, totaled $422.5 million, or 75.6% of CDs with a weighted-average rate of 3.75%.

If these maturing deposits are not renewed, we will seek other sources of funds, including other CDs, non-maturity deposits, and borrowings.

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First Fed has a diversified deposit base with approximately 60% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 11% in brokered deposits.

The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at March 31, 2023.

We estimate that 80-85% of our retail customer deposit balances are below the $250,000 FDIC insurance limit or fully collateralized.

The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at June 30, 2023.

We estimate that 80-85% of our customer deposit balances are below the $250,000 FDIC insurance limit or fully collateralized.

The remaining uninsured deposits represent less than 5% of depositors.

Management believes that maintaining a diversified deposit base is an important factor in managing liquidity.

Management believes that maintaining a diversified deposit base is an important factor in managing and maintaining adequate levels of liquidity.

The Company is a separate legal entity from the Bank and provides for its own liquidity.

At March 31, 2023, the Company, on an unconsolidated basis, had liquid assets of $638,000.

At June 30, 2023, the Company, on an unconsolidated basis, had liquid assets of $2.5 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 March 31, 2023, First Northwest had contributed $8.0 million to Quin Ventures pursuant to the terms of a capital financing agreement and related promissory note.

The Company may receive dividends or capital distributions from the Bank, although there may be regulatory limitations on the ability of the Bank to pay dividends.

First Northwest previously contributed $8.0 million to Quin Ventures pursuant to the terms of a capital financing agreement and related promissory note.

Quil Ventures Inc.

has agreed to repay the amount owed by Quin Ventures under the terms and conditions specified in a repayment and security agreement with First Northwest dated December 20, 2022.

agreed to repay the amount owed by Quin Ventures under the terms and conditions specified in a repayment and security agreement with First Northwest dated December 20, 2022.

Capital Resources

At March 31, 2023, shareholders' equity totaled $160.3 million, or 7.4% of total assets.

Our book value per share of common stock was $16.57 at March 31, 2023, compared to $16.31 at December 31, 2022.

At March 31, 2023, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at March 31, 2023.

At June 30, 2023, shareholders' equity totaled $159.6 million, or 7.4% of total assets.

Our book value per share of common stock was $16.56 at June 30, 2023, compared to $16.31 at December 31, 2022.

At June 30, 2023, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at June 30, 2023.

Minimum Capital Requirements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements