What changed in this filing

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Item 1. Financial Statements

2023-11-13 compared with 2023-08-11 · 588 added, 382 removed, 2376 unchanged (29% of the section changed)

3 unchanged sentences

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

June 30, 2023

September 30, 2023

December 31, 2022

51 unchanged sentences

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

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

issued and outstanding 9,630,735 shares at September 30, 2023, and 9,703,581 shares at December 31, 2022

Additional paid-in capital

23 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

Interest and fees on loans receivable

$ 21,728  

$ 17,778  

$ 62,531  

$ 48,395  

Interest on investment securities

2 unchanged sentences

Total interest income

25,834  

20,855  

74,590  

56,717  

INTEREST EXPENSE

18,261  

Total interest expense

10,884  

27,353  

Net interest income

Provision for (recapture of) credit losses

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

14,950  

18,204  

47,237  

50,933  

PROVISION FOR CREDIT LOSSES

Provision for credit losses on loans

Recapture of provision for credit losses on unfunded commitments

( 509 )  

( 1,024 )  

Provision for credit losses

Net interest income after provision for credit losses

14,579  

17,454  

47,066  

49,683  

NONINTEREST INCOME

2 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

2 unchanged sentences

Compensation and benefits

23,812  

27,583  

Data processing

6 unchanged sentences

Total noninterest expense

14,376  

15,375  

44,464  

47,169  

Income before provision for income taxes

2 unchanged sentences

Net income attributable to parent

$ 2,504  

$ 4,291  

$ 7,808  

$ 9,585  

Basic and diluted earnings per common share

$ 0.28  

$ 0.47  

$ 0.87  

$ 1.04  

See selected notes to the consolidated financial statements.

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

$ 2,504  

3 unchanged sentences

Other comprehensive (loss) income:

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

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

( 8,327 )  

( 15,954 )  

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

( 7,688 )  

Income tax benefit related to unrealized holding losses on investments

10,979  

Amortization of unrecognized DB plan prior service cost

2 unchanged sentences

Unrealized holding gains (losses) on derivatives

( 392 )  

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

( 198 )  

( 114 )  

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

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

Other comprehensive (loss) income, net of tax

Income tax benefit related to reclassification adjustment on sales of securities

Other comprehensive loss, net of tax

( 5,784 )  

( 12,576 )  

Comprehensive (loss) income

( 5,307 )  

Comprehensive (loss) income

( 3,280 )  

Comprehensive loss attributable to noncontrolling interest

( 8,981 )  

Comprehensive (loss) income attributable to noncontrolling interest

( 696 )  

7 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended June 30, 2023 and 2022

For the Three Months Ended September 30, 2023 and 2022

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

4 unchanged sentences

Total Shareholders'

Balance at March 31, 2022

Balance at June 30, 2022

9,950,172  

6 unchanged sentences

( 696 )  

Common stock issued

115,777  

Common stock repurchased

2 unchanged sentences

( 491 )  

Restricted stock award grants net of forfeitures

Restricted stock award forfeitures net of grants

( 3,350 )  

Restricted stock awards canceled

7 unchanged sentences

( 693 )  

Balance at June 30, 2022

9,950,172  

$ 96,479  

Balance at September 30, 2022

9,978,041  

3 unchanged sentences

$ ( 41,023 )  

Balance at March 31, 2023

$ ( 2,432 )  

$ 156,599  

Balance at June 30, 2023

9,633,496  

7 unchanged sentences

( 10 )  

( 39 )  

Restricted stock award forfeitures net of grants

( 8,911 )  

Restricted stock award grants net of forfeitures

Restricted stock awards canceled

3 unchanged sentences

( 5,784 )  

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)

( 673 )  

Balance at June 30, 2023

Balance at September 30, 2023

9,630,735  

7 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2023 and 2022

For the Nine Months Ended September 30, 2023 and 2022

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

12 unchanged sentences

( 1,951 )  

Common stock issued

115,777  

Common stock repurchased

14 unchanged sentences

( 2,092 )  

Balance at June 30, 2022

Balance at September 30, 2022

9,978,041  

23 unchanged sentences

( 205 )  

Other comprehensive income, net of tax

Other comprehensive loss, net of tax

( 5,307 )  

Reclassification resulting from adoption of Accounting Standards Codification 326, net of tax

6 unchanged sentences

( 2,027 )  

Balance at June 30, 2023

Balance at September 30, 2023

9,630,735  

8 unchanged sentences

(In thousands) (Unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

Net income before noncontrolling interest

$ 7,648  

$ 7,634  

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

3 unchanged sentences

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

( 451 )  

Amortization of debt issuance costs

1 unchanged sentence

Additions to servicing rights on sold loans, net

(Recapture of) provision for credit losses

( 145 )  

Provision for credit losses on loans

Recapture of provision for credit losses on unfunded commitments

( 1,024 )  

Allocation of ESOP shares

1 unchanged sentence

Gain on sale of loans, net

( 405 )  

Gain on sale of securities available for sale, net

Increase in cash surrender value of life insurance, net

( 668 )  

Origination of loans held for sale

( 21,351 )  

Proceeds from sale of loans held for sale

21,664  

23,538  

Change in assets and liabilities:

Increase in accrued interest receivable

( 1,350 )  

Decrease (increase) in prepaid expenses and other assets

Increase in accrued interest payable

Increase (decrease) in accrued interest payable

Increase in accrued expenses and other liabilities

Net cash provided by operating activities

15,292  

13,714  

Cash flows from investing activities:

1 unchanged sentence

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

26,937  

Proceeds from sales of securities available for sale

12,685  

Purchase of FHLB stock

( 940 )  

Early surrender of bank-owned life insurance policy

Net increase in loans receivable

( 89,551 )  

Purchase of premises and equipment, net

( 1,066 )  

Capital contributions to equity and partnership investments

( 335 )  

Capital disbursements received from equity and partnership investments

Capital contributions to low-income housing tax credit partnerships

Capital contributions to historic tax credit partnerships

Net cash used by investing activities

( 83,298 )  

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from financing activities:

Net increase in deposits

$ 93,507  

$ 24,655  

Proceeds from long-term FHLB advances

15,000  

Repayment of long-term FHLB advances

( 15,000 )  

Net increase in short-term FHLB advances

19,000  

161,000  

Net (decrease) increase in line of credit

Net decrease in advances from borrowers for taxes and insurance

( 4,000 )  

12,000  

Net increase in advances from borrowers for taxes and insurance

Payment of dividends

( 2,025 )  

Restricted stock awards canceled

( 205 )  

Repurchase of common stock

( 980 )  

Net cash provided by financing activities

106,296  

194,248  

Net increase (decrease) in cash and cash equivalents

38,290  

Cash and cash equivalents at beginning of period

45,596  

126,016  

Cash and cash equivalents at end of period

$ 83,886  

$ 103,663  

Supplemental disclosures of cash flow information:

Cash paid for interest on deposits and borrowings

$ 25,532  

$ 6,072  

Cash paid for income taxes

$ 1,859  

$ 2,954  

Supplemental disclosures of noncash investing activities:

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

Change in unrealized (loss) gain on cash flow hedges

Change in unrealized loss on securities available for sale

$ ( 7,688 )  

Change in unrealized gain (loss) on fair value hedge

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 )  

Lease liabilities arising from obtaining right-of-use assets

Investment in partnership acquired through issuance of shares

$ 1,869  

See selected notes to the consolidated financial statements.

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

Operating results for the three and nine months ended September 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.

56 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.

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

The Bank evaluates the historical period on a quarterly basis.

19 unchanged sentences

In general, management's estimate of the ACLL uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The allowance for loan losses evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for credit losses on loans evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

While management utilizes its best judgment and information available to recognize losses on loans, future additions to the allowance may be necessary based on further declines in local and national economic conditions.

13 unchanged sentences

As of December 31, 2022, the Company had no historical charge-off or recovery history and did not have any investment securities available for sale outstanding at the adoption date for which an other-than-temporary impairment was previously recorded.

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.

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 higher market interest rates at that time making our lower coupon investments less attractive. 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 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.

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

At September 30, 2023 , the ACLL as a percentage of loans receivable was 1.04 %.

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

Unfunded Commitments -  

ASU 2016 - 13 was applied prospectively and replaced the reserve for unfunded commitments with the ACL on unfunded commitments ("ACLU") as included in accrued liabilities and other expenses on the Consolidated Balance Sheet and replaced the provision for unfunded commitments with the provision for credit losses on unfunded commitments as presented on the Consolidated Statements of Income, net of provision for credit losses on loans.

Upon adoption, the Bank recorded a pretax increase in the beginning ACLU of $ 1.5 million.

ASU 2016 - 13 was applied prospectively and replaced the reserve for unfunded commitments with the ACL on unfunded commitments ("ACLUC") as included in accrued liabilities and other expenses on the Consolidated Balance Sheet and replaced the provision for unfunded commitments with the provision for credit losses on unfunded commitments as presented on the Consolidated Statements of Income, net of provision for credit losses on loans.

Upon adoption, the Bank recorded a pretax increase in the beginning ACLUC of $ 1.5 million.

Overall CECL Impact - 

The adoption of ASU 2016 - 13, included an increase to the ACLL of $ 2.2 million and an increase to the ACLU of $ 1.5 million, which resulted in a pretax cumulative-effect adjustment of $ 3.7 million.

The adoption of ASU 2016 - 13, included an increase to the ACLL of $ 2.2 million and an increase to the ACLUC of $ 1.5 million, which resulted in a pretax cumulative-effect adjustment of $ 3.7 million.

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

37 unchanged sentences

In accordance with the FASB’s fair value measurement guidance in ASU 2011 - 04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Recently issued accounting pronouncements not yet adopted

Other Pronouncements

In March 2020, the FASB issued ASU No.

7 unchanged sentences

On December 31, 2022, FASB issued ASU 2022 - 06, which deferred the sunset date for Topic 848 to December 31, 2024.

The Company is implementing a transition plan to identify and modify its loans and other financial instruments that are either directly or indirectly influenced by LIBOR.

The Company is in the process of evaluating ASU No.

2020 - 04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, with no expected material impact on the Company's financial statements.

The Company implemented a transition plan to identify and modify its loans and other financial instruments that were either directly or indirectly influenced by LIBOR.

There was no material impact as a result of transitioning away from LIBOR for its loan and other financial instruments effective July 1, 2023.

Recently issued accounting pronouncements not yet adopted

Other Pronouncements

In June 2022, the FASB issued ASU No.

4 unchanged sentences

ASU 2022 - 03  is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted.

The Company is evaluating the effect that ASU 2022 - 03  will have on its consolidated financial statements and related disclosures.

The Company does not believe this ASU will have a material impact on its consolidated financial statements and related disclosures.

In March 2023, the FASB issued ASU 2023 - 02, Investments - Equity Method and Joint Ventures (Topic 323 ): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force .

14 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 June 30, 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 September 30, 2023 are summarized as follows:

Amortized Cost

60 unchanged sentences

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

June 30, 2023  and 

September 30, 2023  and 

December 31, 2022 .

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

Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million and $ 2.0 million as of September 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 June 30, 2023 :

Less Than Twelve Months

21 unchanged sentences

54,335  

53,674  

Mortgage-backed securities:

63 unchanged sentences

$ 323,783  

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 .

There were 

2  available-for-sale securities with unrealized losses of less than one year, and 180  available-for-sale securities with an unrealized loss of more than one year at September 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 a 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 June 30, 2023 , or December 31, 2022 .

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.

June 30, 2023

September 30, 2023

Available-for-Sale

11 unchanged sentences

10,939  

10,124  

Due after ten years

60 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

1 unchanged sentence

$ 12,685  

Gross realized gains

6 unchanged sentences

Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $ 14.4 million as of 

June 30, 2023 and $ 13.2 million as of 

September 30, 2023 and $ 13.2 million as of 

December 31, 2022 .

2 unchanged sentences

Accrued interest receivable on loans was $ 5.8 million as of 

June 30, 2023 and $ 4.7 million as of 

September 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:

June 30, 2023

September 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:

June 30, 2023

September 30, 2023

December 31, 2022

14 unchanged sentences

$ 1,793  

(1) Presentation of December 31, 2022, balances is in accordance with pre-CECL disclosure requirements.

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

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

three and nine months ended September 30, 2023 , was $ 19,000  and $ 52,000 , 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 

June 30, 2023  or 

September 30, 2023  or 

December 31, 2022 .

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

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

90 Days or More

5 unchanged sentences

325,496  

Commercial real estate

23 unchanged sentences

$ 1,622,030  

$ 1,634,978  

The following table presents the amortized cost of past due loans by segment and class as of December 31, 2022 , in accordance with pre-CECL disclosure requirements:

47 unchanged sentences

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

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)  

Revolving  

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

nine months ended September 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)

(In thousands)

15 unchanged sentences

369,950  

Gross charge-offs during the period

Gross charge-offs year-to-date

47,583  

11 unchanged sentences

325,496  

Gross charge-offs during the period

Gross charge-offs year-to-date

Commercial Real Estate

7 unchanged sentences

19,317  

27,876  

Special Mention

15,136  

Total commercial real estate

6 unchanged sentences

381,508  

Gross charge-offs during the period

Gross charge-offs year-to-date

Construction and Land

4 unchanged sentences

10,602  

Special Mention

15,055  

15,063  

Total construction and land

3 unchanged sentences

143,434  

Gross charge-offs during the period

Gross charge-offs year-to-date

37,810  

63,770  

Special Mention

Total home equity

1 unchanged sentence

64,424  

Gross charge-offs during the period

Gross charge-offs year-to-date

Other Consumer

15 unchanged sentences

248,786  

Gross charge-offs during the period

Gross charge-offs year-to-date

Commercial business

4 unchanged sentences

92,927  

119,886  

Special Mention

5 unchanged sentences

101,380  

Gross charge-offs year-to-date

158,596  

Gross charge-offs during the period

453,614  

20 unchanged sentences

$ 75,460  

Total gross charge-offs during the period

$ 1,634,978  

Total gross charge-offs year-to-date

$ 2,421  

$ 2,668  

( 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.

47 unchanged sentences

Such loans are typically nonperforming, modified loans made to borrowers experiencing financial difficulty, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral.

Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio are evaluated individually for purposes of determining an appropriate lifetime ACLL.

The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell.

Loans that are deemed by management to possess unique risk characteristics are evaluated individually for purposes of determining an appropriate lifetime ACLL.

The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent.

Collateral dependent loans are evaluated based on the estimated fair value of the underlying collateral, less estimated costs to sell.

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.

1 unchanged sentence

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 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 June 30, 2023 .

As of September 30, 2023 , $ 4.1 million of loans were individually evaluated with no ACLL attributed to such loans.

At September 30, 2023 , two individually evaluated loans totaling $ 2.7 million were evaluated using a discounted cash flow approach and the remaining loans totaling $ 1.5 million were evaluated based on the underlying value of the collateral.

The two loans evaluated using the discounted cash flow method were accruing at quarter end, while the collateral dependent loans were all on nonaccrual status at September 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.

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

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

Collateral Type

4 unchanged sentences

$ 1,430  

Commercial real estate

Total collateral dependent loans

13 unchanged sentences

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

three and six months ended June 30, 2022 .

three and nine months ended September 30, 2022 .

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

three and six months ended June 30, 2022 .

three and nine months ended September 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 and six months ended June 30, 2023 , there were no MLTB.

During the three and nine months ended September 30, 2023 , there were no MLTB.

Note 4 - Allowance for Credit Losses on Loans

The Company maintains an ACLL and an ACLU in accordance with ASC 326:

The Company maintains an ACLL and an ACLUC in accordance with ASC 326:

Financial Instruments - Credit Losses .

17 unchanged sentences

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

At or For the Three Months Ended September 30, 2023

Adjusted Beginning Balance

3 unchanged sentences

One-to-four family

$ 3,012  

$ 3,538  

Commercial real estate

( 390 )  

Construction and land

( 352 )  

Auto and other consumer

( 731 )  

( 501 )  

Commercial business

At or For the Six Months Ended June 30, 2023

$ 17,297  

$ ( 731 )  

$ ( 501 )  

$ 16,945  

At or For the Nine Months Ended September 30, 2023

Beginning Balance

5 unchanged sentences

One-to-four family

$ 3,343  

$ ( 429 )  

$ 2,914  

$ 3,538  

( 1,449 )  

Commercial real estate

( 604 )  

( 1,079 )  

Construction and land

( 1,716 )  

( 11 )  

Auto and other consumer

( 2,657 )  

Commercial business

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 

( 385 )  

$ 16,116  

$ 2,209  

$ 18,325  

$ ( 2,668 )  

$ 1,195  

$ 16,945  

The ACLL decreased $ 352,000 during the three months ended September 30, 2023 .

Charge-offs during the third quarter of 2023 were mainly concentrated in unsecured consumer loans purchased through the Splash program. The recovery adjustment is due to a reclassification of funds received from the Splash program which had been recorded as a recovery in the second quarter of 2023.

 The provision for ACLL reflects higher loss factors in one -to- four family, commercial business and multi-family loans based on our assumptions.

The post-adoption ACLL decreased $ 1.4 million during the 

nine months ended September 30, 2023 , with $ 2.6  million of year-to-date net charge-offs partially offset by the provision for ACLL.

The ACLL provision expense during the nine months ended September 30, 2023 , was the result of higher loan balances combined with high loss factors due to the impact of changes in U.S.

gross domestic product and unemployment on our model assumptions.

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 June 30, 2022

At or For the Three Months Ended September 30, 2022

One-to-four family

5 unchanged sentences

Beginning balance

(Recapture of) provision for loan losses

$ 3,026  

$ 2,168  

$ 4,154  

$ 2,550  

$ 2,367  

$ 15,747  

Provision for (recapture of) loan losses

( 45 )  

( 36 )  

( 265 )  

Ending balance

At or For the Six Months Ended June 30, 2022

$ 3,214  

$ 2,332  

$ 4,109  

$ 2,514  

$ 2,559  

$ 16,273  

At or For the Nine Months Ended September 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

( 160 )  

( 14 )  

( 475 )  

Ending balance

$ 3,214  

$ 2,332  

$ 4,109  

$ 2,514  

$ 2,559  

$ 16,273  

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

Six Months Ended

June 30, 2022

Nine Months Ended

September 30, 2022

Average Recorded Investment

18 unchanged sentences

Auto and other consumer

$ 3,630  

$ 3,308  

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

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

three and nine months ended September 30, 2022 , was $ 42,000  and $ 126,000 , 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 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.

The allowance for unfunded commitments was $ 828,000  at September 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 unfunded commitments of $ 509,000  and $ 1.0 million for the three and 

nine months ended September 30, 2023 , respectively, primarily attributable to construction loan disbursements resulting in lower unfunded commitments.

Note 5  - Deposits

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

June 30, 2023

September 30, 2023

December 31, 2022

25 unchanged sentences

$ 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.

Brokered certificates of deposit of $ 169.6 million and $ 133.9 million are included in the September 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 September 30, 2023 and December 31, 2022 , were $ 165.3 million and $ 96.6 million, respectively.

Maturities of certificates at the dates indicated are as follows:

June 30, 2023

September 30, 2023

December 31, 2022

8 unchanged sentences

37,032  

After three years through four years

4 unchanged sentences

$ 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 

September 30, 2023 and December 31, 2022 , deposits included $ 109.4 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 

September 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 

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

September 30, 2023 and December 31, 2022 , were funds held by federally recognized tribes totaling $ 19.2 million and $ 10.3 million, respectively.

Investment securities with a carrying value of $ 21.3 million and $ 23.6 million were pledged as collateral for these deposits at 

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

September 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

Nine Months Ended

September 30,

(In thousands)

3 unchanged sentences

Certificates of deposit

12,740  

Total interest expense on deposits

2 unchanged sentences

$ 18,261  

$ 2,764  

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 $ 885.7 million and $ 753.7 million at 

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

September 30, 2023 and December 31, 2022 , respectively. The Bank had outstanding letters of credit from the FHLB with notional amounts of $ 60.0 million to secure public deposits and $ 772,000  to secure the Bellevue, Washington branch lease at 

September 30, 2023 .

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 $ 8.58 million and $ 8.57 million at 

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

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

No funds have been borrowed to date. Investment securities with a carrying value of $ 9.02 million and $ 8.99 million were pledged to the FRB at 

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

September 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.

7 unchanged sentences

Available borrowing capacity was $18.3 million at 

June 30, 2023 . 

September 30, 2023 . 

No funds have been borrowed to date. Investment securities with a carrying value of $ 15.0 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 .

September 30, 2023 .

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

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

32 unchanged sentences

9.00 %  

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:

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

Weighted- Average Interest Rate

53 unchanged sentences

The effective tax rates were 19.9 % and 

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

19.4 % for the nine months ended September 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.

In the second quarter of 2022, the Company began accruing a provision for income tax for certain states in which we have both employees and collateral for loans, thereby creating a nexus in those states for income tax purposes.

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 and six months ended June 30, 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 nine months ended September 30, 2023 and 2022 .

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except share data)

7 unchanged sentences

( 35 )  

( 39 )  

Earnings allocated to common shareholders

47 unchanged sentences

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

June 30, 2023  and 

September 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.

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

A $ 835,000  principal and interest payment was made by the ESOP during the nine months ended September 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 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.

Compensation expense related to the ESOP for the three months ended September 30, 2023 and 2022 , was $ 167,000 and $ 216,000 , respectively.

Compensation expense related to the ESOP for the nine months ended September 30, 2023 and 2022 , was $ 507,000  and $ 752,000 , respectively.

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

June 30, 2023

September 30, 2023

December 31, 2022

5 unchanged sentences

13,257  

26,442  

Unallocated shares

11 unchanged sentences

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

June 30, 2023 , there were 

September 30, 2023 , there were 

85,490  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.

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

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

At this date, there are 

2 unchanged sentences

32,449  and 

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

55,443  shares of restricted stock awarded, respectively, during the nine months ended September 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 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.

For the three months ended September 30, 2023 and 2022 , total compensation expense for the equity incentive plans was $ 349,000  and $ 404,000 , respectively. Included in the compensation expense for the three months ended September 30, 2023 and 2022 , was directors' equity compensation of $ 59,000  and $ 50,000 , respectively.

For the nine months ended September 30, 2023 and 2022 , total compensation expense for the equity incentive plans was $ 1.1 million and $ 1.3 million, respectively. Included in the compensation expense for the 

nine months ended September 30, 2023 and 2022 , was directors' equity compensation of $ 190,000  and $ 189,000 , respectively.

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

For the Three Months Ended

June 30, 2023

September 30, 2023

Weighted-Average Grant Date Fair Value

Non-vested at April 1, 2023

Non-vested at July 1, 2023

132,918  

1 unchanged sentence

( 10,820 )  

Canceled (1)  

( 3,606 )  

( 1,182 )  

Non-vested at June 30, 2023

Non-vested at September 30, 2023

120,410  

2 unchanged sentences

The surrendered shares are canceled and are unavailable for reissue.

For the Six Months Ended

June 30, 2023

For the Nine Months Ended

September 30, 2023

Weighted-Average Grant Date Fair Value

6 unchanged sentences

( 14,193 )  

Non-vested at June 30, 2023

Non-vested at September 30, 2023

120,410  

2 unchanged sentences

The surrendered shares are canceled and are unavailable for reissue.

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.

As of September 30, 2023 , there was $ 1.2 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 

28 unchanged sentences

Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level 2, when available.

In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value.

Such instruments are classified as Level 3.

Where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value.

The Company believes that the net asset value obtained through financial statements provided by each partnership approximates fair value. Such instruments are classified as Level 3.

Sold loan servicing rights, at fair value : The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs.

10 unchanged sentences

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

June 30, 2023

September 30, 2023

Quoted Prices in Active Markets for Identical Assets or Liabilities

22 unchanged sentences

12,787  

Interest rate swap derivative

Total assets measured at fair value

3 unchanged sentences

$ 326,416  

Financial Liabilities

Interest rate swap derivative

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:

June 30, 2023

September 30, 2023

Fair Value (In thousands)

16 unchanged sentences

-3.97% - 0.87%  

Partnership investments

$ 12,787  

Net asset value per share

Net asset value

(1) Unobservable inputs were weighted by the relative fair value of the instruments.

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 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

The following table summarizes the changes in sold loan servicing rights, a Level 3 asset measured at fair value on a recurring basis, at the dates indicated:

As of or For the Three Months Ended September 30,

As of or For the Nine Months Ended September 30,

(In thousands)

Sold loan servicing rights

Balance at beginning of period

$ 3,825  

1 unchanged sentence

$ 3,887  

(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

$ 3,820  

Servicing rights that result from transfers and sale of financial assets

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

( 167 )  

( 38 )  

( 303 )  

Balance at end of period

(In thousands)

Sold loan servicing rights

$ 3,729  

1 unchanged sentence

$ 3,729  

$ 3,872  

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

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

The following tables summarize the changes in Level 3 securities available for sale and partnership investments, assets which are measured at fair value on a recurring basis, at the dates indicated:

As of or Three Months Ended September 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)

Transfers Into Level 3

Purchases, net of Distributions

Unrealized (Losses) Gains

Balance at end of period

(In thousands)

Sold loan servicing rights

Securities available for sale:

MBS non-agency

$ 29,378  

1 unchanged sentence

$ 29,192  

(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

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

Partnership investments

12,733  

1 unchanged sentence

12,787  

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

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

As of or For the Nine Months Ended September 30, 2023

Balance at beginning of period

Transfers Into Level 3

Purchases, net of Distributions

Unrealized (Losses) Gains

9 unchanged sentences

( 69 )  

12,787  

As of or For the Year Ended December 31, 2022

11 unchanged sentences

12,563  

(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no market activity for the investments.

(1) Transferred from Level 2 to Level 3 in the fourth quarter of 2022 because of a lack of observable market data, resulting from little to no market activity for the investments.

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets.

Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

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

The following table presents the Company’s assets measured at fair value on a nonrecurring basis at the date indicated:

December 31, 2022

3 unchanged sentences

$ 3,034  

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

September 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:

June 30, 2023

September 30, 2023

Fair Value Measurements Using:

27 unchanged sentences

12,787  

Interest rate swap derivative

Financial liabilities

12 unchanged sentences

Line of Credit

11,000  

11,047  

Subordinated debt, net

3 unchanged sentences

Accrued interest payable

Interest rate swap derivative

December 31, 2022

57 unchanged sentences

(In thousands)

Balance at March 31, 2022

Balance at June 30, 2022

$ ( 26,653 )  

$ ( 1,794 )  

Other comprehensive loss before reclassification

( 12,604 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

( 12,604 )  

Balance at September 30, 2022

$ ( 39,257 )  

$ ( 1,766 )  

Balance at June 30, 2023

Balance at March 31, 2023

$ ( 37,679 )  

$ ( 2,079 )  

$ ( 308 )  

Other comprehensive loss before reclassification

( 6,540 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

Balance at June 30, 2023

( 6,540 )  

Balance at September 30, 2023

$ ( 44,219 )  

$ ( 2,050 )  

Balance at December 31, 2021

$ 2,140  

$ ( 1,852 )  

Other comprehensive loss before reclassification

( 41,304 )  

Amounts reclassified from accumulated other comprehensive income

( 93 )  

Net other comprehensive (loss) income

Balance at June 30, 2022

( 41,397 )  

Balance at September 30, 2022

$ ( 39,257 )  

$ ( 1,766 )  

Balance at December 31, 2022

Other comprehensive income before reclassification

$ ( 38,404 )  

$ ( 2,139 )  

Other comprehensive loss before reclassification

( 5,815 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive income

Balance at June 30, 2023

Net other comprehensive (loss) income

( 5,815 )  

Balance at September 30, 2023

$ ( 44,219 )  

$ ( 2,050 )  

Note 13  - Derivatives and Hedging Activities

3 unchanged sentences

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates.

The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount.

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.

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

At September 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 .

3 unchanged sentences

(In thousands)  

June 30, 2023

September 30, 2023

Investment securities (1)

1 unchanged sentence

$ 49,467  

( 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 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.

( 1 ) These amounts include the amortized cost basis of a closed portfolio 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 September 30, 2023 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 59.5  million, the cumulative basis adjustments associated with this hedging relationship was ($ 533,000 ), and the amount of the designated hedged items was $ 50.0 million.

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

5 unchanged sentences

(In thousands)  

June 30, 2023

September 30, 2023

Fair value hedges:

1 unchanged sentence

$ 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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

8 unchanged sentences

$ ( 925 )  

Recognized on derivatives designated as hedging instruments

$ ( 533 )  

Recognized on derivatives designated as hedging instruments

Net income recognized on fair value

4 unchanged sentences

This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.

The Company’s derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties’

creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business.

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.

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.

The Company has an interest rate swap agreement with its derivative counterparty that contains a provision where if the Company either defaults or fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to terminate the contract or post additional collateral.

At September 30, 2023 , the Company had no derivatives in a net liability position related to this agreement.

The Company has minimum collateral posting thresholds with its derivative counterparty and has posted collateral of securities with par values totaling $ 55.8 million and cash of $ 790,000  to secure the interest rate swap agreement at September 30, 2023 .

In certain cases, the Company will have posted excess collateral compared to total exposure due to initial margin requirements or day-to-day rate volatility.

As of September 30, 2023 , the Company was in compliance with all credit risk-related 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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legislative or regulatory changes, including expanded consumer protection regulation, responses to recent events in the banking industry, inflation and climate change issues, which could adversely affect the Company's business;

a continued decrease in the market demand for loans that we originate for sale;

continued depressed market demand for loans that we originate for sale;

our ability to control operating costs and expenses;

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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;

risks related to overall economic conditions, including the impact on the economy of a rising interest rate environment, inflationary pressures, and geopolitical instability, including the war in Ukraine;

any failure of key third-party vendors to perform their obligations to us;

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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.

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

First Fed Bank is a community-oriented financial institution founded in 1923 in Port Angeles, Washington.

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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.

The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.

First Northwest also has a limited partnership investment in the Hero Fund. MWG also holds a 20% general partner interest in MWGC.

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.

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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.

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 the 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 the United States unemployment and gross domestic product metrics, or receipt of recoveries for amounts previously charged off.

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, lower loan or unfunded commitment balances, 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.

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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 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.

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

Total assets increased to $2.15 billion, or 5.5%, at September 30, 2023, from $2.04 billion at December 31, 2022.

Cash and cash equivalents increased by $38.3 million, or 84.0%, to $83.9 million as of September 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 uncertainty pertaining to deposit costs and retention.

Investment securities decreased $17.3 million, or 5.3%, to $309.3 million at September 30, 2023, from $326.6 million at December 31, 2022.

The decrease was due to normal payments and prepayment activity as well as a mark-to-market valuation decrease of $7.7 million, primarily related to a declining market outlook on the municipal bond portfolio due to the current rate environment.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.7 years as of September 30, 2023, compared to 8.2 years as of December 31, 2022, and had an estimated average repricing term of 7.3 years as of September 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 4.9 years at September 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 increasing loans as a percentage of earning assets;

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

Securities are sold to provide liquidity, improve long-term portfolio yields and manage interest rate risk in the portfolio.

Included in MBS non-agency are $58.7 million of commercial mortgage-backed securities ("CMBS"), of which 85.6%, or $50.2 million, are in "A" tranches.

The majority of the remaining 14.4%, or $8.5 million, are in "B" tranches, with one investment in a "C" tranche.

Our largest exposure is to long-term care facilities, which makes up 53.9%, or $31.7 million, of our private label CMBS securities.

All of the CMBS bonds have credit enhancements that further reduce risk of loss on these investments.

The investment portfolio was composed of 49.0% in amortizing securities at September 30, 2023, compared to 50.8% at December 31, 2022.

The projected average life of our securities may vary due to prepayment activity, particularly in the mortgage-backed securities portfolio, which is impacted by prevailing market interest rates. Securities are bought and sold to manage liquidity, improve long-term portfolio yields and manage interest rate risk in the portfolio.

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

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.

Net loans, excluding loans held for sale, increased $86.6 million to $1.62 billion at September 30, 2023, from $1.53 billion at December 31, 2022.

During the nine months ended September 30, 2023, multi-family loans increased $72.8 million through new originations totaling $40.1 million, and $27.8 million of construction loans converting into permanent amortizing loans, including $17.8 million of acquisition-renovation loans. One-to-four family residential loans increased $26.4 million as a result of $3.3 million in new amortizing loan originations and $48.0 million of residential construction loans that converted to permanent amortizing loans, partially offset by loan prepayments totaling $17.5 million and $7.4 million of scheduled payments received.

Commercial business loans increased $24.5 million as a result of $15.2 million of Bankers Healthcare Group loan purchases and $9.2 million of organic originations and draws on existing commitments in excess of payoffs and scheduled payments.

Home equity loans increased $11.6 million primarily as a result of $5.7 million in new fixed-rate originations and $7.7 million in new home equity lines of credit, offset by payment activity.

Auto and other consumer loans increased $9.9 million, due to a $14.3 million purchase of a pool of manufactured home loans and $2.8 million in individual manufactured home loan purchases, offset by a net decrease in auto loans of $1.3 million and payment activity.

Commercial real estate loans decreased $7.3 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 $50.2 million, or 25.9%, to $143.4 million at September 30, 2023, from $193.7 million at December 31, 2022, with $77.6 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.

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

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

At September 30, 2023, no acquisition-renovation loans 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 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.

however, we consider these loans to be lower risk than typical ground-up construction projects. At September 30, 2023, 42% 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:

June 30, 2023

September 30, 2023

North Olympic Peninsula (1)

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Multi-family residential

Commercial acquisition-renovation

Commercial real estate

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Multi-family residential

Commercial acquisition-renovation

Commercial real estate

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Multi-family residential

Commercial acquisition-renovation

Commercial real estate

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One-to-four family residential

Commercial real estate

Total disbursed for land

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

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.

During the nine months ended September 30, 2023, the Company originated $171.5 million of organic loans, of which $122.8 million, or 71.6%, were originated in the Puget Sound region, $42.2 million, or 24.5%, in the North Olympic Peninsula, $3.0 million, or 1.8%, in other areas throughout Washington State, and $3.5 million, or 2.1%, in other states.

The Company purchased an additional $33.2 million in auto loans, $17.1 million in manufactured home loans, and $15.2 million in commercial business loans with collateral located throughout the United States during the nine months ended September 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.

The Northpointe Mortgage Purchase Program ("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 September 30, 2023.

The ACLL increased to $17.0 million at September 30, 2023, as the Company adopted CECL on January 1, 2023, recording a day-one adjusting entry of $2.2 million.

The Company made a $315,000 provision for credit loss on loans for the nine-month period.

Net charge-offs were $2.5 million for the nine-month period. The ACLL as a percentage of total loans was 1.0% and 1.1% at September 30, 2023 and December 31, 2022, respectively.

Nonperforming loans increased $581,000, or 32.4%, to $2.4 million at September 30, 2023, from $1.8 million at December 31, 2022, reflecting the deterioration of three mortgage loans totaling $836,000, partially offset by payments received on other nonperforming loans.

Nonperforming loans to total loans was 0.1% at both September 30, 2023 and December 31, 2022.

The ACLL as a percentage of nonperforming loans decreased to 714% at September 30, 2023, down from 900% at December 31, 2022.

Classified loans increased $6.1 million to $23.0 million at September 30, 2023, from $16.9 million at December 31, 2022, due to downgrades of $2.9 million in commercial business loans, $1.3 million in commercial real estate loans, $1.1 million of additional funds disbursed on a substandard commercial construction loan, $862,000 for three single-family residential loans, along with delinquent unsecured consumer loans totaling $323,000 and home equity loans totaling $141,000.

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.

The underwriting criteria for future loans purchased from the Splash unsecured consumer loan program were adjusted in an effort to minimize future losses.

The Splash portfolio had loan balances of $8.7 million and $9.2 million at September 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 $2.6 million at September 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 September 30, 2023.

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

Increase (Decrease)

June 30, 2023

September 30, 2023

December 31, 2022

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Increase (Decrease)

June 30, 2023

September 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 $2.0 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.

Total liabilities increased to $2.0 billion at September 30, 2023, from $1.88 billion at December 31, 2022, due to an increase in deposits of $93.5 million and borrowings of $15.0 million.

Deposit balances increased $93.5 million to $1.66 billion at September 30, 2023 from $1.56 billion at December 31, 2022.

During the nine-month period ended September 30, 2023, CDs increased $198.0 million and savings accounts increased $52.3 million, offset by money market account decreases of $100.3 million and demand deposit account decreases of $56.5 million.

We believe the shift between categories was driven by customers seeking higher rates and spending excess savings accumulated in 2020 and 2021.

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.

Brokered CDs totaling $169.6 million were included in the $579.7 million balance of CDs at September 30, 2023.

Brokered CD balances increased $35.7 million, business and public fund account balances increased $33.7 million, and consumer account balances increased $23.4 million during the nine-month period ended September 30, 2023.

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

Total shareholders' equity decreased $2.2 million to $156.1 million for the nine months ended September 30, 2023.

The Company recorded year-to-date net income of $7.8 million and a $419,000 increase in the fair market value of derivatives, net of taxes.

Increases were offset by an increase in the after-tax unrealized loss on available-for-sale investments of $5.8 million, a $3.0 million decrease for the cumulative CECL adjustment, $2.0 million of dividends declared and the cost of repurchased shares.

Year-to-date, we repurchased 75,690 shares of common stock under the October 2020 stock repurchase plan at an average price of $12.91 per share for a total of $980,000, leaving 226,337 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.

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

Net income attributable to the Company was $2.5 million for the three months ended September 30, 2023, compared to $4.3 million for the three months ended September 30, 2022.

A $2.9 million decrease in net interest income after provision for credit losses was offset by a $570,000 increase in noninterest income and a $1.0 million decrease in noninterest expense.

Net Interest Income.

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.

Net interest income decreased $3.3 million to $15.0 million for the three months ended September 30, 2023, from $18.2 million for the three months ended September 30, 2022.

This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 187 basis points to 2.60% for the three months ended September 30, 2023, compared to 0.73% for the same period in the prior year.

This was 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 69 basis points to 5.14% for the three months ended September 30, 2023, compared to 4.45% for the same period last year, due primarily to higher yields on variable-rate assets and new loan originations.

Total cost of funds increased 164 basis points to 2.23% for the three months ended September 30, 2023, from 0.59% for the same period in 2022.

The net interest margin decreased 91 basis points to 2.97% for the three months ended September 30, 2023, from 3.88% 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 reverse interest rate margin 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.

A fair value hedging agreement provides additional interest income and new loan originations are priced to current market rates.

Interest Income.

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.

Total interest income increased $5.0 million, or 23.9%, to $25.8 million for the three months ended September 30, 2023, from $20.9 million for the comparable period in 2022, primarily due to higher yields on interest-earning assets.

Interest and fees on loans receivable increased $4.0 million, to $21.7 million for the three months ended September 30, 2023, from $17.8 million for the three months ended September 30, 2022, primarily due to an increase in average loan yields to 5.31% for the three months ended September 30, 2023, from 4.75% for the same period in 2022, coupled with an increase in the average balance of net loans receivable of $140.1 million compared to the third quarter of 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 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 116 basis points to 4.18% 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 yield on interest-earning deposits in banks also increased to 5.46% from 2.72% for the comparable period in 2022, benefitting from increases in rates paid on excess balances held at the FRB.

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

Three Months Ended June 30,

Three Months Ended September 30,

Average Balance Outstanding

Increase (Decrease) in Interest Income

Increase in Interest Income

(Dollars in thousands)

4 unchanged sentences

Interest Expense.

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.

Total interest expense increased $8.2 million, or 310.6%, to $10.9 million for the three months ended September 30, 2023, compared to $2.7 million for the three months ended September 30, 2022. The increase over the third quarter of 2022 was the result of an increase in the cost of deposits to 1.85% from 0.32% in same period one year ago along with higher volumes of CDs.

A shift in the deposit mix from no or low-cost transaction and money market accounts to a higher volume of CDs and promotional savings accounts resulted in higher costs of deposits.

Borrowing expense increased due to an average balance increase of $62.3 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.

Average deposit account balances were composed of 83% in interest-bearing deposits and 17% in noninterest-bearing deposits at September 30, 2023, compared to 78% and 22%, respectively, at September 30, 2022. During the three months ended September 30, 2023, interest expense increased on CDs due to an increase in the average balances of $292.7 million, along with an increase in the average rates paid of 89 basis points, compared to the three months ended September 30, 2022.

During the same period, the average balances of money market accounts decreased $183.0 million, offset by a 72 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 average cost of interest-bearing deposit accounts increased to 2.22% for the three months ended September 30, 2023, from 0.41% for the three months ended September 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.

Customer CDs represented 27.6% and 15.2% of customer deposits at September 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 June 30,

Three Months Ended September 30,

Average Balance Outstanding

2 unchanged sentences

(Dollars in thousands)

Transaction accounts

Interest-bearing demand deposits

Money market accounts

4 unchanged sentences

Provision for Credit Losses.

 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 Company recorded a $371,000 provision for credit losses in the three months ended September 30, 2023, reflecting growth in the loan portfolio and additional charge-offs from the Splash unsecured consumer loan program, partially offset by a recapture due to a lower unfunded commitment balance.

This compares to a $750,000 loan loss provision for the three months ended September 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,

Three Months Ended September 30,

(Dollars in thousands)

Provision for credit losses on loans

Net (charge-offs) recoveries

Net charge-offs

Allowance for credit losses on loans

4 unchanged sentences

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.

Noninterest income increased $570,000, or 24.4%, to $2.9 million for the three months ended September 30, 2023, from $2.3 million for the three months ended September 30, 2022.

The increase was primarily due to a $750,000 reclassification from interest income to noninterest income recouped on Splash loan charge-offs, referral fee income of $219,000 and a quarter-over-quarter increase of $108,00 in swap fee income. Saleable mortgage loan production continues to be hindered by the increase in market rates on mortgage loans and a lack of single-family home inventory compared to the same period in the prior year.

In addition, during the current quarter, commercial loan late charge fee income declined $159,000, the valuation of servicing rights on sold loans decreased $129,000 and no loans were sold to the SBA, resulting in a combined quarter-over-quarter decrease in the net gain on sale of loans of $114,000.

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,

Three Months Ended September 30,

Increase (Decrease)

3 unchanged sentences

Net gain on sale of loans

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 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.

Noninterest expense decreased $1.0 million, or 6.5%, to $14.4 million for the three months ended September 30, 2023, compared to $15.4 million for the three months ended September 30, 2022. The decrease in expenses compared to the third quarter of 2022 reflects a $1.1 million decrease related to Quin Ventures compensation, advertising and customer acquisition costs, and occupancy expenses.

Additional decreases in Bank incentive compensation paid and other non-recurring compensation expenses were partially offset by higher Bank professional fees and FDIC insurance premiums.

The Company continues to manage expenses, with a focus on controlling compensation expenses and reducing advertising 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,

Three Months Ended September 30,

Increase (Decrease)

10 unchanged sentences

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.

An income tax expense of $603,000 was recorded for the three months ended September 30, 2023, compared to $818,000 for the three months ended September 30, 2022, due to a year-over-year decrease in income before taxes of $1.3 million. 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.

Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022

Net income attributable to the Company was $7.81 million for the nine months ended September 30, 2023, compared to $9.59 million for the nine months ended September 30, 2022.

A $2.6 million decrease in net interest income after provision for credit losses and a $1.8 million decrease in the net loss attributable to the noncontrolling interest in Quin Ventures were offset by a $2.7 million decrease in noninterest expense.

Noninterest income was flat period over period.

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.

Net interest income decreased $3.7 million to $47.2 million for the nine months ended September 30, 2023, from $50.9 million for the nine months ended September 30, 2022, as higher funding costs outpaced increased loan, investment and interest-earning deposit income.

Average earning assets increased $135.2 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.

The yield on average interest-earning assets increased 93 basis points to 5.09% for the nine months ended September 30, 2023, compared to 4.16% 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 and interest-earning deposit accounts.

The average cost of interest-bearing liabilities increased to 2.26% for the nine months ended September 30, 2023, compared to 0.55% 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 148 basis points to 1.92% for the nine months ended September 30, 2023, from 0.44% for the same period in 2022.

The net interest margin decreased 51 basis points to 3.22% for the nine months ended September 30, 2023, from 3.73% 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.

Total interest income increased $17.9 million, or 31.5%, to $74.6 million for the nine months ended September 30, 2023, from $56.7 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 $14.1 million, to $62.5 million for the nine months ended September 30, 2023, from $48.4 million for the nine months ended September 30, 2022, primarily due to an increase in the average balance of net loans receivable of $163.9 million compared to the prior year, coupled with an increase in average loan yields to 5.28% for the nine months ended September 30, 2023, from 4.56% for the same period in 2022.

The loan portfolio saw increases in multi-family and commercial real estate balances, 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.

The yield earned on investment securities also increased 116 basis points to 4.07% 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 and third quarters 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,

Nine Months Ended September 30,

Average Balance Outstanding

Increase (Decrease) in Interest Income

Increase in Interest Income

(Dollars in thousands)

4 unchanged sentences

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.

Total interest expense increased $21.6 million, or 372.9%, to $27.4 million for the nine months ended September 30, 2023, compared to $5.8 million for the nine months ended September 30, 2022. The increase over the first nine months of 2022 was the result of a 127 basis point increase in the cost of deposits from 0.24% one year prior along with a higher volume of CD balances.

A shift in the deposit mix from no or 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 $62.3 million increase in the average balance and a 234 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 nine months ended September 30, 2023, interest expense on CDs increased due to higher average balances of $257.5 million, along with a 251 basis point increase in the average rates paid, compared to the nine months ended September 30, 2022.

During the same period, the average balances of money market accounts decreased $179.0 million, with a 72 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 average cost of interest-bearing deposit accounts increased to 1.83% for the nine months ended September 30, 2023, from 0.30% for the nine months ended September 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.

Customer CDs represented 27.7% and 14.0% of total deposits at September 30, 2023 and 2022, respectively.

Brokered CDs represented 10.2% and 8.1% of total deposits at September 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,

Nine Months Ended September 30,

Average Balance Outstanding

Increase (Decrease) in Interest Expense

Increase in Interest Expense

(Dollars in thousands)

Transaction accounts

Interest-bearing demand deposits

Money market accounts

4 unchanged sentences

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.

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 Company recorded a $171,000 provision for credit losses for the nine months ended September 30, 2023, reflecting year-to-date increases in loan balances offset by a decrease in unfunded commitments primarily due to construction loan disbursements.

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

Charged-off loan balances also contributed to the loan-related provision. This compares to a $1.3 million loan loss provision for the nine months ended September 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:

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

Provision for credit losses on loans

Net (charge-offs) recoveries

Net charge-offs

Allowance for credit losses on loans

4 unchanged sentences

Noninterest Income.

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.

Noninterest income decreased $10,000, or 0.1%, to $6.95 million for the nine months ended September 30, 2023, from $6.96 million for the nine months ended September 30, 2022.

Other income increased due to the $750,000 Splash payment reclassification and a year-over-year increase of $271,000 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 which, when combined with a significant decrease in SBA loan sale activity, resulted in a $364,000 year-over-year decrease in net gain on sale of loans.

A decline in the fair value of servicing rights compared to the same period in the prior year decreased that category by $212,000. No investment securities sales were recorded during the current year compared to sales in the same period of 2022 which generated $118,000 in gains.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

3 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

1 unchanged sentence

Noninterest Expense.

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.

Noninterest expense decreased $2.7 million, or 5.7%, to $44.5 million for the nine months ended September 30, 2023, compared to $47.2 million for the nine months ended September 30, 2022. Quin Ventures expenses decreased $3.6 million compared to the first nine months of 2022, mainly due to no Quin Ventures expense recorded for compensation, marketing and occupancy during the first nine months of 2023.

Bank compensation and benefits decreased due to lower commissions and incentives paid as well as a decrease in medical insurance and payroll tax expense.

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.

These decreases were partially offset by increases in legal fees, consulting fees, data processing expenses associated with building enhanced technological infrastructure and FDIC insurance premiums.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

10 unchanged sentences

Provision for Income Tax.

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.

An income tax expense of $1.9 million was recorded for the nine months ended September 30, 2023, compared to $1.8 million for the nine months ended September 30, 2022, due to a year-over-year increase in income before taxes of $78,000.

The year-over-year provision was also impacted by a higher tax-exempt interest exclusion in 2023 due to a larger interest expense disallowance that impacted the effective tax rate.

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 June 30, 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 September 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 June 30,

Three Months Ended September 30,

(Dollars in thousands)

27 unchanged sentences

(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.

(3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.85% and 0.32% for the three months ended September 30, 2023 and 2022, respectively.

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

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in thousands)

27 unchanged sentences

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

(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.

(3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.51% and 0.24% for the nine months ended September 30, 2023 and 2022, respectively.

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

5 unchanged sentences

Three Months Ended

Six Months Ended

June 30, 2023 vs.

Nine Months Ended

September 30, 2023 vs.

Increase (Decrease) Due to

14 unchanged sentences

Total interest-bearing liabilities

Net change in interest income

Change in net interest income

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

4 unchanged sentences

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

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.

For the nine months ended September 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 June 30, 2023, our scheduled maturities of contractual obligations were as follows:

At September 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 June 30, 2023:

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

Amount of Commitment by Expiration

12 unchanged sentences

While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.

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

In the first quarter, we increased liquid assets in response to the recent stresses within the banking industry and related concerns regarding liquidity.

We increased available liquidity during 2023 in response to stresses within the banking industry and related concerns regarding liquidity.

Our most liquid assets are cash and cash equivalents followed by available-for-sale securities.

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

At June 30, 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.

At September 30, 2023, cash and cash equivalents totaled $83.9 million and unpledged securities classified as available-for-sale had a market value of $279.1 million.

The Bank pledged collateral of $582.8 million to support borrowings from the FHLB, with a remaining borrowing capacity of $269.0 million at September 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 $9.0 million were pledged as of September 30, 2023, with a remaining borrowing capacity of $8.5 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 $15.1 million were pledged as of September 30, 2023, with a remaining borrowing capacity of $18.3 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%.

The remaining borrowing capacity of the NexBank line of credit was $12.0 million at September 30, 2023.

At September 30, 2023, we had $680,000 in loan commitments outstanding and $155.0 million in undisbursed loans and standby letters of credit, including $60.6 million in undisbursed construction loan commitments.

CDs due within one year as of September 30, 2023, totaled $449.2 million, or 77.5% of CDs with a weighted-average rate of 4.21%.

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 61% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 10% in brokered deposits.

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

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

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

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

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.

At September 30, 2023, the Company, on an unconsolidated basis, had liquid assets of $507,000.

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, interest payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments to limited partnership investments.

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.

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Capital Resources

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.

At September 30, 2023, shareholders' equity totaled $156.1 million, or 7.2% of total assets.

Our book value per share of common stock was $16.20 at September 30, 2023, compared to $16.31 at December 31, 2022.

At September 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 September 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