First Northwest Bancorp 10-Q

Item 1. Financial Statements (Unaudited)   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) (Unaudited)       September 30, 2023     December 31, 2022   ASSETS                 Cash and due from banks   $ 20,609     $ 17,104   Interest-earning deposits in banks     63,277       28,492   Investment securities available for sale, at fair value     309,324       326,569   Loans held for sale     689       597   Loans receivable (net of allowance for credit losses on loans of $ 16,945 and $ 16,116 )     1,618,033       1,531,435   Federal Home Loan Bank (FHLB) stock, at cost     12,621       11,681   Accrued interest receivable     8,093       6,743   Premises and equipment, net     17,954       18,089   Servicing rights on sold loans, at fair value     3,729       3,887   Bank-owned life insurance, net     40,318       39,665   Equity and partnership investments     14,623       14,289   Goodwill and other intangible assets, net     1,087       1,089   Deferred tax asset, net     16,611       14,091   Prepaid expenses and other assets     26,577       28,339   Total assets   $ 2,153,545     $ 2,042,070                     LIABILITIES AND SHAREHOLDERS' EQUITY                 Deposits   $ 1,657,762     $ 1,564,255   Borrowings     300,416       285,358   Accrued interest payable     2,276       455   Accrued expenses and other liabilities     34,651       32,344   Advances from borrowers for taxes and insurance     2,375       1,376   Total liabilities     1,997,480       1,883,788                     Shareholders' Equity                 Preferred stock, $ 0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding     —       —   Common stock, $ 0.01 par value, authorized 75,000,000 shares; issued and outstanding 9,630,735 shares at September 30, 2023, and 9,703,581 shares at December 31, 2022     96       97   Additional paid-in capital     95,658       95,508   Retained earnings     113,579       114,424   Accumulated other comprehensive loss, net of tax     ( 45,850 )     ( 40,543 ) Unearned employee stock ownership plan (ESOP) shares     ( 7,418 )     ( 7,913 ) Total parent's shareholders' equity     156,065       161,573   Noncontrolling interest in Quin Ventures, Inc.     —       ( 3,291 ) Total shareholders' equity     156,065       158,282   Total liabilities and shareholders' equity   $ 2,153,545     $ 2,042,070     See selected notes to the consolidated financial statements.   3 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited)         Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022   INTEREST INCOME                                 Interest and fees on loans receivable   $ 21,728     $ 17,778     $ 62,531     $ 48,395   Interest on investment securities     3,368       2,817       9,886       7,807   Interest on deposits and other     524       118       1,545       202   FHLB dividends     214       142       628       313   Total interest income     25,834       20,855       74,590       56,717   INTEREST EXPENSE                                 Deposits     7,699       1,251       18,261       2,764   Borrowings     3,185       1,400       9,092       3,020   Total interest expense     10,884       2,651       27,353       5,784   Net interest income     14,950       18,204       47,237       50,933   PROVISION FOR CREDIT LOSSES                                 Provision for credit losses on loans     880       750       1,195       1,250   Recapture of provision for credit losses on unfunded commitments     ( 509 )     —       ( 1,024 )     —   Provision for credit losses     371       750       171       1,250   Net interest income after provision for credit losses     14,579       17,454       47,066       49,683   NONINTEREST INCOME                                 Loan and deposit service fees     1,068       1,302       3,273       3,566   Sold loan servicing fees and servicing rights mark-to-market     98       206       400       665   Net gain on sale of loans     171       285       405       769   Net gain on sale of investment securities     —       —       —       118   Increase in cash surrender value of bank-owned life insurance     252       221       668       686   Other income     1,315       320       2,203       1,155   Total noninterest income     2,904       2,334       6,949       6,959   NONINTEREST EXPENSE                                 Compensation and benefits     7,795       9,045       23,812       27,583   Data processing     1,945       1,778       6,063       5,420   Occupancy and equipment     1,173       1,499       3,596       4,098   Supplies, postage, and telephone     292       322       1,082       1,043   Regulatory assessments and state taxes     446       365       1,259       1,167   Advertising     501       645       2,471       2,802   Professional fees     929       695       2,619       1,883   FDIC insurance premium     369       219       939       653   Other expense     926       807       2,623       2,520   Total noninterest expense     14,376       15,375       44,464       47,169   Income before provision for income taxes     3,107       4,413       9,551       9,473   Provision for income taxes     603       818       1,903       1,839   Net income     2,504       3,595       7,648       7,634   Net loss attributable to noncontrolling interest in Quin Ventures, Inc.     —       696       160       1,951   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.   4 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) (Unaudited)         Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022                                     Net income   $ 2,504     $ 3,595     $ 7,648     $ 7,634                                     Other comprehensive (loss) income:                                 Unrealized holding losses on investments available for sale arising during the period     ( 8,327 )     ( 15,954 )     ( 7,688 )     ( 52,283 ) Income tax benefit related to unrealized holding losses on investments     1,787       3,350       1,873       10,979   Amortization of unrecognized DB plan prior service cost     37       37       113       110   Income tax provision related to amortization of DB plan prior service cost     ( 8 )     ( 9 )     ( 24 )     ( 24 ) Unrealized holding gains (losses) on derivatives     925       —       533       —   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     —       —       —       ( 118 ) Income tax benefit related to reclassification adjustment on sales of securities     —       —       —       25   Other comprehensive loss, net of tax     ( 5,784 )     ( 12,576 )     ( 5,307 )     ( 41,311 ) Comprehensive (loss) income     ( 3,280 )     ( 8,981 )     2,341       ( 33,677 ) Comprehensive (loss) income attributable to noncontrolling interest     —       ( 696 )     ( 160 )     ( 1,951 ) Comprehensive (loss) income attributable to parent   $ ( 3,280 )   $ ( 8,285 )   $ 2,501     $ ( 31,726 )         See selected notes to the consolidated financial statements.   5 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended September 30, 2023 and 2022 (Dollars in thousands, except share information) (Unaudited)       Common Stock     Additional Paid-in     Retained     Unearned ESOP     Accumulated Other Comprehensive Loss,     Noncontrolling     Total Shareholders'       Shares     Amount     Capital     Earnings     Shares     Net of Tax     Interest     Equity                                                                     Balance at June 30, 2022     9,950,172     $ 100     $ 96,479     $ 107,000     $ ( 8,242 )   $ ( 28,447 )   $ ( 1,736 )   $ 165,154   Net income                             4,291                       ( 696 )     3,595   Common stock issued     115,777       1       1,868       —                               1,869   Common stock repurchased     ( 79,054 )     —       ( 790 )     ( 491 )                             ( 1,281 ) Restricted stock award forfeitures net of grants     ( 3,350 )     ( 1 )     1                                       —   Restricted stock awards canceled     ( 5,504 )     —       ( 89 )                                     ( 89 ) Other comprehensive loss, net of tax                                             ( 12,576 )             ( 12,576 ) Share-based compensation expense                     404                                       404   ESOP shares committed to be released                     51               165                       216   Cash dividends declared ($ 0.07 per share)                             ( 693 )                             ( 693 ) Balance at September 30, 2022     9,978,041     $ 100     $ 97,924     $ 110,107     $ ( 8,077 )   $ ( 41,023 )   $ ( 2,432 )   $ 156,599                                                                                                                                       Balance at June 30, 2023     9,633,496     $ 96     $ 95,360     $ 111,750     $ ( 7,583 )   $ ( 40,066 )   $ —     $ 159,557   Net income                             2,504                       —       2,504   Common stock repurchased     ( 1,073 )     —       ( 10 )     ( 2 )                             ( 12 ) Restricted stock award grants net of forfeitures     1,918       —       —                                       —   Restricted stock awards canceled     ( 3,606 )     —       ( 43 )                                     ( 43 ) Other comprehensive loss, net of tax                                             ( 5,784 )             ( 5,784 ) Share-based compensation expense                     349                                       349   ESOP shares committed to be released                     2               165                       167   Cash dividends declared ($ 0.07 per share)                             ( 673 )                             ( 673 ) Balance at September 30, 2023     9,630,735     $ 96     $ 95,658     $ 113,579     $ ( 7,418 )   $ ( 45,850 )   $ —     $ 156,065       See selected notes to the consolidated financial statements.   6 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands, except share information) (Unaudited)       Common Stock     Additional Paid-in     Retained     Unearned ESOP     Accumulated Other Comprehensive Loss,     Noncontrolling     Total Shareholders'       Shares     Amount     Capital     Earnings     Shares     Net of Tax     Interest     Equity                                                                     Balance at December 31, 2021     9,972,698     $ 100     $ 96,131     $ 103,014     $ ( 8,572 )   $ 288     $ ( 481 )   $ 190,480   Net income                             9,585                       ( 1,951 )     7,634   Common stock issued     115,777       1       1,868       —                         1,869   Common stock repurchased     ( 131,672 )     ( 1 )     ( 1,315 )     ( 824 )                             ( 2,140 ) Restricted stock award grants net of forfeitures     37,068       —       —                                       —   Restricted stock awards canceled     ( 15,830 )     —       ( 311 )                                   ( 311 ) Other comprehensive loss, net of tax                                             ( 41,311 )             ( 41,311 ) Reclassification resulting from change in accounting method, net of tax                             424                               424   Share-based compensation expense                   1,294                               1,294   ESOP shares committed to be released                     257               495                       752   Cash dividends declared ($ 0.21 per share)                         ( 2,092 )                       ( 2,092 ) Balance at September 30, 2022     9,978,041     $ 100     $ 97,924     $ 110,107     $ ( 8,077 )   $ ( 41,023 )   $ ( 2,432 )   $ 156,599                                                                                                                                       Balance at December 31, 2022     9,703,581     $ 97     $ 95,508     $ 114,424     $ ( 7,913 )   $ ( 40,543 )   $ ( 3,291 )   $ 158,282   Net income                             7,808                       ( 160 )     7,648   Common stock repurchased     ( 75,690 )     ( 1 )     ( 755 )     ( 224 )                       ( 980 ) Restricted stock award grants net of forfeitures     18,256       —       —                                       —   Restricted stock awards canceled     ( 15,412 )     —       ( 205 )                                   ( 205 ) Other comprehensive loss, net of tax                                     ( 5,307 )           ( 5,307 ) Reclassification resulting from adoption of Accounting Standards Codification 326, net of tax                         ( 2,951 )                       ( 2,951 ) Close out investment in Quin Ventures                         ( 3,451 )                 3,451       —   Share-based compensation expense                   1,098                               1,098   ESOP shares committed to be released                     12               495                       507   Cash dividends declared ($ 0.21 per share)                         ( 2,027 )                       ( 2,027 ) Balance at September 30, 2023     9,630,735     $ 96     $ 95,658     $ 113,579     $ ( 7,418 )   $ ( 45,850 )   $ —     $ 156,065     See selected notes to the consolidated financial statements.   7 Table of Contents     FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Nine Months Ended September 30,       2023     2022   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:                 Depreciation and amortization     1,201       1,547   Amortization of core deposit intangible     2       10   Amortization and accretion of premiums and discounts on investments, net     1,078       1,280   (Accretion) amortization of deferred loan fees and purchased premiums, net     ( 451 )     619   Amortization of debt issuance costs     58       58   Change in fair value of sold loan servicing rights     303       91   Additions to servicing rights on sold loans, net     ( 145 )     ( 143 ) Provision for credit losses on loans     1,195       1,250   Recapture of provision for credit losses on unfunded commitments     ( 1,024 )     —   Allocation of ESOP shares     507       546   Share-based compensation expense     1,098       1,294   Gain on sale of loans, net     ( 405 )     ( 769 ) Gain on sale of securities available for sale, net     —       ( 118 ) Increase in cash surrender value of life insurance, net     ( 668 )     ( 686 ) Origination of loans held for sale     ( 21,351 )     ( 22,272 ) Proceeds from sale of loans held for sale     21,664       23,538   Change in assets and liabilities:                 Increase in accrued interest receivable     ( 1,350 )     ( 1,366 ) Decrease (increase) in prepaid expenses and other assets     2,151       ( 4,191 ) Increase (decrease) in accrued interest payable     1,821       ( 288 ) Increase in accrued expenses and other liabilities     1,960       5,680   Net cash provided by operating activities     15,292       13,714                     Cash flows from investing activities:                 Purchase of securities available for sale     —       ( 78,409 ) Proceeds from maturities, calls, and principal repayments of securities available for sale     8,480       26,937   Proceeds from sales of securities available for sale     —       12,685   Purchase of FHLB stock     ( 940 )     ( 6,765 ) Early surrender of bank-owned life insurance policy     15       —   Net increase in loans receivable     ( 89,551 )     ( 172,727 ) Purchase of premises and equipment, net     ( 1,066 )     ( 2,556 ) Capital contributions to equity and partnership investments     ( 335 )     ( 7,628 ) Capital disbursements received from equity and partnership investments     99       —   Capital contributions to low-income housing tax credit partnerships     —       ( 23 ) Capital contributions to historic tax credit partnerships     —       ( 1,829 ) Net cash used by investing activities     ( 83,298 )     ( 230,315 )   See selected notes to the consolidated financial statements.   8 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)       Nine Months Ended September 30,       2023     2022   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     ( 4,000 )     12,000   Net increase in advances from borrowers for taxes and insurance     999       1,116   Payment of dividends     ( 2,025 )     ( 2,072 ) Restricted stock awards canceled     ( 205 )     ( 311 ) Repurchase of common stock     ( 980 )     ( 2,140 ) Net cash provided by financing activities     106,296       194,248   Net increase (decrease) in cash and cash equivalents     38,290       ( 22,353 ) 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 loss on securities available for sale   $ ( 7,688 )   $ ( 52,401 ) Change in unrealized gain (loss) on fair value hedge   $ 533     $ —   Cumulative adjustment to servicing rights asset due to election of fair value option   $ —     $ 538   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   $ 152     $ —   Investment in partnership acquired through issuance of shares   $ —     $ 1,869     See selected notes to the consolidated financial statements.   9 Table of Contents   FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)   Note 1 - Basis of Presentation and Critical Accounting Policies   Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").   In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $ 10.00 per share for gross proceeds of $ 121.7 million. An additional 933,360 shares of Company common stock and $ 400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $ 117.6 million in net proceeds from the stock offering of which $ 58.4 million was contributed to the Bank upon Conversion.   Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8 % of the common stock issued in the Conversion for a total of 1,048,029 shares.   In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin Ventures").  First Northwest extended $ 8.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of $ 500,000 . Quin Ventures sold substantially all of its assets in December 2022 to Quil Ventures Inc., at which time POM returned the 29,719 shares previously issued and the Joint Venture Agreement was terminated. As part of the sale transaction, the Company received a 5 % ownership stake in Quil Ventures Inc. valued at $ 225,000 and recorded a $ 1.5 million commitment receivable. In June 2023, First Northwest determined that Quin Ventures was no longer a going concern. The Company wrote off the remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods. The noncontrolling interest in Quin Ventures balance was moved to retained earnings, with no change to total shareholders' equity as a result of the transaction.   On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.   On August 5, 2022, First Northwest's election to be treated as a financial holding company became effective, allowing the Company to engage in activities that are financial in nature or incidental to financial activities.   First Northwest and the Bank are collectively referred to as the "Company." For periods prior to June 30, 2023, Company references also include Quin Ventures.   First Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Fed and former controlling interest in Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures.   The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with bor rowing and investing activities.   Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10 -K for the year ended December 31, 2022 . 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 nine months ended September 30, 2023 , are not necessarily indicative of the results that may be expected for future periods.     10 Table of Contents   In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for credit losses ("ACL"), fair value of financial instruments and derivatives, and deferred tax assets and liabilities.   Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures. All material intercompany accounts and transactions have been eliminated in consolidation. Through June 2023, First Northwest and POM shared equal ownership in Quin Ventures; however, it was previously determined that First Northwest had a controlling interest for financial reporting purposes under Accounting Standards Codification  810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.   Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate.   Recently adopted accounting pronouncements   Credit Losses On January 1, 2023, the Company adopted FASB ASU 2016 - 13 Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments , as amended, which replaces the incurred loss methodology with a current expected credit loss ("CECL") methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable and held-to-maturity securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, the CECL adoption made changes to the accounting for investment securities available for sale.   The Company adopted ASU 2016 - 13 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. This method resulted in recording a cumulative-effect adjustment as of the beginning of 2023 with no change to prior periods. The Company elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Company policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.   Results for the reporting period beginning after January 1, 2023, are presented under ASU 2016 - 13, while prior period amounts were not restated and continue to be reported in accordance with previously applicable GAAP. The accounting policies for prior periods are included in the Company's Annual Report on Form  10 -K for the year ended  December 31, 2022.   The accounting policies for all financial instruments impacted by the CECL adoption are as follows:   Investment Securities A debt security is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent. Interest accrued, but not received for a security placed on nonaccrual, is reversed against interest income during the period that the debt security is placed on nonaccrual status.   Allowance for Credit Losses on Investment Securities Management evaluates the need for an ACL on investment securities ("ACLI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLI is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an ACLI is recognized in other comprehensive income (loss).   Changes in the ACLI are recorded as provision, or reversal of provision, for credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met.   11 Table of Contents   Accrued interest receivable on investment securities available for sale is excluded from the estimate of credit losses as interest accrued, but not received, is reversed timely in accordance with the policy for investment securities above.   Loans Receivable Loans receivable include loans originated and indirect loans purchased by the Bank as well as loans acquired in business combinations.   Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the outstanding principal balance, net of purchased premiums and discounts, unearned discounts, and net deferred loan origination fees and costs. Accrued interest receivable for loans receivable is reported in prepaid expenses and other assets on the Consolidated Balance Sheets.   Allowance for Credit Losses on Loans The ACL on loans ("ACLL") is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged against the allowance when management believes the collectability of a loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. The Bank records the changes in the ACLL through earnings, as a provision for credit losses on the Consolidated Statements of Income.   Accrued interest receivable on loans receivable is excluded from the estimate of credit losses. Instead, interest accrued, but not received, is reversed timely in accordance with the policy for loans receivable above.   The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies. Management has adopted a discounted cash flow ("DCF") methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a Remaining Life methodology. The Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. 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 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. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost, as adjusted for balances guaranteed by governmental entities, such as the Small Business Administration ("SBA") or the United States Department of Agriculture ("USDA"), or the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: 1 ) management has a reasonable expectation at the reporting date that a modification agreement will be executed with an individual borrower or 2 ) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment period assumption on a quarterly basis.   The CECL methodology includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets two forecasted macroeconomic factors, which are national gross domestic product ("GDP") and unemployment figures. Each of the forecasted DCF segments is impacted by these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year.   The Bank uses the Federal Open Market Committee ("FOMC") forecast via an application programming interface with our CECL software. FOMC provides various forecast scenarios used to determine the loan portfolio’s expected credit loss. Based on known/knowable information at the measurement date, management has determined that the FOMC scenarios and the underlying assumptions most closely align with current and expected conditions. The Bank has elected to forecast the first four  quarters of the credit loss estimate and revert on a straight-line basis as permitted in ASC 326 - 20 - 30 - 9. The Bank also considers other qualitative risk factors to adjust the estimated ACL calculated by the above-mentioned model. While there are many factors available to incorporate into the quantitative model, the Bank has selected to use the most critical factors. Additional metrics will be included only if internal or external factors outside those considered in its historical losses or macroeconomic forecast indicate otherwise. The Bank has established metrics to estimate the qualitative risk factor by segment based on the identified risk.   12 Table of Contents   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 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ACLL. Such agencies may require the Bank to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the ACLL is appropriate given the above considerations.   Allowance for Credit Losses on Unfunded Commitments The Bank estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Bank is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Bank has determined that no allowance is necessary for its home equity line of credit portfolio as it has the ability to unconditionally cancel the available lines of credit.   The allowance methodology is similar to the ACLL, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class.   The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (reversal of provision) for credit losses on the Consolidated Statements of Income.   Provision for Credit Losses The provision for credit losses as presented in the Company's Consolidated Statements of Income includes the provision for credit losses on loans and the provision for credit losses on unfunded commitments.   Summary of CECL Impact: Investment Securities -  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 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. As a result of the analysis, no allowance for credit losses on investment securities available for sale was recorded upon adoption. See Note 2  Investment Securities for more information.   Loan Receivable -  ASU 2016 - 13 was applied prospectively and replaced the allowance for loan losses with the ACLL on the Consolidated Balance Sheet and replaced the related provision for loan losses with the provision for credit losses on loans as presented on the Consolidated Statements of Income, net of provision for credit losses on unfunded commitments.   The Bank recorded a pretax increase to the ACLL of $ 2.2 million to increase the reserve to the estimated credit losses at January 1, 2023 based on its CECL methodology as part of the cumulative-effect adjustment to beginning retained earnings. 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 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 ("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 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.   13 Table of Contents   Troubled Debt Restructurings In March 2022, the FASB issued ASU 2022 - 02,   Financial Instruments - Credit Losses (Topic 326 ): Troubled Debt Restructurings and Vintage Disclosures . This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancing and restructuring activity by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write offs by year of origination for financing receivables and net investments in leases. This ASU is effective upon adoption of ASU 2016 - 13. On January 1, 2023, the Company adopted this ASU at the same time ASU 2016 - 13 was adopted. The Company recorded gross charge-offs of $ 2.7 million in the first half of 2023 and recoveries for the same period were $ 93,000 . See table in Note 3 for additional information.   Derivative Instruments and Hedging Activities On March 28, 2022, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2022 - 01, Derivatives and Hedging (Topic 815 ): Fair Value Hedging – Portfolio Layer Method . The purpose of this updated guidance is to further align risk management objectives with hedge accounting results on the application of the last-of-layer method, which was first introduced in ASU 2017 - 12, Derivatives and Hedging (Topic 815 ): Targeted Improvements to Accounting for Hedging Activities. ASU 2022 - 01 is effective for public business entities for fiscal years beginning after December 15, 2022, with early adoption in the interim period, permitted. For entities who have already adopted ASU 2017 - 12, immediate adoption is allowed. ASU 2022 - 01 requires a modified retrospective transition method for basis adjustments in which the entity will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company adopted this ASU on January 1, 2023 on a prospective basis; therefore, there was no impact to the consolidated financial statements.   Accounting Policy for Derivative Instruments and Hedging Activities -  FASB ASC 815, Derivatives and Hedging ("ASC 815" ), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.   As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.   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.   14 Table of Contents   LIBOR In March 2020, the FASB issued ASU No. 2020 - 04,   Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020 - 04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, which reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. On December 31, 2022, FASB issued ASU 2022 - 06, which deferred the sunset date for Topic 848 to December 31, 2024. 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. 2022 - 03, Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately. Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). ASU 2022 - 03  is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company 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 . ASU 2023 - 02 allows an entity the option to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits if certain conditions are met. Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this ASU, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. In addition, the amendments in this ASU require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323 - 740 - 25 - 3, requiring a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this ASU, low-income housing tax credit investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this ASU specifies that impairment of low-income housing tax credit investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323 - 10:   Investments - Equity Method and Joint Ventures - Overall . This ASU also clarifies that for low-income housing tax credit investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321: Investments - Equity Securities . The amendments in this ASU also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. ASU 2023 - 02  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 2023 - 02  will have on its consolidated financial statements and related disclosures.   Reclassifications - Certain amounts in the unaudited interim consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation with no effect on net income or shareholders' equity.   15 Table of Contents     Note 2 - Securities   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:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 119,164     $ —     $ ( 25,169 )   $ 93,995   U.S. Treasury notes     2,479       —       ( 102 )     2,377   International agency issued bonds (Agency bonds)     1,962       —       ( 259 )     1,703   Corporate issued debt securities (Corporate debt)     60,543       —       ( 6,208 )     54,335   Mortgage-backed securities:                                 U.S. government agency issued mortgage-backed securities (MBS agency)     83,449       —       ( 16,503 )     66,946   Non-agency issued mortgage-backed securities (MBS non-agency)     98,029       —       ( 8,061 )     89,968   Total securities available for sale   $ 365,626     $ —     $ ( 56,302 )   $ 309,324     The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 2022 , are summarized as follows:               Gross     Gross     Estimated       Amortized Cost     Unrealized Gains     Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                 Municipal bonds   $ 119,990     $ —     $ ( 21,940 )   $ 98,050   U.S. Treasury notes     2,469       —       ( 105 )     2,364   Agency bonds     1,955       —       ( 253 )     1,702   Corporate debt     60,700       —       ( 5,201 )     55,499   Mortgage-backed securities:                                 MBS agency     88,930       1       ( 13,283 )     75,648   MBS non-agency     101,139       —       ( 7,833 )     93,306   Total securities available for sale   $ 375,183     $ 1     $ ( 48,615 )   $ 326,569     There were no securities classified as held-to-maturity at  September 30, 2023  and  December 31, 2022 .   Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million and $ 2.0 million as of 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.   16 Table of Contents   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 September 30, 2023 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 49 )   $ 396     $ ( 25,120 )   $ 93,299     $ ( 25,169 )   $ 93,695   U.S. Treasury notes     —       —       ( 102 )     2,377       ( 102 )     2,377   Agency bonds     —       —       ( 259 )     1,703       ( 259 )     1,703   Corporate debt     —       —       ( 6,208 )     54,335       ( 6,208 )     54,335   Mortgage-backed securities:                                                 MBS agency     ( 1 )     1,236       ( 16,502 )     65,710       ( 16,503 )     66,946   MBS non-agency     —       —       ( 8,061 )     89,968       ( 8,061 )     89,968   Total available for sale   $ ( 50 )   $ 1,632     $ ( 56,252 )   $ 307,392     $ ( 56,302 )   $ 309,024     The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2022 :       Less Than Twelve Months     Twelve Months or Longer     Total       Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value     Gross Unrealized Losses     Fair Value       (In thousands)   Available for Sale                                                 Municipal bonds   $ ( 15,749 )   $ 79,129     $ ( 6,191 )   $ 18,621     $ ( 21,940 )   $ 97,750   U.S. Treasury notes     ( 105 )     2,364       —       —       ( 105 )     2,364   Agency bonds     —       —       ( 253 )     1,702       ( 253 )     1,702   Corporate debt     ( 2,570 )     30,555       ( 2,631 )     24,944       ( 5,201 )     55,499   Mortgage-backed securities:                                                 MBS agency     ( 5,079 )     40,099       ( 8,204 )     33,064       ( 13,283 )     73,163   MBS non-agency     ( 3,956 )     51,994       ( 3,877 )     41,311       ( 7,833 )     93,305   Total available for sale   $ ( 27,459 )   $ 204,141     $ ( 21,156 )   $ 119,642     $ ( 48,615 )   $ 323,783     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 September 30, 2023 , or December 31, 2022 .     17 Table of Contents   The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.       September 30, 2023       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 27,154     $ 26,742   Due after one through five years     16,184       15,475   Due after five through ten years     10,939       9,986   Due after ten years     127,201       104,711   Total mortgage-backed securities     181,478       156,914   All other investment securities:                 Due within one year     300       300   Due after one through five years     22,418       21,066   Due after five through ten years     65,211       56,308   Due after ten years     96,219       74,736   Total all other investment securities     184,148       152,410   Total investment securities   $ 365,626     $ 309,324         December 31, 2022       Available-for-Sale       Amortized Cost     Estimated Fair Value       (In thousands)   Mortgage-backed securities:                 Due within one year   $ 13,762     $ 13,490   Due after one through five years     28,890       27,808   Due after five through ten years     13,436       12,165   Due after ten years     133,981       115,491   Total mortgage-backed securities     190,069       168,954   All other investment securities:                 Due within one year     —       —   Due after one through five years     20,700       18,957   Due after five through ten years     64,211       57,523   Due after ten years     100,203       81,135   Total all other investment securities     185,114       157,615   Total investment securities   $ 375,183     $ 326,569     18 Table of Contents   Sales of securities available-for-sale for the periods shown are summarized as follows:       Three Months Ended September 30,     Nine Months Ended September 30,       2023     2022     2023     2022       (In thousands)   Proceeds from sales   $ —     $ —     $ —     $ 12,685   Gross realized gains     —       —       —       128   Gross realized losses     —       —       —       ( 10 )     Note 3 - Loans Receivable   The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company's strategic plan and the manner in which management monitors performance and credit quality. The three loan portfolio segments are: Real Estate Loans, Consumer Loans and Commercial Business Loans. These segments are further disaggregated into classes based on similar attributes and risk characteristics.   Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $ 14.4 million as of  September 30, 2023 and $ 13.2 million as of  December 31, 2022 . Net loans do  not include accrued interest receivable. Accrued interest receivable on loans was $ 5.8 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:       September 30, 2023     December 31, 2022       (In thousands)   Real Estate:                 One-to-four family   $ 369,950     $ 343,559   Multi-family     325,496       252,745   Commercial real estate     381,508       388,884   Construction and land     143,434       193,646   Total real estate loans     1,220,388       1,178,834   Consumer:                 Home equity     64,424       52,877   Auto and other consumer     248,786       238,913   Total consumer loans     313,210       291,790   Commercial business loans     101,380       76,927   Total loans receivable     1,634,978       1,547,551   Less:                 Allowance for credit losses on loans (1)     16,945       16,116   Total loans receivable, net   $ 1,618,033     $ 1,531,435   ( 1 ) Allowance for credit losses on loans in 2023 reported using the CECL method and in 2022 reported using the incurred loss method.   19 Table of Contents   Nonaccrual Loans.  The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.   The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated:       September 30, 2023     December 31, 2022       Collateral Dependent Loans     Non-Collateral Dependent Loans     Total Nonaccrual Loans     Total Nonaccrual Loans (1)       (In thousands)   One-to-four family   $ 1,430     $ 360     $ 1,790     $ 954   Commercial real estate     —       34       34       53   Construction and land     —       8       8       15   Home equity     32       134       166       196   Auto and other consumer     —       376       376       575   Total nonaccrual loans   $ 1,462     $ 912     $ 2,374     $ 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 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. Loans that were more than 90 days past due and nonaccrual loans were considered nonperforming.   The following table represents the credit risk profile based on payment activity by class of loans as of December 31, 2022 , in accordance with pre-CECL disclosure requirements:       Nonperforming     Performing     Total       (In thousands)   Real Estate:                         One-to-four family   $ 954     $ 342,605     $ 343,559   Multi-family     —       252,745       252,745   Commercial real estate     53       388,831       388,884   Construction and land     15       193,631       193,646   Consumer:                         Home equity     196       52,681       52,877   Auto and other consumer     575       238,338       238,913   Commercial business     —       76,927       76,927   Total loans   $ 1,793     $ 1,545,758     $ 1,547,551     Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at  September 30, 2023  or  December 31, 2022 .     20 Table of Contents   The following table presents the amortized cost of past due loans by segment and class as of September 30, 2023 :       30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ —     $ 654     $ 591     $ 1,245     $ 368,705     $ 369,950   Multi-family     —       —       —       —       325,496       325,496   Commercial real estate     8,583       —       —       8,583       372,925       381,508   Construction and land     —       —       —       —       143,434       143,434   Total real estate loans     8,583       654       591       9,828       1,210,560       1,220,388   Consumer:                                                 Home equity     71       —       45       116       64,308       64,424   Auto and other consumer     1,462       392       381       2,235       246,551       248,786   Total consumer loans     1,533       392       426       2,351       310,859       313,210   Commercial business loans     769       —       —       769       100,611       101,380   Total loans   $ 10,885     $ 1,046     $ 1,017     $ 12,948     $ 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:     30-59 Days     60-89 Days     90 Days or More     Total                       Past Due     Past Due     Past Due     Past Due     Current     Total Loans       (In thousands)   Real Estate:                                                 One-to-four family   $ 1,449     $ 155     $ 652     $ 2,256     $ 341,303     $ 343,559   Multi-family     —       —       —       —       252,745       252,745   Commercial real estate     —       —       —       —       388,884       388,884   Construction and land     —       18       —       18       193,628       193,646   Total real estate loans     1,449       173       652       2,274       1,176,560       1,178,834   Consumer:                                                 Home equity     153       —       11       164       52,713       52,877   Auto and other consumer     1,390       698       557       2,645       236,268       238,913   Total consumer loans     1,543       698       568       2,809       288,981       291,790   Commercial business loans     —       —       —       —       76,927       76,927   Total loans   $ 2,992     $ 871     $ 1,220     $ 5,083     $ 1,542,468     $ 1,547,551     Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8 -point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.   When the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1 - 3 in our risk rating system.     21 Table of Contents   The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of  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)     Revolving     Total       2023     2022     2021     2020     2019     Prior     Loans     Loans       (In thousands)   One-to-four family                                                                 Pass   $ 1,987     $ 93,396     $ 118,341     $ 70,904     $ 13,977     $ 66,929     $ —     $ 365,534   Watch     —       276       —       589       —       1,156       —       2,021   Special Mention     —       —       —       302       —       105       —       407   Substandard     —       —       —       328       485       1,175       —       1,988   Total one-to-four family     1,987       93,672       118,341       72,123       14,462       69,365       —       369,950   Gross charge-offs year-to-date     —       —       —       —       —       —       —       —   Multi-family                                                                 Pass     47,583       103,255       86,171       58,659       8,278       5,357       —       309,303   Watch     —       —       15,198       —       —       995       —       16,193   Total multi-family     47,583       103,255       101,369       58,659       8,278       6,352       —       325,496   Gross charge-offs year-to-date     —       —       —       —       —       —       —       —   Commercial Real Estate                                                                 Pass     32,307       89,244       104,523       82,030       13,186       23,366       —       344,656   Watch     3,881       197       3,785       6,851       3,584       1,019       —       19,317   Special Mention     —       —       15,136       —       —       —       —       15,136   Substandard     —       34       —       2,365       —       —       —       2,399   Total commercial real estate     36,188       89,475       123,444       91,246       16,770       24,385       —       381,508   Gross charge-offs year-to-date     —       —       —       —       —       —       —       —   Construction and Land                                                                 Pass     13,763       61,166       39,308       764       354       2,398       —       117,753   Watch     7,109       3,493       —       —       —       —       —       10,602   Special Mention     —       —       —       —       —       16       —       16   Substandard     15,055       —       —       —       —       8       —       15,063   Total construction and land     35,927       64,659       39,308       764       354       2,422       —       143,434   Gross charge-offs year-to-date     —       —       —       —       —       —       —       —   Home Equity                                                                 Pass     5,534       7,438       4,737       3,169       1,444       3,638       37,810       63,770   Watch     —       —       —       —       —       56       322       378   Substandard     —       —       31       61       —       14       170       276   Total home equity     5,534       7,438       4,768       3,230       1,444       3,708       38,302       64,424   Gross charge-offs year-to-date     —       —       —       —       —       11       —       11   Other Consumer                                                                 Pass     38,604       75,128       66,493       31,104       15,680       18,871       403       246,283   Watch     47       461       485       217       277       226       3       1,716   Special Mention     64       232       33       30       —       51       —       410   Substandard     23       300       —       28       26       —       —       377   Total other consumer     38,738       76,121       67,011       31,379       15,983       19,148       406       248,786   Gross charge-offs year-to-date     —       2,421       15       27       11       112       71       2,657   Commercial business                                                                 Pass     18,818       23,987       11,368       2,791       506       4,947       30,510       92,927   Watch     342       66       394       —       —       —       1       803   Special Mention     —       —       —       1,036       —       —       3,754       4,790   Substandard     177       52       —       144       —       —       2,487       2,860   Total commercial business     19,337       24,105       11,762       3,971       506       4,947       36,752       101,380   Gross charge-offs year-to-date     —       —       —       —       —       —       —       —   Total loans                                                                 Pass     158,596       453,614       430,941       249,421       53,425       125,506       68,723       1,540,226   Watch     11,379       4,493       19,862       7,657       3,861       3,452       326       51,030   Special Mention     64       232       15,169       1,368       —       172       3,754       20,759   Substandard     15,255       386       31       2,926       511       1,197       2,657       22,963   Total loans   $ 185,294     $ 458,725     $ 466,003     $ 261,372     $ 57,797     $ 130,327     $ 75,460     $ 1,634,978   Total gross charge-offs year-to-date   $ —     $ 2,421     $ 15     $ 27     $ 11     $ 123     $ 71     $ 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.   22 Table of Contents   The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of December 31, 2022 , in accordance with pre-CECL disclosure requirements:     Pass     Watch     Special Mention     Substandard     Total       (In thousands)   Real Estate:                                         One-to-four family   $ 339,812     $ 2,234     $ 27     $ 1,486     $ 343,559   Multi-family     237,077       15,668       —       —       252,745   Commercial real estate     350,001       25,586       12,161       1,136       388,884   Construction and land     179,116       529       —       14,001       193,646   Total real estate loans     1,106,006       44,017       12,188       16,623       1,178,834   Consumer:                                         Home equity     52,295       372       14       196       52,877   Auto and other consumer     238,522       222       75       94       238,913   Total consumer loans     290,817       594       89       290       291,790   Commercial business loans     66,276       2,234       8,417       —       76,927   Total loans   $ 1,463,099     $ 46,845     $ 20,694     $ 16,913     $ 1,547,551       Individually Evaluated Loans.  The Company evaluates loans collectively for purposes of determining the ACLL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. 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 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. In cases where the loan is well-secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACLL is recorded. Changes in the ACLL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans. As of 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 September 30, 2023 :       Collateral Type               Single Family Residence     Total       (In thousands)   One-to-four family   $ 1,430     $ 1,430   Home equity     32       32   Total collateral dependent loans   $ 1,462     $ 1,462     Troubled debt restructuring. Prior to the implementation of CECL on January 1, 2023, a loan was identified as a TDR when a loan to a borrower who was experiencing financial difficulty was modified from its original terms and conditions in such a way that the Bank granted the borrower a concession of some kind. First Fed had granted a variety of concessions to borrowers in the form of loan modifications. The modifications were generally related to the loan's interest rate, term and payment amount or a combination thereof.   23 Table of Contents   The following table is a summary of information pertaining to TDR loans included in impaired loans at the date indicated, in accordance with pre-CECL disclosure requirements:     December 31, 2022       (In thousands)   Total TDR loans   $ 1,753   Allowance for credit losses on loans related to TDR loans     21   Total nonaccrual TDR loans     29     There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the  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 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:       December 31, 2022       Accrual     Nonaccrual     Total       (In thousands)   One-to-four family   $ 1,697     $ 29     $ 1,726   Home equity     27       —       27   Total TDR loans   $ 1,724     $ 29     $ 1,753     Modified Loans to Troubled Borrowers.  On January 1, 2023, the Company adopted ASU 2022 - 02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. The Company refers to these loans as modified loans to troubled borrowers ("MLTB"). A MLTB arises from a modification made to a loan in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. GAAP requires that certain types of modifications be reported, which consist of the following: (i) principal forgiveness, (ii) interest rate reduction, (iii) other-than-insignificant payment delay, (iv) term extension, or any combination of the foregoing. The ACLL for a MLTB is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loans no longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACLL for a MLTB is determined through individual evaluation.   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 ACLUC in accordance with ASC 326:   Financial Instruments - Credit Losses . ASC 326 requires the Company to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents the Company’s best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACLL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The reserve is an estimate based upon factors and trends at the time the financial statements are prepared. The Company adopted ASU 2016 - 13 effective January 1, 2023, which increased the beginning ACLL as discussed in Note 1. The incurred loss methodology presentation is used for periods prior to the adoption of ASU 2016 - 13.   The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies. The Company uses a DCF methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a Remaining Life methodology. The Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. If the present value of cash flows is less than the total recorded investment, a reserve is calculated.     24 Table of Contents   The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Company has determined that no allowance is necessary for its home equity line of credit portfolio as it has the ability to unconditionally cancel the available lines of credit. The allowance methodology is similar to the ACLL, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class. The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (reversal of provision) for credit losses on the Consolidated Statements of Income.   The following tables detail activity in the allowance for credit losses on loans by class for the periods shown:       At or For the Three Months Ended September 30, 2023       Adjusted Beginning Balance     Charge-offs     Recoveries     Provision for (Recapture of) Credit Losses     Ending Balance       (In thousands)   One-to-four family   $ 3,012     $ —     $ —     $ 526     $ 3,538   Multi-family     1,041       —       —       230       1,271   Commercial real estate     2,924       —       —       ( 390 )     2,534   Construction and land     2,535       —       —       ( 352 )     2,183   Home equity     1,125       —       —       178       1,303   Auto and other consumer     4,795       ( 731 )     ( 501 )     601       4,164   Commercial business     1,865       —       —       87       1,952   Total   $ 17,297     $ ( 731 )   $ ( 501 )   $ 880     $ 16,945         At or For the Nine Months Ended September 30, 2023       Beginning Balance     Impact of Day 1 CECL Adoption     Adjusted Beginning Balance     Charge-offs     Recoveries     Provision for (Recapture of) Credit Losses     Ending Balance       (In thousands)   One-to-four family   $ 3,343     $ ( 429 )   $ 2,914     $ —     $ 4     $ 620     $ 3,538   Multi-family     2,468       ( 1,449 )     1,019       —       —       252       1,271   Commercial real estate     4,217       ( 604 )     3,613       —       —       ( 1,079 )     2,534   Construction and land     2,344       1,555       3,899       —       —       ( 1,716 )     2,183   Home equity     549       346       895       ( 11 )     5       414       1,303   Auto and other consumer     2,024       2,381       4,405       ( 2,657 )     84       2,332       4,164   Commercial business     786       794       1,580       —       —       372       1,952   Unallocated     385       ( 385 )     —       —       —       —       —   Total   $ 16,116     $ 2,209     $ 18,325     $ ( 2,668 )   $ 93     $ 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.     25 Table of Contents   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 September 30, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,026     $ 2,168     $ 4,154     $ 2,550     $ 486     $ 2,367     $ 680     $ 316     $ 15,747   Provision for (recapture of) loan losses     188       164       ( 45 )     ( 36 )     9       428       14       28       750   Charge-offs     —       —       —       —       —       ( 265 )     —       —       ( 265 ) Recoveries     —       —       —       —       12       29       —       —       41   Ending balance   $ 3,214     $ 2,332     $ 4,109     $ 2,514     $ 507     $ 2,559     $ 694     $ 344     $ 16,273         At or For the Nine Months Ended September 30, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   ALLL:                                                                         Beginning balance   $ 3,184     $ 1,816     $ 3,996     $ 2,672     $ 407     $ 2,221     $ 470     $ 358     $ 15,124   (Recapture of) provision for loan losses     ( 2 )     516       113       ( 160 )     71       644       82       ( 14 )     1,250   Charge-offs     —       —       —       —       —       ( 475 )     —       —       ( 475 ) Recoveries     32       —       —       2       29       169       142       —       374   Ending balance   $ 3,214     $ 2,332     $ 4,109     $ 2,514     $ 507     $ 2,559     $ 694     $ 344     $ 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:     At December 31, 2022       One-to-four family     Multi-family     Commercial real estate     Construction and land     Home equity     Auto and other consumer     Commercial business     Unallocated     Total       (In thousands)   Total ALLL   $ 3,343     $ 2,468     $ 4,217     $ 2,344     $ 549     $ 2,024     $ 786     $ 385     $ 16,116   General reserve     3,321       2,468       4,217       2,343       545       2,019       786       385       16,084   Specific reserve     22       —       —       1       4       5       —       —       32                                                                             Gross loans   $ 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)     2,654       —       50       16       222       92       —       —       3,034     ( 1 )  Loans collectively evaluated for general reserves. ( 2 )  Loans individually evaluated for specific reserves.     26 Table of Contents Impaired loans incurred loss model.  Prior to the implementation of CECL on January 1, 2023, a loan was considered impaired when the Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment was measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying TDR loans.   The following table provides additional information on loans individually evaluated for impairment by portfolio class at the date indicated under the incurred loss methodology. Recorded investment includes the unpaid principal balance or carrying amount of loans less charge-offs.       December 31, 2022       Recorded Investment     Unpaid Principal Balance     Related Allowance       (In thousands)   With no allowance recorded:                         One-to-four family   $ 666     $ 705     $ —   Commercial real estate     50       149       —   Construction and land     —       14       —   Auto and other consumer     —       2       —   Total     716       870       —   With an allowance recorded:                         One-to-four family     1,988       2,129       22   Construction and land     16       19       1   Home equity     222       224       4   Auto and other consumer     92       95       5   Total     2,318       2,467       32   Total impaired loans:                         One-to-four family     2,654       2,834       22   Commercial real estate     50       149       —   Construction and land     16       33       1   Home equity     222       224       4   Auto and other consumer     92       97       5   Total   $ 3,034     $ 3,337     $ 32       27 Table of Contents   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     Nine Months Ended       September 30, 2022     September 30, 2022       Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized       (In thousands)   With no allowance recorded:                                 One-to-four family   $ 211     $ 1     $ 259     $ 1   Commercial real estate     56       —       63       —   Construction and land     583       1       194       1   Home equity     —       —       3       —   Auto and other consumer     239       5       246       14   Total     1,089       7       765       16   With an allowance recorded:                                 One-to-four family     2,258       51       2,138       120   Commercial real estate     —       —       7       —   Construction and land     18       —       21       —   Home equity     232       3       273       8   Auto and other consumer     33       1       104       2   Total     2,541       55       2,543       130   Total impaired loans:                                 One-to-four family     2,469       52       2,397       121   Commercial real estate     56       —       70       —   Construction and land     601       1       215       1   Home equity     232       3       276       8   Auto and other consumer     272       6       350       16   Total   $ 3,630     $ 62     $ 3,308     $ 146     Interest income recognized on a cash basis on impaired loans for the  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 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.     28 Table of Contents     Note 5  - Deposits   Deposits and weighted-average interest rates at the dates indicated are as follows:       September 30, 2023     December 31, 2022       Amount     Weighted-Average Interest Rate     Amount     Weighted-Average Interest Rate       (Dollars in thousands)   Noninterest-bearing demand deposits   $ 269,800       — %   $ 315,083       — % Interest-bearing demand deposits     182,361       0.52 %     193,558       0.01 % Money market accounts     372,706       1.28 %     473,009       0.58 % Savings accounts     253,182       1.45 %     200,920       0.26 % Certificates of deposit     579,713       3.93 %     381,685       2.19 % Total deposits   $ 1,657,762       1.94 %   $ 1,564,255       0.74 %   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:     September 30, 2023     December 31, 2022       (In thousands)   Within one year or less   $ 449,211     $ 262,189   After one year through two years     105,169       69,967   After two years through three years     9,780       37,032   After three years through four years     10,863       7,409   After four years through five years     4,690       5,088   Total certificates of deposit   $ 579,713     $ 381,685     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  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  September 30, 2023 and December 31, 2022 , respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs.    Interest on deposits by type for the periods shown was as follows:       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (In thousands)   Demand deposits   $ 204     $ 16     $ 599     $ 58   Money market accounts     1,146       468       2,866       1,089   Savings accounts     918       24       2,056       76   Certificates of deposit     5,431       743       12,740       1,541   Total interest expense on deposits   $ 7,699     $ 1,251     $ 18,261     $ 2,764       29 Table of Contents     Note 6  - Borrowings   First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to  45 % of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements.   First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until paid. First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of funds. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 885.7 million and $ 753.7 million at  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  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  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. The net proceeds to the Company from the sale of the Notes were approximately $ 39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company used the net proceeds of the offering for general corporate purposes.   On May 20, 2022, First Northwest consummated a borrowing arrangement with NexBank for a $ 20.0 million revolving line of credit. Borrowings are secured by a blanket lien on First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments. The line of credit matures on May 18, 2024 , with the option for one 364 -day extension.   In June 2023, First Fed established a Bank Term Funding ("BTFP") borrowing arrangement with the FRB as an additional source of liquidity. Available borrowing capacity was $18.3 million at  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  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.       FHLB Long-Term Advances     FHLB Overnight Variable-Rate Advances     FHLB Short-Term Fixed-Rate Advances     Line of Credit     Subordinated Debt, net       (Dollars in thousands)   Balance outstanding   $ 80,000     $ 168,000     $ 5,000     $ 8,000     $ 39,416   Maximum outstanding at any month-end     85,000       189,000       95,000       11,000       39,416   Average monthly outstanding during the period     82,222       141,444       32,222       10,249       39,384   Weighted-average daily interest rates                                         Annual     1.96 %     5.15 %     5.08 %     9.06 %     4.02 % Period End     2.09 %     5.53 %     5.27 %     9.00 %     4.01 %     30 Table of Contents   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:       Amount     Weighted- Average Interest Rate       (Dollars in thousands)   Within one year or less   $ 25,000       2.76 % After one year through two years     20,000       2.12   After two years through three years     15,000       1.49   After three years through four years     10,000       1.63   After four years through five years     10,000       1.76   Total FHLB long-term advances   $ 80,000       2.09 %   The following table sets forth information regarding our borrowings at the end of and during the year ended December 31, 2022 . The table includes both long- and short-term borrowings.       FHLB Long-Term Advances     FHLB Overnight Variable-Rate Advances     FHLB Short-Term Fixed-Rate Advances     Line of Credit     Subordinated Debt, net       (Dollars in thousands)   Balance outstanding   $ 80,000     $ 144,000     $ 10,000     $ 12,000     $ 39,358   Maximum outstanding at any month-end     80,000       206,000       42,500       12,000       39,358   Average monthly outstanding during the period     80,000       90,983       15,208       5,770       39,312   Weighted-average daily interest rates                                         Annual     1.52 %     2.83 %     1.82 %     6.76 %     4.01 % Period End     1.52 %     4.30 %     2.12 %     8.00 %     4.01 %     Note 7  - Income Tax   Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.   The effective tax rates were 19.9 % and  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 both employees and collateral for loans, thereby creating a nexus in those states for income tax purposes.     31 Table of Contents     Note 8  - Earnings per Common Share   The two -class method is used for computing basic and diluted earnings per share. Under the two -class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.   The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022 .       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022       (In thousands, except share data)   Net income:                                 Net income available to common shareholders   $ 2,504     $ 4,291     $ 7,808     $ 9,585   Earnings allocated to participating securities     ( 11 )     ( 35 )     ( 39 )     ( 92 ) Earnings allocated to common shareholders   $ 2,493     $ 4,256     $ 7,769     $ 9,493   Basic:                                 Weighted average common shares outstanding     9,631,929       9,955,322       9,666,900       9,979,152   Weighted average unvested restricted stock awards     ( 125,338 )     ( 212,930 )     ( 143,326 )     ( 231,253 ) Weighted average unallocated ESOP shares     ( 600,065 )     ( 648,571 )     ( 613,183 )     ( 661,670 ) Total basic weighted average common shares outstanding     8,906,526       9,093,821       8,910,391       9,086,229   Diluted:                                 Basic weighted average common shares outstanding     8,906,526       9,093,821       8,910,391       9,086,229   Dilutive restricted stock awards     28,356       44,302       20,013       69,584   Total diluted weighted average common shares outstanding     8,934,882       9,138,123       8,930,404       9,155,813   Basic earnings per common share   $ 0.28     $ 0.47     $ 0.87     $ 1.04   Diluted earnings per common share   $ 0.28     $ 0.47     $ 0.87     $ 1.04     Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At  September 30, 2023  and  2022 , antidilutive shares as calculated under the treasury stock method totaled  13,582 and 2,617 , respectively.     Note 9  - Employee Benefits   Employee Stock Ownership Plan   In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12 -month period are eligible to participate in the ESOP.   Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46 %. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. A $ 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. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.     32 Table of Contents   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:     September 30, 2023     December 31, 2022       (Dollars in thousands)   Allocated shares     439,174       386,285   Committed to be released shares     13,257       26,442   Unallocated shares     595,598       635,302   Total ESOP shares issued     1,048,029       1,048,029   Fair value of unallocated shares   $ 7,308     $ 9,758         Note 10  - Stock-based Compensation   In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ( "2020  EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 . As of  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. As of  September 30, 2023 , there were no shares available for grant under the 2015 EIP. At this date, there are  34,920  shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.   There were  32,449  and  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 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       September 30, 2023       Shares     Weighted-Average Grant Date Fair Value   Non-vested at July 1, 2023     132,918     $ 16.50   Granted     3,100       12.17   Vested     ( 10,820 )     14.60   Canceled (1)     ( 3,606 )     14.60   Forfeited     ( 1,182 )     20.02   Non-vested at September 30, 2023     120,410     $ 16.59                     (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue.     33 Table of Contents       For the Nine Months Ended       September 30, 2023       Shares     Weighted-Average Grant Date Fair Value   Non-vested at January 1, 2023     166,839     $ 17.78   Granted     32,449       13.90   Vested     ( 49,273 )     18.11   Canceled (1)     ( 15,412 )     18.11   Forfeited     ( 14,193 )     17.51   Non-vested at September 30, 2023     120,410     $ 16.59                     (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue.     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  1.34  years.     Note 11  - Fair Value Accounting and Measurement   Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third -party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.   Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.   A three -level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:   Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.   Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.   Level 3 - Unobservable inputs.   The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.   The Company used the following methods to measure fair value on a recurring and nonrecurring basis.   Securities available for sale : Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.   Partnership investments : Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level 2, when available. 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.     34 Table of Contents   Sold loan servicing rights, at fair value : The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation.   Loans receivable, net : The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.   Interest rate swap derivative : The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2 ). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third -party pricing services. The fair values of all interest rate swaps are determined from third -party pricing services without adjustment.   Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets and liabilities measured at fair value on a recurring basis at the dates indicated:       September 30, 2023       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total   Financial Assets     (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 4,637     $ 89,358     $ —     $ 93,995   U.S. Treasury notes     2,377       —       —       2,377   Agency bonds     —       1,703       —       1,703   Corporate debt     5,376       48,959       —       54,335   MBS agency     —       66,946       —       66,946   MBS non-agency     —       60,776       29,192       89,968   Sold loan servicing rights     —       —       3,729       3,729   Partnership investments     —       —       12,787       12,787   Interest rate swap derivative     —       576       —       576   Total assets measured at fair value   $ 12,390     $ 268,318     $ 45,708     $ 326,416         December 31, 2022       Quoted Prices in Active Markets for Identical Assets or Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs               (Level 1)     (Level 2)     (Level 3)     Total   Financial Assets     (In thousands)   Securities available-for-sale                                 Municipal bonds   $ 4,913     $ 93,137     $ —     $ 98,050   U.S. Treasury notes     2,364       —       —       2,364   Agency bonds     —       1,702       —       1,702   Corporate debt     5,326       50,173       —       55,499   MBS agency     —       75,648       —       75,648   MBS non-agency     —       63,707       29,599       93,306   Sold loan servicing rights     —       —       3,887       3,887   Partnership investments     —       —       12,563       12,563   Total assets measured at fair value   $ 12,603     $ 284,367     $ 46,049     $ 343,019       35 Table of Contents   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:   September 30, 2023   Fair Value (In thousands)   Valuation Technique   Unobservable Input (1)   Range (Weighted Average)   Sold loan servicing rights   $ 3,729   Discounted cash flow   Constant prepayment rate   5.36% - 34.46% (8.39%)                 Discount rate     11.75% - 14.24% (12.56%)   MBS non-agency   $ 29,192   Consensus pricing   Offered quotes   94.5 - 99.3                 Comparability adjustments (%)     -3.97% - 0.87%   Partnership investments   $ 12,787   Net asset value per share   Net asset value   n/a   (1) Unobservable inputs were weighted by the relative fair value of the instruments.     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,       2023     2022     2023     2022       (In thousands)   Balance at beginning of period   $ 3,825     $ 3,865     $ 3,887     $ 3,820   Servicing rights that result from transfers and sale of financial assets     71       45       145       143   Changes in fair value due to changes in model inputs or assumptions (1)     ( 167 )     ( 38 )     ( 303 )     ( 91 ) Balance at end of period   $ 3,729     $ 3,872     $ 3,729     $ 3,872   (1) Represents changes due to collection/realization of expected cash flows and curtailments.     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     Transfers Into Level 3     Purchases, net of Distributions     Unrealized (Losses) Gains     Balance at end of period       (In thousands)   Securities available for sale:                                         MBS non-agency   $ 29,378     $ —     $ —     $ ( 186 )   $ 29,192   Partnership investments     12,733       —       ( 82 )     136       12,787       36 Table of Contents       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     Balance at end of period       (In thousands)   Securities available for sale:                                         MBS non-agency   $ 29,599     $ —     $ —     $ ( 407 )   $ 29,192   Partnership investments     12,563       —       ( 69 )     293       12,787             As of or For the Year Ended December 31, 2022       Balance at beginning of period     Transfers Into Level 3 (1)     Purchases     Unrealized Gains     Balance at end of period       (In thousands)   Securities available for sale:                                         MBS non-agency   $ —     $ 29,599     $ —     $ —     $ 29,599   Sold loan servicing rights     —       12,490       —       73       12,563   (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 table presents the Company’s assets measured at fair value on a nonrecurring basis at the date indicated:       December 31, 2022       Level 1     Level 2     Level 3     Total       (In thousands)   Impaired loans   $ —     $ —     $ 3,034     $ 3,034     At  September 30, 2023 and December 31, 2022 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.     37 Table of Contents   The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:       September 30, 2023                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 83,886     $ 83,886     $ 83,886     $ —     $ —   Investment securities available for sale     309,324       309,324       12,390       267,742       29,192   Loans held for sale     689       689       —       689       —   Loans receivable, net     1,618,033       1,486,050       —       —       1,486,050   FHLB stock     12,621       12,621       —       12,621       —   Accrued interest receivable     8,093       8,093       —       8,093       —   Sold loan servicing rights, at fair value     3,729       3,729       —       —       3,729   Partnership investments     12,787       12,787       —       —       12,787   Interest rate swap derivative     576       576       —       576       —   Financial liabilities                                         Demand deposits   $ 1,078,049     $ 1,078,049     $ 1,078,049     $ —     $ —   Time deposits     579,713       572,616       —       —       572,616   FHLB Borrowings     253,000       248,031       —       —       248,031   Line of Credit     8,000       8,030       —       —       8,030   Subordinated debt, net     39,416       39,879       —       —       39,879   Accrued interest payable     2,276       2,276       —       2,276       —         December 31, 2022                       Fair Value Measurements Using:       Carrying Amount     Estimated Fair Value     Level 1     Level 2     Level 3       (In thousands)   Financial assets                                         Cash and cash equivalents   $ 45,596     $ 45,596     $ 45,596     $ —     $ —   Investment securities available for sale     326,569       326,569       12,603       284,367       29,599   Loans held for sale     597       597       —       597       —   Loans receivable, net     1,531,435       1,461,470       —       —       1,461,470   FHLB stock     11,681       11,681       —       11,681       —   Accrued interest receivable     6,743       6,743       —       6,743       —   Sold loan servicing rights, at fair value     3,887       3,887       —       —       3,887   Partnership investments     12,563       12,563       —       —       12,563   Financial liabilities                                         Demand deposits     1,182,570     $ 1,182,570     $ 1,182,570     $ —     $ —   Time deposits     381,685       372,865       —       —       372,865   FHLB Borrowings     234,000       229,103       —       —       229,103   Line of Credit     12,000       12,034       —       —       12,034   Subordinated debt, net     39,358       38,841       —       —       38,841   Accrued interest payable     455       455       —       455       —       38 Table of Contents     Note 12 - Change in Accumulated Other Comprehensive Income ("AOCI")   Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:       Unrealized Gains and Losses on Available-for-Sale Securities     Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization     Unrealized Gains and Losses on Derivatives     Total       (In thousands)                                     Balance at June 30, 2022   $ ( 26,653 )   $ ( 1,794 )   $ —     $ ( 28,447 ) Other comprehensive loss before reclassification     ( 12,604 )     —       —       ( 12,604 ) Amounts reclassified from accumulated other comprehensive income     —       28       —       28   Net other comprehensive (loss) income     ( 12,604 )     28       —       ( 12,576 ) Balance at September 30, 2022   $ ( 39,257 )   $ ( 1,766 )   $ —     $ ( 41,023 )                                   Balance at June 30, 2023   $ ( 37,679 )   $ ( 2,079 )   $ ( 308 )   $ ( 40,066 ) Other comprehensive loss before reclassification     ( 6,540 )     —       727       ( 5,813 ) Amounts reclassified from accumulated other comprehensive income     —       29       —       29   Net other comprehensive (loss) income     ( 6,540 )     29       727       ( 5,784 ) Balance at September 30, 2023   $ ( 44,219 )   $ ( 2,050 )   $ 419     $ ( 45,850 )                                                                     Balance at December 31, 2021   $ 2,140     $ ( 1,852 )   $ —     $ 288   Other comprehensive loss before reclassification     ( 41,304 )     —       —       ( 41,304 ) Amounts reclassified from accumulated other comprehensive income     ( 93 )     86       —       ( 7 ) Net other comprehensive (loss) income     ( 41,397 )     86       —       ( 41,311 ) Balance at September 30, 2022   $ ( 39,257 )   $ ( 1,766 )   $ —     $ ( 41,023 )                                   Balance at December 31, 2022   $ ( 38,404 )   $ ( 2,139 )   $ —     $ ( 40,543 ) Other comprehensive loss before reclassification     ( 5,815 )     —       419       ( 5,396 ) Amounts reclassified from accumulated other comprehensive income     —       89       —       89   Net other comprehensive (loss) income     ( 5,815 )     89       419       ( 5,307 ) Balance at September 30, 2023   $ ( 44,219 )   $ ( 2,050 )   $ 419     $ ( 45,850 )     39 Table of Contents     Note 13  - Derivatives and Hedging Activities   The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.   Fair Value Hedges of Interest Rate Risk 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 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 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 . Line item in the income statement in which the hedged item is included   Carrying Amount of the Hedged Assets (Liabilities)     Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)       (In thousands)   September 30, 2023                 Investment securities (1)   $ 49,467     $ ( 533 ) Total   $ 49,467     $ ( 533 ) ( 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. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:             Fair Value       Notional Amount     Other Assets     Other Liabilities         (In thousands)   September 30, 2023                         Fair value hedges:                         Interest rate swaps - securities   $ 50,000     $ 576     $ —     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,       2023     2022     2023     2022       (In thousands)   Total amounts recognized in interest on investment securities   $ 3,368     $ 2,817     $ 9,886     $ 7,807   Net gains (losses) on fair value hedging relationships                                 Interest rate swaps - securities                                 Recognized on hedged items   $ ( 925 )   $ —     $ ( 533 )   $ —   Recognized on derivatives designated as hedging instruments     1,071       —       817       —   Net income recognized on fair value   $ 146     $ —     $ 284     $ —       40 Table of Contents   Credit Risk-related Contingent Features The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.   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.   41 Table of Contents     ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements   Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:   • statements of our goals, intentions and expectations;   • statements regarding our business plans, prospects, growth and operating strategies;   • statements regarding the quality of our loan and investment portfolios; and   • estimates of our risks and future costs and benefits.   These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:   • the risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio;   • 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;   • continued depressed market demand for loans that we originate for sale;   • our ability to control operating costs and expenses;   • whether our management team can succeed in implementing our operational strategy, including but not limited to our efforts to achieve loan and revenue growth;   • our ability to successfully execute on merger and/or acquisition strategies, integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and realize related cost savings within expected time frames;   • our ability to successfully execute on growth strategies related to our entry into new markets and delivery channels, including banking as a service;   • our ability to develop user-friendly digital applications to serve existing customers and attract new customers;   • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;   • changes in monetary policy and fiscal policies, including interest rate policies of the Federal Reserve, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;   • pressures on liquidity, including as a result of withdrawals of deposits or declines in the value of our investment portfolio;   • increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;   • our ability to attract and retain deposits at a reasonable cost;   • changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;   • results of examinations by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;   • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;   • 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 wars in Ukraine and the Middle East;   • any failure of key third-party vendors to perform their obligations to us;   • the effects of any reputational damage to the Company resulting from any of the foregoing; and   • other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2022, ("2022 Form 10-K").   Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.   42 Table of Contents   General   First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities. Non-financial investments include several limited partnership investments, including a 33.3% interest in The Meriwether Group, LLC ("MWG"). The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed. The Company 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. We have 16 locations including 12 full-service branches and four business centers in Clallam, Jefferson, King, Kitsap, and Whatcom counties. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a fully array of financial products and services for individuals, small business, and commercial customers. Lending activities include the origination of first lien one-to-four family mortgage loans, commercial and multi-family real estate loans, residential and commercial construction and land loans, commercial business loans, SBA loans, and consumer loans, consisting primarily of home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit ("CDs") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.   First Northwest's limited partnership investments include Canapi Ventures Fund, LP; BankTech Ventures, LP; and JAM FINTOP Blockchain, LP. These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Meriwether Group Capital Hero Fund LP ("Hero Fund"). The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. 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. Deposit flows are influenced by several factors, including interest rates paid on competing deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand and pricing for loan funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.   Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in our asset and liability mix, market and portfolio interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income for the Company is noninterest income, which includes revenue earned from providing products and services, including service charges on deposit accounts, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, gains and losses from sales of securities, and changes in the market value of our equity and partnership investments.   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 investment, loan and unfunded commitment portfolios 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, 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.     43 Table of Contents   Critical Accounting Policies   On January 1, 2023, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments , referred to as the Current Expected Credit Loss or CECL model. In conjunction with the adoption of CECL, the Company also adopted ASU 2022-02,  Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . For additional information on these ASUs, see "Note 1 - Basis of Presentation and Critical Accounting Policies - Recently adopted accounting pronouncements" of the Notes to the Consolidated Financial Statements included in Part I. Item 1 of this report.   Effective with the execution of a hedging agreement in the first quarter of 2023, the Company implemented an accounting policy on derivatives and hedging. For additional information on the hedging policy, see "Note 1 - Basis of Presentation and Critical Accounting Policies - Recently adopted accounting pronouncements" of the Notes to the Consolidated Financial Statements included in Part I. Item 1 of this report.   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 September 30, 2023 and December 31, 2022   Assets . 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.   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 $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.     44 Table of Contents   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. We manage construction lending by utilizing a licensed third-party vendor to assist us in monitoring the progress toward completion of our construction projects. We continue to monitor the impact of supply chain challenges, inflation and consumer demand in a rising interest rate environment on completion of the projects currently in the portfolio. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. At 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 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. We continually assess our lending strategies across all product lines and markets where we do business to improve earnings while also prudently managing credit risk.   45 Table of Contents   The following tables show our construction commitments by type and geographic concentrations at the dates indicated:   September 30, 2023   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Idaho     Total       (In thousands)   Construction Commitment                                                 One-to-four family residential   $ 14,635     $ 60,461     $ 7,577     $ 540     $ —     $ 83,213   Multi-family residential     —       76,905       9,221       415       3,592       90,133   Commercial real estate     —       24,238       —       —       —       24,238   Total commitment   $ 14,635     $ 161,604     $ 16,798     $ 955     $ 3,592     $ 197,584                                                     Construction Funds Disbursed                                                 One-to-four family residential   $ 6,277     $ 36,418     $ 4,866     $ 173     $ —     $ 47,734   Multi-family residential     —       60,643       5,679       85       3,334       69,741   Commercial real estate     —       19,498       —       —       —       19,498   Total disbursed   $ 6,277     $ 116,559     $ 10,545     $ 258     $ 3,334     $ 136,973                                                     Undisbursed Commitment                                                 One-to-four family residential   $ 8,358     $ 24,043     $ 2,711     $ 367     $ —     $ 35,479   Multi-family residential     —       16,262       3,542       330       258       20,392   Commercial real estate     —       4,740       —       —       —       4,740   Total undisbursed     $ 8,358       $ 45,045       $ 6,253       $ 697       $ 258       $ 60,611                                                     Land Funds Disbursed                                                 One-to-four family residential   $ 3,639     $ 3,033     $ 274     $ —     $ —     $ 6,946   Total disbursed for land   $ 3,639     $ 3,033     $ 274     $ —     $ —     $ 6,946   (1) Includes Clallam and Jefferson counties. (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.   December 31, 2022   North Olympic Peninsula (1)     Puget Sound Region (2)     Other Washington     Oregon     Idaho     Total       (In thousands)   Construction Commitment                                                 One-to-four family residential   $ 39,031     $ 75,745     $ 12,015     $ —     $ —     $ 126,791   Multi-family residential     —       102,429       9,296       415       3,592       115,732   Commercial acquisition-renovation     1,636       18,625       —       —       —       20,261   Commercial real estate     349       39,845       —       540       —       40,734   Total commitment   $ 41,016     $ 236,644     $ 21,311     $ 955     $ 3,592     $ 303,518                                                     Construction Funds Disbursed                                                 One-to-four family residential   $ 17,557     $ 36,902     $ 4,280     $ —     $ —     $ 58,739   Multi-family residential     —       68,936       5,296       42       2,752       77,026   Commercial acquisition-renovation     1,636       17,687       —       —       —       19,323   Commercial real estate     212       27,492       —       12       —       27,716   Total disbursed   $ 19,405     $ 151,017     $ 9,576     $ 54     $ 2,752     $ 182,804                                                     Undisbursed Commitment                                                 One-to-four family residential   $ 21,474     $ 38,843     $ 7,735     $ —     $ —     $ 68,052   Multi-family residential     —       33,493       4,000       373       840       38,706   Commercial acquisition-renovation     —       938       —       —       —       938   Commercial real estate     137       12,353       —       528       —       13,018   Total undisbursed   $ 21,611     $ 85,627     $ 11,735     $ 901     $ 840     $ 120,714                                                     Land Funds Disbursed                                                 One-to-four family residential   $ 3,552     $ 3,370     $ 419     $ —     $ —     $ 7,341   Commercial real estate     372       4,129       —       —       —       4,501   Total disbursed for land   $ 3,924     $ 7,499     $ 419     $ —     $ —     $ 11,842   (1) Includes Clallam and Jefferson counties. (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.   46 Table of Contents   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. 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. 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)       September 30, 2023     December 31, 2022     Amount     Percent       (In thousands)                   Real Estate:                                 One-to-four family   $ 369,950     $ 343,559     $ 26,391       7.7 % Multi-family     325,496       252,745       72,751       28.8   Commercial real estate     381,508       388,884       (7,376 )     (1.9 ) Construction and land     143,434       193,646       (50,212 )     (25.9 ) Total real estate loans     1,220,388       1,178,834       41,554       3.5   Consumer:                                 Home equity     64,424       52,877       11,547       21.8   Auto and other consumer     248,786       238,913       9,873       4.1   Total consumer loans     313,210       291,790       21,420       7.3   Commercial business loans     101,380       76,927       24,453       31.8   Total loans     1,634,978       1,547,551       87,427       5.6   Less:                                 Allowance for credit losses on loans     16,945       16,116       829       5.1   Loans receivable, net   $ 1,618,033     $ 1,531,435     $ 86,598       5.7     47 Table of Contents   The following table represents nonperforming assets at the dates indicated.                     Increase (Decrease)       September 30, 2023     December 31, 2022     Amount     Percent       (In thousands)                   Nonperforming loans:                                 Real estate loans:                                 One-to-four family   $ 1,790     $ 954     $ 836       87.6 % Commercial real estate     34       53       (19 )     (35.8 ) Construction and land     8       15       (7 )     (46.7 ) Total real estate loans     1,832       1,022       810       79.3   Consumer loans:                                 Home equity     166       196       (30 )     (15.3 ) Auto and other consumer     376       575       (199 )     (34.6 ) Total consumer loans     542       771       (229 )     (29.7 ) Total nonperforming assets   $ 2,374     $ 1,793     $ 581       32.4                                     Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.1 %     0.1 %     0.0 %     —       Liabilities. 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 $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.   Equity . 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.     48 Table of Contents   Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022   General. 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 $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. 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 $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 5.46% from 2.72% for the comparable period in 2022, benefitting from increases in rates paid on excess balances held at the FRB.     49 Table of Contents   The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:     Three Months Ended September 30,               2023     2022               Average Balance Outstanding     Yield     Average Balance Outstanding     Yield     Increase in Interest Income       (Dollars in thousands)   Loans receivable, net   $ 1,624,722       5.31 %   $ 1,484,615       4.75 %   $ 3,950   Investment securities     319,508       4.18       348,281       3.21       551   FHLB stock     11,922       7.12       9,269       6.08       72   Interest-earning deposits in banks     38,099       5.46       17,231       2.72       406   Total interest-earning assets   $ 1,994,251       5.14 %   $ 1,859,396       4.45 %   $ 4,979     Interest Expense. 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 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 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 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 September 30,               2023     2022               Average Balance Outstanding     Rate     Average Balance Outstanding     Rate     Increase (Decrease) in Interest Expense       (Dollars in thousands)   Interest-bearing demand deposits   $ 176,503       0.46 %   $ 190,542       0.03 %   $ 188   Money market accounts     373,408       1.22       556,434       0.33       678   Savings accounts     255,956       1.42       198,403       0.05       894   Certificates of deposit     571,867       3.77       279,169       1.06       4,688   Advances     244,859       4.52       182,554       2.18       1,786   Subordinated debt     39,403       3.97       39,326       3.98       (1 ) Total interest-bearing liabilities   $ 1,661,996       2.60 %   $ 1,446,428       0.73 %   $ 8,233     Provision for Credit Losses.  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.     50 Table of Contents   The following table details activity and information related to the ACLL for the periods shown:       Three Months Ended September 30,       2023     2022       (Dollars in thousands)   Provision for credit losses on loans   $ 880     $ 782   Net charge-offs     (1,232 )     (224 ) Allowance for credit losses on loans     16,945       16,273   Allowance for losses as a percentage of gross loans receivable at period end     1.0 %     1.1 % Total nonaccrual loans     2,374       3,517   Allowance for credit losses on loans as a percentage of nonaccrual loans at period end     713.8 %     462.7 % Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.1 %     0.2 % Total loans   $ 1,634,978     $ 1,537,391     Noninterest 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 September 30,     Increase (Decrease)       2023     2022     Amount     Percent       (Dollars in thousands)   Loan and deposit service fees   $ 1,068     $ 1,302     $ (234 )     (18.0 )% Sold loan servicing fees and servicing rights mark-to-market     98       206       (108 )     (52.4 ) Net gain on sale of loans     171       285       (114 )     (40.0 ) Increase in cash surrender value of bank-owned life insurance     252       221       31       14.0   Other income     1,315       320       995       310.9   Total noninterest income   $ 2,904     $ 2,334     $ 570       24.4 %   Noninterest Expense. 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 September 30,     Increase (Decrease)       2023     2022     Amount     Percent       (Dollars in thousands)   Compensation and benefits   $ 7,795     $ 9,045     $ (1,250 )     (13.8 )% Data processing     1,945       1,778       167       9.4   Occupancy and equipment     1,173       1,499       (326 )     (21.7 ) Supplies, postage, and telephone     292       322       (30 )     (9.3 ) Regulatory assessments and state taxes     446       365       81       22.2   Advertising     501       645       (144 )     (22.3 ) Professional fees     929       695       234       33.7   FDIC insurance premium     369       219       150       68.5   Other expense     926       807       119       14.7   Total noninterest expense   $ 14,376     $ 15,375     $ (999 )     (6.5 )%     51 Table of Contents   Provision for Income Tax. 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 Nine Months Ended September 30, 2023 and 2022   General. 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 $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 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 $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 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.     52 Table of Contents   The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:     Nine Months Ended September 30,               2023     2022               Average Balance Outstanding     Yield     Average Balance Outstanding     Yield     Increase in Interest Income       (Dollars in thousands)   Loans receivable, net   $ 1,582,658       5.28 %   $ 1,418,734       4.56 %   $ 14,136   Investment securities     324,968       4.07       358,419       2.91       2,079   FHLB stock     11,873       7.07       7,605       5.50       315   Interest-earning deposits in banks     40,447       5.11       39,976       0.68       1,343   Total interest-earning assets   $ 1,959,946       5.09 %   $ 1,824,734       4.16 %   $ 17,873     Interest Expense. 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 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 1.83% 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. 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:       Nine Months Ended September 30,               2023     2022               Average Balance Outstanding     Rate     Average Balance Outstanding     Rate     Increase in Interest Expense       (Dollars in thousands)   Interest-bearing demand deposits   $ 180,789       0.44 %   $ 194,568       0.04 %   $ 541   Money market accounts     397,023       0.97       576,019       0.25       1,777   Savings accounts     241,802       1.14       196,170       0.05       1,980   Certificates of deposit     514,082       3.31       256,508       0.80       11,199   Advances     246,683       4.29       138,470       1.77       6,072   Subordinated debt     39,384       4.02       39,301       4.02       —   Total interest-bearing liabilities   $ 1,619,763       2.26 %   $ 1,401,036       0.55 %   $ 21,569     Provision for Credit Losses.  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.     53 Table of Contents   The following table details activity and information related to the ACLL for the periods shown:     Nine Months Ended September 30,       2023     2022       (Dollars in thousands)   Provision for credit losses on loans   $ 1,195     $ 1,321   Net charge-offs     (2,575 )     (101 ) Allowance for credit losses on loans     16,945       16,273   Allowance for losses as a percentage of total gross loans receivable at period end     1.0 %     1.1 % Total nonaccrual loans     2,374       3,517   Allowance for credit losses on loans as a percentage of nonaccrual loans at period end     713.8 %     462.7 % Nonaccrual and 90 days or more past due loans as a percentage of total loans     0.1 %     0.2 % Total loans   $ 1,634,978     $ 1,537,391     Noninterest Income. 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:     Nine Months Ended September 30,     Increase (Decrease)       2023     2022     Amount     Percent       (Dollars in thousands)   Loan and deposit service fees   $ 3,273     $ 3,566     $ (293 )     (8.2 )% Sold loan servicing fees and servicing rights mark-to-market     400       665       (265 )     (39.8 ) Net gain on sale of loans     405       769       (364 )     (47.3 ) Net gain on sale of investment securities     —       118       (118 )     (100.0 ) Increase in cash surrender value of bank-owned life insurance     668       686       (18 )     (2.6 ) Other income     2,203       1,155       1,048       90.7   Total noninterest income   $ 6,949     $ 6,959     $ (10 )     (0.1 )%   Noninterest Expense. 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 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:     Nine Months Ended September 30,     Increase (Decrease)       2023     2022     Amount     Percent       (Dollars in thousands)   Compensation and benefits   $ 23,812     $ 27,583     $ (3,771 )     (13.7 )% Data processing     6,063       5,420       643       11.9   Occupancy and equipment     3,596       4,098       (502 )     (12.2 ) Supplies, postage, and telephone     1,082       1,043       39       3.7   Regulatory assessments and state taxes     1,259       1,167       92       7.9   Advertising     2,471       2,802       (331 )     (11.8 ) Professional fees     2,619       1,883       736       39.1   FDIC insurance premium     939       653       286       43.8   Other expense     2,623       2,520       103       4.1   Total noninterest expense   $ 44,464     $ 47,169     $ (2,705 )     (5.7 )%   54 Table of Contents   Provision for Income Tax. 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. 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.     Average Balances, Interest and Average Yields/Cost   The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of 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 September 30,       2023     2022       Average     Interest             Average     Interest               Balance     Earned/     Yield/     Balance     Earned/     Yield/       Outstanding     Paid     Rate     Outstanding     Paid     Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans receivable, net (1)   $ 1,624,722     $ 21,728       5.31 %   $ 1,484,615     $ 17,778       4.75 % Investment securities     319,508       3,368       4.18       348,281       2,817       3.21   FHLB dividends     11,922       214       7.12       9,269       142       6.08   Interest-earning deposits in banks     38,099       524       5.46       17,231       118       2.72   Total interest-earning assets (2)     1,994,251       25,834       5.14       1,859,396       20,855       4.45   Noninterest-earning assets     145,483                       137,369                   Total average assets   $ 2,139,734                     $ 1,996,765                                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 176,503     $ 204       0.46     $ 190,542     $ 16       0.03   Money market accounts     373,408       1,146       1.22       556,434       468       0.33   Savings accounts     255,956       918       1.42       198,403       24       0.05   Certificates of deposit     571,867       5,431       3.77       279,169       743       1.06   Total interest-bearing deposits (3)     1,377,734       7,699       2.22       1,224,548       1,251       0.41   Advances     244,859       2,791       4.52       182,554       1,005       2.18   Subordinated debt     39,403       394       3.97       39,326       395       3.98   Total interest-bearing liabilities     1,661,996       10,884       2.60       1,446,428       2,651       0.73   Noninterest-bearing deposits (3)     276,294                       342,944                   Other noninterest-bearing liabilities     40,450                       39,129                   Total average liabilities     1,978,740                       1,828,501                   Average equity     160,994                       168,264                   Total average liabilities and equity   $ 2,139,734                     $ 1,996,765                                                                     Net interest income           $ 14,950                     $ 18,204           Net interest rate spread                     2.54                       3.72   Net earning assets   $ 332,255                     $ 412,968                   Net interest margin (4)                     2.97                       3.88   Average interest-earning assets to average interest-bearing liabilities     120.0 %                     128.6 %                   (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.85% and 0.32% for the three months ended September 30, 2023 and 2022, respectively. (4) Net interest income divided by average interest-earning assets.     55 Table of Contents       Nine Months Ended September 30,       2023     2022       Average     Interest             Average     Interest               Balance     Earned/     Yield/     Balance     Earned/     Yield/       Outstanding     Paid     Rate     Outstanding     Paid     Rate       (Dollars in thousands)   Interest-earning assets:                                                 Loans receivable, net (1)   $ 1,582,658     $ 62,531       5.28 %   $ 1,418,734     $ 48,395       4.56 % Total investment securities     324,968       9,886       4.07       358,419       7,807       2.91   FHLB dividends     11,873       628       7.07       7,605       313       5.50   Interest-earning deposits in banks     40,447       1,545       5.11       39,976       202       0.68   Total interest-earning assets (2)     1,959,946       74,590       5.09       1,824,734       56,717       4.16   Noninterest-earning assets     143,034                       129,004                   Total average assets   $ 2,102,980                     $ 1,953,738                                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits (3)   $ 180,789     $ 599       0.44     $ 194,568     $ 58       0.04   Money market accounts     397,023       2,866       0.97       576,019       1,089       0.25   Savings accounts     241,802       2,056       1.14       196,170       76       0.05   Certificates of deposit     514,082       12,740       3.31       256,508       1,541       0.80   Total interest-bearing deposits     1,333,696       18,261       1.83       1,223,265       2,764       0.30   Advances     246,683       7,909       4.29       138,470       1,837       1.77   Subordinated debt     39,384       1,183       4.02       39,301       1,183       4.02   Total interest-bearing liabilities     1,619,763       27,353       2.26       1,401,036       5,784       0.55   Noninterest-bearing deposits (3)     284,282                       338,745                   Other noninterest-bearing liabilities     38,362                       36,934                   Total average liabilities     1,942,407                       1,776,715                   Average equity     160,573                       177,023                   Total average liabilities and equity   $ 2,102,980                     $ 1,953,738                                                                     Net interest income           $ 47,237                     $ 50,933           Net interest rate spread                     2.83                       3.61   Net earning assets   $ 340,183                     $ 423,698                   Net interest margin (4)                     3.22                       3.73   Average interest-earning assets to average interest-bearing liabilities     121.0 %                     130.2 %                   (1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-earning deposits (cash) at other financial institutions. (3) Cost of all deposits, including noninterest-bearing demand deposits, was 1.51% and 0.24% for the nine months ended September 30, 2023 and 2022, respectively. (4) Net interest income divided by average interest-earning assets.     56 Table of Contents   Rate/Volume Analysis   The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.       Three Months Ended             Nine Months Ended               September 30, 2023 vs. 2022             September 30, 2023 vs. 2022               Increase (Decrease) Due to             Increase (Decrease) Due to               Volume     Rate     Total Increase (Decrease)     Volume     Rate     Total Increase (Decrease)       (In thousands)     (In thousands)   Interest-earning assets:                                                 Loans receivable, net   $ 1,667     $ 2,283     $ 3,950     $ 5,602     $ 8,534     $ 14,136   Investments     (232 )     783       551       (734 )     2,813       2,079   FHLB stock     41       31       72       176       139       315   Other (1)     143       263       406       2       1,341       1,343   Total interest-earning assets   $ 1,619     $ 3,360     $ 4,979     $ 5,046     $ 12,827     $ 17,873                                                     Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ (2 )   $ 190     $ 188     $ (2 )   $ 543     $ 541   Money market accounts     (156 )     834       678       (348 )     2,125       1,777   Savings accounts     10       884       894       13       1,967       1,980   Certificates of deposit     782       3,906       4,688       1,544       9,655       11,199   Advances     342       1,444       1,786       1,428       4,644       6,072   Subordinated debt     —       (1 )     (1 )     —       —       —   Total interest-bearing liabilities   $ 976     $ 7,257     $ 8,233     $ 2,635     $ 18,934     $ 21,569                                                     Change in net interest income   $ 643     $ (3,897 )   $ (3,254 )   $ 2,411     $ (6,107 )   $ (3,696 )   (1) Includes interest-earning deposits (cash) at other financial institutions.         Off-Balance Sheet Activities   In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the 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.   57 Table of Contents   Contractual Obligations   At September 30, 2023, our scheduled maturities of contractual obligations were as follows:       Within     After 1 Year Through     After 3 Years Through     Beyond     Total       1 Year     3 Years     5 Years     5 Years     Balance       (In thousands)   Certificates of deposit   $ 449,211     $ 114,949     $ 15,553     $ —     $ 579,713   FHLB advances     198,000       35,000       20,000       —       253,000   Line of credit     8,000       —       —       —       8,000   Subordinated debt obligation     —       —       —       39,416       39,416   Operating leases     892       1,880       1,652       3,396       7,820   Borrower taxes and insurance     2,375       —       —       —       2,375   Deferred compensation     113       243       186       667       1,209   Total contractual obligations   $ 658,591     $ 152,072     $ 37,391     $ 43,479     $ 891,533     Commitments and Off-Balance Sheet Arrangements   The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, 2023:       Amount of Commitment by Expiration       Within     After 1 Year Through     After 3 Years Through     Beyond     Total Amounts       1 Year     3 Years     5 Years     5 Years     Committed       (In thousands)   Commitments to originate loans:                                         Fixed-rate   $ 183     $ —     $ —     $ —     $ 183   Variable-rate     497       —       —       —       497   Unfunded commitments under lines of credit or existing loans     54,347       7,373       3,628       89,374       154,722   Standby letters of credit     58       —       —       200       258   Total commitments   $ 55,085     $ 7,373     $ 3,628     $ 89,574     $ 155,660     Liquidity Management   Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.   Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our liquidity management, interest-rate risk and investment policies. 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 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 $12.0 million at September 30, 2023.     58 Table of Contents   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. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on CDs. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.   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 September 30, 2023. We estimate that 80-85% of our customer deposit balances are below the $250,000 FDIC insurance limit or fully collateralized. The remaining uninsured deposits represent less than 5% of depositors. Management believes that maintaining a diversified deposit base is an important factor in managing and maintaining adequate levels of liquidity.   The Company is a separate legal entity from the Bank and provides for its own liquidity. 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.   First Northwest previously contributed $8.0 million to Quin Ventures pursuant to the terms of a capital financing agreement and related promissory note. Quil Ventures Inc. agreed to repay the amount owed by Quin Ventures under the terms and conditions specified in a repayment and security agreement with First Northwest dated December 20, 2022.   Capital Resources   At 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.       Actual     Minimum Capital Requirements     Minimum Required to be Well-Capitalized       Amount     Ratio     Amount     Ratio     Amount     Ratio                       (Dollars in thousands)                   Tier 1 leverage capital (to average assets)   $ 219,326       10.1 %   $ 86,654       4.0 %   $ 108,318       5.0 % Common equity tier 1 (to risk-weighted assets)   $ 219,326       13.4       73,482       4.5       106,141       6.5   Tier 1 risk-based capital (to risk-weighted assets)   $ 219,326       13.4       97,976       6.0       130,635       8.0   Total risk-based capital (to risk-weighted assets)   $ 234,841       14.4       130,635       8.0       163,294       10.0     In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.     59 Table of Contents   Effect of Inflation and Changing Prices   The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.       Item 3. Quantitative and Qualitative Disclosures about Market Risk   There has not been any material change in the market risk disclosures contained in the 2022 Form 10-K.