What changed in this filing

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Item 1. Financial Statements

2024-05-13 compared with 2023-11-13 · 850 added, 2280 removed, 684 unchanged (82% of the section changed)

3 unchanged sentences

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

September 30, 2023

March 31, 2024

December 31, 2023

Cash and due from banks

$ 20,609  

$ 17,104  

$ 15,562 $ 19,845

Interest-earning deposits in banks

63,277  

28,492  

61,784 103,324

Investment securities available for sale, at fair value

309,324  

326,569  

325,955 295,623

Loans held for sale

Loans receivable (net of allowance for credit losses on loans of $ 17,958 and $ 17,510 )

1,618,033  

1,531,435  

1,692,774 1,642,518

Federal Home Loan Bank (FHLB) stock, at cost

12,621  

11,681  

15,876 13,664

Accrued interest receivable

Premises held for sale at cost, net

Premises and equipment, net

17,954  

18,089  

11,028 18,049

Servicing rights on sold loans, at fair value

Bank-owned life insurance, net

40,318  

39,665  

34,681 40,578

Equity and partnership investments

14,623  

14,289  

15,121 14,794

Goodwill and other intangible assets, net

Deferred tax asset, net

16,611  

14,091  

12,704 13,001

Prepaid expenses and other assets

26,577  

28,339  

$ 2,153,545  

$ 2,042,070  

32,982 26,875

$ 2,240,020 $ 2,201,797

LIABILITIES AND SHAREHOLDERS' EQUITY

$ 1,657,762  

$ 1,564,255  

300,416  

285,358  

$ 1,666,624 $ 1,676,892

371,455 320,936

Accrued interest payable

Accrued expenses and other liabilities

34,651  

32,344  

36,207 35,973

Advances from borrowers for taxes and insurance

Total liabilities

1,997,480  

1,883,788  

2,079,514 2,038,457

Shareholders' Equity

1 unchanged sentence

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

issued and outstanding 9,442,796 shares at March 31, 2024, and 9,611,876 shares at December 31, 2023

Additional paid-in capital

95,658  

95,508  

93,763 95,784

Retained earnings

113,579  

114,424  

106,202 107,349

Accumulated other comprehensive loss, net of tax

( 45,850 )  

( 32,465 ) ( 32,636 )

Unearned employee stock ownership plan (ESOP) shares

( 7,418 )  

Total parent's shareholders' equity

156,065  

161,573  

Noncontrolling interest in Quin Ventures, Inc.

( 7,088 ) ( 7,253 )

Total shareholders' equity

156,065  

158,282  

160,506 163,340

Total liabilities and shareholders' equity

$ 2,153,545  

$ 2,042,070  

$ 2,240,020 $ 2,201,797

See selected notes to the consolidated financial statements.

3 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

Interest and fees on loans receivable

$ 21,728  

$ 17,778  

$ 62,531  

$ 48,395  

$ 22,767 $ 19,504

Interest on investment securities

2 unchanged sentences

Total interest income

25,834  

20,855  

74,590  

56,717  

27,326 23,282

INTEREST EXPENSE

18,261  

Total interest expense

10,884  

27,353  

Net interest income

14,950  

18,204  

47,237  

50,933  

13,928 16,305

PROVISION FOR CREDIT LOSSES

Provision for credit losses on loans

Provision for (recapture of) credit losses on loans

1,239 ( 515 )

(Recapture of) provision for credit losses on unfunded commitments

( 509 )  

( 1,024 )  

Provision for credit losses

Net interest income after provision for credit losses

14,579  

17,454  

47,066  

49,683  

Provision for (recapture of) credit losses

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

12,958 16,805

NONINTEREST INCOME

2 unchanged sentences

Net gain on sale of loans

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

2 unchanged sentences

Compensation and benefits

23,812  

27,583  

Data processing

6 unchanged sentences

Total noninterest expense

14,376  

15,375  

44,464  

47,169  

14,303 14,871

Income before provision for income taxes

2 unchanged sentences

Net income attributable to parent

$ 2,504  

$ 4,291  

$ 7,808  

$ 9,585  

$ 396 $ 3,528

Basic and diluted earnings per common share

$ 0.28  

$ 0.47  

$ 0.87  

$ 1.04  

$ 0.04 $ 0.39

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands) (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

$ 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 )  

Income tax benefit related to unrealized holding losses on investments

10,979  

$ 396 $ 3,443

Other comprehensive income:

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

( 747 ) 4,791

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

159 ( 1,029 )

Amortization of unrecognized DB plan prior service cost

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

( 24 )  

Unrealized holding gains (losses) on derivatives

929 ( 1,728 )

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

( 198 )  

( 114 )  

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

Income tax benefit related to reclassification adjustment on sales of securities

Other comprehensive loss, net of tax

( 5,784 )  

( 12,576 )  

( 5,307 )  

Comprehensive (loss) income

( 3,280 )  

( 8,981 )  

Comprehensive (loss) income attributable to noncontrolling interest

( 696 )  

( 160 )  

Comprehensive (loss) income attributable to parent

$ ( 3,280 )  

$ ( 8,285 )  

$ 2,501  

See selected notes to the consolidated financial statements.

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)

Additional Paid-in

Unearned ESOP

Accumulated Other Comprehensive Loss,

Noncontrolling

Total Shareholders'

Balance at June 30, 2022

9,950,172  

$ 96,479  

$ 107,000  

$ ( 8,242 )  

$ ( 28,447 )  

$ ( 1,736 )  

$ 165,154  

( 696 )  

Common stock issued

115,777  

Common stock repurchased

( 79,054 )  

( 790 )  

( 491 )  

Restricted stock award forfeitures net of grants

( 3,350 )  

Restricted stock awards canceled

( 5,504 )  

( 89 )  

Other comprehensive loss, net of tax

( 12,576 )  

Share-based compensation expense

ESOP shares committed to be released

Cash dividends declared ($ 0.07 per share)

( 693 )  

Balance at September 30, 2022

9,978,041  

$ 97,924  

$ 110,107  

$ ( 8,077 )  

$ ( 41,023 )  

$ ( 2,432 )  

$ 156,599  

Balance at June 30, 2023

9,633,496  

$ 95,360  

$ 111,750  

$ ( 7,583 )  

$ ( 40,066 )  

$ 159,557  

Common stock repurchased

( 1,073 )  

( 10 )  

Restricted stock award grants net of forfeitures

Restricted stock awards canceled

( 3,606 )  

( 43 )  

Other comprehensive loss, net of tax

( 5,784 )  

Share-based compensation expense

ESOP shares committed to be released

Cash dividends declared ($ 0.07 per share)

( 673 )  

Balance at September 30, 2023

9,630,735  

$ 95,658  

$ 113,579  

$ ( 7,418 )  

$ ( 45,850 )  

$ 156,065  

Other comprehensive income, net of tax

Comprehensive income

Comprehensive loss attributable to noncontrolling interest

Comprehensive income attributable to parent

$ 567 $ 5,963

See selected notes to the consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2023 and 2022

For the Three Months Ended March 31, 2024 and 2023

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

5 unchanged sentences

Balance at December 31, 2022

9,972,698  

$ 96,131  

$ 103,014  

$ ( 8,572 )  

$ ( 481 )  

$ 190,480  

( 1,951 )  

Common stock issued

115,777  

9,703,581 $ 97 $ 95,508 $ 114,424 $ ( 7,913 ) $ ( 40,543 ) $ ( 3,291 ) $ 158,282

3,528 ( 85 ) 3,443

Common stock repurchased

( 131,672 )  

( 1,315 )  

( 824 )  

( 44,441 ) — ( 444 ) ( 183 ) ( 627 )

Restricted stock award grants net of forfeitures

37,068  

Restricted stock awards canceled

( 15,830 )  

( 311 )  

Other comprehensive loss, net of tax

( 41,311 )  

Reclassification resulting from change in accounting method, net of tax

( 10,334 ) — ( 145 ) ( 145 )

Other comprehensive income, net of tax

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

( 2,951 ) ( 2,951 )

Share-based compensation expense

1 unchanged sentence

Cash dividends declared ($ 0.07 per share)

( 2,092 )  

Balance at September 30, 2022

9,978,041  

$ 97,924  

$ 110,107  

$ ( 8,077 )  

$ ( 41,023 )  

$ ( 2,432 )  

$ 156,599  

( 679 ) ( 679 )

Balance at March 31, 2023

9,674,055 $ 97 $ 95,333 $ 114,139 $ ( 7,749 ) $ ( 38,108 ) $ ( 3,376 ) $ 160,336

Balance at December 31, 2023

9,703,581  

$ 95,508  

$ 114,424  

$ ( 7,913 )  

$ ( 40,543 )  

$ ( 3,291 )  

$ 158,282  

( 160 )  

9,611,876 $ 96 $ 95,784 $ 107,349 $ ( 7,253 ) $ ( 32,636 ) $ — $ 163,340

Common stock repurchased

( 75,690 )  

( 755 )  

( 224 )  

( 214,132 ) ( 2 ) ( 2,169 ) ( 872 ) ( 3,043 )

Restricted stock award grants net of forfeitures

18,256  

Restricted stock awards canceled

( 15,412 )  

( 205 )  

Other comprehensive loss, net of tax

( 5,307 )  

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

( 2,951 )  

Close out investment in Quin Ventures

( 3,451 )  

( 9,460 ) — ( 148 ) ( 148 )

Other comprehensive income, net of tax

Share-based compensation expense

1 unchanged sentence

Cash dividends declared ($ 0.07 per share)

( 2,027 )  

Balance at September 30, 2023

9,630,735  

$ 95,658  

$ 113,579  

$ ( 7,418 )  

$ ( 45,850 )  

$ 156,065  

( 671 ) ( 671 )

Balance at March 31, 2024

9,442,796 $ 94 $ 93,763 $ 106,202 $ ( 7,088 ) $ ( 32,465 ) $ — $ 160,506

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities:

Net income before noncontrolling interest

$ 7,648  

$ 7,634  

$ 396 $ 3,443

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

2 unchanged sentences

Amortization and accretion of premiums and discounts on investments, net

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

( 451 )  

Accretion of deferred loan fees and purchased premiums, net

( 353 ) ( 111 )

Amortization of debt issuance costs

Change in fair value of sold loan servicing rights

( 17 ) ( 269 )

Additions to servicing rights on sold loans, net

( 145 )  

Provision for credit losses on loans

( 10 ) ( 68 )

Provision for (recapture of) credit losses on loans

1,239 ( 515 )

(Recapture of) provision for credit losses on unfunded commitments

( 1,024 )  

Allocation of ESOP shares

1 unchanged sentence

Gain on sale of loans, net

( 405 )  

Gain on sale of securities available for sale, net

( 52 ) ( 176 )

Increase in cash surrender value of life insurance, net

( 668 )  

( 243 ) ( 226 )

Origination of loans held for sale

( 21,351 )  

( 5,421 ) ( 4,812 )

Proceeds from sale of loans held for sale

21,664  

23,538  

Change in assets and liabilities:

Increase in accrued interest receivable

( 1,350 )  

Decrease (increase) in prepaid expenses and other assets

Increase (decrease) in accrued interest payable

( 1,015 ) ( 462 )

(Increase) decrease in prepaid expenses and other assets

( 6,303 ) 2,806

(Decrease) increase in accrued interest payable

Increase in accrued expenses and other liabilities

Net cash provided by operating activities

15,292  

13,714  

Net cash (used) provided by operating activities

( 4,865 ) 6,790

Cash flows from investing activities:

1 unchanged sentence

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

26,937  

Proceeds from sales of securities available for sale

12,685  

Purchase of FHLB stock

( 940 )  

( 2,212 ) ( 3,921 )

Early surrender of bank-owned life insurance policy

Net increase in loans receivable

( 89,551 )  

( 51,142 ) ( 32,746 )

Purchase of premises and equipment, net

( 1,066 )  

( 113 ) ( 559 )

Capital contributions to equity and partnership investments

( 335 )  

Capital disbursements received from equity and partnership investments

Capital contributions to low-income housing tax credit partnerships

Capital contributions to historic tax credit partnerships

Net cash used by investing activities

( 83,298 )  

( 78,466 ) ( 35,313 )

See selected notes to the consolidated financial statements.

2 unchanged sentences

(In thousands) (Unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from financing activities:

Net increase in deposits

$ 93,507  

$ 24,655  

Net (decrease) increase in deposits

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 (decrease) in line of credit

Net increase in advances from borrowers for taxes and insurance

Payment of dividends

( 2,025 )  

Restricted stock awards canceled

( 205 )  

Repurchase of common stock

( 980 )  

Net cash provided by financing activities

106,296  

194,248  

Net increase (decrease) in cash and cash equivalents

38,290  

Net (decrease) increase in cash and cash equivalents

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 )  

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

Change in unrealized gain (loss) on fair value hedge

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

Amortization of unrecognized DB plan prior service cost

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

$ ( 3,735 )  

Lease liabilities arising from obtaining right-of-use assets

Investment in partnership acquired through issuance of shares

$ 1,869  

See selected notes to the consolidated financial statements.

2 unchanged sentences

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").

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.

3 unchanged sentences

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.

In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, Peace of Mind, Inc.

("POM"), and Quin Ventures, Inc.

("Quin Ventures"). 

("Quin" or "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.

Quin Ventures sold substantially all of its assets in December 2022 to Quil Ventures, Inc.

("Quil"), 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 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.

1 unchanged sentence

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.

In December 2023, the Company determined that Quil was no longer a going concern, making the collectability of the receivable from and investment in Quil unlikely.

As result, the related investment of $ 225,000 and commitment receivable of $ 1.5 million were written off during the fourth quarter of 2023, impacting other noninterest income and other noninterest expense, respectively.

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.

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.

7 unchanged sentences

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

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

Operating results for the three months ended March 31, 2024 , are not necessarily indicative of the results that may be expected for future periods.

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

1 unchanged sentence

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

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

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest;

its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures.

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

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

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

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

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

January 1, 2023, the Company adopted FASB ASU

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.

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.

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.

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

March 28, 2022, the Financial Accounting Standards Board issued Accounting Standards Update (ASU)

01, Derivatives and Hedging (Topic

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

12, Derivatives and Hedging (Topic

Targeted Improvements to Accounting for Hedging Activities.

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

12, immediate adoption is allowed.

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

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.

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.

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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.

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.

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 adoption of this ASU did not have a material impact on the 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 .

Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures.

8 unchanged sentences

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.

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 adoption of this ASU did not have a material impact on the consolidated financial statements and related disclosures.

November 2023, the FASB issued ASU

Segment Reporting (Topic 280 ):

Improvements to Reportable Segment Disclosures .

07 requires public companies to provide more transparency in both quarterly and annual reports about the expenses they incur from revenue generating business units to better understand the Company's overall performance and potential future cash flows.

The Company has identified

one reporting segment.

07 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 adoption of this ASU did

not have a material impact on the consolidated financial statements and related disclosures.

Recently issued accounting pronouncements not yet adopted

In March 2024, the FASB issued ASU 2024 - 01, Compensation—Stock Compensation (Topic 718 ):

Scope Application of Profits Interest and Similar Awards .

ASU 2024 - 01 added an illustrative example to demonstrate how an entity should apply the scope guidance in paragraph 718 - 10 - 15 - 3 to determine whether a profits interest award should be accounted for in accordance with Topic 718.

Awards not meeting the criteria should be accounted for in accordance with Topic 710.

The illustrative example provides four fact patterns which are intended to reduce complexity in determining whether a profits interest award is subject to the guidance in Topic 718 and reduce existing diversity in practice.

ASU 2024 - 01 is effective for the Company for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years, with early adoption permitted.

The adoption of this ASU is not expected to have a material impact on the consolidated financial statements and related disclosures.

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:

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at March 31, 2024 are summarized as follows:

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value  

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Allowance for Credit Losses

(In thousands)

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Municipal bonds

$ 119,164  

$ ( 25,169 )  

$ 93,995  

Treasury notes

( 102 )  

International agency issued bonds (Agency bonds)

( 259 )  

$ 102,820 $ — $ ( 15,816 ) $ 87,004 $ —

government agency issued asset-backed securities (ABS agency)

14,859 3 ( 40 ) 14,822 —

Corporate issued asset-backed securities (ABS corporate)

13,951 1 ( 23 ) 13,929 —

Corporate issued debt securities (Corporate debt)

60,543  

( 6,208 )  

54,335  

58,162 — ( 5,131 ) 53,031 —

Small Business Administration securities (SBA)

7,925 5 ( 19 ) 7,911 —

Mortgage-backed securities:

government agency issued mortgage-backed securities (MBS agency)

83,449  

( 16,503 )  

66,946  

96,381 1 ( 13,111 ) 83,271 —

Non-agency issued mortgage-backed securities (MBS non-agency)

98,029  

( 8,061 )  

89,968  

70,931 1 ( 4,945 ) 65,987 —

Total securities available for sale

$ 365,626  

$ ( 56,302 )  

$ 309,324  

$ 365,029 $ 11 $ ( 39,085 ) $ 325,955 $ —

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

Amortized Cost

Unrealized Gains

Unrealized Losses

Fair Value  

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Allowance for Credit Losses

(In thousands)

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Municipal bonds

$ 119,990  

$ ( 21,940 )  

$ 98,050  

Treasury notes

( 105 )  

( 253 )  

$ 102,998 $ — $ ( 15,237 ) $ 87,761 $ —

11,847 — ( 65 ) 11,782 —

ABS corporate

5,370 — ( 84 ) 5,286 —

Corporate debt

60,700  

( 5,201 )  

55,499  

56,515 — ( 5,061 ) 51,454 —

Mortgage-backed securities:

88,930  

( 13,283 )  

75,648  

75,665 — ( 12,418 ) 63,247 —

MBS non-agency

101,139  

( 7,833 )  

93,306  

81,555 — ( 5,462 ) 76,093 —

Total securities available for sale

$ 375,183  

$ ( 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.

$ 333,950 $ — $ ( 38,327 ) $ 295,623 $ —

There were no securities classified as held-to-maturity at March 31, 2024 and December 31, 2023 .

There was no allowance for credit losses on investment securities recorded at March 31, 2024 and December 31, 2023 , based on analysis performed by the Company.

Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million and $ 1.9 million as of March 31, 2024 and December 31, 2023 , respectively.

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

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of September 30, 2023 :

Less Than Twelve Months

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Municipal bonds

$ ( 49 )  

$ ( 25,120 )  

$ 93,299  

$ ( 25,169 )  

$ 93,695  

Treasury notes

( 102 )  

( 259 )  

$ — $ — $ ( 15,816 ) $ 86,704 $ ( 15,816 ) $ 86,704

( 40 ) 11,158 — — ( 40 ) 11,158

ABS corporate

( 23 ) 9,912 — — ( 23 ) 9,912

Corporate debt

( 6,208 )  

54,335  

( 6,208 )  

54,335  

( 10 ) 1,662 ( 5,121 ) 51,369 ( 5,131 ) 53,031

( 19 ) 4,747 — — ( 19 ) 4,747

Mortgage-backed securities:

( 16,502 )  

65,710  

( 16,503 )  

66,946  

( 338 ) 20,472 ( 12,773 ) 58,676 ( 13,111 ) 79,148

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  

( 1 ) 1,024 ( 4,944 ) 62,955 ( 4,945 ) 63,979

Total available-for-sale in a loss position

$ ( 431 ) $ 48,975 $ ( 38,654 ) $ 259,704 $ ( 39,085 ) $ 308,679

7 unchanged sentences

Municipal bonds

$ ( 15,749 )  

$ 79,129  

$ ( 6,191 )  

$ 18,621  

$ ( 21,940 )  

$ 97,750  

Treasury notes

( 105 )  

( 253 )  

$ — $ — $ ( 15,237 ) $ 87,461 $ ( 15,237 ) $ 87,461

( 65 ) 11,782 — — ( 65 ) 11,782

ABS corporate

( 84 ) 3,771 — — ( 84 ) 3,771

Corporate debt

( 2,570 )  

30,555  

( 2,631 )  

24,944  

( 5,201 )  

55,499  

— — ( 5,061 ) 51,454 ( 5,061 ) 51,454

Mortgage-backed securities:

( 5,079 )  

40,099  

( 8,204 )  

33,064  

( 13,283 )  

73,163  

( 27 ) 3,941 ( 12,391 ) 59,305 ( 12,418 ) 63,246

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 .

— — ( 5,462 ) 76,086 ( 5,462 ) 76,086

Total available-for-sale in a loss position

$ ( 176 ) $ 19,494 $ ( 38,151 ) $ 274,306 $ ( 38,327 ) $ 293,800

There were 22 available-for-sale securities with unrealized losses of less than one year, and 155 available-for-sale securities with an unrealized loss of more than one year at March 31, 2024 .

There were 6 available-for-sale securities with unrealized losses of less than one year, and 156 available-for-sale securities with an unrealized loss of more than one year at December 31, 2023 .

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 .

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 believes that it is unlikely that we would be required to sell these investments prior to a market price recovery or maturity.

Based on the Company’s evaluation of these securities, no credit impairment was recorded at March 31, 2024 , or December 31, 2023 .

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

1 unchanged sentence

therefore, these securities are shown separately.

September 30, 2023

March 31, 2024

Available-for-Sale

4 unchanged sentences

Due within one year

$ 27,154  

$ 26,742  

$ 19,531 $ 19,352

Due after one through five years

16,184  

15,475  

16,351 15,759

Due after five through ten years

10,939  

Due after ten years

127,201  

104,711  

123,164 106,425

Total mortgage-backed securities

181,478  

156,914  

167,312 149,258

All other investment securities:

1 unchanged sentence

Due after one through five years

22,418  

21,066  

17,180 16,502

Due after five through ten years

65,211  

56,308  

61,982 55,194

Due after ten years

96,219  

74,736  

117,255 103,771

Total all other investment securities

184,148  

152,410  

197,717 176,697

Total investment securities

$ 365,626  

$ 309,324  

$ 365,029 $ 325,955

December 31, 2023

5 unchanged sentences

Due within one year

$ 13,762  

$ 13,490  

$ 25,279 $ 25,017

Due after one through five years

28,890  

27,808  

16,622 16,029

Due after five through ten years

13,436  

12,165  

Due after ten years

133,981  

115,491  

106,445 90,097

Total mortgage-backed securities

190,069  

168,954  

157,220 139,340

All other investment securities:

1 unchanged sentence

Due after one through five years

20,700  

18,957  

18,187 17,384

Due after five through ten years

64,211  

57,523  

57,328 50,768

Due after ten years

100,203  

81,135  

100,915 87,831

Total all other investment securities

185,114  

157,615  

176,730 156,283

Total investment securities

$ 375,183  

$ 326,569  

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

Three Months Ended September 30,

Nine Months Ended September 30,

(In thousands)

Proceeds from sales

$ 12,685  

Gross realized gains

Gross realized losses

$ 333,950 $ 295,623

There were no sales of securities available-for-sale during the three months ended March 31, 2024 and 2023.

Note 3 - Loans Receivable

3 unchanged sentences

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

Loan amounts are presented at amortized cost which is comprised of the loan balance net of unearned loan fees in excess of unamortized costs and premiums of $ 17.2 million as of March 31, 2024 and $ 14.8 million as of December 31, 2023 .

The amortized cost reflected in total loans receivable does not include accrued interest receivable.

Accrued interest receivable on loans was $ 6.6 million as of March 31, 2024 and $ 6.0 million as of December 31, 2023 , and was reported in accrued interest receivable on the consolidated balance sheets and is excluded from the calculation of the allowance for credit losses on loans.

The amortized cost of loans receivable, net of the allowance for credit losses on loans ("ACLL"), consisted of the following at the dates indicated:

March 31, 2024

December 31, 2023

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One-to-four family

$ 369,950  

$ 343,559  

325,496  

252,745  

$ 383,905 $ 378,432

339,538 333,094

Commercial real estate

381,508  

388,884  

385,130 387,983

Construction and land

143,434  

193,646  

125,347 129,691

Total real estate loans

1,220,388  

1,178,834  

64,424  

52,877  

1,233,920 1,229,200

72,391 69,403

Auto and other consumer

248,786  

238,913  

268,834 249,130

Total consumer loans

313,210  

291,790  

341,225 318,533

Commercial business loans

101,380  

76,927  

136,297 112,295

Total loans receivable

1,634,978  

1,547,551  

1,711,442 1,660,028

Derivative basis adjustment

Allowance for credit losses on loans

16,945  

16,116  

17,958 17,510

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.

$ 1,692,774 $ 1,642,518

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.

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.

2 unchanged sentences

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.

For those loans placed on nonaccrual 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

March 31, 2024

December 31, 2023

Collateral Dependent Loans

Non-Collateral Dependent Loans

Total Nonaccrual Loans

Nonaccrual Loans with ACLL

Nonaccrual Loans with No ACLL

Total Nonaccrual Loans

(In thousands)

One-to-four family

$ 1,430  

$ 1,790  

Commercial real estate

Construction and land

Auto and other consumer

Nonaccrual Loans with ACLL

Nonaccrual Loans with No ACLL

Total Nonaccrual Loans

$ 1,462  

$ 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

(In thousands)

One-to-four family

$ 342,605  

$ 343,559  

252,745  

$ 407 $ 830 $ 1,237 $ 418 $ 1,426 $ 1,844

— 708 708 — — —

Commercial real estate

388,831  

388,884  

22 — 22 28 — 28

Construction and land

193,631  

193,646  

52,681  

52,877  

3 14,437 14,440 6 14,980 14,986

91 30 121 92 31 123

Auto and other consumer

238,338  

238,913  

42 970 1,012 38 748 786

Commercial business

76,927  

$ 1,793  

$ 1,545,758  

$ 1,547,551  

1,307 634 1,941 165 712 877

Total nonaccrual loans

$ 1,872 $ 17,609 $ 19,481 $ 747 $ 17,897 $ 18,644

Interest income recognized on a cash basis on nonaccrual loans for the three months ended March 31, 2024 and 2023 , was $ 75,000 and $ 9,000 , respectively.

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 .

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

There were three loans with a total amortized cost of $ 8.5 million that were past due 90 days or more and still accruing interest at March 31, 2024 .

The loans were well secured and met the regulatory criteria for continuing to accrue interest.

There were no loans past due 90 days or more and still accruing interest at December 31, 2023 .

The following tables present the amortized cost of past due loans by segment and class as of the periods shown:

90 Days or More

March 31, 2024

Past Due Past Due Past Due Past Due Current Total Loans

(In thousands)

One-to-four family

$ 1,245  

$ 368,705  

$ 369,950  

325,496  

$ 614 $ 866 $ 68 $ 1,548 $ 382,357 $ 383,905

— 708 — 708 338,830 339,538

Commercial real estate

372,925  

381,508  

— — 8,528 8,528 376,602 385,130

Construction and land

143,434  

13 — 14,437 14,450 110,897 125,347

Total real estate loans

1,210,560  

1,220,388  

64,308  

64,424  

627 1,574 23,033 25,234 1,208,686 1,233,920

90 — — 90 72,301 72,391

Auto and other consumer

246,551  

248,786  

1,324 608 1,016 2,948 265,886 268,834

Total consumer loans

310,859  

313,210  

1,414 608 1,016 3,038 338,187 341,225

Commercial business loans

100,611  

101,380  

$ 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:

2,033 — 1,823 3,856 132,441 136,297

$ 4,074 $ 2,182 $ 25,872 $ 32,128 $ 1,679,314 $ 1,711,442

90 Days or More

December 31, 2023

Past Due Past Due Past Due Past Due Current Total Loans

(In thousands)

One-to-four family

$ 1,449  

$ 2,256  

$ 341,303  

$ 343,559  

252,745  

$ 802 $ — $ 1,010 $ 1,812 $ 376,620 $ 378,432

— — — — 333,094 333,094

Commercial real estate

388,884  

— 8,526 — 8,526 379,457 387,983

Construction and land

193,628  

193,646  

14 — — 14 129,677 129,691

Total real estate loans

1,176,560  

1,178,834  

52,713  

52,877  

816 8,526 1,010 10,352 1,218,848 1,229,200

59 — — 59 69,344 69,403

Auto and other consumer

236,268  

238,913  

1,854 601 791 3,246 245,884 249,130

Total consumer loans

288,981  

291,790  

1,913 601 791 3,305 315,228 318,533

Commercial business loans

76,927  

$ 2,992  

$ 1,220  

$ 5,083  

$ 1,542,468  

$ 1,547,551  

1,117 757 — 1,874 110,421 112,295

$ 3,846 $ 9,884 $ 1,801 $ 15,531 $ 1,644,497 $ 1,660,028

Credit quality indicator.

5 unchanged sentences

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 First Fed classifies problem assets as either substandard or doubtful, it may choose to individually evaluate the expected credit loss or may determine that the characteristics are not significantly different from those in pooled loan analysis.

The Company evaluates individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis.

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;

Assets that do not currently expose First Fed to sufficient risk to warrant classification as substandard or doubtful but 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.

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.

The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of March 31, 2024 , as well as gross charge-off activity for the three months ended March 31, 2024 .

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)

1 unchanged sentence

One-to-four family

$ 1,987  

$ 93,396  

$ 118,341  

$ 70,904  

$ 13,977  

$ 66,929  

$ 365,534  

Special Mention

Pass (Grades 1-3)

$ — $ 1,991 $ 110,224 $ 119,355 $ 68,383 $ 77,265 $ — $ 377,218

Watch (Grade 4)

— — 275 1,330 1,021 1,686 — 4,312

Special Mention (Grade 5)

— — — — 840 80 — 920

Substandard (Grade 6)

— — — — 325 1,130 — 1,455

Total one-to-four family

93,672  

118,341  

72,123  

14,462  

69,365  

369,950  

— 1,991 110,499 120,685 70,569 80,161 — 383,905

Gross charge-offs year-to-date

47,583  

103,255  

86,171  

58,659  

309,303  

15,198  

16,193  

— — — — — — — —

Pass (Grades 1-3)

5,088 52,168 105,927 91,093 56,949 11,565 — 322,790

Watch (Grade 4)

— — — 15,052 — 988 — 16,040

Substandard (Grade 6)

— — — — 708 — — 708

Total multi-family

47,583  

103,255  

101,369  

58,659  

325,496  

5,088 52,168 105,927 106,145 57,657 12,553 — 339,538

Gross charge-offs year-to-date

— — — — — — — —

Commercial Real Estate

32,307  

89,244  

104,523  

82,030  

13,186  

23,366  

344,656  

19,317  

Special Mention

15,136  

Pass (Grades 1-3)

751 52,559 86,745 99,663 75,997 35,186 — 350,901

Watch (Grade 4)

— 4,406 1,159 — 8,777 3,537 — 17,879

Special Mention (Grade 5)

— — — 6,516 — — — 6,516

Substandard (Grade 6)

— — 22 8,528 1,284 — — 9,834

Total commercial real estate

36,188  

89,475  

123,444  

91,246  

16,770  

24,385  

381,508  

751 56,965 87,926 114,707 86,058 38,723 — 385,130

Gross charge-offs year-to-date

— — — — — — — —

Construction and Land

13,763  

61,166  

39,308  

117,753  

10,602  

Special Mention

15,055  

15,063  

Pass (Grades 1-3)

3,011 24,556 42,424 18,841 719 667 — 90,218

Watch (Grade 4)

971 5,541 6,360 — — 14 — 12,886

Special Mention (Grade 5)

7,790 — — — — 13 — 7,803

Substandard (Grade 6)

— 14,437 — — — 3 — 14,440

Total construction and land

35,927  

64,659  

39,308  

143,434  

11,772 44,534 48,784 18,841 719 697 — 125,347

Gross charge-offs year-to-date

37,810  

63,770  

— — — — — — — —

Pass (Grades 1-3)

833 6,954 6,988 4,479 2,875 5,441 44,009 71,579

Watch (Grade 4)

— — — — 37 79 504 620

Substandard (Grade 6)

— — — 30 58 12 92 192

Total home equity

38,302  

64,424  

833 6,954 6,988 4,509 2,970 5,532 44,605 72,391

Gross charge-offs year-to-date

Other Consumer

38,604  

75,128  

66,493  

31,104  

15,680  

18,871  

246,283  

Special Mention

Total other consumer

38,738  

76,121  

67,011  

31,379  

15,983  

19,148  

248,786  

— — — — — — — —

Auto and Other Consumer

Pass (Grades 1-3)

33,232 57,479 76,093 43,133 15,527 38,640 444 264,548

Watch (Grade 4)

110 679 940 182 216 214 2 2,343

Special Mention (Grade 5)

55 338 36 242 18 — — 689

Substandard (Grade 6)

178 270 — 241 329 232 4 1,254

Total auto and other consumer

33,575 58,766 77,069 43,798 16,090 39,086 450 268,834

Gross charge-offs year-to-date

— 203 586 — — 2 15 806

Commercial business

18,818  

23,987  

11,368  

30,510  

92,927  

Special Mention

Pass (Grades 1-3)

14,905 23,085 13,003 4,555 2,390 19,570 39,522 117,030

Watch (Grade 4)

— 39 4,740 6,190 — — — 10,969

Substandard (Grade 6)

— 283 4,662 102 758 — 2,493 8,298

Total commercial business

19,337  

24,105  

11,762  

36,752  

101,380  

14,905 23,407 22,405 10,847 3,148 19,570 42,015 136,297

Gross charge-offs year-to-date

158,596  

453,614  

430,941  

249,421  

53,425  

125,506  

68,723  

1,540,226  

11,379  

19,862  

51,030  

Special Mention

15,169  

20,759  

15,255  

22,963  

$ 185,294  

$ 458,725  

$ 466,003  

$ 261,372  

$ 57,797  

$ 130,327  

$ 75,460  

$ 1,634,978  

— — 33 — — — — 33

Pass (Grades 1-3)

57,820 218,792 441,404 381,119 222,840 188,334 83,975 1,594,284

Watch (Grade 4)

1,081 10,665 13,474 22,754 10,051 6,518 506 65,049

Special Mention (Grade 5)

7,845 338 36 6,758 858 93 — 15,928

Substandard (Grade 6)

178 14,990 4,684 8,901 3,462 1,377 2,589 36,181

$ 66,924 $ 244,785 $ 459,598 $ 419,532 $ 237,211 $ 196,322 $ 87,070 $ 1,711,442

Total gross charge-offs year-to-date

$ 2,421  

$ 2,668  

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

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:

Special Mention

$ — $ 203 $ 619 $ — $ — $ 2 $ 15 $ 839

( 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.

The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of December 31, 2023 , as well as gross charge-off activity for the year then ended.

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

Term Loans by Year of Origination (1)

(In thousands)

One-to-four family

$ 339,812  

$ 2,234  

$ 1,486  

$ 343,559  

237,077  

15,668  

252,745  

Pass (Grades 1-3)

$ 2,282 $ 102,389 $ 118,028 $ 69,229 $ 13,882 $ 65,701 $ — $ 371,511

Watch (Grade 4)

— 275 1,338 1,569 — 1,295 — 4,477

Special Mention (Grade 5)

— — — 300 — 80 — 380

Substandard (Grade 6)

— — — 327 482 1,255 — 2,064

Total one-to-four family

2,282 102,664 119,366 71,425 14,364 68,331 — 378,432

Gross charge-offs for the year

— — — — — — — —

Pass (Grades 1-3)

52,208 105,902 88,293 57,588 6,922 5,356 — 316,269

Watch (Grade 4)

— — 15,126 708 — 991 — 16,825

Total multi-family

52,208 105,902 103,419 58,296 6,922 6,347 — 333,094

Gross charge-offs for the year

— — — — — — — —

Commercial Real Estate

350,001  

25,586  

12,161  

388,884  

Pass (Grades 1-3)

52,823 87,712 99,058 76,664 13,096 22,425 — 351,778

Watch (Grade 4)

4,433 1,168 1,340 8,829 3,561 496 — 19,827

Special Mention (Grade 5)

— — 6,528 — — 2 — 6,530

Substandard (Grade 6)

— 28 8,526 1,294 — — — 9,848

Total commercial real estate

57,256 88,908 115,452 86,787 16,657 22,923 — 387,983

Gross charge-offs for the year

— — — — — — — —

Construction and Land

179,116  

14,001  

193,646  

Total real estate loans

1,106,006  

44,017  

12,188  

16,623  

1,178,834  

52,295  

52,877  

Pass (Grades 1-3)

20,772 49,508 23,988 727 344 464 — 95,803

Watch (Grade 4)

6,512 4,935 229 — — 15 — 11,691

Special Mention (Grade 5)

7,196 — — — — 14 — 7,210

Substandard (Grade 6)

14,981 — — — — 6 — 14,987

Total construction and land

49,461 54,443 24,217 727 344 499 — 129,691

Gross charge-offs for the year

— — — — — — — —

Pass (Grades 1-3)

7,179 7,169 4,638 3,063 1,331 4,283 41,105 68,768

Watch (Grade 4)

— — — — — 155 345 500

Substandard (Grade 6)

— — 30 59 — 13 33 135

Total home equity

7,179 7,169 4,668 3,122 1,331 4,451 41,483 69,403

Gross charge-offs for the year

— — — — — 10 — 10

Auto and Other Consumer

238,522  

238,913  

Total consumer loans

290,817  

291,790  

Commercial business loans

66,276  

76,927  

$ 1,463,099  

$ 46,845  

$ 20,694  

$ 16,913  

$ 1,547,551  

Pass (Grades 1-3)

49,649 69,052 64,101 29,113 14,660 18,593 385 245,553

Watch (Grade 4)

270 919 579 204 138 59 4 2,173

Special Mention (Grade 5)

90 334 33 162 — — — 619

Substandard (Grade 6)

84 393 — — 30 278 — 785

Total auto and other consumer

50,093 70,698 64,713 29,479 14,828 18,930 389 249,130

Gross charge-offs for the year

— 3,018 15 52 11 112 104 3,312

Commercial business

Pass (Grades 1-3)

23,499 19,191 11,032 2,440 455 13,635 29,976 100,228

Watch (Grade 4)

340 62 275 270 — ( 1 ) 3,806 4,752

Substandard (Grade 6)

291 3,653 104 779 — ( 1 ) 2,489 7,315

Total commercial business

24,130 22,906 11,411 3,489 455 13,633 36,271 112,295

Gross charge-offs for the year

— — — — — — — —

Pass (Grades 1-3)

208,412 440,923 409,138 238,824 50,690 130,457 71,466 1,549,910

Watch (Grade 4)

11,555 7,359 18,887 11,580 3,699 3,010 4,155 60,245

Special Mention (Grade 5)

7,286 334 6,561 462 — 96 — 14,739

Substandard (Grade 6)

15,356 4,074 8,660 2,459 512 1,551 2,522 35,134

$ 242,609 $ 452,690 $ 443,246 $ 253,325 $ 54,901 $ 135,114 $ 78,143 $ 1,660,028

Total Gross charge-offs for the year

$ — $ 3,018 $ 15 $ 52 $ 11 $ 122 $ 104 $ 3,322

( 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.

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.

The Company evaluates loans collectively for purposes of determining the ACLL in accordance with ASC 326 by aggregating loans deemed to possess similar risk characteristics and individually evaluates 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.

1 unchanged sentence

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.

1 unchanged sentence

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 .

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

As of March 31, 2024 , $ 20.6 million of loans were individually evaluated with $ 500,000 of ACLL attributed to such loans.

At March 31, 2024 , one individually evaluated loan totaling $ 2.5 million was evaluated using a discounted cash flow approach and the remaining loans totaling $ 18.1 million were evaluated based on the underlying value of the collateral.

The loan evaluated using the discounted cash flow method and one of the collateral dependent loans were accruing at quarter end, while the remaining collateral dependent loans were all on nonaccrual status at March 31, 2024 .

At December 31, 2023 , $ 20.0 million of loans were individually evaluated with $ 165,000 of ACLL attributed to such loans.

At December 31, 2023 , one individually evaluated loan with a recorded investment of $ 2.5 million was evaluated using a discounted cash flow approach and the remaining loans totaling $ 17.5 million were evaluated based on the underlying value of the collateral.

The loan evaluated using the discounted cash flow method was accruing at year end, while the collateral dependent loans were all on nonaccrual status at December 31, 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 :

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 the periods shown:

Collateral Type

Single Family Residence

March 31, 2024

Single Family Residence Multi-family Housing Condominium Automobile Business Assets Total

(In thousands)

One-to-four family

$ 1,430  

$ 830 $ — $ — $ — $ — $ 830

— 707 — — — 707

Construction and land

— — 14,437 — — 14,437

30 — — — — 30

Auto and other consumer

— — — 180 — 180

Commercial business

— — 119 — 1,820 1,939

Total collateral dependent loans

$ 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.

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

Total nonaccrual TDR loans

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:

$ 860 $ 707 $ 14,556 $ 180 $ 1,820 $ 18,123

Collateral Type

December 31, 2023

Single Family Residence Condominium Automobile Business Assets Total

(In thousands)

One-to-four family

$ 1,697  

$ 1,726  

Total TDR loans

$ 1,724  

$ 1,753  

$ 1,426 $ — $ — $ — $ 1,426

Construction and land

— 14,981 — — 14,981

Auto and other consumer

— — 180 — 180

Commercial business

— 119 — 652 771

Total collateral dependent loans

$ 1,456 $ 15,100 $ 180 $ 652 $ 17,388

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.

On January 1, 2023, the Company adopted ASU 2022 - 02, which introduced 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.

principal forgiveness, interest rate reduction, other-than-insignificant payment delay, 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.

During the three months ended March 31, 2024 and 2023 , there were no new MLTB to report.

During the year ended December 31, 2023, there was one new MLTB, a commercial business loan with a recorded investment of $ 119,000 for which the Bank agreed to deferred principal payments.

The borrower continues to make interest-only payments and the loan was current at year end based on the modified terms.

Note 4 - Allowance for Credit Losses on Loans

2 unchanged sentences

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.

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 Bank's Current Expected Credit Loss ("CECL") 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.

The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies.

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

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

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 March 31, 2024

Beginning Balance

Provision for (Recapture of) Credit Losses

2 unchanged sentences

One-to-four family

$ 3,012  

$ 3,538  

$ 2,975 $ — $ 2 $ 1,099 $ 4,076

1,154 — — 177 1,331

Commercial real estate

( 390 )  

3,671 — — ( 289 ) 3,382

Construction and land

( 352 )  

1,889 — — ( 899 ) 990

1,077 — — 664 1,741

Auto and other consumer

( 731 )  

( 501 )  

4,409 ( 806 ) 46 ( 806 ) 2,843

Commercial business

$ 17,297  

$ ( 731 )  

$ ( 501 )  

$ 16,945  

At or For the Nine Months Ended September 30, 2023

2,335 ( 33 ) — 1,293 3,595

$ 17,510 $ ( 839 ) $ 48 $ 1,239 $ 17,958

At or For the Three Months Ended March 31, 2023

Beginning Balance

1 unchanged sentence

Adjusted Beginning Balance

Provision for (Recapture of) Credit Losses

Ending Balance

(In thousands)

One-to-four family

$ 3,343  

$ ( 429 )  

$ 2,914  

$ 3,538  

( 1,449 )  

Commercial real estate

( 604 )  

( 1,079 )  

Construction and land

( 1,716 )  

( 11 )  

Auto and other consumer

( 2,657 )  

Commercial business

( 385 )  

$ 16,116  

$ 2,209  

$ 18,325  

$ ( 2,668 )  

$ 1,195  

$ 16,945  

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

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

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

The post-adoption ACLL decreased $ 1.4 million during the 

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

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

gross domestic product and unemployment on our model assumptions.

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

At or For the Three Months Ended September 30, 2022

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

(In thousands)

Beginning balance

$ 3,026  

$ 2,168  

$ 4,154  

$ 2,550  

$ 2,367  

$ 15,747  

Provision for (recapture of) loan losses

( 45 )  

( 36 )  

( 265 )  

(Recapture of) Provision for Credit Losses

Ending Balance

$ 3,214  

$ 2,332  

$ 4,109  

$ 2,514  

$ 2,559  

$ 16,273  

At or For the Nine Months Ended September 30, 2022

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Commercial business

(In thousands)

Beginning balance

$ 3,184  

$ 1,816  

$ 3,996  

$ 2,672  

$ 2,221  

$ 15,124  

(Recapture of) provision for loan losses

( 160 )  

( 14 )  

( 475 )  

Ending balance

$ 3,214  

$ 2,332  

$ 4,109  

$ 2,514  

$ 2,559  

$ 16,273  

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

At December 31, 2022

One-to-four family

$ 3,343 $ ( 429 ) $ 2,914 $ — $ — $ ( 11 ) $ 2,903

2,468 ( 1,449 ) 1,019 — — 26 1,045

Commercial real estate

4,217 ( 604 ) 3,613 — — ( 634 ) 2,979

Construction and land

2,344 1,555 3,899 — — ( 1,117 ) 2,782

549 346 895 ( 11 ) — 200 1,084

Auto and other consumer

2,024 2,381 4,405 ( 954 ) 21 1,217 4,689

Commercial business

(In thousands)

$ 3,343  

$ 2,468  

$ 4,217  

$ 2,344  

$ 2,024  

$ 16,116  

General reserve

16,084  

Specific reserve

$ 343,825  

$ 253,551  

$ 390,246  

$ 194,646  

$ 52,322  

$ 222,794  

$ 76,996  

$ 1,534,380  

Loans collectively evaluated (1)

341,171  

253,551  

390,196  

194,630  

52,100  

222,702  

76,996  

1,531,346  

Loans individually evaluated (2)

( 1 )  Loans collectively evaluated for general reserves.

( 2 )  Loans individually evaluated for specific reserves.

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

Commercial real estate

Construction and land

Auto and other consumer

With an allowance recorded:

One-to-four family

Construction and land

Auto and other consumer

Total impaired loans:

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

$ 3,034  

$ 3,337  

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

Three Months Ended

Nine Months Ended

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

Commercial real estate

Construction and land

Auto and other consumer

With an allowance recorded:

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

Total impaired loans:

One-to-four family

Commercial real estate

Construction and land

Auto and other consumer

$ 3,630  

$ 3,308  

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.

786 794 1,580 — — 334 1,914

385 ( 385 ) — — — — —

$ 16,116 $ 2,209 $ 18,325 $ ( 965 ) $ 21 $ 15 $ 17,396

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.

Note 5  - Deposits

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 for unfunded commitments was $ 548,000 and $ 817,000 at March 31, 2024 , and December 31, 2023 , respectively.

Note 5 - Deposits

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

September 30, 2023

March 31, 2024

December 31, 2023

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Noninterest-bearing demand deposits

$ 269,800  

$ 315,083  

$ 252,761 — % $ 252,083 — %

Interest-bearing demand deposits

182,361  

0.52 %  

193,558  

170,729 0.56 % 169,418 0.56 %

Money market accounts

372,706  

1.28 %  

473,009  

395,480 2.21 % 362,205 1.78 %

Savings accounts

253,182  

1.45 %  

200,920  

Certificates of deposit

579,713  

3.93 %  

381,685  

236,550 1.66 % 242,148 1.62 %

Certificates of deposit, retail

418,904 4.12 % 443,412 4.04 %

Certificates of deposit, brokered

192,200 4.74 % 207,626 4.85 %

Total deposits

$ 1,657,762  

1.94 %  

$ 1,564,255  

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.

$ 1,666,624 2.40 % $ 1,676,892 2.34 %

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at March 31, 2024 and December 31, 2023 , were $ 159.1 million and $ 173.8 million, respectively.

Maturities of certificates at the dates indicated are as follows:

September 30, 2023

March 31, 2024

December 31, 2023

1 unchanged sentence

Within one year or less

$ 449,211  

$ 262,189  

$ 493,494 $ 495,605

After one year through two years

105,169  

69,967  

43,379 79,537

After two years through three years

37,032  

28,716 24,777

After three years through four years

10,863  

23,619 28,302

After four years through five years

21,896 22,817

Total certificates of deposit

$ 579,713  

$ 381,685  

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. 

$ 611,104 $ 651,038

At March 31, 2024 and December 31, 2023 , deposits included $ 115.8 million and $ 114.2 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 March 31, 2024 and December 31, 2023 , to secure public deposits.

This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

Also included in deposits at March 31, 2024 and December 31, 2023 , were funds held by federally recognized tribes totaling $ 18.3 million and $ 18.4 million, respectively.

Investment securities with a carrying value of $ 23.0 million and $ 23.8 million were pledged as collateral for these deposits at March 31, 2024 and December 31, 2023 , 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,

(In thousands)

2 unchanged sentences

Savings accounts

Certificates of deposit

12,740  

Certificates of deposit, retail

Certificates of deposit, brokered

Total interest expense on deposits

$ 7,699  

$ 1,251  

$ 18,261  

$ 2,764  

Note 6  - Borrowings

$ 10,112 $ 4,353

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.

As a member, First Fed has a committed line of credit of up to 35 % 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.

1 unchanged sentence

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.

Available borrowing capacity was $ 213.0 million and $ 253.8 million at March 31, 2024 and December 31, 2023 , respectively.

All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 905.9 million and $ 896.2 million at March 31, 2024 and December 31, 2023 , 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 March 31, 2024 .

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 $ 17.4 million and $ 6.6 million at March 31, 2024 and December 31, 2023 , respectively.

No funds have been borrowed to date.

Investment securities with a carrying value of $ 18.2 million and $ 6.9 million were pledged to the FRB at March 31, 2024 and December 31, 2023 , respectively.

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

2 unchanged sentences

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

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

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

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

The line of credit matures on May 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.

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

Available borrowing capacity was $ 15.2 million at December 31, 2023.

No funds were borrowed prior to the new loan cutoff date in March 2024, effectively ending the Bank's participation in the program.

Investment securities with a carrying value of $ 12.9 million were pledged to secure the BTFP at December 31, 2023.

The following table sets forth information regarding our borrowings at the end of and during the three months ended March 31, 2024 .

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

FHLB Long-Term Advances

5 unchanged sentences

Balance outstanding

$ 80,000  

$ 168,000  

$ 5,000  

$ 8,000  

$ 39,416  

$ 95,000 $ 227,000 $ — $ 10,000 $ 39,455

Maximum outstanding at any month-end

85,000  

189,000  

95,000  

11,000  

39,416  

110,000 227,000 — 10,000 39,455

Average monthly outstanding during the period

82,222  

141,444  

32,222  

10,249  

39,384  

95,000 171,000 — 7,648 39,446

Weighted-average daily interest rates

1.96 %  

5.15 %  

5.08 %  

9.06 %  

2.09 %  

5.53 %  

5.27 %  

9.00 %  

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:

2.58 % 5.52 % — % 9.37 % 4.02 %

2.79 % 5.52 % — % 9.30 % 4.02 %

The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at March 31, 2024 are as follows:

Weighted- Average Interest Rate

1 unchanged sentence

Within one year or less

$ 25,000  

$ 30,000 2.48 %

After one year through two years

20,000  

After two years through three years

15,000  

After three years through four years

10,000  

After four years through five years

10,000  

Total FHLB long-term advances

$ 80,000  

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.

$ 95,000 2.79 %

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

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

FHLB Long-Term Advances

5 unchanged sentences

Balance outstanding

$ 80,000  

$ 144,000  

$ 10,000  

$ 12,000  

$ 39,358  

$ 80,000 $ 195,000 $ — $ 6,500 $ 39,436

Maximum outstanding at any month-end

80,000  

206,000  

42,500  

12,000  

39,358  

85,000 195,000 95,000 11,000 39,436

Average monthly outstanding during the period

80,000  

90,983  

15,208  

39,312  

81,667 149,500 25,000 9,327 39,395

Weighted-average daily interest rates

1.52 %  

2.83 %  

1.82 %  

6.76 %  

1.52 %  

4.30 %  

2.12 %  

8.00 %  

Note 7  - Income Tax

2.00 % 5.26 % 5.08 % 9.15 % 4.01 %

2.09 % 5.52 % 5.27 % 9.00 % 4.00 %

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.

3 unchanged sentences

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.

Note 8  - Earnings per Common Share

The effective tax rates were 53.0 % and 19.3 % for the three months ended March 31, 2024 and 2023 , respectively.

The effective tax rates differ from the statutory maximum federal tax rate for 2024 and 2023 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans.

The current quarter rate includes an estimate for taxes and penalties on the early surrender of a BOLI contract which was recorded in the first quarter of 2024.

Note 8 - Earnings per Common Share

The two -class method is used for computing basic and diluted earnings per share.

1 unchanged sentence

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 .

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the periods shown:

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except share data)

Net income available to common shareholders

$ 2,504  

$ 4,291  

$ 7,808  

$ 9,585  

$ 396 $ 3,528

Earnings allocated to participating securities

( 11 )  

( 35 )  

( 39 )  

Earnings allocated to common shareholders

$ 2,493  

$ 4,256  

$ 7,769  

$ 9,493  

$ 395 $ 3,508

Weighted average common shares outstanding

9,631,929  

9,955,322  

9,666,900  

9,979,152  

9,542,514 9,703,115

Weighted average unvested restricted stock awards

( 125,338 )  

( 212,930 )  

( 143,326 )  

( 92,774 ) ( 165,333 )

Weighted average unallocated ESOP shares

( 600,065 )  

( 648,571 )  

( 613,183 )  

( 573,504 ) ( 626,488 )

Total basic weighted average common shares outstanding

8,906,526  

9,093,821  

8,910,391  

9,086,229  

8,876,236 8,911,294

Basic weighted average common shares outstanding

8,906,526  

9,093,821  

8,910,391  

9,086,229  

8,876,236 8,911,294

Dilutive restricted stock awards

28,356  

44,302  

20,013  

69,584  

30,948 28,307

Total diluted weighted average common shares outstanding

8,934,882  

9,138,123  

8,930,404  

9,155,813  

8,907,184 8,939,601

Basic earnings per common share

$ 0.28  

$ 0.47  

$ 0.87  

$ 1.04  

$ 0.04 $ 0.39

Diluted earnings per common share

$ 0.28  

$ 0.47  

$ 0.87  

$ 1.04  

$ 0.04 $ 0.39

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

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

At March 31, 2024 and 2023 , antidilutive shares as calculated under the treasury stock method totaled 582 and 7,934 , respectively.

Note 9 - Employee Benefits

Employee Stock Ownership Plan

4 unchanged sentences

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

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

No principal and interest payment was made by the ESOP during the three months ended March 31, 2024 .

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

2 unchanged sentences

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

Compensation expense related to the ESOP for the three months ended 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.

Compensation expense related to the ESOP for the three months ended March 31, 2024 and 2023 , was $ 197,000 and $ 187,000 , respectively.

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

September 30, 2023

March 31, 2024

December 31, 2023

1 unchanged sentence

Allocated shares

439,174  

386,285  

439,174 439,174

Committed to be released shares

13,257  

26,442  

39,771 26,514

Unallocated shares

595,598  

635,302  

569,084 582,341

Total ESOP shares issued

1,048,029  

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.

$ 8,906 $ 9,283

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 .

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.

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 .

As of March 31, 2024 , there were 234,599 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 March 31, 2024 , there were no shares available for grant under the 2015 EIP.

At this date, there are 16,800 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.

There were 55,987 and 27,049 shares of restricted stock awarded, respectively, during the three months ended March 31, 2024 and 2023 .

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.

For the three months ended March 31, 2024 and 2023 , total compensation expense for the equity incentive plans was $ 264,000 and $ 391,000 , respectively.

Included in the compensation expense for the three months ended March 31, 2024 and 2023 , was directors' equity compensation of $ 54,000 and $ 58,000 , 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

Weighted-Average Grant Date Fair Value

Non-vested at July 1, 2023

132,918  

$ 16.50  

( 10,820 )  

( 3,606 )  

( 1,182 )  

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.

For the Nine Months Ended

September 30, 2023

March 31, 2024

Weighted-Average Grant Date Fair Value

Non-vested at January 1, 2024

166,839  

$ 17.78  

32,449  

( 49,273 )  

( 15,412 )  

( 14,193 )  

Non-vested at September 30, 2023

120,410  

$ 16.59  

96,022 $ 17.02

( 38,716 ) 17.48

( 9,460 ) 17.48

( 1,475 ) 13.50

Non-vested at March 31, 2024

102,358 $ 16.12

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.

As of March 31, 2024 , there was $ 1.4 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 1.98 years.

Note 11 - Fair Value Measurements

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.

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Such instruments are classified as Level 3.

Partnership investments :

Equity and 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.

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.

The Company believes that the net asset value obtained through financial statements provided by each partnership approximates fair value.

Such instruments are classified as Level 3.

Sold loan servicing rights, at fair value :

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

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.

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.

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 securities derivatives are traded in an over-the-counter market where quoted market prices are not always available.

The Company also entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans.

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.

2 unchanged sentences

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

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

March 31, 2024

Quoted Prices in Active Markets for Identical Assets or Liabilities

2 unchanged sentences

Financial Assets

(In thousands)  

Securities available-for-sale

Municipal bonds

$ 4,637  

$ 89,358  

$ 93,995  

Treasury notes

$ — $ 87,004 $ — $ 87,004

— 14,822 — 14,822

ABS corporate

— 13,929 — 13,929

Corporate debt

48,959  

54,335  

66,946  

1,875 51,156 — 53,031

— 7,911 — 7,911

— 83,271 — 83,271

MBS non-agency

60,776  

29,192  

89,968  

— 48,636 17,351 65,987

Sold loan servicing rights

Partnership investments

12,787  

— — 3,820 3,820

Equity and partnership investments

— 1,762 12,860 14,622

Interest rate swap derivative

Total assets measured at fair value

$ 12,390  

$ 268,318  

$ 45,708  

$ 326,416  

$ 1,875 $ 309,292 $ 34,031 $ 345,198

Financial Liabilities

Interest rate swap derivative

$ — $ 44 $ — $ 44

December 31, 2023

Quoted Prices in Active Markets for Identical Assets or Liabilities  

Significant Other Observable Inputs

Significant Unobservable Inputs  

Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs

Significant Unobservable Inputs

Financial Assets

(In thousands)  

Securities available-for-sale

Municipal bonds

$ 4,913  

$ 93,137  

$ 98,050  

Treasury notes

$ 5,118 $ 82,643 $ — $ 87,761

— 11,782 — 11,782

ABS corporate

— 5,286 — 5,286

Corporate debt

50,173  

55,499  

75,648  

1,883 49,571 — 51,454

— 63,247 — 63,247

MBS non-agency

63,707  

29,599  

93,306  

— 48,624 27,469 76,093

Sold loan servicing rights

— — 3,793 3,793

Partnership investments

12,563  

— — 13,183 13,183

Total assets measured at fair value

$ 12,603  

$ 284,367  

$ 46,049  

$ 343,019  

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

$ 7,001 $ 261,153 $ 44,445 $ 312,599

Financial Liabilities

Interest rate swap derivative

$ — $ 1,002 $ — $ 1,002

The following tables provide 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 dates indicated:

March 31, 2024

Fair Value (In thousands)

3 unchanged sentences

Sold loan servicing rights

$ 3,729  

$ 3,820 Discounted cash flow

Constant prepayment rate

5.36% - 34.46% (8.39%)  

3.96% - 43.13% (6.81%)

Discount rate

11.75% - 14.24% (12.56%)  

11.13% - 13.51% (11.85%)

MBS non-agency

$ 29,192  

$ 17,351 Consensus pricing

Offered quotes

94.5 - 99.3  

Comparability adjustments (%)

-3.97% - 0.87%  

Partnership investments

$ 12,787  

$ 12,860 Net asset value per share

1 unchanged sentence

(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,

December 31, 2023

Fair Value (In thousands)

Valuation Technique

Unobservable Input (1)

Range (Weighted Average)

Sold loan servicing rights

$ 3,793 Discounted cash flow

Constant prepayment rate

4.10% - 47.53% (7.39%)

Discount rate

11.00% - 13.42% (11.74%)

MBS non-agency

$ 27,469 Consensus pricing

Offered quotes

Partnership investments

$ 13,183 Net asset value per share

Net asset value

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

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

As of or For the Three Months Ended March 31,

Sold loan servicing rights:

(In thousands)

Balance at beginning of period

$ 3,825  

$ 3,865  

$ 3,887  

$ 3,820  

$ 3,793 $ 3,887

Servicing rights that result from transfers and sale of financial assets

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

( 167 )  

( 38 )  

( 303 )  

Balance at end of period

$ 3,729  

$ 3,872  

$ 3,729  

$ 3,872  

$ 3,820 $ 4,224

(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)

As of or For the Three Months Ended March 31,

Securities available for sale:

(In thousands)

MBS non-agency

$ 29,378  

$ ( 186 )  

$ 29,192  

Partnership investments

12,733  

( 82 )  

12,787  

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

$ 27,469 $ 29,599

Principal payments received

Unrealized Gains

Balance at end of period

$ 17,351 $ 29,622

As of or For the Three Months Ended March 31,

(In thousands)

Securities available for sale:

MBS non-agency

$ 29,599  

$ ( 407 )  

$ 29,192  

Partnership investments

12,563  

( 69 )  

12,787  

As of or For the Year Ended December 31, 2022

Balance at beginning of period

Transfers Into Level 3 (1)

Unrealized Gains

$ 13,183 $ 12,563

Funding contributions

Distributions received

Unrealized Losses

( 110 ) ( 7 )

Balance at end of period

(In thousands)

Securities available for sale:

MBS non-agency

$ 29,599  

Sold loan servicing rights

12,490  

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.

$ 12,860 $ 12,556

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:

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

March 31, 2024

(In thousands)

Individually evaluated collateral dependent loans

$ — $ — $ 18,123 $ 18,123

December 31, 2023

(In thousands)

Impaired loans

$ 3,034  

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

Individually evaluated collateral dependent loans

$ — $ — $ 17,388 $ 17,388

At March 31, 2024 and December 31, 2023 , there were no individually evaluated loans with discounts to appraisal disposition value or other unobservable inputs.

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

September 30, 2023

March 31, 2024

Fair Value Measurements Using:

4 unchanged sentences

Cash and cash equivalents

$ 83,886  

$ 77,346 $ 77,346 $ 77,346 $ — $ —

Investment securities available for sale

309,324  

12,390  

267,742  

29,192  

325,955 325,955 1,875 306,729 17,351

Loans held for sale

988 988 — 988 —

Loans receivable, net

1,618,033  

1,486,050  

12,621  

1,692,774 1,555,221 — — 1,555,221

15,876 15,876 — 15,876 —

Accrued interest receivable

8,909 8,909 — 8,909 —

Sold loan servicing rights, at fair value

Partnership investments

12,787  

3,820 3,820 — — 3,820

Equity and partnership investments

14,622 14,622 — 1,762 12,860

Interest rate swap derivative

801 801 — 801 —

Financial liabilities

Demand deposits

$ 1,078,049  

$ 1,055,520 $ 1,055,520 $ 1,055,520 $ — $ —

Time deposits

579,713  

572,616  

611,104 608,191 — — 608,191

FHLB Borrowings

253,000  

248,031  

322,000 318,137 — — 318,137

Line of Credit

10,000 10,193 — — 10,193

Subordinated debt, net

39,416  

39,879  

39,455 41,162 — — 41,162

Accrued interest payable

2,830 2,830 — 2,830 —

Interest rate swap derivative

December 31, 2023

5 unchanged sentences

Cash and cash equivalents

$ 45,596  

$ 123,169 $ 123,169 $ 123,169 $ — $ —

Investment securities available for sale

326,569  

12,603  

284,367  

29,599  

295,623 295,623 7,001 261,153 27,469

Loans held for sale

753 753 — 753 —

Loans receivable, net

1,531,435  

1,461,470  

11,681  

1,642,518 1,506,130 — — 1,506,130

13,664 13,664 — 13,664 —

Accrued interest receivable

7,894 7,894 — 7,894 —

Sold loan servicing rights, at fair value

3,793 3,793 — — 3,793

Partnership investments

12,563  

13,183 13,183 — — 13,183

Financial liabilities

Demand deposits

1,182,570  

$ 1,182,570  

1,025,854 $ 1,025,854 $ 1,025,854 $ — $ —

Time deposits

381,685  

372,865  

651,038 648,428 — — 648,428

FHLB Borrowings

234,000  

229,103  

275,000 271,284 — — 271,284

Line of Credit

12,000  

12,034  

6,500 6,524 — — 6,524

Subordinated debt, net

39,358  

38,841  

39,436 42,116 — — 42,116

Accrued interest payable

3,396 3,396 — 3,396 —

Interest rate swap derivative

1,002 1,002 — 1,002 —

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:

Our AOCI includes unrealized gains (losses) on available-for-sale securities, defined benefit plan assets and derivatives as well as 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

Net Actuarial Gains (Losses) on Defined Benefit Plan Assets

Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization

1 unchanged sentence

(In thousands)

Balance at June 30, 2022

$ ( 26,653 )  

$ ( 1,794 )  

Other comprehensive loss before reclassification

( 12,604 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

( 12,604 )  

Balance at September 30, 2022

$ ( 39,257 )  

$ ( 1,766 )  

Balance at June 30, 2023

$ ( 37,679 )  

$ ( 2,079 )  

$ ( 308 )  

Other comprehensive loss before reclassification

( 6,540 )  

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

( 6,540 )  

Balance at September 30, 2023

$ ( 44,219 )  

$ ( 2,050 )  

Balance at December 31, 2022

$ 2,140  

$ ( 1,852 )  

Other comprehensive loss before reclassification

( 41,304 )  

$ ( 38,404 ) $ ( 600 ) $ ( 1,539 ) $ — $ ( 40,543 )

Other comprehensive income (loss) before reclassification

3,762 — — ( 1,357 ) 2,405

Amounts reclassified from accumulated other comprehensive income

( 93 )  

Net other comprehensive (loss) income

( 41,397 )  

Balance at September 30, 2022

$ ( 39,257 )  

$ ( 1,766 )  

Net other comprehensive income

3,762 — 30 ( 1,357 ) 2,435

Balance at March 31, 2023

$ ( 34,642 ) $ ( 600 ) $ ( 1,509 ) $ ( 1,357 ) $ ( 38,108 )

Balance at December 31, 2023

$ ( 38,404 )  

$ ( 2,139 )  

Other comprehensive loss before reclassification

( 5,815 )  

$ ( 30,099 ) $ ( 288 ) $ ( 1,421 ) $ ( 828 ) $ ( 32,636 )

Other comprehensive (loss) income before reclassification

( 588 ) — — 730 142

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

( 5,815 )  

Balance at September 30, 2023

$ ( 44,219 )  

$ ( 2,050 )  

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.

( 588 ) — 29 730 171

Balance at March 31, 2024

$ ( 30,687 ) $ ( 288 ) $ ( 1,392 ) $ ( 98 ) $ ( 32,465 )

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.

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

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, the Secured Overnight Financing 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.

The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheets.

The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s consolidated statements of income.

The following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges for the periods shown.

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

(In thousands)

Line item in the Consolidated Balance Sheets where the hedged item is included:

March 31, 2024

Investment securities (1)

$ 49,467  

( 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:

$ 50,125 $ 125

Loans receivable (2)

99,289 ( 711 )

$ 149,414 $ ( 586 )

December 31, 2023

Investment securities

$ 51,054 $ 1,054

( 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 March 31, 2024 and December 31, 2023 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 57.1 million and $ 57.4 million, respectively;

the cumulative basis adjustments associated with this hedging relationship was $ 125,000 and $1.1 million, respectively;

and the amount of the designated hedged items was $ 50.0 million for both periods.

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

At March 31, 2024 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 297.2 million, the cumulative basis adjustments associated with this hedging relationship was ($ 711,000 ), and the amount of the designated hedged items was $100.0 million.

No prior year end information is provided as this hedging relationship was initiated in 2024.

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

The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:

Notional Amount

Other Liabilities

(In thousands)  

September 30, 2023

(In thousands)

March 31, 2024

Fair value hedges:

Interest rate swaps - securities

$ 50,000  

$ 50,000 $ — $ 44

Interest rate swaps - loans

100,000 801 —

December 31, 2023

Fair value hedges:

Interest rate swaps - securities

$ 50,000 $ — $ 1,002

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,

Three Months Ended March 31,

(In thousands)

Total amounts recognized in interest on investment securities

$ 3,368  

$ 2,817  

$ 9,886  

$ 7,807  

$ 3,632 $ 3,182

Total amounts recognized in interest and fees on loans receivable

Net gains (losses) on fair value hedging relationships

1 unchanged sentence

Recognized on hedged items

$ ( 925 )  

$ ( 533 )  

$ ( 967 ) $ 1,728

Recognized on derivatives designated as hedging instruments

1,155 ( 1,697 )

Interest rate swaps - loans

Recognized on hedged items

Recognized on derivatives designated as hedging instruments

Net income recognized on fair value

2 unchanged sentences

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.

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;

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;

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.

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.

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

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.

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.

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

(In thousands)

Construction Commitment

One-to-four family residential

Multi-family residential

Commercial real estate

Total commitment

Construction Funds Disbursed

One-to-four family residential

Multi-family residential

Commercial real estate

Total disbursed

Undisbursed Commitment

One-to-four family residential

Multi-family residential

Commercial real estate

Total undisbursed

Land Funds Disbursed

One-to-four family residential

Total disbursed for land

(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

(In thousands)

Construction Commitment

One-to-four family residential

Multi-family residential

Commercial acquisition-renovation

Commercial real estate

Total commitment

Construction Funds Disbursed

One-to-four family residential

Multi-family residential

Commercial acquisition-renovation

Commercial real estate

Total disbursed

Undisbursed Commitment

One-to-four family residential

Multi-family residential

Commercial acquisition-renovation

Commercial real estate

Total undisbursed

Land Funds Disbursed

One-to-four family residential

Commercial real estate

Total disbursed for land

(1) Includes Clallam and Jefferson counties.

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

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

(In thousands)

One-to-four family

Commercial real estate

Construction and land

Total real estate loans

Auto and other consumer

Total consumer loans

Commercial business loans

Allowance for credit losses on loans

Loans receivable, net

The following table represents nonperforming assets at the dates indicated.

Increase (Decrease)

September 30, 2023

December 31, 2022

(In thousands)

Nonperforming loans:

Real estate loans:

One-to-four family

Commercial real estate

Construction and land

Total real estate loans

Consumer loans:

Auto and other consumer

Total consumer loans

Total nonperforming assets

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

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.

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.

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

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

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

Net Interest Income.

Net interest income decreased $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.

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,

Average Balance Outstanding

Increase in Interest Income

(Dollars in thousands)

Loans receivable, net

Investment securities

Interest-earning deposits in banks

Total interest-earning assets

Interest Expense.

Total interest expense increased $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,

Average Balance Outstanding

Increase (Decrease) in Interest Expense

(Dollars in thousands)

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Subordinated debt

Total interest-bearing liabilities

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.

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

Three Months Ended September 30,

(Dollars in thousands)

Provision for credit losses on loans

Net charge-offs

Allowance for credit losses on loans

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

Total nonaccrual loans

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

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

Noninterest Income.

Noninterest income 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)

(Dollars in thousands)

Loan and deposit service fees

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

Net gain on sale of loans

Increase in cash surrender value of bank-owned life insurance

Total noninterest income

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)

(Dollars in thousands)

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Professional fees

FDIC insurance premium

Other expense

Total noninterest expense

Provision for Income Tax.

An income tax expense of $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

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.

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,

Average Balance Outstanding

Increase in Interest Income

(Dollars in thousands)

Loans receivable, net

Investment securities

Interest-earning deposits in banks

Total interest-earning assets

Interest Expense.

Total interest expense increased $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,

Average Balance Outstanding

Increase in Interest Expense

(Dollars in thousands)

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Subordinated debt

Total interest-bearing liabilities

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.

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

Nine Months Ended September 30,

(Dollars in thousands)

Provision for credit losses on loans

Net charge-offs

Allowance for credit losses on loans

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

Total nonaccrual loans

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

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

Noninterest Income.

Noninterest income decreased $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)

(Dollars in thousands)

Loan and deposit service fees

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

Net gain on sale of loans

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance

Total noninterest income

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)

(Dollars in thousands)

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Professional fees

FDIC insurance premium

Other expense

Total noninterest expense

Provision for Income Tax.

An income tax expense of $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.

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,

(Dollars in thousands)

Interest-earning assets:

Loans receivable, net (1)

Investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (2)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Total interest-bearing deposits (3)

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits (3)

Other noninterest-bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Net interest rate spread

Net earning assets

Net interest margin (4)

Average interest-earning assets to average interest-bearing liabilities

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

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

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

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

Nine Months Ended September 30,

(Dollars in thousands)

Interest-earning assets:

Loans receivable, net (1)

Total investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (2)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits (3)

Money market accounts

Savings accounts

Certificates of deposit

Total interest-bearing deposits

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits (3)

Other noninterest-bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Net interest rate spread

Net earning assets

Net interest margin (4)

Average interest-earning assets to average interest-bearing liabilities

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

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

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

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

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.

Increase (Decrease) Due to

Total Increase (Decrease)

(In thousands)

Interest-earning assets:

Loans receivable, net

Total interest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit

Subordinated debt

Total interest-bearing liabilities

Change in net interest income

(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.

Contractual Obligations

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

After 1 Year Through

After 3 Years Through

(In thousands)

Certificates of deposit

FHLB advances

Line of credit

Subordinated debt obligation

Operating leases

Borrower taxes and insurance

Deferred compensation

Total contractual obligations

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

After 1 Year Through

After 3 Years Through

Total Amounts

(In thousands)

Commitments to originate loans:

Variable-rate

Unfunded commitments under lines of credit or existing loans

Standby letters of credit

Total commitments

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.

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.

Minimum Capital Requirements

Minimum Required to be Well-Capitalized

(Dollars in thousands)

Tier 1 leverage capital (to average assets)

Common equity tier 1 (to risk-weighted assets)

Tier 1 risk-based capital (to risk-weighted assets)

Total risk-based capital (to risk-weighted assets)

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

Effect of Inflation and 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.

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.

The Company has interest rate swap agreements with its derivative counterparties that contain provisions 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 March 31, 2024 , the Company had $ 44,000 of derivatives in a net liability position related to these agreements.

The Company has minimum collateral posting thresholds with its derivative counterparties and has posted cash of $ 1.1 million to secure the related interest rate swap agreements at March 31, 2024 .

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 March 31, 2024 , 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.

Note 14 - Segment Reporting

First Fed is engaged in the business of attracting deposits and providing lending services.

Substantially all income is derived from a diverse base of commercial, mortgage, and consumer lending activities and investments.

The Company’s activities are considered to be a single industry segment for financial reporting purposes.

The chief operating decision maker ("CODM") is comprised of the chief financial officer, chief operating officer and the chief executive officer.

The accounting policies of the Bank are the same as those described in the summary of significant accounting policies in Note 1 of the Company's Annual Report on Form 10 -K for the year ended December 31, 2023 (" 2023 Form 10 -K").

The CODM assesses performance for the Bank and decides how to allocate resources based on net income that is reported on the income statement as consolidated net income.

The measurement of segment assets is reported on the balance sheet as total consolidated assets.

The CODM uses net income to evaluate income generated from the segment assets (return on assets) in deciding whether to reinvest profits into the Bank or into other parts of the entity, such as to pay dividends or a share repurchase plan.

Net income is used to monitor budget versus actual results and assess the performance of the Bank.

Note 15 - Premises Held for Sale

On January 30, 2024, the Bank entered into an agreement for the purchase and sale of real property (the "Sale Agreement") with Mountainseed Real Estate Services, LLC, a Georgia limited liability company ("Mountainseed"), providing for the Bank’s sale to Mountainseed of up to six properties (the "Properties").

All of the Properties are currently operated as branches and located in Clallam County, Washington or Jefferson County, Washington.

Upon signing the agreement, the Company classified the related properties as held for sale and presented them separately on the Consolidated Balance Sheets at cost, net of accumulated amortization.

The sale of all six properties was finalized on May 7, 2024, for an aggregate cash sales price of $ 14.7 million.

An estimated pre-tax gain on sale of $ 7.9 million will be recorded in noninterest income for the second quarter of 2024.

Concurrent with the closing of the sale of the Properties, the Bank entered into triple net lease agreements (the "Lease Agreements") to lease back each of the Properties sold.

Each Lease Agreement has an initial term of 15 years with one 15 -year renewal option.

Monthly rent expense of approximately $ 130,000 in the aggregate for all Properties will be recorded in Occupancy and Equipment for a total expense of $ 1.0 million in 2024.

The increase in rent will be partially oﬀset by the elimination of annualized depreciation expense on the buildings of $ 204,000 .

The executed Lease Agreements also generated right of use assets totaling $ 12.2 million and lease liabilities of $ 12.2 million resulting in increases to other assets and other liabilities, respectively, on the Consolidated Balance Sheets that will be recorded during the second quarter of 2024.

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

What changed 10-Q

Item 1. Financial Statements