What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-12 · 185 added, 357 removed, 316 unchanged (63% of the section changed)

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statements regarding the quality of our loan and investment portfolios;

statements regarding litigation;

estimates of our risks and future costs and benefits.

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Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio;

legislative or regulatory changes, including increased insurance rates and assessments or expanded consumer protection regulations, responses to recent events in the banking industry, interest rates along the yield curve, and inflation, which could adversely affect the Company's business;

risks associated with lending and potential adverse changes in the credit quality of our loan portfolio;

legislative, regulatory and policy changes;

uncertainties relating to litigation;

continued depressed market demand for mortgage and Small Business Administration loans that we originate for sale;

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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 ability to achieve higher net interest income and noninterest revenue growth;

whether our management team can succeed in implementing our operational strategy, including but not limited to our efforts to achieve higher net interest income and noninterest revenue growth;

our ability to successfully execute on growth strategies related to our entry into new markets and delivery channels, including banking as a service;

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results of examinations by our primary or other regulatory authorities could have an adverse impact on our business and operations;

the material weakness in our internal controls could result in inaccuracies in the reporting of our financial condition;

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 an elevated interest rate environment and geopolitical instability, including the wars in Ukraine and the Middle East;

risks related to overall economic conditions, including the impact on the economy of an elevated interest rate environment, geopolitical instability, including the wars in Ukraine and the Middle East, and potential recessionary and other unfavorable conditions and trends relating to housing markets, cost of living, unemployment levels, supply chain difficulties and inflationary pressures;

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

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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").

First Northwest, a Washington corporation, is a bank holding company and a financial holding company.

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

Non-banking investments include several limited partnership investments, including a 33.3% interest in The Meriwether Group, LLC ("MWG"), a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed, including equity and debt raising services.

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.

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

We have 18 locations including 12 full-service branches, three business centers and three administration centers in Clallam, Jefferson, King, Kitsap, Snohomish and Whatcom counties.

First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a full 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" or "term certificate") for individuals and businesses.

The Company has also entered into partnerships to strategically invest in fintech-related businesses.

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

The Bank serves Clallam, Jefferson, King, Kitsap, Snohomish and Whatcom counties in Washington State through its twelve full-service branches and six business centers, including our headquarters.

We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve.

To diversify our portfolio and increase interest income, we increased our origination of commercial real estate, multi-family real estate, and commercial business loans.

We also increased our auto and consumer loans through purchased auto loan programs and purchased manufactured homes.

We continue to originate one-to-four family residential mortgage loans, primarily for sale into the secondary market to generate noninterest gain on sale and servicing fee revenue and manage interest rate risk or retain select loans in our portfolio to enhance interest income.

Home equity, residential construction and commercial construction loans are also originated primarily in Western Washington.

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

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BankTech Ventures, LP;

and JAM FINTOP Blockchain, LP.

and JAM FINTOP Frontier Fund, 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 33.3% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed.

In 2022, First Northwest acquired a 33.3% interest in MWG.

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 Hero Fund.

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MWGC holds a 0.01% general partner interest in the Hero Fund.

First Northwest is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions.

Deposit flows are influenced by several factors, including interest rates paid on competing deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business.

Lending activities are influenced by the demand and pricing for loan funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.

The Company is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal policy, including fiscal stimulus, interest rate policy and open market operations, housing, and consumer protection.

Deposit flows are influenced by various factors, including changes in market rates;

sales and marketing efforts;

interest rates paid by competitors;

available alternative investments such as money market mutual funds, the stock and bond markets;

account maturities;

government stimulus and unemployment programs;

and the overall level of personal income and savings.

Lending activities are influenced by prevailing interest rates and property values in our markets, the demand for funds, the number and quality of lenders employed by First Fed, and both regional and national 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, 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 if the underlying assumptions driving anticipated loss rates within the CECL model improve, such as the United States unemployment and gross domestic product metrics;

lowered qualitative factor adjustments to reflect improvements in the nonaccrual and past due status or upgrades in risk ratings of a particular loan segment;

lower loan or unfunded commitment balances, or receipt of recoveries for amounts previously charged off.

Noninterest expenses incurred 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.

Net interest income is interest income earned on our loans and investments less interest expense paid on our deposits and borrowings.

Changes in levels of interest rates impact our net interest income.

A secondary source of income for the Company is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, earnings from equity and partnership investments, and gains and losses from the sale of loans and securities.

An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations required to adequately provide for probable losses inherent in our loan, unfunded commitments and investment portfolios through the ACL.

A recapture of previously recognized provision for credit losses may be recorded if forecasted macroeconomic factors improve, underlying balances decrease, or recoveries of amounts previously charged off are received.

Noninterest expenses incurred in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, professional fees, deposit insurance premiums and regulatory assessments, digital delivery and data processing expenses, marketing and other customer acquisition expenses, expenses related to real estate and personal property owned, state and local taxes, federal income tax, and other miscellaneous expenses.

Recent Regulatory Developments

Brokered Deposits Rulemaking.

On July 30, 2024, the Board of Directors of the FDIC approved a proposed rule that would amend the FDIC’s regulations governing the classification and treatment of brokered deposits.

The proposal would, among other changes, broaden the definition of deposit broker to include agents that place or facilitate the placement of third-party deposits at only one insured depository institution and narrow the exception to the definition of deposit broker for agents whose primary purpose is not the placement of funds with depository institutions.

While the Company is evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, the Bank would likely be required to classify a greater amount of its deposits obtained with the involvement of third parties as brokered deposits.

An increase in the amount of brokered deposits on the Bank’s balance sheet could, among other consequences, increase the Bank’s deposit insurance assessment costs.

Third-Party Deposit Arrangements Guidance.

On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks.

Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships.

The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements.

On October 24, 2023, the federal banking agencies issued a final rule amending their regulations implementing the Community Reinvestment Act (the "CRA") to substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods.

On March 28, 2025, the agencies announced their intent to issue a proposal to rescind the October 2023 final rule, and to reinstate the CRA framework that existed prior to the October 2023 final rule.

The Bank received a rating of "satisfactory" in its most recent performance evaluation, which was conducted using the CRA framework that existed prior to the October 2023 final rule.

Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in the Company's 2024 Form 10-K.

Comparison of Financial Condition at September 30, 2024 and December 31, 2023

Total assets increased to $2.26 billion, or 2.4%, at September 30, 2024, from $2.2 billion at December 31, 2023.

Cash and cash equivalents decreased by $40.5 million, or 32.8%, to $82.7 million as of September 30, 2024, compared to $123.2 million as of December 31, 2023.

Cash decreased during the current year as the Bank deployed funds into higher-yielding investment securities and loans.

Investment securities increased $15.2 million, or 5.2%, to $310.9 million at September 30, 2024, from $295.6 million at December 31, 2023.

Investment security purchases during the nine months ended September 30, 2024, totaled $53.0 million with an estimated weighted-average yield of 6.4% and a weighted-average life of 5.4 years.

The security purchases and a portfolio market value increase of $8.1 million were partially offset by the sale of $23.2 million of securities, with an average yield of 3.0%, during the nine months ended September 30, 2024, and payment activity during the period.

Our recent investment purchases have primarily been floating rate securities to take advantage of higher short-term rates above those offered on cash and to reduce liability sensitivity.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.4 years as of September 30, 2024, compared to 7.7 years as of December 31, 2023, and had an estimated average repricing term of 5.6 years as of September 30, 2024, compared to 6.3 years as of December 31, 2023, based on the interest rate environment at those times.

The effective duration of the investment portfolio was 3.9 years at September 30, 2024, compared to 4.8 years at December 31, 2023.

If prevailing market interest rates fall, we expect prepayments will accelerate due to the current coupons of fixed rate bonds.

Included in MBS non-agency were $29.6 million of commercial mortgage-backed securities ("CMBS"), of which 89.8% were in "A" tranches with the remaining 10.2% in "B" tranches.

Our largest exposure in the CMBS portfolio was to long-term care facilities, which comprised 65.0%, or $19.2 million, of our private label CMBS securities.

All of the CMBS had credit enhancements ranging from 28.8% to 71.8%, with a weighted-average credit enhancement of 55.3%, that further reduced the risk of loss on these investments.

The investment portfolio was comprised of 55.8% in amortizing securities at September 30, 2024, compared to 52.0% at December 31, 2023.

Comparison of Financial Condition at March 31, 2025 and December 31, 2024

Total assets decreased to $2.17 billion, or 2.7%, at March 31, 2025, from $2.23 billion at December 31, 2024.

Cash and cash equivalents decreased by $2.1 million, or 2.9%, to $70.3 million as of March 31, 2025, compared to $72.5 million as of December 31, 2024.

Investment securities decreased $24.9 million, or 7.3%, to $315.4 million at March 31, 2025, from $340.3 million at December 31, 2024.

The decrease was primarily due to maturities and early redemptions within the MBS non-agency portfolio totaling $20.2 million along with other payment activity was partially offset by a portfolio market value increase of $3.1 million during the three months ended March 31, 2025.

Included in MBS non-agency portfolio as of March 31, 2025, were $28.7 million of commercial mortgage-backed securities ("CMBS"), of which 93.4% were in "A" tranches with the remaining 6.6% in "B" tranches.

Our largest exposure in the CMBS portfolio balance was to long-term care facilities, which comprised 67.8%, or $19.4 million, of our private label CMBS securities.

All of the CMBS had credit enhancements at the current period end ranging from 30.8% to 93.1%, with a weighted-average credit enhancement of 62.6%, which further reduced the risk of loss on these investments.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 6.9 years as of both March 31, 2025 and December 31, 2024, and had an estimated average repricing term of 6.2 years as of March 31, 2025, compared to 5.3 years as of December 31, 2024, based on the interest rate environment at those times.

The effective duration of the investment portfolio was 4.3 years at March 31, 2025, compared to 3.9 years at December 31, 2024.

The investment portfolio was comprised of 55.9% in amortizing securities at March 31, 2025, compared to 60.2% at December 31, 2024.

The projected average life of the securities portfolio may vary due to prepayment activity, particularly in the mortgage-backed securities portfolio, which is impacted by prevailing market interest rates.

Our securities portfolio is utilized to manage liquidity, improve long-term interest income and manage interest rate risk.

If prevailing market interest rates fall, we expect prepayments to accelerate due to the current coupons of fixed rate bonds.

We utilize our securities portfolio to manage liquidity, improve long-term interest income and manage interest rate risk.

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 $71.9 million, or 4.4%, to $1.71 billion at September 30, 2024, from $1.64 billion at December 31, 2023.

During the nine months ended September 30, 2024, commercial business loans increased $43.0 million, including a $28.7 million increase to our Northpointe Bank Mortgage Purchase Program ("Northpointe MPP") participation, $26.9 million of organic originations, $9.5 million of purchased loans and $6.4 million of draws on existing line of credit commitments, offset by repayments.

Auto and other consumer loans increased $32.1 million with $32.6 million of auto loan purchases, manufactured home loan pool purchases of $17.7 million, additional manufactured home loan purchases of $10.1 million and $14.2 million of auto loan purchases, partially offset by prepayments and scheduled payments.

Multi-family loans increased $20.7 million during the nine months ended September 30, 2024, with $30.4 million of construction loans converting into permanent amortizing loans, partially offset by payment activity.

One-to-four family loans increased $17.4 million during the nine months ended September 30, 2024, as a result of $36.1 million in residential construction loans which converted to permanent amortizing loans, partially offset by payments received.

Home equity loan outstanding balances increased $7.6 million over the prior year end due to $13.7 million from home equity loan originations and draws on new and existing line of credit commitments.

Commercial real estate loans decreased $12.0 million during the nine months ended September 30, 2024, due to prepayments, scheduled payments, maturities and a reclassification of $3.9 million to multi-family offsetting originations of $13.8 million.

Construction and land loans decreased $34.0 million, or 26.2%, to $95.7 million at September 30, 2024, from $129.7 million at December 31, 2023, with $66.5 million converting into fully amortizing loans, partially offset by draws on new and existing loan commitments.

Construction loans in the portfolio are geographically dispersed throughout Western Washington.

Net loans, excluding loans held for sale, decreased $37.6 million, or 2.2%, to $1.64 billion at March 31, 2025, from $1.68 billion at December 31, 2024.

During the three months ended March 31, 2025, commercial business loans decreased $31.7 million, including a $36.2 million decrease to our Northpointe Bank Mortgage Purchase Program ("Northpointe MPP") participation and other repayment activity, partially offset by increases from $6.7 million of organic originations, $5.9 million of draws on existing line of credit commitments and $414,000 of new purchased loans.

One-to-four family loans decreased $887,000 during the three months ended March 31, 2025, as repayment activity exceeded $4.5 million in residential construction loans that converted to permanent amortizing loans and new loan originations totaling $1.5 million.

Multi-family loans increased $5.6 million during the three months ended March 31, 2025, as $8.0 million of construction loans converting into permanent amortizing loans exceeded repayments.

Auto and other consumer loans increased $5.0 million with auto loan purchases of $11.1 million, manufactured home loan pool purchases of $4.6 million, and additional manufactured home loan purchases of $3.6 million, partially offset by prepayments and scheduled payments.

Commercial real estate loans decreased $3.1 million during the three months ended March 31, 2025, with loan charge-offs totaling $5.6 million and repayment activity exceeding $12.3 million of new loan originations and $334,000 of construction loan conversions.

Home equity loan outstanding balances increased $97,000 over the prior year end due to $2.5 million of net draws on new and existing line of credit commitments and $1.1 million of home equity loan originations, partially offset by prepayments and scheduled payments.

Construction and land loans decreased $13.2 million, or 16.9%, to $64.9 million at March 31, 2025, from $78.1 million at December 31, 2024, with payment activity totaling $14.0 million and $12.8 million converting into fully amortizing loans, partially offset by draws on new and existing loan commitments.

Construction projects in the portfolio are geographically dispersed throughout Western Washington as well as one project in California.

All construction projects are monitored by either a third-party firm or our internal construction administration team.

Projects with larger loan commitments have more robust monitoring by firms with more services and expertise.

We continue to monitor the impact inflation and housing demand may have on the 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, 2024, 39% of construction commitments were secured by one-to-four family residential properties, which are anticipated to convert into amortizing loans upon completion and may be sold at that time.

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.

At March 31, 2025, 39% of construction commitments were secured by one-to-four family residential properties, which are anticipated to convert into amortizing loans upon completion and may be sold at that time.

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

September 30, 2024

March 31, 2025

North Olympic Peninsula (1)

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

During the nine months ended September 30, 2024, the Company added $144.5 million of organic loan originations, of which $100.1 million, or 69.2%, were located in the Puget Sound region, $30.9 million, or 21.4%, on the North Olympic Peninsula, $7.2 million, or 5.0%, in other areas throughout Washington State, and $6.3 million, or 4.4%, in other states.

The Company purchased an additional $46.8 million in auto loans, $27.8 million in manufactured home loans, and $9.5 million in commercial business loans to borrowers located throughout the United States during the nine months ended September 30, 2024.

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 MPP also provides a source of additional interest income but is dependent on demand for mortgage funding, with repayment of advances to this program typically occurring within 30 days or less.

The total loan portfolio was composed of 77.3% organic originations and 22.7% purchased loans at September 30, 2024.

The ACLL increased to $22.0 million at September 30, 2024, as the Company recorded a $13.0 million provision for credit loss on loans for the nine-month period.

Net charge-offs were $8.5 million for the nine-month period.

The ACLL as a percentage of total loans was 1.27% and 1.10% at September 30, 2024 and December 31, 2023, respectively.

Nonaccrual loans increased $11.7 million, or 62.9%, to $30.4 million at September 30, 2024, from $18.6 million at December 31, 2023, primarily attributable to a $8.1 million commercial construction loan placed on nonaccrual during the quarter ended June 30, 2024, a $5.6 million commercial real estate relationship placed on nonaccrual during the quarter ended September 30, 2024, three delinquent commercial business loans with an aggregate total of $2.0 million, a $535,000 delinquent purchased one-to-four family loan, four delinquent auto loans totaling $425,000 and a $184,000 increase to a commercial construction relationship previously placed on nonaccrual.

These increases were partially offset by a $4.5 million charge-off to a commercial construction loan and a $591,000 single family residence loan that was paid off during the first quarter of 2024.

Nonaccrual loans to total loans was 1.75% at September 30, 2024, compared to 1.12% at December 31, 2023.

The ACLL as a percentage of nonaccrual loans decreased to 72% at September 30, 2024, down from 94% at December 31, 2023.

Classified loans increased $11.8 million to $46.9 million at September 30, 2024, from $35.1 million at December 31, 2023, due to the downgrade during the first nine months of 2024 of the loans noted above.

An $11.2 million construction loan relationship which became classified in the fourth quarter of 2022, a $6.2 million commercial loan relationship which became classified in the fourth quarter of 2023 and an $8.1 million commercial construction loan relationship which became classified in the second quarter of 2024, account for 55% of the classified loan balance at September 30, 2024.

The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in two of the three collateral-dependent relationships.

Proceeds from the sale of a unit in the $15.2 million construction loan relationship during the first quarter of 2024 were used to the paydown principal of the related loan balance.

A property included in the $6.2 million commercial loan relationship was sold, resulting in a $3.0 million loan payoff recorded in the third quarter of 2024.

The Bank recorded commercial construction loan charge-offs totaling $4.0 million and commercial business loan charge-offs of $2.7 million in the second quarter of 2024 as a result of uncertainty in the collectability of the underlying collateral in specific loan relationships.

During the three months ended March 31, 2025, the Company added $67.3 million of organic loan originations, of which $31.3 million, or 46.5%, were located in the Puget Sound region, $11.2 million, or 16.7%, on the North Olympic Peninsula, $9.0 million, or 13.3%, in other areas throughout Washington State, and $15.8 million, or 23.5%, in other states.

The Company purchased an additional $11.1 million in auto loans, $8.2 million in manufactured home loans, $550,000 in one-to-four family loans and $418,000 in commercial business loans to borrowers located throughout the United States during the three months ended March 31, 2025.

The total loan portfolio was composed of 79.4% organic originations and 20.6% purchased loans at March 31, 2025.

We will continue to assess our lending strategies across all product lines and markets where we do business as well as evaluate opportunities to supplement organic growth through wholesale acquisitions with the goal of improving earnings while also prudently managing credit risk.

The ACLL increased to $20.6 million at March 31, 2025, compared to $20.5 million at December 31, 2024.

Qualitative factor adjustments related to an increase in nonaccrual commercial business loans and an increase in the average risk rating of multi-family loans resulted in higher loss rates applied to those categories.

Mild deterioration in gross domestic product and unemployment estimates further added to the increase in the allowance related to pooled loan balances.

The ACLL as a percentage of total loans was 1.24% and 1.20% at March 31, 2025 and December 31, 2024, respectively.

Management continues to monitor economic conditions for potential weaknesses that could expose the loan portfolio to losses.

We believe the ACLL is adequate to cover current expected credit losses in the loan portfolio as of March 31, 2025.

Nonperforming loans decreased $10.2 million, or 33.3%, to $20.4 million at March 31, 2025, from $30.5 million at December 31, 2024, primarily attributable to loan charge-offs totaling $7.7 million and $3.9 million in payments received on commercial construction loans, partially offset by a $633,000 commercial business loan placed on nonaccrual status during the quarter.

The increase in charge-off activity was related to underlying collateral deficiencies for two commercial real estate loans and a related commercial business loan totaling $6.2 million.

Nonperforming loans to total loans was 1.23% at March 31, 2025, compared to 1.80% at December 31, 2024.

The ACLL as a percentage of nonaccrual loans increased to 101% at March 31, 2025, up from 67% at December 31, 2024.

Classified loans decreased $10.9 million, or 25.7%, to $31.6 million at March 31, 2025, from $42.5 million at December 31, 2024, primarily due to charge-offs totaling $7.2 million and $3.9 million in payments received on commercial construction loans included in this category.

An $8.1 million construction loan relationship which became classified in the fourth quarter of 2022 and a $7.1 million commercial construction loan relationship which became classified in the second quarter of 2024, account for 48% of the classified loan balance at March 31, 2025.

The Bank is also closely monitoring a group of commercial business loans that have similar collateral, with 16 loans totaling $1.6 million included in classified loans at March 31, 2025, and an additional seven loans totaling $2.4 million included in the special mention risk grading category.

The Bank continues to work with these borrowers to facilitate satisfactory repayment.

In the first quarter of 2025, the Bank recorded commercial real estate loan charge-offs totaling $5.6 million and commercial business loan charge-offs totaling $603,000 due to underlying collateral deficiencies.

Additional commercial business loan charge-offs totaling $811,000 and commercial construction loan charge-offs totaling $374,000 were recorded as a result of uncertainty in the collectability of the underlying collateral in specific loan relationships.

Charge-offs are based on individual loan evaluations and do not represent a universal decline in the collectability of all loans in these categories.

Additional charged-off balances related to purchased unsecured consumer loans totaled $1.7 million during the nine months ended September 30, 2024, or 19% of gross charge-offs.

Additional charged-off balances related to purchased unsecured consumer loans totaled $207,000 during the three months ended March 31, 2025.

The Bank's active participation in the program was discontinued in 2023.

Total Splash purchased unsecured consumer loan balances of $3.9 million and $7.3 million were included in Auto and Other Consumer loans at September 30, 2024 and December 31, 2023, respectively.

We believe the ACLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of September 30, 2024.

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

Increase (Decrease)

September 30, 2024

March 31, 2025

December 31, 2024

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Loans receivable, net

The following table represents nonperforming assets at the dates indicated.

The following table summarizes nonperforming assets at the dates indicated:

Increase (Decrease)

September 30, 2024

March 31, 2025

December 31, 2024

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Total nonaccrual loans

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

In the second quarter of 2024, the Bank completed the sale and leaseback of six branch properties to Mountainseed, reducing premises and equipment by $6.8 million.

The Bank received the full sales price of $14.7 million.

The proceeds of the sale transaction were used to pay down borrowings.

First Fed is leasing back the six properties sold to Mountainseed under agreements with initial terms of 15 years with one 15-year renewal option each.

The leases, recorded in the second quarter of 2024, resulted in an increase of $12.2 million to both other assets and other liabilities for the related right-of-use assets and lease liabilities created by the contracts, respectively.

In the second quarter of 2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed.

First Northwest utilized the cash received to pay down the NexBank line of credit.

Total liabilities increased to $2.09 billion at September 30, 2024, from $2.04 billion at December 31, 2023, due to increases in deposits of $34.8 million, lease liabilities of $11.4 million and borrowings of $14.0 million.

Deposit balances increased $34.8 million, or 2.1%, to $1.71 billion at September 30, 2024 from $1.68 billion at December 31, 2023.

During the first nine months of 2024, total retail deposit balances increased $38.7 million and brokered deposit balances decreased $3.9 million.

Within retail deposit balances, an increase in money market accounts of $71.1 million was partially offset by a decrease in savings accounts of $29.4 million, retail term certificates of $1.8 million and demand deposit accounts of $1.3 million.

Increases in money market accounts were driven by customer behavior as they sought out higher rates offered as term certificate specials matured and savings specials ended.

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.

Overall, the current rate environment contributes to continued competition for deposits with additional deposit rate specials offered to retain existing balances and attract new funds.

Advances increased $15.0 million, or 5.5% to $290.0 million at September 30, 2024, from $275.0 million at December 31, 2023.

We reduced short-term FHLB advances and the NexBank line of credit to improve the cost of funds while long-term advances increased to provide additional balance sheet liquidity.

Total shareholders' equity decreased $2.6 million to $160.8 million for the nine months ended September 30, 2024.

The Company recorded a net loss during that period of $3.8 million, $4.0 million for the cost of repurchased shares, $2.0 million of dividends declared and a $298,000 decrease in the post-tax fair market value of derivatives.

Decreases were partially offset by an increase in the after-tax fair market values of the available-for-sale investment securities portfolio of $6.4 million.

During the first quarter of 2024, we repurchased 214,132 shares of common stock under the October 2020 stock repurchase plan at an average price of $14.03 per share for a total of $3.0 million, which completed the October 2020 share repurchase program.

In April 2024, the Board of Directors authorized a new buyback plan of up to 10% of shares outstanding for a maximum of 944,279 shares.

During the third quarter of 2024, we repurchased 98,156 shares of common stock under the April 2024 stock repurchase plan at an average price of $10.19 per share for a total of $1.0 million, leaving 846,123 shares remaining in the current share repurchase program.

Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023

The Company recorded a net loss of $2.0 million for the three months ended September 30, 2024, compared to net income of $2.5 million for the three months ended September 30, 2023.

A $3.7 million decrease in net interest income after provision for credit losses, a $1.5 million increase in noninterest expense and a $1.1 million decrease in noninterest income were partially offset by decrease in provision for income taxes of $1.8 million.

Net Interest Income.

Net interest income decreased $930,000 to $14.0 million for the three months ended September 30, 2024, from $15.0 million for the three months ended September 30, 2023.

This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 63 basis points to 3.23% for the three months ended September 30, 2024, compared to 2.60% for the same period in the prior year.

This was due to higher rates paid on all deposits and borrowings and an increase in the average balances of CDs and borrowings.

The cost of total deposits increased 71 basis points to 2.56% for the three months ended September 30, 2024, compared to 1.85% for the same period in 2023.

The average yield on interest-earning assets increased 30 basis points to 5.44% for the three months ended September 30, 2024, compared to 5.14% for the same period last year, due primarily to higher yields on variable- and adjustable-rate assets and an increase in higher yielding loan volume due to originations, purchases and draws on new and existing lines of credit.

The net interest margin decreased 27 basis points to 2.70% for the three months ended September 30, 2024, from 2.97% for the same period in 2023.

Total cost of funds increased 59 basis points to 2.82% for the three months ended September 30, 2024, from 2.23% for the same period in 2023.

While increases in the cost of funding outpaced the growth of the yield on interest-earning assets, the Company has taken measures to control interest rate margin compression.

Organic loan production was augmented with higher-yielding purchased loans through established third-party relationships.

Interest income on investment securities increased as a result of the purchase of higher-yielding investment securities in the linked quarter.

Income on the Bank's fair value hedging agreements on securities increased quarter-over-quarter by $42,000.

The fair value hedge on loans established in 2024 also increased interest income by $395,000 for the third quarter of 2024.

Interest Income.

Total interest income increased $2.4 million, or 9.2%, to $28.2 million for the three months ended September 30, 2024, from $25.8 million for the comparable period in 2023, primarily due to higher yields on interest-earning assets.

Interest and fees on loans receivable increased $1.8 million, to $23.5 million for the three months ended September 30, 2024, from $21.7 million for the three months ended September 30, 2023, primarily due to an increase in average loan yields to 5.51% for the three months ended September 30, 2024, from 5.31% for the same period in 2023, coupled with an increase in the average balance of net loans receivable of $74.6 million compared to the third quarter of 2023.

The loan portfolio has grown through draws on new and existing business lines of credit, originations of multi-family real estate loans, and purchases of auto, manufactured home, and purchased commercial business loans.

Loan interest income for the third quarter of 2024 was reduced by $625,000 due to interest reversals for loans placed on nonaccrual during the quarter.

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

The yield earned on investment securities also increased 72 basis points to 4.90% compared to the same period in 2023, as increases in floating bond rates, sales of lower-yielding bonds, purchases of new bonds at higher yields and a reduction in amortization of premium costs as prepayment speeds slow down have all positively impacted investment securities income.

The yield on FHLB dividends also increased to 9.46% from 7.12% for the comparable period in 2023.

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 $3.3 million, or 30.3%, to $14.2 million for the three months ended September 30, 2024, compared to $10.9 million for the three months ended September 30, 2023.

The increase over the third quarter of 2023 was the result of an increase in the cost of deposits to 2.56% from 1.85% in same period one year ago along with higher volumes of CDs and money market accounts.

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

Interest expense on borrowings increased due to an average balance increase of $10.5 million and an increase in the cost of advances from 4.52% to 4.41%, primarily FHLB advances, compared to the same period in 2023.

Average deposit account balances were composed of 85% in interest-bearing deposits and 15% in noninterest-bearing deposits at September 30, 2024, compared to 82% and 18%, respectively, at September 30, 2023.

During the three months ended September 30, 2024, interest expense increased on CDs due to an increase in the average balances of $58.6 million, along with an increase in the average rates paid of 63 basis points, compared to the three months ended September 30, 2023.

During the same period, the average balances of money market accounts increased $57.9 million with a 143-basis point average rate increase, resulting in an increase to interest expense.

The average cost of interest-bearing deposit accounts increased to 3.00% for the three months ended September 30, 2024, from 2.22% for the three months ended September 30, 2023, 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 retail customer deposit balances shifted from non-maturity accounts towards higher cost term certificate products.

Retail customer CDs represented 29.3% and 27.6% of retail customer deposits at September 30, 2024 and 2023, 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, retail

Certificates of deposit, brokered

Subordinated debt

Total interest-bearing liabilities

Provision for Credit Losses.

The Company recorded a $3.1 million provision for credit losses in the three months ended September 30, 2024.

A provision for credit losses on loans of $3.0 million was the result of reserves taken on individually evaluated loans and an increase in the estimated CECL loss factors applied to pooled commercial business loans and multi-family loans at quarter end.

Increases were partially offset by a decrease in the loss factors applied to consumer, commercial real estate and one-to-four family loan balances.

A provision for credit losses on unfunded commitments of $57,000 was also recorded during the quarter ended September 30, 2024, due to higher loss factors and a moderate increase in commitment balances at quarter end.

The total provision for credit losses on loans was $880,000 for the quarter ended September 30, 2023, partially offset by a provision recovery on unfunded commitments of $509,000.

The ACLL as a percentage of nonaccrual loans at period end decreased to 72% compared to 714% for the same period in 2023.

This ratio continues to decline as higher balances of real estate loans are included in the nonperforming assets with no significant corresponding increase to the ACLL as these secured loans are considered adequately reserved for based on the information currently available.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments 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 credit losses on loans as a percentage of total 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 receivable

Total loans receivable

Provision for (recapture of) credit losses on unfunded commitments

Reserve for unfunded commitments

Unfunded loan commitments

Noninterest Income.

Noninterest income decreased $1.1 million, or 38.7%, to $1.8 million for the three months ended September 30, 2024, from $2.9 million for the three months ended September 30, 2023.

The third quarter of 2023 included $750,000 in credit enhancements reimbursed to the Company on Splash charge-offs recorded in other noninterest income.

The quarter ended September 30, 2023, also included a $102,000 gain on sale of mortgage loans, compared to a $6,000 gain in the third quarter of 2024.

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 increased $1.5 million, or 10.2%, to $15.9 million for the three months ended September 30, 2024, compared to $14.4 million for the three months ended September 30, 2023.

The increase in expenses compared to the third quarter of 2023 is mainly due to one-time severance payouts of $704,000, additional payroll tax expense of $342,000 and additional medical benefit expense of $162,000.

Payroll tax expense in the third quarter of 2023 was offset by the accretion of the employee retention credit ("ERC"), which reduced the expense by $293,000.

In the fourth quarter of 2023, the Bank stopped the recognition of the ERC for the foreseeable future.

Occupancy increased due to the additional rent of $416,000 from the previous quarter sale-leaseback transaction.

Other increases compared to the third quarter of 2023 included $51,000 in stockholder communications, $103,000 in state taxes, $163,000 in FDIC insurance premiums, and $269,000 in additional credit related expenses.

These increases were partially offset by lower legal fees of $204,000, consulting fees of $146,000 and advertising costs of $91,000.

The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending to improve earnings.

The reduction in force, along with year-to-date headcount management through attrition, is expected to result in a decrease to prior levels of compensation expense by approximately $820,000 per quarter starting in the fourth quarter of 2024.

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 benefit of $1.2 million was recorded for the three months ended September 30, 2024, compared to expense of $603,000 for the three months ended September 30, 2023, due to a year-over-year decrease in income before taxes of $6.3 million.

The provision includes accruals for both federal and state income taxes.

For additional information, see Note 9 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, 2024 and 2023

The Company recorded a net loss of $3.8 million for the nine months ended September 30, 2024, compared to net income of $7.8 million for the nine months ended September 30, 2023.

A $17.7 million decrease in net interest income after provision for credit losses and a $1.3 million increase in noninterest expense were partially offset by a $4.4 million increase in noninterest income and a decrease in provision for income tax of $3.2 million.

Commercial real estate

Commercial business

Total restructured loans

Nonaccrual loans as a percentage of total loans

Nonperforming MLTB loans included in total nonaccrual loans and total restructured loans above

In the first quarter of 2025, a commercial business loan receivable held by First Northwest converted into a Series A security valued at $1.3 million.

The transaction resulted in a $1.0 million reduction to loans receivable, a $260,000 reduction to interest receivable and a $1.3 million increase to equity investments.

Also in the first quarter of 2025, a BOLI group life policy with a $9.4 million carrying value was terminated and the balance reclassified from BOLI to other assets until reimbursement is received from the issuer.

In April, the Bank reinvested the value of the terminated policy into a new BOLI separate life policy.

Total liabilities decreased to $2.02 billion at March 31, 2025, from $2.08 billion at December 31, 2024, due to decreases in brokered deposits of $45.0 million and borrowings of $28.9 million, partially offset by an increase in customer deposit balances of $23.0 million.

Deposit account balances decreased $22.0 million, or 1.3%, to $1.67 billion at March 31, 2025 from $1.69 billion at December 31, 2024.

During the first three months of 2025, total customer deposit balances increased $23.0 million and brokered deposit balances decreased $45.0 million.

Within customer deposit balances, increases in savings accounts of $30.1 million and money market accounts of $10.7 million were partially offset by decreases in customer term certificates of $14.3 million and demand deposit accounts of $3.5 million.

Increases in savings and money market accounts were driven by customer behavior as they sought out higher rates offered as term certificate specials matured and specials ended.

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

Overall, the current rate environment contributed to continued competition for deposits during the first quarter of 2025.

As a result, the Bank continued offering deposit rate specials to retain existing balances and attract new funds.

FHLB advances decreased $30.0 million, or 10.3% to $260.0 million at March 31, 2025, from $290.0 million at December 31, 2024.

The Bank reduced short-term FHLB advances while long-term advances marginally increased to provide additional balance sheet liquidity.

The Company also redeemed $5.0 million of subordinated debt during the first quarter of 2025 at a discount, resulting in a one-time gain on extinguishment of debt recorded in other noninterest income.

Total shareholders' equity decreased $7.4 million to $146.5 million for the three months ended March 31, 2025, due to a $9.0 million net loss recorded during that period, $656,000 of dividends declared and a $425,000 decrease in the post-tax fair market value of derivatives.

These decreases were partially offset by an increase in the after-tax fair market values of the available-for-sale investment securities portfolio of $2.4 million.

During the first quarter of 2025, the Company did not repurchase any common stock under the Company's April 2024 stock repurchase plan, leaving 846,123 shares remaining in the current share repurchase program.

Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024

The Company recorded a net loss of $9.0 million for the three months ended March 31, 2025, compared to net income of $396,000 for the three months ended March 31, 2024.

A $6.8 million increase in provision for credit losses and a $5.7 million increase in noninterest expense were partially offset by a decrease in provision for income tax of $1.6 million and a $1.6 million increase in noninterest income.

Net Interest Income.

Net interest income decreased $5.1 million to $42.2 million for the nine months ended September 30, 2024, from $47.2 million for the nine months ended September 30, 2023, as higher funding costs outpaced increased loan, investment and interest-earning deposit income.

Net interest income decreased $81,000 to $13.9 million for the three months ended March 31, 2025, from $13.9 million for the three months ended March 31, 2024, as declines in loan and interest-earning deposit income outpaced reduced deposit costs.

Average earning assets increased $3.9 million year-over-year.

The yield on average interest-earning assets increased 38 basis points to 5.47% for the nine months ended September 30, 2024, compared to 5.09% 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 3.22% for the nine months ended September 30, 2024, compared to 2.26% 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, money market accounts and FHLB advances.

Total cost of funds increased 89 basis points to 2.81% for the nine months ended September 30, 2024, from 1.92% for the same period in 2023.

The net interest margin decreased 48 basis points to 2.74% for the nine months ended September 30, 2024, from 3.22% for the same period in 2023.

The yield on average interest-earning assets decreased 7 basis points to 5.35% for the three months ended March 31, 2025, compared to 5.42% for the same period in the prior year, due to decreases in average net loans receivable and interest-earning deposit account balances, along with decreased yields on all interest-earning assets.

The average cost of interest-bearing liabilities decreased to 3.05% for the three months ended March 31, 2025, compared to 3.14% for the same period last year, due primarily to lower rates paid on savings accounts, CDs, and advances along with decreases in the average balances of brokered CDs, savings account balances and subordinated debt.

Total cost of funds decreased 7 basis points to 2.67% for the three months ended March 31, 2025, from 2.74% for the same period in 2024.

The net interest margin remained flat at 2.76% for both the three months ended March 31, 2025 and the same period in 2024.

Interest Income.

Total interest income increased $9.6 million, or 12.8%, to $84.1 million for the nine months ended September 30, 2024, from $74.6 million for the comparable period in 2023, 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 $7.5 million, to $70.0 million for the nine months ended September 30, 2024, from $62.5 million for the nine months ended September 30, 2023, primarily due to an increase in the average balance of net loans receivable of $103.9 million compared to the prior year, coupled with an increase in average loan yields to 5.55% for the nine months ended September 30, 2024, from 5.28% for the same period in 2023.

The loan portfolio increased as a result of participation in the Northpointe MPP and additional auto, manufactured home, and commercial business loan purchases.

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

The yield earned on investment securities also increased 82 basis points to 4.89% compared to the same period in 2023, due to the purchase of higher-yielding investments in the second quarter of 2024.

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.

Total interest income decreased $503,000, or 1.8%, to $26.8 million for the three months ended March 31, 2025, from $27.3 million for the comparable period in 2024, primarily due to a decrease in yields on all interest-earning assets and a decrease in average net loans receivable balances.

Interest and fees on loans receivable decreased $536,000, to $22.2 million for the three months ended March 31, 2025, from $22.8 million for the three months ended March 31, 2024, primarily due to a decrease in the average balance of net loans receivable of $19.5 million compared to the prior year, coupled with a decrease in average loan yields to 5.49% for the three months ended March 31, 2025, from 5.51% for the same period in 2024.

Average balances in the loan portfolio decreased primarily due to a lower average volume of construction loans partially offset by higher average volumes of one-to-four family, purchased auto and purchased manufactured home loans.

Loan yields decreased over the prior year due to the repricing of variable- and adjustable-rate loans tied to the Prime Rate or other variable-rate indices.

The yield earned on investment securities also decreased 12 basis points to 4.63% compared to the same period in 2024, due to floating bond yields and maturities of higher yielding fixed-rate investments.

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,

Three Months Ended March 31,

Average Balance Outstanding

Increase in Interest Income

(Decrease) Increase in Interest Income

(Dollars in thousands)

4 unchanged sentences

Interest Expense.

Total interest expense increased $14.6 million, or 53.4%, to $42.0 million for the nine months ended September 30, 2024, compared to $27.4 million for the nine months ended September 30, 2023.

The increase over the first nine months of 2023 was the result of a 98-basis point increase in the cost of total deposits from 1.51% one year prior to 2.49% along with a higher volume of CD balances.

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

Interest expense on borrowings increased due to a $27.9 million increase in the average balance and a 31-basis point increase in the cost of advances, primarily FHLB advances, compared to the same period in 2023.

During the nine months ended September 30, 2024, interest expense on CDs increased due to higher average balances of $113.8 million, along with a 108-basis point increase in the average rates paid, compared to the nine months ended September 30, 2023.

Total interest expense decreased $422,000, or 3.1%, to $13.0 million for the three months ended March 31, 2025, compared to $13.4 million for the three months ended March 31, 2024.

The decrease over the first three months of 2024 was the result of a 4-basis point decrease in the cost of total deposits from 2.43% one year prior to 2.39% along with a reduction of brokered CDs.

A shift in the deposit mix from savings accounts and brokered CDs to a higher volume of customer CDs and money market accounts resulted in a lower cost of deposits.

Interest expense on borrowings increased marginally due to a $25.5 million increase in the average balance, partially offset by a 39-basis point decrease in the cost of advances, primarily FHLB advances, compared to the same period in 2024.

During the three months ended March 31, 2025, interest expense on CDs decreased due to lower average balances of $33.2 million, primarily brokered CDs, along with a 17-basis point increase in the average rates paid, compared to the three months ended March 31, 2024.

During the same period, the average balances of money market accounts increased $36.9 million, with a 21-basis point average rate increase, resulting in an increase to interest expense.

The average cost of interest-bearing deposit accounts increased to 2.92% for the nine months ended September 30, 2024, from 1.83% for the nine months ended September 30, 2023, due to the use of promotional products designed to retain existing deposits and generate new deposits.

The mix of retail customer deposit balances shifted from non-maturity accounts towards higher cost CDs.

Retail customer CDs represented 25.8% and 24.7% of total deposits at September 30, 2024 and 2023, respectively.

Brokered CDs represented 11.9% and 10.2% of total deposits at September 30, 2024 and 2023, respectively.

The average cost of interest-bearing deposit accounts decreased to 2.80% for the three months ended March 31, 2025, from 2.86% for the three months ended March 31, 2024.

The Bank continues to use promotional products designed to retain existing deposits and generate new deposits.

Promotional rates are regularly reviewed and adjusted.

The mix of customer deposit balances shifted from savings accounts towards money market accounts and CDs.

Customer CDs represented 27.0% and 25.1% of total deposits at March 31, 2025 and 2024, respectively.

Brokered CDs represented 8.3% and 11.5% of total deposits at March 31, 2025 and 2024, 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,

Three Months Ended March 31,

Average Balance Outstanding

Increase (Decrease) in Interest Expense

(Decrease) Increase in Interest Expense

(Dollars in thousands)

2 unchanged sentences

Savings accounts

Certificates of deposit, retail

Certificates of deposit, customer

Certificates of deposit, brokered

2 unchanged sentences

Provision for Credit Losses.

The Company recorded a $12.8 million provision for credit losses in the nine months ended September 30, 2024.

A provision for credit losses on loans of $13.0 million was the result of the charge-off activity previously discussed;

an increase in the estimated CECL loss factors applied to commercial business loans, residential real estate and multi-family loans;

and growth in the purchased auto loan portfolio.

Increases were partially offset by a decrease in the loss factors applied to commercial real estate loans, home equity lines of credit and other consumer loans, and declining construction loan balances.

A recapture of $113,000 was due to a lower year-over-year loss factor applied to unfunded commitment balances reducing the provision for credit losses recorded during the nine months ended September 30, 2024.

This compares to a $1.2 million loan loss provision and a $1.0 million unfunded commitment provision recapture for the nine months ended September 30, 2023.

While the ACLL as a percentage of nonaccrual loans at period end has decreased to 72% compared to 714% for the same period in 2023, the majority of the nonaccrual loan balance is comprised of well-secured real estate loans, based on the current loan-to-value ratio, which the Company believes will be sufficient to repay the loans upon sale of the underlying collateral.

The Company recorded a $7.8 million loan loss provision and a $15,000 unfunded commitment provision for the three months ended March 31, 2025.

This compares to a $1.2 million loan loss provision offset by a $269,000 unfunded commitment provision recapture for the three months ended March 31, 2024.

The higher provision for credit losses on loans compared to the same period in 2024 was mainly due to underlying collateral deficiencies for two commercial real estate loans, a commercial business loan, a group of commercial equipment loans and consumer unsecured loans resulting in net charge-offs totaling $7.7 million for the three-month period.

Increases in qualitative factor adjustments and a mild increase in factors related the general economic outlook applied to the remaining loan portfolio balance at March 31, 2025 also contributed to the higher provision.

The increase in unfunded commitment provision compared to the same period in 2024 was due to higher balances.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

5 unchanged sentences

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 receivable

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

Total loans receivable

Recapture of provision for credit losses on unfunded commitments

Provision for (recapture of) credit losses on unfunded commitments

Reserve for unfunded commitments

1 unchanged sentence

Noninterest Income.

Noninterest income increased $4.4 million, or 62.8%, to $11.3 million for the nine months ended September 30, 2024, from $7.0 million for the nine months ended September 30, 2023.

The increase was primarily due to the sale of the six branch properties in the sale-leaseback transaction partially offset by the sale of securities and no loan swap fee income or investment services fee income during the nine months ended September 30, 2024.

The Company ended its investment services program in 2023.

The third quarter of 2023 included $750,000 in credit enhancements reimbursed to the Company on Splash charge-offs recorded in other noninterest income.

Income from the gain on sale of loans during the nine months ended September 30, 2024, includes $116,000 from SBA loans compared to $65,000 in the same period of 2023.

The conversion of lower-yielding BOLI policies initiated in the first quarter of 2024 contributed towards the $120,000 year-over-year recorded increase.

Noninterest income increased $1.6 million, or 72.6%, to $3.8 million for the three months ended March 31, 2025, from $2.2 million for the three months ended March 31, 2024.

The increase was primarily due to income from a $1.1 million BOLI death benefit and a $846,000 gain on the extinguishment of debt related to repurchasing $5.0 million of subordinated debt at a discount.

As a result of the conversion of lower-yielding BOLI policies in 2024, there was a period-over-period increase in BOLI cash surrender value.

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,

Three Months Ended March 31,

Increase (Decrease)

3 unchanged sentences

Net gain on sale of loans

Net (loss) gain on sale of investment securities

Net gain on sale of premises and equipment

Increase in cash surrender value of bank-owned life insurance

Increase in BOLI cash surrender value

Income from BOLI death benefit, net

Total noninterest income

Noninterest Expense.

Noninterest expense increased $1.3 million, or 2.9%, to $45.8 million for the nine months ended September 30, 2024, compared to $44.5 million for the nine months ended September 30, 2023.

The increase in expenses compared to the same period in 2023 is mainly due to one-time severance payouts of $704,000, higher payroll taxes of $965,000 related to employee retention tax credits recorded in 2023, tax on the sale-leaseback transaction of $359,000, additional rent of $707,000 and production commissions of $113,000.

These increases were partially offset by lower advertising costs and a $218,000 reduction in the accrual for a civil money penalty assessed by the FDIC.

The civil money penalty was originally accrued in the fourth quarter of 2023.

Noninterest expense increased $5.7 million, or 39.8%, to $20.0 million for the three months ended March 31, 2025, compared to $14.3 million for the three months ended March 31, 2024.

The increase in expenses compared to the same period in 2024 is mainly due to a $5.8 million accrued legal reserve included in other expense and an increase in occupancy and equipment due to additional rent related to a sale-leaseback transaction in the second quarter of 2024.

These increases were partially offset by lower compensation and benefit costs due to a smaller workforce and lower professional fees.

The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending to improve earnings.

A reduction-in-force impacting 9% of our workforce took place in July 2024.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Increase (Decrease)

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Provision for Income Tax.

An income tax benefit of $1.3 million was recorded for the nine months ended September 30, 2024, compared to expense of $1.9 million for the nine months ended September 30, 2023, due to a year-over-year decrease in income before taxes of $14.7 million.

The provision for the nine months ended September 30, 2024, includes a tax penalty estimate for the early surrender of a BOLI contract.

The provision includes accruals for both federal and state income taxes.

An income tax benefit of $1.1 million was recorded for the three months ended March 31, 2025, compared to an expense of $447,000 for the three months ended March 31, 2024, due to a period-over-period decrease in income before taxes of $11.0 million.

Both periods include a tax penalty estimate for the early surrender of BOLI contracts.

The provision also 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.

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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, 2024 and 2023.

Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of March 31, 2025 and 2024.

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) (2)

Investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (3)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit, retail

Certificates of deposit, brokered

Total interest-bearing deposits (4)

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits (4)

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 (5)

Average interest-earning assets to average interest-bearing liabilities

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

(2) Interest earned on loans receivable includes net deferred fees (costs) of $22,000 and ($275,000) for the three months ended September 30, 2024 and 2023, respectively.

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

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.56% and 1.85% for the three months ended September 30, 2024 and 2023, respectively.

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

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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Savings accounts

Certificates of deposit, retail

Certificates of deposit, customer

Certificates of deposit, brokered

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

(2) Interest earned on loans receivable includes net deferred costs of ($115,000) and ($410,000) for the nine months ended September 30, 2024 and 2023, respectively.

(2) Interest earned on loans receivable includes net deferred costs of ($338,000) and ($171,000) for the three months ended March 31, 2025 and 2024, respectively.

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

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.49% and 1.51% for the nine months ended September 30, 2024 and 2023, respectively.

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.39% and 2.43% for the three months ended March 31, 2025 and 2024, respectively.

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

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Three Months Ended

Nine Months Ended

September 30, 2024 Compared to September 30, 2023

Increase (Decrease) Due to

March 31, 2025 Compared to March 31, 2024

Increase (Decrease) Due to

Total Increase (Decrease)

(In thousands)

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Savings accounts

Certificates of deposit, retail

Certificates of deposit, customer

Certificates of deposit, brokered

Subordinated debt

Total interest-bearing liabilities

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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, 2024 and the year ended December 31, 2023, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

For the three months ended March 31, 2025 and the year ended December 31, 2024, 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, 2024, our scheduled maturities of contractual obligations were as follows:

At March 31, 2025, our scheduled maturities of contractual obligations were as follows:

After 1 Year Through

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Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, 2024:

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2025:

Amount of Commitment by Expiration

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(In thousands)

Commitments to originate loans:

Variable-rate

Unfunded commitments under lines of credit

Unfunded commitments under existing construction loans

Unfunded commitments under existing maritime loans

Standby letters of credit

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

At September 30, 2024, cash and cash equivalents totaled $82.7 million and unpledged securities classified as available-for-sale had a market value of $267.3 million.

The Bank pledged collateral of $576.9 million to support borrowings from the FHLB, with a remaining borrowing capacity of $226.1 million at September 30, 2024.

The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $19.3 million were pledged as of September 30, 2024, providing a borrowing capacity of $18.7 million.

At March 31, 2025, cash and cash equivalents totaled $70.3 million and unpledged securities classified as available-for-sale had a market value of $273.4 million.

The Bank pledged collateral of $538.3 million to support borrowings from the FHLB, with a remaining borrowing capacity of $217.6 million at March 31, 2025.

The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $18.5 million were pledged as of March 31, 2025, providing a borrowing capacity of $17.9 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 $14.5 million at September 30, 2024.

At September 30, 2024, we had $2.5 million in commitments to originate new loans, $2.5 million in standby letters of credit and $166.5 million in undisbursed loans, including $58.6 million in undisbursed construction loan commitments and $1.6 million in undisbursed maritime fabrication loan commitments.

CDs due within one year as of September 30, 2024, totaled $523.6 million, or 81.1% of CDs with a weighted-average rate of 4.37%.

The remaining borrowing capacity of the NexBank line of credit was $7.5 million at March 31, 2025.

At March 31, 2025, we had commitments to fund $408,000 in standby letters of credit and $175.1 million in undisbursed loans, including $57.1 million in undisbursed construction loan commitments.

CDs due within one year as of March 31, 2025, totaled $500.8 million, or 85.1% of CDs with a weighted-average rate of 4.11%.

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

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First Fed has a diversified deposit base with approximately 62% of deposit account balances held by consumers, 22% held by business and 8% by public fund depositors, and 8% in brokered deposits.

The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at September 30, 2024.

We estimate that 20-25% of our retail customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers.

The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at March 31, 2025.

We estimate that 20-25% of our customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers.

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, 2024, the Company, on an unconsolidated basis, had liquid assets of $595,000.

At March 31, 2025, the Company, on an unconsolidated basis, had liquid assets of $865,000.

In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, and 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.

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Capital Resources

At September 30, 2024, shareholders' equity totaled $160.8 million, or 7.1% of total assets.

Our book value per share of common stock was $17.17 at September 30, 2024, compared to $16.99 at December 31, 2023.

At September 30, 2024, 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, 2024.

At March 31, 2025, shareholders' equity totaled $146.5 million, or 6.7% of total assets.

Our book value per share of common stock was $15.52 at March 31, 2025, compared to $16.45 at December 31, 2024.

At March 31, 2025, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at March 31, 2025.

Minimum Capital Requirements

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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%.

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

Effect of Inflation and Changing Prices

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis