First Northwest Bancorp

Previous wording

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, 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") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities.

Current wording

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") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities. First Fed also has a limited partnership investment in the Meriwether Group Capital Hero Fund LP ("Hero Fund") which was previously held by First Northwest. The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.

Previous wording

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 33.3% 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.

Current wording

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 33.3% 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 Hero Fund. MWG also holds a 20% general partner interest in MWGC. MWGC holds a 0.01% general partner interest in the Hero Fund.

Previous wording

Assets*.* Total assets increased to $2.24 billion, or 1.7%, at March 31, 2024, from $2.2 billion at December 31, 2023.

Current wording

Assets*.* Total assets increased to $2.22 billion, or 0.8%, at June 30, 2024, from $2.2 billion at December 31, 2023.

Previous wording

Cash and cash equivalents decreased by $45.8 million, or 37.2%, to $77.4 million as of March 31, 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.

Current wording

Cash and cash equivalents decreased by $40.0 million, or 32.5%, to $83.2 million as of June 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.

Previous wording

Investment securities increased $30.3 million, or 10.3%, to $326.0 million at March 31, 2024, from $295.6 million at December 31, 2023. Investment security purchases during the first quarter of 2024 totaled $45.3 million, carrying an estimated weighted-average yield of 6.3% with a weighted-average life of 5.6 years. The purchases were partially offset by payment activity and a portfolio market value decrease of $749,000. Our recent investments have primarily been floating rate securities to take advantage of higher short-term rates above those offered on cash and to reduce our liability sensitivity. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.8 years as of March 31, 2024, compared to 7.7 years as of December 31, 2023, and had an estimated average repricing term of 5.7 years as of March 31, 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 4.4 years at March 31, 2024, compared to 4.8 years at December 31, 2023. We believe prepayment activity may continue to slow if interest rates continue to rise, extending the projected duration and causing deterioration to the market value of our securities portfolio.

Current wording

Investment securities increased $11.1 million, or 3.8%, to $306.7 million at June 30, 2024, from $295.6 million at December 31, 2023. Investment security purchases during the six months ended June 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 $100,000 were partially offset by the sale of $23.2 million of securities, with an average yield of 3.0%, during the six months ended June 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 balance sheet sensitivity. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.8 years as of June 30, 2024, compared to 7.7 years as of December 31, 2023, and had an estimated average repricing term of 6.5 years as of June 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 4.3 years at June 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.

Previous wording

Included in MBS non-agency are $29.9 million of commercial mortgage-backed securities ("CMBS"), of which 93.3% are in "A" tranches and the remaining 6.7% are in "B" tranches. Our largest exposure is to long-term care facilities, which comprises 65.3%, or $19.5 million, of our private label CMBS securities. All of the CMBS bonds have credit enhancements ranging from 29% to 99%, with a weighted-average credit enhancement of 56%, that further reduces the risk of loss on these investments.

Current wording

Included in MBS non-agency are $29.8 million of commercial mortgage-backed securities ("CMBS"), of which 89.8% are in "A" tranches with the remaining 10.2% in "B" tranches. Our largest exposure in the CMBS portfolio is to long-term care facilities, which comprises 65.2%, or $19.4 million, of our private label CMBS securities. All of the CMBS have credit enhancements ranging from 28.8% to 99.8%, with a weighted-average credit enhancement of 55.2%, that further reduces the risk of loss on these investments.

Previous wording

The investment portfolio was composed of 55.6% in amortizing securities at March 31, 2024, compared to 52.0% at December 31, 2023. 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.

Current wording

The investment portfolio was comprised of 55.8% in amortizing securities at June 30, 2024, compared to 52.0% at December 31, 2023. 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. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Previous wording

Net loans, excluding loans held for sale, increased $50.3 million to $1.69 billion at March 31, 2024, from $1.64 billion at December 31, 2023. During the three months ended March 31, 2024, commercial business loans increased $24.0 million, including an increase in our participation in the Northpointe Bank Mortgage Purchase Program from $9.5 million last quarter to $15.0 million at the current quarter end, $8.7 million of Bankers Healthcare group loans and organic originations partially offset by repayments. Auto and other consumer loans increased $19.7 million during the current quarter with $13.4 million of new Woodside auto loan purchases and a pool purchase of Triad manufactured home loans totaling $5.1 million, partially offset by payment activity. Multi-family loans increased $6.4 million during the current quarter. The increase was primarily the result of $12.7 million of construction loans converting into permanent amortizing loans, partially offset by scheduled payments. One-to-four family loans increased $5.5 million during the current quarter as a result of $10.4 million in residential construction loans that converted to permanent amortizing loans, partially offset by payments received. Home equity loan outstanding balances increased $3.0 million over the previous quarter due to draws on new and existing line of credit commitments and $833,000 from home equity loan production. Commercial real estate loans decreased $2.9 million during the current quarter compared to the previous quarter due to a reclassification of $2.9 million to multi-family along with payoffs and scheduled payments exceeding originations.

Current wording

Net loans, excluding loans held for sale, increased $39.8 million to $1.68 billion at June 30, 2024, from $1.64 billion at December 31, 2023. During the six months ended June 30, 2024, auto and other consumer loans increased $36.5 million with $25.6 million of Woodside auto loan purchases, $22.3 million of Triad manufactured home loan purchases and $14.2 million of First Help auto loan purchases, partially offset by prepayments and scheduled payments. Multi-family loans increased $17.0 million during the six months ended June 30, 2024. The increase was the result of $21.4 million of construction loans converting into permanent amortizing loans, partially offset by payment activity. One-to-four family loans increased $11.5 million during the six months ended June 30, 2024, as a result of $22.3 million in residential construction loans which converted to permanent amortizing loans, partially offset by payments received. Commercial business loans increased $7.5 million, including $13.4 million of organic originations, $9.5 million of purchased Bankers Healthcare group loans and $4.9 million in draws on existing line of credit commitments, offset by repayments. Home equity loan outstanding balances increased $3.2 million over the prior year end due to $2.9 million from home equity loan originations and draws on new and existing line of credit commitments. Commercial real estate loans decreased $12.5 million during the six months ended June 30, 2024, due to payoffs, scheduled payments and a reclassification of $3.9 million to multi-family offsetting originations of $5.2 million.

Previous wording

Construction and land loans decreased $4.3 million, or 3.3%, to $125.4 million at March 31, 2024, from $129.7 million at December 31, 2023, with $14.5 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 and one loan in Oregon. We manage construction lending by utilizing a licensed third-party vendor to assist us in monitoring our higher-risk projects while internal staff monitor the progress toward completion of our lower-risk projects. We continue to monitor the impact of inflation and consumer demand in the current interest rate environment on completion of the projects currently in the portfolio. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. At March 31, 2024, 51% of construction commitments were for one-to-four family residential properties, which are anticipated to convert into amortizing loans upon completion.

Current wording

Construction and land loans decreased $18.4 million, or 14.2%, to $111.3 million at June 30, 2024, from $129.7 million at December 31, 2023, with $44.1 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. 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 June 30, 2024, 47% 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.

Previous wording

During the three months ended March 31, 2024, the Company added $50.0 million of organic loan originations and commitments to the portfolio, of which $36.1 million, or 72.1%, were located in the Puget Sound region, $10.4 million, or 20.8%, in the North Olympic Peninsula, $448,000, or 0.9%, in other areas throughout Washington State, and $3.1 million, or 6.1%, in other states. The Company purchased an additional $18.1 million in auto loans, $13.8 million in manufactured home loans, and $9.1 million in commercial business loans to borrowers located throughout the United States during the three months ended March 31, 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 Bank 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 78.6% organic originations and 21.4% purchased loans at March 31, 2024.

Current wording

During the six months ended June 30, 2024, the Company added $90.5 million of organic loan originations, of which $59.4 million, or 65.7%, were located in the Puget Sound region, $23.5 million, or 26.0%, on the North Olympic Peninsula, $2.8 million, or 3.1%, in other areas throughout Washington State, and $4.8 million, or 5.3%, in other states. The Company purchased an additional $40.7 million in auto loans, $22.3 million in manufactured home loans, and $9.5 million in commercial business loans to borrowers located throughout the United States during the six months ended June 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 Bank Mortgage Purchase Program ("Northpointe MPP") also provides a 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 78.3% organic originations and 21.7% purchased loans at June 30, 2024.

Previous wording

The ACLL increased to $18.0 million at March 31, 2024, as the Company recorded a $1.2 million provision for credit loss on loans for the three-month period. Net charge-offs were $791,000 for the three-month period. The ACLL as a percentage of total loans was 1.05% and 1.10% at March 31, 2024 and December 31, 2023, respectively.

Current wording

The ACLL increased to $21.5 million at June 30, 2024, as the Company recorded a $4.1 million provision for credit loss on loans for the six-month period. Net charge-offs were $1.4 million for the six-month period. The ACLL as a percentage of total loans was 1.26% and 1.10% at June 30, 2024 and December 31, 2023, respectively.

Previous wording

Nonaccrual loans increased $837,000, or 4.5%, to $19.5 million at March 31, 2024, from $18.6 million at December 31, 2023, primarily attributable to two delinquent commercial business loans with an aggregate total of $1.1 million and a $708,000 multi-family loan placed on nonaccrual due to credit concerns, partially offset by a $544,000 payment received on the commercial construction loan previously placed on nonaccrual and a $591,000 single family residence loan that was paid off during the current quarter. Nonaccrual loans to total loans was 1.14% at March 31, 2024, compared to 1.12% at December 31, 2023. The ACLL as a percentage of nonaccrual loans decreased to 92% at March 31, 2024, down from 94% at December 31, 2023.

Current wording

Nonaccrual loans increased $11.6 million, or 62.3%, to $30.3 million at June 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, four delinquent commercial business loans with an aggregate total of $2.8 million, a $708,000 multi-family loan, a $535,000 delinquent purchased one-to-four family loan, three delinquent auto loans totaling $406,000 and a $184,000 increase to a commercial construction relationship previously placed on nonaccrual. These increases were partially offset by a $591,000 single family residence loan that was paid off during the first quarter of 2024. Nonaccrual loans to total loans was 1.78% at June 30, 2024, compared to 1.12% at December 31, 2023. The ACLL as a percentage of nonaccrual loans decreased to 71% at June 30, 2024, down from 94% at December 31, 2023. Subsequent to quarter-end, the $708,000 multifamily loan was paid off.

Previous wording

Classified loans increased $1.1 million to $36.2 million at March 31, 2024, from $35.1 million at December 31, 2023, due to the downgrade of the three loans during the first quarter as noted above. A $14.4 million construction loan relationship, which became a classified loan in the fourth quarter of 2022, and a $9.3 million commercial loan relationship which became classified in the fourth quarter of 2023, account for 66% of the classified loan balance at March 31, 2024. The Bank has exercised legal remedies, including the appointment of a third-party receivership and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in the two relationships. Proceeds from the sale of a unit in the construction loan relationship during the first quarter of 2024 were used to the paydown principal of the related loan balance.

Current wording

Classified loans increased $11.3 million to $46.4 million at June 30, 2024, from $35.1 million at December 31, 2023, due to the downgrade during the first half of 2024 of the loans noted above. A $15.2 million construction loan relationship, which became classified in the fourth quarter of 2022, a $9.2 million commercial loan relationship which became classified in the fourth quarter of 2023 and the $8.1 million commercial construction loan relationship which became classified in the quarter ended June 30, 2024, account for 70% of the classified loan balance at June 30, 2024. The Bank has exercised legal remedies, including the appointment of a third-party receivership 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. Subsequent to quarter-end, a property included in the $9.2 million commercial loan relationship was sold, resulting in a $3.0 million loan payoff recorded in the third quarter of 2024.

Previous wording

Loan charge-offs are concentrated mainly in purchased unsecured consumer loans. Charged-off balances related to loans purchased through the Splash Financial unsecured consumer loan program totaled $713,000 during the current quarter, or 85% of gross charge-offs. The Bank's participation in the program was discontinued in 2023. Total Splash loan balances of $6.0 million and $7.3 million were included in Auto and Other Consumer loans at March 31, 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 March 31, 2024.

Current wording

Loan charge-offs are concentrated mainly in purchased unsecured consumer loans. Charged-off balances related to loans purchased through the Splash unsecured consumer loan program totaled $1.3 million during the six months ended June 30, 2024, or 76% of gross charge-offs. The Bank's active participation in the program was discontinued in 2023. Total Splash loan balances of $4.7 million and $7.3 million were included in Auto and Other Consumer loans at June 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 June 30, 2024.

Previous wording

In the first quarter of 2024, the Bank changed the classification of assets related to the six properties included in the Sale Agreement with Mountainseed to properties held for sale on the Consolidated Balance Sheets. The Bank received the full sales price of $14.7 million. It is expected that proceeds of the sale transaction will be deployed into interest-earning assets or used to pay down advances. 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.

Current wording

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.

Previous wording

Liabilities. Total liabilities increased to $2.08 billion at March 31, 2024, from $2.04 billion at December 31, 2023, due to an increase in borrowings of $50.5 million. partially offset by a decrease in deposits of $10.3 million.

Current wording

Liabilities. Total liabilities increased to $2.06 billion at June 30, 2024, from $2.04 billion at December 31, 2023, due to increases in deposits of $31.4 million and lease liabilities included in other liabilities of $11.6 million, partially offset by a decrease in borrowings of $18.4 million.

Previous wording

Deposit balances decreased $10.3 million to $1.67 billion at March 31, 2024 from $1.68 billion at December 31, 2023. During first quarter of 2024, total retail deposit balances increased $5.2 million while brokered deposit balances decreased $15.4 million. Within retail deposit balances, an increase in money market accounts of $33.2 million and demand deposit accounts of $2.0 million was partially offset by a decrease in retail CDs of $24.5 million and savings accounts of $5.6 million. Increases in demand and money market accounts were driven by customer behavior as they sought out higher rates offered as CD specials matured. 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 continues to contribute to greater competition for deposits with additional deposit rate specials offered to attract new funds.

Current wording

Deposit balances increased $31.4 million to $1.71 billion at June 30, 2024 from $1.68 billion at December 31, 2023. During the first half of 2024, total retail deposit balances increased $15.3 million and brokered deposit balances increased $16.1 million. Within retail deposit balances, an increase in money market accounts of $60.8 million and demand deposit accounts of $17.2 million was partially offset by a decrease in retail CDs of $45.3 million and savings accounts of $17.5 million. Increases in demand and money market accounts were driven by customer behavior as they sought out higher rates offered as CD specials matured. 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.

Previous wording

FHLB advances increased $47.0 million, or 17.1% to $322.0 million at March 31, 2024, from $275.0 million at December 31, 2023. We increased both short-term and long-term advances to provide additional balance sheet liquidity and fund loan growth.

Current wording

Advances decreased $14.9 million, or 5.4% to $260.1 million at June 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.

Previous wording

Equity***.*** Total shareholders' equity decreased $2.8 million to $160.5 million for the three months ended March 31, 2024. The Company recorded year-to-date net income of $396,000 and a $730,000 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 securities of $588,000, $671,000 of dividends declared and $3.0 million for the cost of repurchased shares. Year-to-date, 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, with no shares remaining in the current share repurchase program. In April 2024, the Board of Directors authorized a new buyback plan of up to 10% of shares outstanding.

Current wording

Equity***.*** Total shareholders' equity decreased $822,000 to $162.5 million for the six months ended June 30, 2024. The Company recorded net income during that period of $1.8 million, a $902,000 increase in the post-tax fair market value of derivatives and $866,000 related to share-based compensation plans. Increases were partially offset by $1.3 million of dividends declared and $3.0 million for the cost of repurchased shares. During the six months ended June 30, 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. No shares have been repurchased to date under the new program.

Previous wording

**General.**Net income attributable to the Company was $396,000 for the three months ended March 31, 2024, compared to $3.5 million for the three months ended March 31, 2023. A $3.9 million decrease in net interest income after provision for credit losses and a $146,000 decrease in noninterest income was offset by a $568,000 decrease in noninterest expense.

Current wording

**General.**Net income attributable to the Company was $1.4 million for the three months ended June 30, 2024, compared to $1.8 million for the three months ended June 30, 2023. A $5.7 million decrease in net interest income after provision for credit losses and a $392,000 increase in noninterest expense were partially offset by a $5.6 million increase in noninterest income.

Previous wording

**Net Interest Income.**Net interest income decreased $2.4 million to $13.9 million for the three months ended March 31, 2024, from $16.3 million for the three months ended March 31, 2023. This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 133 basis points to 3.14% for the three months ended March 31, 2024, compared to 1.81% 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 131 basis points to 2.43% for the three months ended March 31, 2024, compared to 1.12% for the same period in 2023. The average yield on interest-earning assets increased 47 basis points to 5.42% for the three months ended March 31, 2024, compared to 4.95% for the same period last year, due primarily to higher yields on variable-rate assets and new loan originations.

Current wording

**Net Interest Income.**Net interest income decreased $1.7 million to $14.3 million for the three months ended June 30, 2024, from $16.0 million for the three months ended June 30, 2023. This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 95 basis points to 3.28% for the three months ended June 30, 2024, compared to 2.33% 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 93 basis points to 2.47% for the three months ended June 30, 2024, compared to 1.54% for the same period in 2023. The average yield on interest-earning assets increased 39 basis points to 5.56% for the three months ended June 30, 2024, compared to 5.17% 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.

Previous wording

Total cost of funds increased 121 basis points to 2.74% for the three months ended March 31, 2024, from 1.53% for the same period in 2023. The net interest margin decreased 70 basis points to 2.76% for the three months ended March 31, 2024, from 3.46% for the same period in 2023. While increases in the cost of funding currently outpace the growth of the yield on interest-earning assets, the Company has taken measures to reverse interest rate margin compression. Organic loan production was augmented with higher-yielding purchased loans through established third-party relationships. Lower yielding investment securities were sold at a loss in December 2023 and $45.3 million of higher-yielding security investments were purchased during the first quarter of 2024. Income on the Bank's fair value hedging agreements on securities increased quarter-over-quarter by $157,000. The fair value hedge on loans established mid-quarter brought in $173,000 for the first quarter of 2024.

Current wording

Total cost of funds increased 89 basis points to 2.87% for the three months ended June 30, 2024, from 1.98% for the same period in 2023. The net interest margin decreased 48 basis points to 2.77% for the three months ended June 30, 2024, from 3.25% 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 reverse interest rate margin compression. Organic loan production was augmented with higher-yielding purchased loans through established third-party relationships. Lower yielding investment securities totaling $23.2 million were sold at a loss in the second quarter of 2024, replaced with $53.3 million of higher-yielding security investments during the second quarter of 2024. Income on the Bank's fair value hedging agreements on securities increased quarter-over-quarter by $67,000. The fair value hedge on loans established in 2024 increased interest income by $378,000 for the second quarter of 2024.

Previous wording

**Interest Income.Total **interest income increased $4.0 million, or 17.4%, to $27.3 million for the three months ended March 31, 2024, from $23.3 million for the comparable period in 2023, primarily due to higher yields on interest-earning assets. Interest and fees on loans receivable increased $3.3 million, to $22.8 million for the three months ended March 31, 2024, from $19.5 million for the three months ended March 31, 2023, primarily due to an increase in average loan yields to 5.51% for the three months ended March 31, 2024, from 5.16% for the same period in 2023, coupled with an increase in the average balance of net loans receivable of $127.1 million compared to the first quarter of 2023. 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 82 basis points to 4.75% 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 interest-earning deposits in banks also increased to 5.57% from 4.63% for the comparable period in 2023, benefitting from increases in rates paid on excess balances held at the FRB.

Current wording

**Interest Income.Total **interest income increased $3.2 million, or 12.4%, to $28.6 million for the three months ended June 30, 2024, from $25.5 million for the comparable period in 2023, primarily due to higher yields on interest-earning assets. Interest and fees on loans receivable increased $2.5 million, to $23.8 million for the three months ended June 30, 2024, from $21.3 million for the three months ended June 30, 2023, primarily due to an increase in average loan yields to 5.62% for the three months ended June 30, 2024, from 5.38% for the same period in 2023, coupled with an increase in the average balance of net loans receivable of $111.0 million compared to the second 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 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- and adjustable-rate loans tied to the Prime Rate or other indices. The yield earned on investment securities also increased 87 basis points to 5.01% 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 interest-earning deposits in banks also increased to 5.54% from 5.18% for the comparable period in 2023, benefitting from increases in rates paid on excess balances held at the FRB.

Previous wording

Interest Expense. Total interest expense increased $6.4 million, or 92.0%, to $13.4 million for the three months ended March 31, 2024, compared to $7.0 million for the three months ended March 31, 2023. The increase over the first quarter of 2023 was the result of an increase in the cost of deposits to 2.43% from 1.12% 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 resulted in higher costs of deposits. Borrowing expense increased due to an average balance increase of $20.7 million and an increase in the cost of advances, primarily FHLB advances, compared to the same period in 2023.

Current wording

Interest Expense. Total interest expense increased $4.9 million, or 51.5%, to $14.4 million for the three months ended June 30, 2024, compared to $9.5 million for the three months ended June 30, 2023. The increase over the second quarter of 2023 was the result of an increase in the cost of deposits to 2.47% from 1.54% 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 savings accounts to a higher volume of CDs and money market accounts and higher prevailing market rates resulted in a higher cost of deposits. Interest expense on borrowings increased due to an average balance increase of $52.5 million and an increase in the cost of advances from 4.41% to 4.85%, primarily FHLB advances, compared to the same period in 2023.

Previous wording

Average deposit account balances were composed of 85% in interest-bearing deposits and 15% in noninterest-bearing deposits at March 31, 2024, compared to 81% and 19%, respectively, at March 31, 2023. During the three months ended March 31, 2024, interest expense increased on CDs due to an increase in the average balances of $195.7 million, along with an increase in the average rates paid of 135 basis points, compared to the three months ended March 31, 2023. During the same period, the average balances of money market accounts decreased $56.6 million, offset by a 135 basis point average rate increase, resulting in an increase to interest expense. The average cost of interest-bearing deposit accounts increased to 2.86% for the three months ended March 31, 2024, from 1.37% for the three months ended March 31, 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 customer deposit balances shifted from non-maturity accounts towards higher cost term certificate products. Customer CDs represented 28.4% and 22.8% of customer deposits at March 31, 2024 and 2023, respectively.

Current wording

Average deposit account balances were composed of 85% in interest-bearing deposits and 15% in noninterest-bearing deposits at June 30, 2024, compared to 82% and 18%, respectively, at June 30, 2023. During the three months ended June 30, 2024, interest expense increased on CDs due to an increase in the average balances of $88.5 million, along with an increase in the average rates paid of 108 basis points, compared to the three months ended June 30, 2023. During the same period, the average balances of money market accounts increased $21.1 million with a 141-basis point average rate increase, resulting in an increase to interest expense. The average cost of interest-bearing deposit accounts increased to 2.91% for the three months ended June 30, 2024, from 1.87% for the three months ended June 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 26.8% and 25.8% of retail customer deposits at June 30, 2024 and 2023, respectively.

Previous wording

**Noninterest Income.**Noninterest income decreased $146,000, or 6.3%, to $2.2 million for the three months ended March 31, 2024, from $2.3 million for the three months ended March 31, 2023. The decrease was primarily due to lower servicing asset valuation and gain on sale of loans, partially offset by an unrealized gain on partnership investments. Saleable mortgage loan production and related gains continued to be impacted by higher market rates on mortgage loans compared to the prior year. The conversion of lower-yielding BOLI policies was initiated in the first quarter of 2024 and is expected to be finalized in the third quarter.

Current wording

**Noninterest Income.**Noninterest income increased $5.6 million, or 329.4%, to $7.4 million for the three months ended June 30, 2024, from $1.7 million for the three months ended June 30, 2023. The increase was primarily due to the sale of six branch properties in the sale-leaseback transaction, partially offset by loss on sale of securities. While saleable mortgage loan production and related gains continued to be impacted by higher market rates on mortgage loans, the Company did see improvement due to the sale of SBA loans over the same quarter of 2023. The conversion of lower-yielding BOLI policies was initiated in the first quarter of 2024 and is expected to be finalized in the third and fourth quarters. The decrease in other income is due to $174,000 loan swap fee income recorded in the second quarter of 2023 and a quarter-over-quarter unrealized loss of $285,000 recorded for partnership investments.

Previous wording

Provision for Credit Losses. The Company recorded a $970,000 provision for credit losses in the three months ended March 31, 2024. A provision for credit losses on loans of $1.2 million was the result of an increase in the loss factors applied to residential real estate and commercial business loans, growth in the commercial business loan portfolio and additional charge-offs from the Splash unsecured consumer loan program, partially offset by a decrease in the loss factors applied to Woodside auto and construction loans. A recapture of $269,000 due to a lower loss factor applied to unfunded commitment balances further offset the provision for credit losses on loans recorded during the current quarter. This compares to a $500,000 loan loss provision recapture for the three months ended March 31, 2023. While the ACLL as a percentage of nonaccrual loans at period end has decreased significantly compared to the same period in 2023, a large portion of the nonaccrual loan balance is comprised of well-secured real estate loans which the Company believes will be sufficient to repay the loans in full upon sale of the underlying collateral.

Current wording

Provision for Credit Losses. The Company recorded a $5.2 million provision for credit losses in the six months ended June 30, 2024. A provision for credit losses on loans of $5.4 million was the result of reserves taken on individually evaluated loans; additional charge-offs from the Splash unsecured consumer loan program; an increase in the estimated CECL loss factors applied to residential real estate, multi-family and commercial business loans; and growth in the purchased auto loan portfolio, partially offset by a decrease in the loss factors applied to Woodside auto and construction loans. A recapture of $170,000 was due to a lower year-over-year loss factor applied to unfunded commitment balances reducing the provision for credit losses recorded during the six months ended June 30, 2024. This compares to a $315,000 loan loss provision and a $515,000 unfunded commitment provision recapture for the six months ended June 30, 2023. While the ACLL as a percentage of nonaccrual loans at period end has decreased to 71% compared to 677% for the same period in 2023, 85% 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.

Previous wording

**Noninterest Expense.**Noninterest expense decreased $568,000, or 3.8%, to $14.3 million for the three months ended March 31, 2024, compared to $14.9 million for the three months ended March 31, 2023. The decrease in expenses compared to the first quarter of 2023 is mainly due to 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 for in the fourth quarter of 2023. The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending while the net interest margin compression persists, given higher market rates and an inverted yield curve.

Current wording

**Noninterest Expense.**Noninterest expense decreased $176,000, or 0.6%, to $29.9 million for the six months ended June 30, 2024, compared to $30.1 million for the six months ended June 30, 2023. The decrease in expenses compared to the same period in 2023 is mainly due to 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. These decreases were partially offset by higher payroll taxes of $628,000 related to employee retention tax credits recorded in 2023, tax on the sale-leaseback transaction of $359,000, additional rent of $239,000 and production commissions of $113,000. The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending while the net interest margin compression persists, given higher market rates and an inverted yield curve. A reduction-in-force impacting 9% of our workforce took place in July 2024.

Previous wording

Provision for Income Tax. An income tax expense of $447,000 was recorded for the three months ended March 31, 2024, compared to $825,000 for the three months ended March 31, 2023, due to a year-over-year decrease in income before taxes of $3.4 million. The current year provision also includes a tax penalty estimate for the early surrender of a BOLI contract. 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.

Current wording

Provision for Income Tax. An income tax expense of $781,000 was recorded for the six months ended June 30, 2024, compared to $1.3 million for the six months ended June 30, 2023, due to a year-over-year decrease in income before taxes of $3.9 million. The provision for the six months ended June 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. For additional information, see Note 9 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Previous wording

(1) The average loans receivable, net balances include nonaccrual loans. (2) Interest earned on loans receivable includes net deferred costs of $171,000 and $88,000 for the three months ended March 31, 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 2.43% and 1.12% for the three months ended March 31, 2024 and 2023, respectively. (5) Net interest income divided by average interest-earning assets.

Current wording

(1) The average loans receivable, net balances include nonaccrual loans. (2) Interest earned on loans receivable includes net deferred fees (costs) of $50,000 and ($48,000) for the three months ended June 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 2.47% and 1.54% for the three months ended June 30, 2024 and 2023, respectively. (5) Net interest income divided by average interest-earning assets.

Previous wording

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 three months ended March 31, 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.

Current wording

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 six months ended June 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.

Previous wording

Liquidity is the ability to meet current and future short-term and long-term financial obligations. Our primary sources of funds consist of investment security principal and interest payments, customer and brokered deposit inflows, loan repayments and maturities, 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.

Current wording

Liquidity is the ability to meet current and future short-term and long-term financial obligations. Our primary sources of funds consist of investment security principal and interest payments, customer and brokered deposit inflows, loan repayments and maturities, sales of securities, borrowings from the FHLB and utilization of the NexBank line of credit. 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.

Previous wording

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 March 31, 2024, cash and cash equivalents totaled $77.4 million and unpledged securities classified as available-for-sale had a market value of $284.8 million. The Bank pledged collateral of $595.8 million to support borrowings from the FHLB, with a remaining borrowing capacity of $213.0 million at March 31, 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 $18.2 million were pledged as of March 31, 2024, providing a borrowing capacity of $17.4 million, which the Bank has not borrowed against to-date. 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 $10.0 million at March 31, 2024.

Current wording

Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2024, cash and cash equivalents totaled $83.2 million and unpledged securities classified as available-for-sale had a market value of $266.7 million. The Bank pledged collateral of $578.4 million to support borrowings from the FHLB, with a remaining borrowing capacity of $257.6 million at June 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 $17.8 million were pledged as of June 30, 2024, providing a borrowing capacity of $17.0 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 $17.0 million at June 30, 2024.

Previous wording

At March 31, 2024, we had $330,000 in commitments to originate new loans, $3.9 million in standby letters of credit and $148.7 million in undisbursed loans, including $51.0 million in undisbursed construction loan commitments and $1.6 million in undisbursed maritime fabrication loan commitments.

Current wording

At June 30, 2024, we had $2.9 million in commitments to originate new loans, $3.8 million in standby letters of credit and $155.0 million in undisbursed loans, including $51.2 million in undisbursed construction loan commitments and $1.6 million in undisbursed maritime fabrication loan commitments.

Previous wording

CDs due within one year as of March 31, 2024, totaled $493.5 million, or 80.8% of CDs with a weighted-average rate of 4.42%. 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. We believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide adequate short-term and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

Current wording

CDs due within one year as of June 30, 2024, totaled $482.4 million, or 77.6% of CDs with a weighted-average rate of 4.42%. If these maturing deposits are not renewed, we will seek other sources of funds, including other CDs, non-maturity deposits, and borrowings. We can attract and retain deposits by adjusting the interest rates offered and 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. We believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide adequate short-term and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

Previous wording

First Fed has a diversified deposit base with approximately 59% of deposit account balances held by consumers, 29% held by business and public fund depositors, and 12% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $27,000 at March 31, 2024. 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.

Current wording

First Fed has a diversified deposit base with approximately 57% of deposit account balances held by consumers, 30% held by business and public fund depositors, and 13% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at June 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. Management believes that maintaining a diversified deposit base is an important factor in managing and maintaining adequate levels of liquidity.

Previous wording

The Company is a separate legal entity from the Bank and provides for its own liquidity. At March 31, 2024, the Company, on an unconsolidated basis, had liquid assets of $587,000. 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. 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.

Current wording

The Company is a separate legal entity from the Bank and provides for its own liquidity. At June 30, 2024, the Company, on an unconsolidated basis, had liquid assets of $723,000. 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. 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.

Previous wording

At March 31, 2024, shareholders' equity totaled $160.5 million, or 7.2% of total assets. Our book value per share of common stock was $17.00 at March 31, 2024, compared to $16.99 at December 31, 2023.

Current wording

At June 30, 2024, shareholders' equity totaled $162.5 million, or 7.3% of total assets. Our book value per share of common stock was $17.19 at June 30, 2024, compared to $16.99 at December 31, 2023.