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, 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.

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" or "term certificate") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities. First Fed has a limited partnership investment in the Canapi Ventures SBIC Fund II, LP. 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

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in our asset and liability mix, market and portfolio interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income for the Company is noninterest income, which includes revenue earned from providing products and services, including service charges on deposit accounts, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, gains and losses from sales of securities, and changes in the market value of our equity and partnership investments.

Current wording

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.

Previous wording

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

Current wording

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

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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. 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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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. 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. 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.

Previous 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.

Current wording

Liabilities. 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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

Equity***.*** 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.

Previous 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.

Current wording

**General.**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.

Previous 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.

Current wording

**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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

**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.

Previous 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.

Current wording

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.

Previous 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.

Current wording

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.

Previous wording

Provision for Credit Losses. The Company recorded a $4.2 million provision for credit losses in the three months ended June 30, 2024. A provision for credit losses on loans of $4.1 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 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 commercial business and construction loan balances. A provision for credit losses on unfunded commitments of $99,000 was also recorded during the quarter ended June 30, 2024, due to higher loss factors and a moderate increase in commitment balances at quarter end. This compares to a $300,000 loan loss provision for the quarter 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.

Current wording

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.

Previous wording

Provision for Income Tax. An income tax expense of $334,000 was recorded for the three months ended June 30, 2024, compared to $475,000 for the three months ended June 30, 2023, due to a year-over-year decrease in income before taxes of $424,000. 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.

Current wording

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.

Previous wording

Comparison of Results of Operations for the Six Months Ended June 30, 2024 and 2023

Current wording

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

Previous wording

**General.**Net income attributable to the Company was $1.8 million for the six months ended June 30, 2024, compared to $5.3 million for the six months ended June 30, 2023. A $9.5 million decrease in net interest income after provision for credit losses was partially offset by a $5.5 million increase in noninterest income and a $176,000 decrease in noninterest expense.

Current wording

**General.**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.

Previous wording

**Net Interest Income.**Net interest income decreased $4.1 million to $28.2 million for the six months ended June 30, 2024, from $32.3 million for the six months ended June 30, 2023, as higher funding costs outpaced increased loan, investment and interest-earning deposit income.

Current wording

**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.

Previous wording

Average earning assets increased $107.6 million year-over-year. The yield on average interest-earning assets increased 43 basis points to 5.49% for the six months ended June 30, 2024, compared to 5.06% 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.

Current wording

Average earning assets increased $94.1 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.

Previous wording

The average cost of interest-bearing liabilities increased to 3.21% for the six months ended June 30, 2024, compared to 2.08% 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 money market accounts, CDs and FHLB advances. Total cost of funds increased 105 basis points to 2.81% for the six months ended June 30, 2024, from 1.76% for the same period in 2023. The net interest margin decreased 59 basis points to 2.76% for the six months ended June 30, 2024, from 3.35% for the same period in 2023.

Current wording

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.

Previous wording

**Interest Income.**Total interest income increased $7.2 million, or 14.8%, to $56.0 million for the six months ended June 30, 2024, from $48.8 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 $5.7 million, to $46.5 million for the six months ended June 30, 2024, from $40.8 million for the six months ended June 30, 2023, primarily due to an increase in the average balance of net loans receivable of $118.9 million compared to the prior year, coupled with an increase in average loan yields to 5.57% for the six months ended June 30, 2024, from 5.27% for the same period in 2023. The loan portfolio increased as a result of additional auto, manufactured home, and Bankers Healthcare Group commercial 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 87 basis points to 4.88% compared to the same period in 2023, with half of the purchase of higher-yielding investments occurring late in the first quarter of 2023 which resulted in the related increase only impacting income for 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.

Current wording

**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.

Previous wording

Interest Expense. Total interest expense increased $11.3 million, or 68.6%, to $27.8 million for the six months ended June 30, 2024, compared to $16.5 million for the six months ended June 30, 2023. The increase over the first six months of 2023 was the result of a 112-basis point increase in the cost of deposits from 1.33% one year prior to 2.45% along with a higher volume of money market account and CD balances. A shift in the deposit mix from no or low-cost transaction, money market, and savings accounts to a higher volume of CDs resulted in higher costs of deposits. Interest expense on borrowings increased due to a $36.6 million increase in the average balance and a 50-basis point increase in the cost of advances, primarily FHLB advances, compared to the same period in 2023.

Current wording

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.

Previous wording

During the six months ended June 30, 2024, interest expense on CDs increased due to higher average balances of $141.9 million, along with a 135-basis point increase in the average rates paid, compared to the six months ended June 30, 2023. During the same period, the average balances of money market accounts decreased $17.6 million, with a 139-basis point average rate increase, resulting in an overall increase to interest expense. The average cost of interest-bearing deposit accounts increased to 2.88% for the six months ended June 30, 2024, from 1.62% for the six months ended June 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 CD and savings products. Retail customer CDs represented 23.3% and 23.0% of total deposits at June 30, 2024 and 2023, respectively. Brokered CDs represented 13.1% and 10.9% of total deposits at June 30, 2024 and 2023, respectively.

Current wording

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. During the same period, the average balances of money market accounts increased $7.8 million, with a 142-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.

Previous 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.

Current wording

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.

Previous wording

**Noninterest Income.**Noninterest income increased $5.5 million, or 135.7%, to $9.5 million for the six months ended June 30, 2024, from $4.1 million for the six months ended June 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 six months ended June 30, 2024. The Company ended its investment services program in 2023. Income from the gain on sale of loans during the six months ended June 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.

Current wording

**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.

Previous 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.

Current wording

**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. 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.

Previous 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.

Current wording

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. 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 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.

Current wording

(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.

Previous wording

(1) The average loans receivable, net balances include nonaccrual loans. (2) Interest earned on loans receivable includes net deferred costs of ($121,000) and ($136,000) for the six 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 six months ended June 30, 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 costs of ($115,000) and ($410,000) for the nine 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 2.49% and 1.51% for the nine months ended September 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 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.

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 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.