Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2020March 31, 2021

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from _____ to _____

 

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

 

(Exact name of registrant as specified in its charter)

   

Washington

 

46-1259100

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer I.D. Number)

 

 

 

105 West 8th Street, Port Angeles, Washington

 

98362

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant's telephone number, including area code:

 

(360) 457-0461

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

 

FNWB

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 4, 2020,May 7, 2021, there were 10,302,73710,218,878 shares of common stock, $0.01 par value per share, outstanding.

 

1

 

 

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

 

PART 1 - FINANCIAL INFORMATION

 

 

Page

Item 1 - Financial Statements (Unaudited)

3

 

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

3334

 

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

4948

 

 

Item 4 - Controls and Procedures

4948

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1 - Legal Proceedings

5049

 

 

Item 1A - Risk Factors

5049

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

5049

 

 

Item 3 - Defaults Upon Senior Securities

5150

 

 

Item 4 - Mine Safety Disclosures

5150

 

 

Item 5 - Other Information

5150

 

 

Item 6 - Exhibits

5251

 

 

SIGNATURES

5352

 

 

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First Northwest") and its consolidated subsidiary, unless the context indicates otherwise. When we refer to “First Federal”Fed” or the “Bank” in this report, we are referring to First Federal Savings and Loan Association of Port Angeles, the wholly owned subsidiary of First Northwest Bancorp.

 

2


 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 

ASSETS

            
  

Cash and due from banks

 $16,346 $13,519 $15,827  $13,508 

Interest-bearing deposits in banks

 33,242 35,220 83,444  51,647 

Investment securities available for sale, at fair value

 364,273 315,580 393,495  364,296 

Loans held for sale

 3,111 503 4,037  3,753 

Loans receivable (net of allowance for loan losses of $12,109 and $9,628)

 986,351 878,437

Loans receivable (net of allowance for loan losses of $14,265 and $13,847)

 1,156,439  1,141,969 

Federal Home Loan Bank (FHLB) stock, at cost

 6,074 6,034 3,997  5,977 

Accrued interest receivable

 5,360 3,931 6,251  6,966 

Premises and equipment, net

 14,188 14,342 14,795  14,785 

Mortgage servicing rights, net

 1,098 871 2,309  2,120 

Bank-owned life insurance, net

 37,482 30,027 38,596  38,353 

Prepaid expenses and other assets

 11,334 8,872  17,103   10,975 
  

Total assets

 $1,478,859 $1,307,336 $1,736,293  $1,654,349 
  
  

LIABILITIES AND SHAREHOLDERS' EQUITY

            
  

Deposits

 $1,170,325 $1,001,645 $1,434,807  $1,333,517 

Borrowings

 112,379 112,930
FHLB advances 50,000 109,977 

Subordinated debt, net

 39,310  0 

Accrued interest payable

 253 373 84  53 

Accrued expenses and other liabilities

 18,184 14,392 27,994  23,303 

Advances from borrowers for taxes and insurance

 1,403 1,145  2,000   1,116 
  

Total liabilities

 1,302,544 1,130,485  1,554,195   1,467,966 
  

Shareholders' Equity

          

Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding

   0  0 

Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,432,963 shares at June 30, 2020, and 10,731,639 shares at December 31, 2019

 103 107

Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,195,644 shares at March 31, 2021, and 10,247,185 shares at December 31, 2020

 102  102 

Additional paid-in capital

 98,421 102,017 96,499  97,412 

Retained earnings

 86,633 86,156 94,363  92,657 

Accumulated other comprehensive income (loss), net of tax

 717 (1,539)

Accumulated other comprehensive income, net of tax

 199  5,442 

Unearned employee stock ownership plan (ESOP) shares

 (9,559) (9,890)  (9,065)  (9,230)
  

Total shareholders' equity

 176,315 176,851  182,098   186,383 
  

Total liabilities and shareholders' equity

 $1,478,859 $1,307,336 $1,736,293  $1,654,349 

 

See selected notes to the consolidated financial statements.

 

3


 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data) (Unaudited)

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 
 

June 30,

 

June 30,

 

March 31,

 
 

2020

 

2019

 

2020

 

2019

 

2021

  

2020

 

INTEREST INCOME

  

Interest and fees on loans receivable

 $10,236 $10,473 $20,072 $20,565 $12,541  $9,836 

Interest on mortgage-backed securities

 740 1,192 1,699 2,449 464  959 

Interest on investment securities

 1,316 969 2,385 1,979 1,570  1,069 

Interest on deposits and other

 8 58 76 125 13  68 

FHLB dividends

 55 88 102 176  45   47 
  

Total interest income

 12,355 12,780 24,334 25,294  14,633   11,979 

INTEREST EXPENSE

  

Deposits

 2,041 2,068 4,179 3,992 934  2,138 

Borrowings

 201 1,036 635 2,026 191  434 
Subordinated debt  25  0 
  

Total interest expense

 2,242 3,104 4,814 6,018  1,150   2,572 
  

Net interest income

 10,113 9,676 19,520 19,276 13,483  9,407 

PROVISION FOR LOAN LOSSES

 1,500 255 2,766 590  500   1,266 
  

Net interest income after provision for loan losses

 8,613 9,421 16,754 18,686  12,983   8,141 

NONINTEREST INCOME

  

Loan and deposit service fees

 765 995 1,646 1,900 837  881 

Mortgage servicing fees, net of amortization

 (172) 54 (157) 99 30  15 

Net gain on sale of loans

 2,001 88 2,384 175 1,337  383 

Net gain on sale of investment securities

 661 57 1,266 57 0  605 

Increase in cash surrender value of bank-owned life insurance

 627 145 955 288 244  328 

Other income

 227 84 333 155  256   106 
  

Total noninterest income

 4,109 1,423 6,427 2,674  2,704   2,318 
  

NONINTEREST EXPENSE

  

Compensation and benefits

 5,966 4,753 11,327 9,326 7,295  5,361 

Data processing

 769 667 1,459 1,298 739  690 

Occupancy and equipment

 1,345 1,140 2,696 2,248 1,623  1,351 

Supplies, postage, and telephone

 284 242 495 470 242  211 

Regulatory assessments and state taxes

 223 195 397 364 261  174 

Advertising

 377 229 649 372 445  272 

Professional fees

 354 331 754 629 522  400 

FDIC insurance premium

 70 77 70 154 148  0 

FHLB prepayment penalty

   210  0  210 

Other expense

 894 638 1,607 1,211  819   713 
  

Total noninterest expense

 10,282 8,272 19,664 16,072  12,094   9,382 
  

INCOME BEFORE PROVISION FOR INCOME TAXES

 2,440 2,572 3,517 5,288 3,593  1,077 
  

PROVISION FOR INCOME TAXES

 464 493 668 1,002  473   204 
  

NET INCOME

 $1,976 $2,079 $2,849 $4,286 $3,120  $873 
  

Basic and diluted earnings per common share

 $0.21 $0.21 $0.30 $0.43 $0.34  $0.09 

 

See selected notes to the consolidated financial statements.

 

4


 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMELOSS

(In thousands) (Unaudited)

 

  

Three Months Ended

 

Six Months Ended

  

June 30,

 

June 30,

  

2020

 

2019

 

2020

 

2019

                 

NET INCOME

 $1,976 $2,079 $2,849 $4,286
                 

Other comprehensive income:

                
Unrealized holding gains arising during the period 12,018 2,313 4,121 4,343

Income tax provision related to unrealized holding gains

 (2,523) (487) (865) (914)

Reclassification adjustment for gains on sales of securities realized in income

 (661) (57) (1,266) (57)
Income tax provision related to reclassification adjustment on sales of securities 139 12 266 12
                 

Other comprehensive income, net of tax

 8,973 1,781 2,256 3,384
                 

COMPREHENSIVE INCOME

 $10,949 $3,860 $5,105 $7,670
  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
         

NET INCOME

 $3,120  $873 
         

Other comprehensive loss:

        

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

  (4,428)  (7,897)

Income tax benefit related to unrealized holding losses

  930   1,658 

Unrecognized defined benefit ("DB") plan prior service cost

  (2,210)  0 

Income tax benefit related to DB plan prior service cost

  465   0 

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

  0   (605)

Income tax benefit related to reclassification adjustment on sales of securities

  0   127 
         

Other comprehensive loss, net of tax

  (5,243)  (6,717)
         

COMPREHENSIVE LOSS

 $(2,123) $(5,844)

 

See selected notes to the consolidated financial statements.

 

5


 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended June 30,March 31, 2021 and 2020 and 2019

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

 

  

Common Stock

 

Additional Paid-in

 

Retained

 

Unearned ESOP

 Accumulated Other Comprehensive (Loss) 

Total Shareholders'

  

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Income, Net of Tax

 

Equity

                             

BALANCE, March 31, 2019

 10,992,181 $110 $104,374 $82,436 $(10,385) $(3,128) $173,407
                             

Net income

             2,079         2,079

Common stock repurchased

 (63,000) (1) (628) (392)         (1,021)
Restricted stock award forfeitures (4,000)               

Other comprehensive income, net of tax

                     1,781 1,781

Share-based compensation

         270             270

ESOP shares committed to be released

         48     165     213

Cash dividends declared and paid ($0.03 per share)

             (328)         (328)
                             

BALANCE, June 30, 2019

 10,925,181 $109 $104,064 $83,795 $(10,220) $(1,347) $176,401
                             
                             

BALANCE, March 31, 2020

 10,432,963 $104 $99,479 $85,549 $(9,725) $(8,256) $167,151
                             

Net income

             1,976         1,976

Common stock repurchased

 (130,237) (1) (1,301) (370)         (1,672)

Restricted stock award forfeitures net of grants

 23,500               

Other comprehensive income, net of tax

                     8,973 8,973

Share-based compensation

         251             251

ESOP shares committed to be released

         (8)     166     158

Cash dividends declared and paid ($0.05 per share)

             (522)         (522)
                             

BALANCE, June 30, 2020

 10,326,226 $103 $98,421 $86,633 $(9,559) $717 $176,315

 

Common Stock

 

Additional Paid-in

 

Retained

 

Unearned ESOP

 Accumulated Other Comprehensive (Loss) 

Total Shareholders'

 

Common Stock

 

Additional Paid-in

 

Retained

 

Unearned ESOP

 Accumulated Other Comprehensive (Loss) Income, 

Total Shareholders'

 
 

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Income, Net of Tax

 

Equity

               

BALANCE, December 31, 2018

 11,170,018 $112 $105,825 $81,607 $(10,549) $(4,731) $172,264
               

Net income

        4,286      4,286

Common stock repurchased

 (240,837) (3) (2,405) (1,439)      (3,847)
Restricted stock award forfeitures (4,000)          

Other comprehensive income, net of tax

            3,384 3,384

Share-based compensation

      553        553

ESOP shares committed to be released

      91    329    420

Cash dividends declared and paid ($0.06 per share)

             (659)         (659)
               

BALANCE, June 30, 2019

 10,925,181 $109 $104,064 $83,795 $(10,220) $(1,347) $176,401
                

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Net of Tax

  

Equity

 
                              

BALANCE, December 31, 2019

 10,731,639 $107 $102,017 $86,156 $(9,890) $(1,539) $176,851 10,731,639  $107  $102,017  $86,156  $(9,890) $(1,539) $176,851 
                              

Net income

        2,849      2,849   0 0  873  0 0  873 

Common stock repurchased

 (418,513) (4) (4,181) (1,317)      (5,502) (288,276) (3) (2,880) (947) 0 0  (3,830)
Restricted stock award forfeitures net of grants (10,400)            

Other comprehensive loss, net of tax

   0 0 0 0  (6,717) (6,717)

Share-based compensation expense

   0  304  0 0 0  304 

ESOP shares committed to be released

   0  38  0  165  0  203 

Cash dividends declared and paid ($0.05 per share)

      0   0   (533)  0   0   (533)
               

BALANCE, March 31, 2020

  10,432,963  $104  $99,479  $85,549  $(9,725) $(8,256) $167,151 
               
               

BALANCE, December 31, 2020

 10,247,185  $102  $97,412  $92,657  $(9,230) $5,442  $186,383 
               

Net income

   0 0  3,120  0 0  3,120 

Common stock repurchased

 (135,837) 0  (1,358) (805) 0 0  (2,163)

Restricted stock award grants net of forfeitures

 13,100           84,896              

Other comprehensive income, net of tax

            2,256 2,256

Share-based compensation

      555        555
Restricted stock awards canceled (600) 0 (11) 0 0 0  (11)

Other comprehensive loss, net of tax

   0 0 0 0  (5,243) (5,243)

Share-based compensation expense

   0  404  0 0 0  404 

ESOP shares committed to be released

      30    331    361   0  52  0  165  0  217 

Cash dividends declared and paid ($0.10 per share)

             (1,055)         (1,055)

Cash dividends declared and paid ($0.06 per share)

      0   0   (609)  0   0   (609)
                              

BALANCE, June 30, 2020

 10,326,226 $103 $98,421 $86,633 $(9,559) $717 $176,315

BALANCE, March 31, 2021

  10,195,644  $102  $96,499  $94,363  $(9,065) $199  $182,098 

 

See selected notes to the consolidated financial statements.

 

6


 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

Six Months Ended June 30,

 

Three Months Ended March 31,

 
 

2020

 

2019

 

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

          

Net income

 $2,849 $4,286 $3,120  $873 

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

          

Depreciation and amortization

 675 667 338 338 

Amortization and accretion of premiums and discounts on investments, net

 954 920 270 477 

(Accretion) amortization of deferred loan fees, net

 (767) 486
Amortization (accretion) of deferred loan fees, net 160 (436)

Amortization of mortgage servicing rights, net

 347 119 124 82 

Additions to mortgage servicing rights, net

 (574) (27) (332) (54)

Net increase (decrease) on the valuation allowance on mortgage servicing rights

  (3)
Net increase on the valuation allowance on mortgage servicing rights 19 0 

Provision for loan losses

 2,766 590 500 1,266 

Allocation of ESOP shares

 361 420 154 203 

Share-based compensation

 555 553
Share-based compensation expense 404 304 

Gain on sale of loans, net

 (2,384) (175) (1,337) (383)

Gain on sale of securities available for sale, net

 (1,266) (57) 0  (605)

Increase in cash surrender value of life insurance, net

 (955) (288) (244) (328)

Origination of loans held for sale

 (79,472) (10,432) (37,287) (20,027)

Proceeds from loans held for sale

 79,248 8,091 38,340 16,382 

Change in assets and liabilities:

          

Increase in accrued interest receivable

 (1,429) (46)
Decrease (increase) in accrued interest receivable 715 (193)

Increase in prepaid expenses and other assets

 (2,659) (3,606) (8,326) (382)

Decrease in accrued interest payable

 (120) (132)
Increase (decrease) in accrued interest payable 31 (179)

Increase in accrued expenses and other liabilities

 3,792 6,996 6,138 833 
      

Net cash from operating activities

 1,921 8,362  2,787   (1,829)
  

CASH FLOWS FROM INVESTING ACTIVITIES

          

Purchase of securities available for sale

 (166,253)  (53,290) (66,372)

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

 26,296 12,860 19,393 15,984 

Proceeds from sales of securities available for sale

 94,432 3,558 0 40,073 

Proceeds from maturities, calls, and principal repayments of securities held to maturity

  5,433

(Purchase) redemption of FHLB stock

 (40) 154
Purchase of bank-owned life insurance (6,500) 
Redemption (purchase) of FHLB stock 1,980 (1,547)

Net increase in loans receivable

 (110,316) (11,182) (15,130) (21,943)

Purchase of premises and equipment, net

 (521) (131) (348) (227)
      

Net cash from investing activities

 (162,902) 10,692  (47,395)  (34,032)

 

See selected notes to the consolidated financial statements.

 

7


 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

Six Months Ended June 30,

 

Three Months Ended March 31,

 
 

2020

 

2019

 

2021

  

2020

 

CASH FLOWS FROM FINANCING ACTIVITIES

          

Net increase (decrease) in deposits

 $168,680 $(6,995)
Net increase in deposits $101,290 $62,260 

Proceeds from long-term FHLB advances

 30,000  10,000 30,000 

Repayment of long-term FHLB advances

 (30,000)  (10,000) (25,000)

Net decrease in short-term FHLB advances

 (551) (5,215)

Net increase in advances from borrowers for taxes and insurance

 258 161
Net (decrease) increase in short-term FHLB advances (59,977) 32,091 
Proceeds from issuance of subordinated debt, net 39,310 0 
Net increase (decrease) in advances from borrowers for taxes and insurance 884 (702)

Dividends paid

 (1,055) (659) (609) (533)
Restricted stock awards canceled (11) 0 

Repurchase of common stock

 (5,502) (3,847) (2,163) (3,830)
            

Net cash from financing activities

 161,830 (16,555)  78,724   94,286 
          

NET INCREASE IN CASH AND CASH EQUIVALENTS

 849 2,499 34,116  58,425 
          

CASH AND CASH EQUIVALENTS, beginning of period

 48,739 26,323  65,155   48,739 
          

CASH AND CASH EQUIVALENTS, end of period

 $49,588 $28,822 $99,271  $107,164 
          

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

          

Cash paid during the year for:

          

Interest on deposits and borrowings

 $4,933 $6,151 $1,119 $2,751 

Income taxes

 $ $990
Prior unrecognized service cost of defined benefit plan transferred to single-employer plan $2,718 $0 
          

NONCASH INVESTING ACTIVITIES

          

Unrealized gain on securities available for sale

 $2,855 $4,286

Unrealized loss on securities available for sale

 $(4,428) $(8,502)

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses

 $403 $160 $0 $396 

Lease liabilities arising from obtaining right-of-use assets

 $902 $ $672 $0 

 

See selected notes to the consolidated financial statements.

 

8


 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Note 1 - Basis of Presentation and Critical Accounting Policies

 

Organization and Nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Federal Savings and Loan Association of Port Angeles ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion"). First Northwest and the Bank are collectively referred to as the "Company." In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $121.7 million. An additional 933,360 shares of Company common stock and $400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $117.6 million in net proceeds from the stock offering of which $58.4 million were contributed to the Bank upon Conversion.

 

Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8% of the common stock issued in the Conversion for a total of 1,048,029 shares.

 

First Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Federal.Fed. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank.

 

The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in Western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with borrowing and investing activities.

 

Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 20192020. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for the three and sixmonths ended June 30, 2020March 31, 2021, are not necessarily indicative of the results that may be expected for future periods.

 

In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for loan losses ("ALLL"), fair value of financial instruments, and deferred tax assets and liabilities.

 

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest Bancorp and its wholly owned subsidiary, First Federal.Fed. All material intercompany accounts and transactions have been eliminated in consolidation.

 

Subsequent Events - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate.

See Note 10 for additional information.

 

Recently adopted accounting pronouncements

 

In August 2018,December 2019, FASB issued ASU No. 20182019-13,12, Disclosure Framework — ChangesIncome Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing certain exceptions to the Disclosure Requirements for Fair Value Measurement,general principles in Topic 740. The standard also clarifies and amends existing guidance to improve consistent application. This ASU, which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This guidance is effective for public companies in fiscal years beginning after December 15, 2019,2020, with early adoption permitted. This ASU did not have a material impact on the Company's consolidated financial statements.

 

In January 2020, the FASB issued ASU No.2020-01,Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The ASU, which is effective for fiscal years beginning after December 15, 2020, did not have a material effect on the Company's financial statements.

9

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In August 2018, FASB issued ASU No.2018-15,Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to provide guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of such arrangements that are service contracts and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This ASU, which is effective for fiscal years beginning after December 15, 2019, did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued ASU No.2020-03,Codification Improvements to Financial Instruments. The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s financial statements.

Recently issued accounting pronouncements not yet adopted

 

Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Loss, which updates the guidance on recognition and measurement of credit losses for financial assets. The new requirements, known as the current expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses rather than incurred losses. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Upon adoption, the Company will change processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach.

 

Additional updates were issued in ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825), Financial Instruments. This ASU clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition and measurement of financial instruments. The amendments provide entities with various measurement alternatives and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables that were previously written off and expected to be written off. The amendments also allow entities to use projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments.

 

In addition, new updates were issued through ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This amendment allows entities to elect the fair value option on certain financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment.

 

10

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In November 2019, the FASB issued ASU 2019-10 which defers the effective date for this guidance for smaller reporting companies from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company plans to defer adoption of CECL until January 1, 2023.

 

The Company is evaluating the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third-party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date.

 

Other Pronouncements

In December 2019, FASB issued ASU No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The standard also clarifies and amends existing guidance to improve consistent application. This ASU, which is effective for fiscal years beginning after December 15, 2020, is not expected to have a material impact on the Company's financial statements. Early adoption is permitted.

In January 2020, the FASB issued ASU No.2020-01,Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The ASU, which is effective for fiscal years beginning after December 15, 2020, is not expected to have a material effect on the Company's financial statements.

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments are effective for the Company as of March 12, 2020 through December 31, 2022. The Company does not believe this standard will have a material impact on its financial statements.

 

Reclassifications - Certain amounts in the unaudited interim consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation with no effect on net income or shareholders' equity.

1110

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Note 2 - Securities

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at June 30, 2020March 31, 2021 are summarized as follows:

 

   

Gross

 

Gross

 

Estimated

   

Gross

 

Gross

 

Estimated

 
 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 Fair Value 

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value 
 

(In thousands)

 

(In thousands)

 

Available for Sale

                

Municipal bonds

 $104,641 $3,337 $(368) $107,610 $131,788  $2,560  $(1,856) $132,492 
U.S. government and agency issued bonds (Agency bonds) 1,940 0 (27) 1,913 

U.S. government agency issued asset-backed securities (ABS agency)

 63,220 662 (3,063) 60,819 64,355  1,637  (82) 65,910 

Corporate issued asset-backed securities (ABS corporate)

 41,695  (1,891) 39,804 17,620  0  (115) 17,505 

Corporate issued debt securities (Corporate debt)

 22,486 134 (192) 22,428 43,305  920  (335) 43,890 

U.S. Small Business Administration securities (SBA)

 23,338 221 (12) 23,547 17,399  167  0  17,566 

Mortgage-backed securities:

  

U.S. government agency issued mortgage-backed securities (MBS agency)

 100,113 2,578 (44) 102,647 74,214  581  (779) 74,016 

Corporate issued mortgage-backed securities (MBS corporate)

 7,873 4 (459) 7,418  40,413   96   (306)  40,203 
  

Total securities available for sale

 $363,366 $6,936 $(6,029) $364,273 $391,034  $5,961  $(3,500) $393,495 

 

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 20192020, are summarized as follows:

 

   

Gross

 

Gross

 

Estimated

   

Gross

 

Gross

 

Estimated

 
 

Amortized Cost

 

Unrealized Gains

 

Unrealized Losses

 Fair Value 

Amortized Cost

  

Unrealized Gains

  

Unrealized Losses

  Fair Value 
 

(In thousands)

 

(In thousands)

 

Available for Sale

                

Municipal bonds

 $39,524 $125 $(367) $39,282 $122,667  $5,212  $(17) $127,862 

ABS agency

 29,796  (938) 28,858 62,934  1,240  (354) 63,820 

ABS corporate

 41,728  (873) 40,855 29,661  37  (418) 29,280 

Corporate debt

 9,986  (343) 9,643 35,408  687  (585) 35,510 

SBA

 28,423 72 (36) 28,459 18,420  144  0  18,564 

Mortgage-backed securities:

  

MBS agency

 159,697 811 (341) 160,167 61,859  876  (52) 62,683 

MBS corporate

 8,374  (58) 8,316  26,458   162   (43)  26,577 
  

Total securities available for sale

 $317,528 $1,008 $(2,956) $315,580 $357,407  $8,358  $(1,469) $364,296 

 

 

There were 0 securities classified as held-to-maturity at June 30, 2020March 31, 2021 and December 31, 20192020.

 

1211

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of June 30, 2020March 31, 2021:

 

 

Less Than Twelve Months

 

Twelve Months or Longer

 

Total

 

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

 
 

Gross Unrealized Losses

 

Fair Value

 

Gross Unrealized Losses

 

Fair Value

 

Gross Unrealized Losses

 

Fair Value

 

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

 
 

(In thousands)

 

(In thousands)

 

Available for Sale

                                    

Municipal bonds

 $(368) $14,515 $ $ $(368) $14,515 $(1,727) $57,025  $(129) $3,507  $(1,856) $60,532 
Agency bonds (27) 1,913 0 0 (27) 1,913 

ABS agency

 (318) 8,086 (2,745) 23,025 (3,063) 31,111 0  0  (82) 1,938  (82) 1,938 

ABS corporate

 (93) 3,787 (1,798) 36,017 (1,891) 39,804 0  0  (115) 17,505  (115) 17,505 

Corporate debt

 (3) 997 (189) 4,811 (192) 5,808 (250) 16,746  (85) 4,915  (335) 21,661 

SBA

   (12) 4,020 (12) 4,020 0  53  0  43  0  96 

Mortgage-backed securities:

                          

MBS agency

 (44) 13,994  7 (44) 14,001 (777) 33,330  (2) 1,760  (779) 35,090 

MBS corporate

 (37) 2,215 (422) 3,750 (459) 5,965  (306)  23,671   0   0   (306)  23,671 
  

Total available for sale

 $(863) $43,594 $(5,166) $71,630 $(6,029) $115,224 $(3,087) $132,738  $(413) $29,668  $(3,500) $162,406 

 

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 20192020:

 

 

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

  

Less Than Twelve Months

  

Twelve Months or Longer

  

Total

 
 

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

  

Gross Unrealized Losses

  

Fair Value

 
 

(In thousands)

  

(In thousands)

 

Available for Sale

                                          

Municipal bonds

 $(367) $29,928  $  $  $(367) $29,928  $(15) $5,214  $(2) $1,319  $(17) $6,533 

ABS agency

 (59) 3,855  (879) 25,002  (938) 28,857  0  0  (354) 21,430  (354) 21,430 

ABS corporate

 (31) 3,848  (842) 37,007  (873) 40,855  0  0  (418) 27,283  (418) 27,283 

Corporate debt

 (17) 4,983  (326) 4,660  (343) 9,643  (8) 5,892  (577) 9,409  (585) 15,301 

SBA

     (36) 15,034  (36) 15,034  0  63  0  47  0  110 

Mortgage-backed securities:

                          

MBS agency

 (166) 18,744  (175) 47,463  (341) 66,207  (52) 18,516  0  261  (52) 18,777 

MBS corporate

        (58)  8,316   (58)  8,316   (43)  10,003   0   0   (43)  10,003 
  

Total available for sale

 $(640) $61,358  $(2,316) $137,482  $(2,956) $198,840  $(118) $39,688  $(1,351) $59,749  $(1,469) $99,437 

 

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At June 30, 2020March 31, 2021 and December 31, 20192020, there were 3371 and 6236 investment securities in an unrealized loss position, respectively.

 

We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates, market demand, and related volatility, rather than credit quality, that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company does not intend to sell the securities in an unrealized loss position and believes it is not likely it will be required to sell these investments prior to a market price recovery or maturity.

 

There were 0 OTTI losses during the three and sixmonths ended June 30, 2020March 31, 2021 and 20192020.

 

1312

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.

 

 

June 30, 2020

 

March 31, 2021

 
 

Available-for-Sale

 

Available-for-Sale

 
 

Amortized Cost

 

Estimated Fair Value

 

Amortized Cost

  

Estimated Fair Value

 
 

(In thousands)

 

(In thousands)

 

Mortgage-backed securities:

          

Due within one year

 $ $ $48  $50 

Due after one through five years

 8,574 8,791 21,235  21,207 

Due after five through ten years

 218 219 1,994  1,953 

Due after ten years

 99,194 101,055  91,350   91,009 
  

Total mortgage-backed securities

 107,986 110,065  114,627   114,219 
  

All other investment securities:

          

Due within one year

   0  0 

Due after one through five years

 3,034 3,112 1,344  1,344 

Due after five through ten years

 54,171 52,943 75,507  76,038 

Due after ten years

 198,175 198,153  199,556   201,894 
  

Total all other investment securities

 255,380 254,208  276,407   279,276 
  

Total investment securities

 $363,366 $364,273 $391,034  $393,495 

 

 

December 31, 2019

  

December 31, 2020

 
 

Available-for-Sale

  

Available-for-Sale

 
 

Amortized Cost

  

Estimated Fair Value

  

Amortized Cost

  

Estimated Fair Value

 
 

(In thousands)

  

(In thousands)

 

Mortgage-backed securities:

          

Due within one year

 $  $  $80  $84 

Due after one through five years

 13,360  13,391  12,446  12,402 

Due after five through ten years

 6,261  6,257  0  0 

Due after ten years

  148,450   148,835   75,791   76,774 
  

Total mortgage-backed securities

  168,071   168,483   88,317   89,260 
  

All other investment securities:

          

Due within one year

     0  0 

Due after one through five years

 2,043  2,084  2,210  2,328 

Due after five through ten years

 58,460  57,680  74,568  74,351 

Due after ten years

  88,954   87,333   192,312   198,357 
  

Total all other investment securities

  149,457   147,097   269,090   275,036 
  

Total investment securities

 $317,528  $315,580  $357,407  $364,296 

 

1413

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

  

Three Months Ended June 30,

 

Six Months Ended June 30,

  

2020

 

2019

 

2020

 

2019

  

(In thousands)

 

(In thousands)

Proceeds from sales

 $54,359 $3,558 $94,432 $3,558

Gross realized gains

 867 57 1,504 57

Gross realized losses

 (206)  (238) 

  

Three Months Ended March 31,

 
  

2021

  

2020

 
  

(In thousands)

 

Proceeds from sales

 $0  $40,073 

Gross realized gains

  0   637 

Gross realized losses

  0   (32)

 

 

Note 3 - Loans Receivable

 

Loans receivable consisted of the following at the dates indicated:

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
��

(In thousands)

 

(In thousands)

 

Real Estate:

          

One-to-four family

 $325,349 $306,014 $295,831  $309,828 

Multi-family

 103,279 96,098 162,487  162,467 

Commercial real estate

 267,233 255,722 296,826  296,574 

Construction and land

 58,153 37,187  157,316   123,627 

Total real estate loans

 754,014 695,021 912,460  892,496 
  

Consumer:

          

Home equity

 33,696 35,046 33,713  33,103 

Auto and other consumer

 109,214 112,119  139,134   128,233 

Total consumer loans

 142,910 147,165 172,847  161,336 
  

Commercial business loans

 99,477 41,571  83,033   100,201 
  

Total loans

 996,401 883,757  1,168,340   1,154,033 
  

Less:

          

Net deferred loan fees

 1,842 206 4,983  4,346 

Premium on purchased loans, net

 (3,901) (4,514) (7,347) (6,129)

Allowance for loan losses

 12,109 9,628  14,265   13,847 
  

Total loans receivable, net

 $986,351 $878,437 $1,156,439  $1,141,969 

 

Allowance for Loan Losses. The Company maintains a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. The reserve is an estimate based upon factors and trends identified by management at the time the financial statements are prepared.

 

1514

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following tables summarize changes in the ALLL and loan portfolio by segment and impairment method for the periods shown:

 

 

At or For the Three Months Ended June 30, 2020

 

At or For the Three Months Ended March 31, 2021

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

     
 

four family

 

Multi-family

 

real estate

 

and land

 

equity

 

consumer

 

business

 

Unallocated

 

Total

 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
 

(In thousands)

 

(In thousands)

 

ALLL:

                    

Beginning balance

 $3,396 $923 $2,722 $592 $449 $2,317 $250 $181 $10,830 $3,469  $1,764  $3,420  $1,461  $368  $2,642  $429  $294  $13,847 

Provision for (recapture of) loan losses

 383 205 299 146 (20) 157 213 117 1,500

(Recapture of) provision for loan losses

 (59) 58  209  426  (6) (197) 54  15  500 

Charge-offs

      (240)   (240) 0  0  0  0  0  (229) 0  0  (229)

Recoveries

 1     18   19  6   0   0   3   17   121   0   0   147 

Ending balance

 $3,780 $1,128 $3,021 $738 $429 $2,252 $463 $298 $12,109 $3,416  $1,822  $3,629  $1,890  $379  $2,337  $483  $309  $14,265 

 

  

At or For the Six Months Ended June 30, 2020

  

One-to-

     

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

        
  

four family

 

Multi-family

 

real estate

 

and land

 

equity

 

consumer

 

business

 

Unallocated

 

Total

  

(In thousands)

ALLL:

                                    

Beginning balance

 $3,024 $888 $2,243 $399 $454 $2,261 $208 $151 $9,628

Provision for (recapture of) loan losses

 702 240 778 337 (26) 333 255 147 2,766

Charge-offs

      (374)   (374)

Recoveries

 54   2 1 32   89

Ending balance

 $3,780 $1,128 $3,021 $738 $429 $2,252 $463 $298 $12,109

 

At June 30, 2020

 

At March 31, 2021

 
 

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

      

One-to-

   

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

     
 

four family

 

Multi-family

 

real estate

 

and land

 

equity

 

consumer

 

business

 

Unallocated

 

Total

 

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
 

(In thousands)

 

(In thousands)

 

Total ALLL

 $3,780 $1,128 $3,021 $738 $429 $2,252 $463 $298 $12,109 $3,416  $1,822  $3,629  $1,890  $379  $2,337  $483  $309  $14,265 

General reserve

 3,734 1,128 3,021 737 421 2,096 463 298 11,898 3,384  1,822  3,628  1,890  374  2,126  483  309  14,016 

Specific reserve

 46   1 8 156   211 32  0  1  0  5  211  0  0  249 
  

Total loans

 $325,349 $103,279 $267,233 $58,153 $33,696 $109,214 $99,477 $ $996,401 $295,831  $162,487  $296,826  $157,316  $33,713  $139,134  $83,033  $0  $1,168,340 

Loans collectively evaluated (1)

 321,575 102,982 266,076 58,016 33,402 108,318 99,170  989,539 293,228  162,206  295,560  157,291  33,560  138,059  83,033  0  1,162,937 

Loans individually evaluated (2)

 3,774 297 1,157 137 294 896 307  6,862 2,603  281  1,266  25  153  1,075  0  0  5,403 

 


(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

 

1615

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

At or For the Three Months Ended June 30, 2019

  

One-to-

     

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

        
  

four family

 

Multi-family

 

real estate

 

and land

 

equity

 

consumer

 

business

 

Unallocated

 

Total

  (In thousands)

ALLL:

   

Beginning balance

 $3,441 $769 $2,337 $700 $467 $1,678 $191 $176 $9,759

(Recapture of) provision for loan losses

 (25) (118) 20 11 (22) 416 (20) (7) 255

Charge-offs

      (362)   (362)

Recoveries

 1    20 58   79

Ending balance

 $3,417 $651 $2,357 $711 $465 $1,790 $171 $169 $9,731

 

  

At or For the Six Months Ended June 30, 2019

  

One-to-

     

Commercial

 

Construction

 

Home

 

Auto and other

 

Commercial

        
  

four family

 

Multi-family

 

real estate

 

and land

 

equity

 

consumer

 

business

 

Unallocated

 

Total

  (In thousands)

ALLL:

   

Beginning balance

 $3,297 $762 $2,289 $585 $480 $1,611 $334 $175 $9,533

Provision for (recapture of) loan losses

 117 (111) 68 126 (36) 593 (161) (6) 590

Charge-offs

      (548) (4)  (552)

Recoveries

 3    21 134 2  160

Ending balance

 $3,417 $651 $2,357 $711 $465 $1,790 $171 $169 $9,731

 

  

At December 31, 2019

 
  

One-to-

      

Commercial

  

Construction

  

Home

  

Auto and other

  

Commercial

         
  

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
  

(In thousands)

 

Total ALLL

 $3,024  $888  $2,243  $399  $454  $2,261  $208  $151  $9,628 

General reserve

  2,993   887   2,235   399   439   2,119   203   151   9,426 

Specific reserve

  31   1   8      15   142   5      202 
                                     

Total loans

 $306,014  $96,098  $255,722  $37,187  $35,046  $112,119  $41,571  $  $883,757 

Loans collectively evaluated (1)

  303,026   95,991   253,839   37,158   34,775   111,271   41,308      877,368 

Loans individually evaluated (2)

  2,988   107   1,883   29   271   848   263      6,389 
  

At or For the Three Months Ended March 31, 2020

 
  

One-to-

      

Commercial

  

Construction

  

Home

  

Auto and other

  

Commercial

         
  

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
  (In thousands) 

ALLL:

   

Beginning balance

 $3,024  $888  $2,243  $399  $454  $2,261  $208  $151  $9,628 

Provision for (recapture of) loan losses

  319   35   479   191   (6)  176   42   30   1,266 

Charge-offs

  0   0   0   0   0   (134)  0   0   (134)

Recoveries

  53   0   0   2   1   14   0   0   70 

Ending balance

 $3,396  $923  $2,722  $592  $449  $2,317  $250  $181  $10,830 

  

At December 31, 2020

 
  

One-to-

      

Commercial

  

Construction

  

Home

  

Auto and other

  

Commercial

         
  

four family

  

Multi-family

  

real estate

  

and land

  

equity

  

consumer

  

business

  

Unallocated

  

Total

 
  

(In thousands)

 

Total ALLL

 $3,469  $1,764  $3,420  $1,461  $368  $2,642  $429  $294  $13,847 

General reserve

  3,433   1,764   3,419   1,461   364   2,366   429   294   13,530 

Specific reserve

  36   0   1   0   4   276   0   0   317 
                                     

Total loans

 $309,828  $162,467  $296,574  $123,627  $33,103  $128,233  $100,201  $0  $1,154,033 

Loans collectively evaluated (1)

  306,862   162,183   295,296   123,601   32,968   127,411   100,201   0   1,148,522 

Loans individually evaluated (2)

  2,966   284   1,278   26   135   822   0   0   5,511 

 


(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

 

Impaired loans. A loan is considered impaired when First Federalthe Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.

 

1716

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents a summary of loans individually evaluated for impairment by portfolio segment at the dates indicated:

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

  

Recorded Investment

  

Unpaid Principal Balance

  

Related Allowance

 
 

(In thousands)

 

(In thousands)

 

With no allowance recorded:

                          

One-to-four family

 $316 $344 $ $297 $332 $ $223 $254 $ $227 $257 $ 

Multi-family

 297 297     281 281  284 284  

Commercial real estate

 1,157 1,311  1,240 1,320  1,209 1,306  1,216 1,308  

Construction and land

 110 142   33  0 0  0 29  

Home equity

 62 119  45 110  36 68  37 94  

Auto and other consumer

  270  251 548  105 227  0 224  

Commercial business

 307 307      0  0    0  0   

Total

 2,249 2,790  1,833 2,343  1,854  2,136    1,764  2,196   
  

With an allowance recorded:

                          

One-to-four family

 $3,458 $3,669 $46 2,691 2,911 31 2,380 2,560 32 2,739 2,941 36 

Multi-family

    107 107 1 0 0 0 0 0 0 

Commercial real estate

    643 643 8 57 57 1 62 62 1 

Construction and land

 27 27 1 29 29  25 52 0 26 26 0 

Home equity

 232 292 8 226 286 15 117 175 5 98 157 4 

Auto and other consumer

 896 1,174 156 597 690 142 970 1,021 211 822 953 276 

Commercial business

    263 263 5  0  0  0  0  0  0 

Total

 4,613 5,162 211 4,556 4,929 202 3,549  3,865  249  3,747  4,139  317 
  

Total impaired loans:

                          

One-to-four family

 3,774 4,013 46 2,988 3,243 31 2,603  2,814  32  2,966  3,198  36 

Multi-family

 297 297  107 107 1 281  281  0  284  284  0 

Commercial real estate

 1,157 1,311  1,883 1,963 8 1,266  1,363  1  1,278  1,370  1 

Construction and land

 137 169 1 29 62  25  52  0  26  55  0 

Home equity

 294 411 8 271 396 15 153  243  5  135  251  4 

Auto and other consumer

 896 1,444 156 848 1,238 142 1,075  1,248  211  822  1,177  276 

Commercial business

 307 307  263 263 5  0   0   0   0   0   0 

Total

 $6,862 $7,952 $211 $6,389 $7,272 $202 $5,403  $6,001  $249  $5,511  $6,335  $317 

 

1817

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents a summary ofthe average recorded investment in loans individually evaluated for impairment by portfolio segment atand the dates indicated:related interest income recognized for the period shown:

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 
 

June 30, 2020

 

June 30, 2020

 

March 31, 2021

 
 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

  

Interest Income Recognized

 
 

(In thousands)

 

(In thousands)

 

(In thousands)

 

With no allowance recorded:

          

One-to-four family

 $153 $9 $130 $9 $226  $4 

Multi-family

 198  148  282  5 

Commercial real estate

 1,205  1,218 15 1,212  18 
Construction and land 36  18  0  0 

Home equity

 48 1 46  36  0 

Auto and other consumer

  12  14 35  8 

Commercial business

 102  51   0   0 

Total

 1,742 22 1,611 38 1,791  35 
          

With an allowance recorded:

          

One-to-four family

 2,932 71 2,804 112 2,507  51 

Multi-family

 170  237  0  0 

Commercial real estate

 429  536  58  1 

Construction and land

 28 2 28 2 26  2 

Home equity

 246 5 247 10 111  3 

Auto and other consumer

 765 20 727 29 865  12 

Commercial business

 175  219   0   0 

Total

 4,745 98 4,798 153 3,567  69 
          

Total impaired loans:

          

One-to-four family

 3,085 80 2,934 121 2,733  55 

Multi-family

 368  385  282  5 

Commercial real estate

 1,634  1,754 15 1,270  19 

Construction and land

 64 2 46 2 26  2 

Home equity

 294 6 293 10 147  3 

Auto and other consumer

 765 32 727 43 900  20 

Commercial business

 277  270   0   0 

Total

 $6,487 $120 $6,409 $191 $5,358  $104 

 

Interest income recognized on a cash basis on impaired loans for the three and sixmonths ended June 30, 2020March 31, 2021, was $56,000 and $126,000, respectively.$76,000.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the periodsperiod shown:

 

  

Three Months Ended

 

Six Months Ended

  

June 30, 2019

 

June 30, 2019

  

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

  

(In thousands)

 

(In thousands)

With no allowance recorded:

                

One-to-four family

 $189 $3 $246 $5

Commercial real estate

 1,278 13 1,288 25

Home equity

 55 9 190 17

Auto and other consumer

  9  11

Total

 1,522 34 1,724 58
                 

With an allowance recorded:

                

One-to-four family

 2,827 69 2,829 112

Multi-family

 109 1 110 3

Commercial real estate

 658 8 660 15

Construction and land

 66 3 59 3

Home equity

 307 8 303 13

Auto and other consumer

 311 6 287 9

Commercial business

 302 5 315 10

Total

 4,580 100 4,563 165
                 

Total impaired loans:

                

One-to-four family

 3,016 72 3,075 117

Multi-family

 109 1 110 3

Commercial real estate

 1,936 21 1,948 40

Construction and land

 66 3 59 3

Home equity

 362 17 493 30

Auto and other consumer

 311 15 287 20

Commercial business

 302 5 315 10

Total

 $6,102 $134 $6,287 $223

  

Three Months Ended

 
  

March 31, 2020

 
  

Average Recorded Investment

  

Interest Income Recognized

 
  

(In thousands)

 

With no allowance recorded:

        

One-to-four family

 $108  $1 

Multi-family

  99   0 

Commercial real estate

  1,231   15 

Home equity

  42   3 

Auto and other consumer

  0   10 

Commercial business

  0   0 

Total

  1,480   29 
         

With an allowance recorded:

        

One-to-four family

  2,676   64 

Multi-family

  305   0 

Commercial real estate

  643   0 

Construction and land

  28   2 

Home equity

  248   6 

Auto and other consumer

  689   17 

Commercial business

  263   0 

Total

  4,852   89 
         

Total impaired loans:

        

One-to-four family

  2,784   65 

Multi-family

  404   0 

Commercial real estate

  1,874   15 

Construction and land

  28   2 

Home equity

  290   9 

Auto and other consumer

  689   27 

Commercial business

  263   0 

Total

 $6,332  $118 

 

Interest income recognized on a cash basis on impaired loans for the three and sixmonths ended June 30, 2019March 31, 2020, was $94,000 and $183,000, respectively.$76,000.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

(In thousands)

 

(In thousands)

 

One-to-four family

 $1,543 $698 $796  $912 

Multi-family

 297  0  284 

Commercial real estate

 35 109 145  157 

Construction and land

 137 29 25  26 

Home equity

 140 112 93  73 

Auto and other consumer

 896 848 1,076  821 

Commercial business

 308   0   0 
  

Total nonaccrual loans

 $3,356 $1,796 $2,135  $2,273 

 

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were 0 loans past due 90 days or more and still accruing interest at June 30, 2020March 31, 2021 and December 31, 20192020.

 

The following table presents past due loans, net of partial loan charge-offs, by class, as of June 30, 2020March 31, 2021:

 

 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

      

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

     
 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Total Loans

 

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

 
 

(In thousands)

 

(In thousands)

 

Real Estate:

                          

One-to-four family

 $1,594 $1,127 $444 $3,165 $322,184 $325,349 $585  $0  $0  $585  $295,246  $295,831 

Multi-family

   297 297 102,982 103,279 0  0  0  0  162,487  162,487 

Commercial real estate

  76  76 267,157 267,233 0  0  0  0  296,826  296,826 

Construction and land

     58,153 58,153  53   0   0   53   157,263   157,316 

Total real estate loans

 1,594 1,203 741 3,538 750,476 754,014 638  0  0  638  911,822  912,460 
  

Consumer:

                          

Home equity

 78  36 114 33,582 33,696 80  12  21  113  33,600  33,713 

Auto and other consumer

 772 520 566 1,858 107,356 109,214  288   208   239   735   138,399   139,134 

Total consumer loans

 850 520 602 1,972 140,938 142,910 368  220  260  848  171,999  172,847 
  

Commercial business loans

   307 307 99,170 99,477  0   0   0   0   83,033   83,033 
  

Total loans

 $2,444 $1,723 $1,650 $5,817 $990,584 $996,401 $1,006  $220  $260  $1,486  $1,166,854  $1,168,340 

 

2120

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, 20192020:

 

 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

      

30-59 Days

 

60-89 Days

 

90 Days or More

 

Total

     
 

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Current

  

Total Loans

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                          

One-to-four family

 $928  $92  $116  $1,136  $304,878  $306,014  $406  $132  $29  $567  $309,261  $309,828 

Multi-family

         96,098  96,098  0  0  0  0  162,467  162,467 

Commercial real estate

         255,722  255,722  0  0  0  0  296,574  296,574 

Construction and land

  38         38   37,149   37,187   56   0   26   82   123,545   123,627 

Total real estate loans

 966  92  116  1,174  693,847  695,021  462  132  55  649  891,847  892,496 
  

Consumer:

                          

Home equity

 299  24    323  34,723  35,046  94  0  0  94  33,009  33,103 

Auto and other consumer

  1,423   370   614   2,407   109,712   112,119   815   138   137   1,090   127,143   128,233 

Total consumer loans

 1,722  394  614  2,730  144,435  147,165  909  138  137  1,184  160,152  161,336 
  

Commercial business loans

     115      115   41,456   41,571   0   0   0   0   100,201   100,201 
  

Total loans

 $2,688  $601  $730  $4,019  $879,738  $883,757  $1,371  $270  $192  $1,833  $1,152,200  $1,154,033 

 

Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8-point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that First Federalthe Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

 

When First Federalthe Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose First Federalthe Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1-3 in our risk rating system.

 

Additionally, First Federalthe Bank categorizes loans as performing or nonperforming based on payment activity. Loans that are more than 90 days past due and nonaccrual loans are considered nonperforming.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table represents the internally assigned grade as of June 30, 2020March 31, 2021, by class of loans:

 

 

Pass

 

Watch

 

Special Mention

 

Substandard

 

Total

 

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

 
 

(In thousands)

 

(In thousands)

 

Real Estate:

                      

One-to-four family

 $318,430 $4,197 $1,813 $909 $325,349 $291,735  $866  $1,715  $1,515  $295,831 

Multi-family

 102,982   297 103,279 146,318  16,169  0  0  162,487 

Commercial real estate

 256,775 7,117 2,133 1,208 267,233 235,018  36,256  14,453  11,099  296,826 

Construction and land

 45,547 12,384 74 148 58,153  146,451   9,930   874   61   157,316 

Total real estate loans

 723,734 23,698 4,020 2,562 754,014 819,522  63,221  17,042  12,675  912,460 
  

Consumer:

                      

Home equity

 32,724 697 126 149 33,696 33,236  259  100  118  33,713 

Auto and other consumer

 103,857 2,654 1,776 927 109,214  135,471   1,808   740   1,115   139,134 

Total consumer loans

 136,581 3,351 1,902 1,076 142,910 168,707  2,067  840  1,233  172,847 
  

Commercial business loans

 97,960 51  1,466 99,477  73,154   9,647   0   232   83,033 
  

Total loans

 $958,275 $27,100 $5,922 $5,104 $996,401 $1,061,383  $74,935  $17,882  $14,140  $1,168,340 

 

The following table represents the internally assigned grade as of December 31, 20192020, by class of loans:

 

 

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

  

Pass

  

Watch

  

Special Mention

  

Substandard

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

                      

One-to-four family

 $301,312  $2,685  $1,148  $869  $306,014  $303,840  $2,487  $1,730  $1,771  $309,828 

Multi-family

 95,694    107  297  96,098  146,536  15,647  0  284  162,467 

Commercial real estate

 251,531  97  2,800  1,294  255,722  250,970  20,759  20,690  4,155  296,574 

Construction and land

  35,897   1,184   77   29   37,187   114,575   8,914   74   64   123,627 

Total real estate loans

 684,434  3,966  4,132  2,489  695,021  815,921  47,807  22,494  6,274  892,496 
  

Consumer:

                      

Home equity

 34,260  470  89  227  35,046  32,500  349  100  154  33,103 

Auto and other consumer

  107,327   3,243   594   955   112,119   124,115   2,034   1,216   868   128,233 

Total consumer loans

 141,587  3,713  683  1,182  147,165  156,615  2,383  1,316  1,022  161,336 
  

Commercial business loans

  39,653   376   263   1,279   41,571   92,010   7,791   168   232   100,201 
  

Total loans

 $865,674  $8,055  $5,078  $4,950  $883,757  $1,064,546  $57,981  $23,978  $7,528  $1,154,033 

 

2322

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following table represents the credit risk profile based on payment activity as of June 30, 2020March 31, 2021, by class of loans:

 

 

Nonperforming

 

Performing

 

Total

 

Nonperforming

  

Performing

  

Total

 
 

(In thousands)

 

(In thousands)

 

Real Estate:

              

One-to-four family

 $1,543 $323,806 $325,349 $796  $295,035  $295,831 

Multi-family

 297 102,982 103,279 0  162,487  162,487 

Commercial real estate

 35 267,198 267,233 145  296,681  296,826 

Construction and land

 137 58,016 58,153 25  157,291  157,316 
  

Consumer:

              

Home equity

 140 33,556 33,696 93  33,620  33,713 

Auto and other consumer

 896 108,318 109,214 1,076  138,058  139,134 
  

Commercial business

 308 99,169 99,477  0   83,033   83,033 
  

Total loans

 $3,356 $993,045 $996,401 $2,135  $1,166,205  $1,168,340 

 

The following table represents the credit risk profile based on payment activity as of December 31, 20192020, by class of loans:

 

 

Nonperforming

  

Performing

  

Total

  

Nonperforming

  

Performing

  

Total

 
 

(In thousands)

  

(In thousands)

 

Real Estate:

              

One-to-four family

 $698  $305,316  $306,014  $912  $308,916  $309,828 

Multi-family

   96,098  96,098  284  162,183  162,467 

Commercial real estate

 109  255,613  255,722  157  296,417  296,574 

Construction and land

 29  37,158  37,187  26  123,601  123,627 
  

Consumer:

              

Home equity

 112  34,934  35,046  73  33,030  33,103 

Auto and other consumer

 848  111,271  112,119  821  127,412  128,233 
  

Commercial business

     41,571   41,571   0   100,201   100,201 
  

Total loans

 $1,796  $881,961  $883,757  $2,273  $1,151,760  $1,154,033 

 

Troubled debt restructuring. A TDR is a loan to a borrower who is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that First Federalthe Bank is granting the borrower a concession of some kind. First FederalFed has granted a variety of concessions to borrowers in the form of loan modifications. The modifications are generally related to the loan's interest rate, term and payment amount or a combination thereof.

 

The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act"), provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (i.e., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. AsThis relief was extended under the Consolidated Appropriations Act 2021, to the earlier of June 30, 202060 days after the COVID-19 pandemic national emergency termination date or January 1, 2022. Through March 31, 2021, the Company had approvedgranted COVID-19 pandemic related temporary loan modifications for 297on a total of 357 loans aggregating to $128.4$175.0 million, or 12.9%15.0% of loans receivable.total loans. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table is a summary of information with respect to total COVID-19 loan modificationsmodified loans that remain on deferral as of June 30, 2020March 31, 2021 (dollars in thousands):

 

Count

 

Balance

 

Percent

 

Count

  

Balance

  

Percent

 
        (Dollars in Thousands)

Real Estate:

                  

One-to-four family

 38 $11,157 8.7% 0  $0  0.0%

Multi-family

 8 25,150 19.6 1  918  11.4 

Commercial real estate

 37 70,800 55.1 2  7,122  88.5 

Construction and land

 13 6,939 5.4  0   0   0 

Total real estate loans

 96 114,046 88.8 3  8,040  99.9 
              

Consumer:

                  

Home equity

 8 784 0.6 0  0  0 

Auto and other consumer

 182 9,620 7.5  1   12   0.1 

Total consumer loans

 190 10,404 8.1 1  12  0.1 
              

Commercial business loans

 11 3,970 3.1  0   0   0 
              

Total loans

 297 $128,420 100.0%  4  $8,052   100.0%

 

The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

(In thousands)

 

(In thousands)

 

Total TDR loans

 $2,495 $3,544 $1,973 $2,224 

Allowance for loan losses related to TDR loans

 31 41 24 26 

Total nonaccrual TDR loans

 110 81 107  108 

 

There were 0 newly restructured and renewals or modifications of existing TDR loans that occurred during the three months ended March 31, 2021 or 2020.

There were 0 TDR loans which incurred a payment default within 12 months of the restructure date during the three months ended March 31, 2021 or 2020.

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

There were 0 newly restructured and renewals or modifications of existing TDR loans that occurred during the three and six months ended June 30, 2020 or June 30, 2019.

There were 0 TDR loans which incurred a payment default within 12 months of the restructure date during three and six months ended June 30, 2020.

The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three and six months ended June 30, 2019, by type of concession granted.

  

Number

  

Rate

  

Term

  

Combination

  

Total

 
  

of Contracts

  

Modification

  

Modification

  

Modification

  

Modifications

 
      

(Dollars in thousands)

 

Pre-modification outstanding recorded investment

                    

One- to four-family

  1  $  $50  $  $50 
                     

Post-modification outstanding recorded investment

                    

One- to four-family

  1  $  $51  $  $51 

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three and six months ended June 30, 2019.

  

Number

  

Rate

  

Term

  

Combination

  

Total

 
  

of Contracts

  

Modification

  

Modification

  

Modification

  

Modifications

 
      

(Dollars in thousands)

 

TDR loans that subsequently defaulted

                    

One- to four-family

  1  $  $  $48  $48 

NaN additional funds were committed to be advanced in connection with impaired loans at June 30, 2020March 31, 2021.

 

The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

Accrual

 

Nonaccrual

 

Total

 

Accrual

 

Nonaccrual

 

Total

 

Accrual

  

Nonaccrual

  

Total

  

Accrual

  

Nonaccrual

  

Total

 
 

(In thousands)

 

(In thousands)

 

One-to-four family

 $2,231 $110 $2,341 $2,290 $81 $2,371 $1,807  $107  $1,914  $2,054  $108  $2,162 

Multi-family

    107  107

Commercial real estate

    643  643

Home equity

 154  154 160  160  59   0   59   62   0   62 

Commercial business

    263  263
  

Total TDR loans

 $2,385 $110 $2,495 $3,463 $81 $3,544 $1,866  $107  $1,973  $2,116  $108  $2,224 

 

 

Note 4 - Deposits

 

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at June 30, 2020March 31, 2021 and December 31, 20192020, were $94.0$80.1 million and $93.5$91.7 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:

 

 

June 30, 2020

  

December 31, 2019

  

March 31, 2021

  

December 31, 2020

 
 

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

  

Amount

  

Weighted-Average Interest Rate

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Savings

  $ 175,749  0.53%   $ 168,983  0.86%  $186,173  0.27% $164,434  0.17%

Transaction accounts

 339,151  0.01%  276,496  0.03%  466,143  0.00% 431,171  0.01%

Money market accounts

 330,261  0.44%  248,086  0.46%  495,265  0.23% 429,143  0.31%

Certificates of deposit

  325,164  1.57%   308,080  1.85%   287,226   0.80%  308,769   1.00%
      
  $ 1,170,325  0.64%   $ 1,001,645  0.84%  $1,434,807   0.28% $1,333,517   0.36%

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Maturities of certificates at the dates indicated are as follows:

 

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

(In thousands)

 

(In thousands)

 

Within one year or less

 $240,053 $241,127 $184,108  $185,804 

After one year through two years

 60,814 42,274 51,647  70,705 

After two years through three years

 9,353 11,167 37,591  37,417 

After three years through four years

 8,540 6,593 7,227  6,938 

After four years through five years

 6,404 6,919 6,653  7,905 

After five years

    0   0 
  
 $325,164 $308,080 $287,226  $308,769 

 

Brokered certificates of deposits of $86.3$85.9 million and $51.6$89.6 million are included in the June 30, 2020March 31, 2021 and December 31, 20192020 certificate of deposits totals above, respectively.

 

Deposits atAt June 30, 2020March 31, 2021 and December 31, 20192020, deposits included $76.9$98.4 million and $57.4$80.9 million, respectively, in public fund deposits. Investment securities with a carrying value of $43.2$51.8 million and $35.5$48.1 million were pledged as collateral for these deposits at June 30, 2020March 31, 2021 and December 31, 20192020, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

 

Interest on deposits by type for the periods shown was as follows:

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 
 

June 30,

 

June 30,

 

March 31,

 
 

2020

 

2019

 

2020

 

2019

 

2021

  

2020

 
 

(In thousands)

 

(In thousands)

 

(In thousands)

 

Savings

 $269 $372 $609 $688 $40  $340 

Transaction accounts

 4 36 23 72 7  19 

Money market accounts

 400 313 756 633 286  356 

Certificates of deposit

 1,368 1,347 2,791 2,599  601   1,423 
  
 $2,041 $2,068 $4,179 $3,992 $934  $2,138 

 

 

Note 5 - Federal Taxes on Income

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

 

The effective tax rates were 18.9%13.2% and 18.9% for the sixthree months ended June 30, 2020March 31, 2021 and 20192020, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 20202021 and 20192020 of 21%, largely due to the nontaxable earnings on bank owned life insurance and tax-exempt interest income earned on certain investment securities and loans. Additionally, a cumulative adjustment was recorded in the first quarter of 2021.

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Note 6 - Earnings per Share

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share.

 

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and sixmonths ended June 30, 2020March 31, 2021 and 20192020.

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 
 

June 30,

 

June 30,

 

March 31,

 
 

2020

 

2019

 

2020

 

2019

 

2021

  

2020

 
 

(In thousands, except share data)

 

(In thousands, except share data)

 

(In thousands, except share data)

 

Numerator:

          

Net income

 $1,976 $2,079 $2,849 $4,286 $3,120  $873 
  

Denominator:

          

Basic weighted average common shares outstanding

 9,373,253 9,856,423 9,488,197 9,916,423 9,094,354  9,624,727 

Dilutive restricted stock grants

 34,870 100,664 40,011 90,907  91,371   51,650 

Diluted weighted average common shares outstanding

 9,408,123 9,957,087 9,528,208 10,007,330  9,185,725   9,676,377 
  

Basic earnings per share

 $0.21 $0.21 $0.30 $0.43 $0.34  $0.09 
  

Diluted earnings per share

 $0.21 $0.21 $0.30 $0.43 $0.34  $0.09 

 

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of June 30, 2020March 31, 2021 and 20192020, there were 767,522727,859 and 820,556780,785 shares in the ESOP that remain unallocated, respectively.

Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. There were 35,508 and 0 restricted stock award anti-dilutive weighted-average shares for the three months ended June 30, 2020 and 2019 respectively. There were 28,111 and 0 restricted stock award anti-dilutive weighted-average shares for the six months ended June 30, 2020 and 2019 respectively.

 

 

Note 7 - Employee Benefits

 

Change from Multi-employer to Single-employer Pension Plan

Effective March 23, 2021, the Company withdrew from the Pentegra Defined Benefit Plan for Financial Institutions ("Pentegra DB Plan") and established the First Federal Defined Benefit Plan ("Bank DB Plan"). On March 23, 2021, all assets and liabilities were transferred from the Pentegra DB Plan to the newly established Bank DB Plan.

The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available under the plan are frozen. The plan provides defined benefits based on years of service and final average salary prior to the freeze. The Company uses December 31 as the measurement date for this plan. The initial measurement period will be March 23, 2021 – December 31, 2021.

The fair value of plan assets and projected benefit obligation on the March 23, 2021, Bank DB Plan adoption date were $14,705,000 and $14,197,000, respectively. A $2,717,599 cash contribution was made to the Pentegra DB Plan in March 2021 prior to the transition. A prior service cost of $1,745,519, net of tax, was included in accumulated other comprehensive loss on the Company's balance sheet at March 31, 2021. The prior service cost is expected to be amortized over 15 years.

Weighted-average assumptions used to determine pension benefit obligations at year-end include a 2.95% discount rate and a 0% rate of compensation increase. The weighted average assumptions used to determine net periodic pension cost include 2.95% discount rate, 5.75% expected return on plan assets and a 0% rate of compensation increase. The 5.75% weighted average expected long-term rate of return is estimated based on current trends in similar plan assets, as well as projected future rates of returns on similar assets.

Employee Stock Ownership Plan

 

In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month12-month period are eligible to participate in the ESOP.

 

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. An annualNo principal andor interest payment of $835,000 was made by the ESOP during the sixthree months ended June 30, 2020March 31, 2021.

 

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Compensation expense related to the ESOP for the three months ended June 30, 2020March 31, 2021 and 20192020, was $109,000$217,000 and $120,000, respectively. Compensation expense related to the ESOP for the six months ended June 30, 2020 and 2019, was $260,000 and $327,000,$151,000, respectively.

 

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

 

June 30, 2020

 

December 31, 2019

 

March 31, 2021

  

December 31, 2020

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Allocated shares

 280,507 227,473 306,949  306,949 

Committed to be released shares

  26,514 13,221  0 

Unallocated shares

 767,522 794,042  727,859   741,080 
  

Total ESOP shares issued

 1,048,029 1,048,029  1,048,029   1,048,029 
  

Fair value of unallocated shares

 $9,533 $14,396 $12,097  $11,561 

 

 

Note 8 - Stock-based Compensation

 

In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. AtAs of June 30, 2020March 31, 2021, there were 520,000336,480 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.

 

As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and 0 additional awards will be made. AtAs of June 30, 2020March 31, 2021, there were 0 shares available for grant under the 2015 EIP. At this date, there were 277,400are 189,500 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.

 

During the three and six months ended June 30, 2020, 27,500 and 62,600 shares of restricted stock were awarded, respectively, and 0 stock options were granted. There were 084,896 and 35,100 shares of restricted stock awarded, respectively, during the three and sixmonths ended June 30, 2019March 31, 2021 and 2020. Awarded shares of restricted stock vest ratably over periods ranging from three to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over five years.the stated period.

 

For the three months ended June 30, 2020March 31, 2021 and 20192020, total compensation expense for the 2015 EIPequity incentive plans was $250,000$404,000 and $270,000, respectively. For the six months ended June 30, 2020 and 2019, total compensation expense for the 2015 EIP was $555,000 and $553,000,$304,000, respectively.

 

Included in the above compensation expense for the three months ended June 30, 2020March 31, 2021 and 20192020, was directors' compensation was $86,000of $91,000 and $85,000, respectively. For the six months ended June 30, 2020 and 2019, directors' compensation was $171,000 and $170,000, respectively.

 

The following table provide a summary of changes in non-vested restricted stock awards for the period shown:

 

  

For the Three Months Ended

  

June 30, 2020

  

Shares

 

Weighted-Average Grant Date Fair Value

Non-vested at April 1, 2020

 253,900 $15.05

Granted

 27,500 11.23

Forfeited

 (4,000) 14.61
         

Non-vested at June 30, 2020

 277,400 $14.68
  

For the Three Months Ended

 
  

March 31, 2021

 
  

Shares

  

Weighted-Average Grant Date Fair Value

 

Non-vested at January 1, 2021

  292,892  $13.96 

Granted

  84,896   18.60 

Vested

  (5,620)  16.42 

Canceled (1)

  (600)  16.42 
         

Non-vested at March 31, 2021

  371,568  $14.98 
         

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's share of tax on the vested shares. The surrendered shares are canceled and are unavailable for reissue.

 
 

 

  

For the Six Months Ended

  

June 30, 2020

  

Shares

 

Weighted-Average Grant Date Fair Value

Non-vested at January 1, 2020

 264,300 $14.60

Granted

 62,600 14.03

Forfeited

 (49,500) 13.41
         

Non-vested at June 30, 2020

 277,400 $14.68

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As of June 30, 2020March 31, 2021, there was $3.1$4.6 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 3.422.88 years.

 

 

Note 9 - Fair Value Accounting and Measurement

 

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

 

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

 

A three-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows:

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

 

Level 3 - Unobservable inputs.

 

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

 

Qualitative disclosures of valuation techniques - Securities available for sale: where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities.

 

If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets measured at fair value on a recurring basis at the dates indicated:

 

 

June 30, 2020

 

March 31, 2021

 
 Quoted Prices in Active Markets for Identical Assets or Liabilities 

Significant Other Observable Inputs

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

Significant Other Observable Inputs

 Significant Unobservable Inputs   
 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 
 

(In thousands)

 

(In thousands)

 

Securities available-for-sale

                  

Municipal bonds

 $ $107,610 $ $107,610 $0  $132,492  $0  $132,492 
Agency bonds 0 1,913 0 1,913 

ABS agency

  60,819  60,819 0  65,910  0  65,910 

ABS corporate

  39,804  39,804 0  17,505  0  17,505 

Corporate debt

  22,428  22,428 0  43,890  0  43,890 

SBA

  23,547  23,547 0  17,566  0  17,566 

MBS agency

  102,647  102,647 0  74,016  0  74,016 

MBS corporate

  7,418  7,418  0   40,203   0   40,203 
 $ $364,273 $ $364,273 $0  $393,495  $0  $393,495 

 

 

December 31, 2019

  

December 31, 2020

 
 

Quoted Prices in Active

Markets for Identical Assets or Liabilities

 

Significant Other Observable Inputs

 

Significant Unobservable

Inputs

    Quoted Prices in Active Markets for Identical Assets or Liabilities 

Significant Other Observable Inputs

 Significant Unobservable Inputs   
 

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Total

 
 

(In thousands)

  

(In thousands)

 

Securities available-for-sale

                  

Municipal bonds

 $  $39,282  $  $39,282  $0  $127,862  $0  $127,862 

ABS agency

   28,858    28,858  0  63,820  0  63,820 

ABS corporate

   40,855    40,855  0  29,280  0  29,280 

Corporate debt

   9,643    9,643  0  32,970  2,540  35,510 

SBA

   28,459    28,459  0  18,564  0  18,564 

MBS agency

   160,167    160,167  0  62,683  0  62,683 

MBS corporate

     8,316      8,316   0   20,205   6,372   26,577 
 $  $315,580  $  $315,580  $0  $355,384  $8,912  $364,296 

30

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The significant unobservable inputs in the fair value measurement of the Company's Level 3 securities are noted below. Significant fluctuations in any of those inputs in isolation would result in a significantly different fair value measurement.


The following table presents quantitative information about recurring Level
3 fair value measurements at the date indicated:

December 31, 2020

Fair Value (In thousands)

Valuation Technique

Unobservable Input

Range (a)

Corporate debt

$ 1,540

Consensus pricing

Offered quotes

89 - 91

Comparability adjustments (%)

-0.7% - +1.3%

1,000

Consensus pricing

Offered quotes

92 - 100

Comparability adjustments (%)

-7.4% - 0%

MBS corporate

6,372

Consensus pricing

Offered quotes

104 - 107

Comparability adjustments (%)

-1.5% - +1.5%

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

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

  

March 31, 2021

 
  

Balance at Beginning of Period

  

Transfers Out of Level 3 (1)

  

Purchases

  

Unrealized

  

Total

 
  

(In thousands)

 

Securities available for sale

                    

Corporate debt

 $2,540  $(2,540) $0  $0  $0 

MBS corporate

  6,372   (6,372)  0   0   0 
  $8,912  $(8,912) $0  $0  $0 
(1) Transferred from Level 3 to Level 2 after obtaining observable market data. 

  

December 31, 2020

 
  

Balance at Beginning of Period

  

Transfers Into Level 3 (1)

  

Purchases

  

Unrealized

  

Total

 
  

(In thousands)

 

Securities available for sale

                    

Corporate debt

 $0  $1,540  $1,000  $0  $2,540 

MBS corporate

  0   0   6,372   0   6,372 
  $0  $1,540  $7,372  $0  $8,912 
(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no market activity for the securities. 

 

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

 

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

  

June 30, 2020

  

Level 1

 

Level 2

 

Level 3

 

Total

  

(In thousands)

Impaired loans

 $ $ $6,862 $6,862
  

March 31, 2021

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $5,403  $5,403 

 

  

December 31, 2019

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $  $  $6,389  $6,389 
  

December 31, 2020

 
  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Impaired loans

 $0  $0  $5,511  $5,511 

 

At June 30, 2020March 31, 2021 and December 31, 20192020, there were 0 impaired loans with discounts to appraisal disposition value or other unobservable inputs.

 

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

 

 

June 30, 2020

 

March 31, 2021

 
     

Fair Value Measurements Using:

     

Fair Value Measurements Using:

 
 

Carrying Amount

 

Estimated Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(In thousands)

 

(In thousands)

 

Financial assets

                      

Cash and cash equivalents

 $16,346 $16,346 $16,346 $ $ $15,827  $15,827  $15,827  $0  $0 

Investment securities available for sale

 364,273 364,273  364,273  393,495  393,495  0  393,495  0 

Loans held for sale

 3,111 3,111  3,111  4,037  4,037  0  4,037  0 
Loans receivable, net 986,351 975,116   975,116 1,156,439 1,147,018 0 0 1,147,018 

FHLB stock

 6,074 6,074  6,074  3,997  3,997  0  3,997  0 

Accrued interest receivable

 5,360 5,360  5,360  6,251  6,251  0  6,251  0 

Mortgage servicing rights, net

 1,098 1,467   1,467 2,309  2,499  0  0  2,499 
  

Financial liabilities

                      

Demand deposits

 $845,161 $845,161 $845,161 $ $ $1,147,581  $1,147,581  $1,147,581  $0  $0 
Time deposits 325,164 328,123  328,123  287,226 288,807 0 288,807 0 
Borrowings 112,379 113,919  113,919 
FHLB Borrowings 50,000 50,447 0 50,447 0 
Subordinated debt 39,310 39,310 0 39,310 0 

Accrued interest payable

 253 253  253  84  84  0  84  0 

 

3132

 

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

December 31, 2019

  

December 31, 2020

 
     

Fair Value Measurements Using:

      

Fair Value Measurements Using:

 
 

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

  

Carrying Amount

  

Estimated Fair Value

  

Level 1

  

Level 2

  

Level 3

 
 

(In thousands)

  

(In thousands)

 

Financial assets

                      

Cash and cash equivalents

 $48,739  $48,739  $48,739  $  $  $65,155  $65,155  $65,155  $0  $0 

Investment securities available for sale

 315,580  315,580    315,580    364,296  364,296  0  355,384  8,912 

Loans held for sale

 503  503    503    3,753  3,753  0  3,753  0 

Loans receivable, net

 878,437  858,101      858,101  1,141,969  1,129,570  0  0  1,129,570 

FHLB stock

 6,034  6,034    6,034    5,977  5,977  0  5,977  0 

Accrued interest receivable

 3,931  3,931    3,931    6,966  6,966  0  6,966  0 

Mortgage servicing rights, net

 871  1,486      1,486  2,120  2,189  0  0  2,189 
  

Financial liabilities

                      

Demand deposits

 $693,565  $693,565  $693,565  $  $  $1,024,748  $1,024,748  $1,024,748  $0  $0 

Time deposits

 308,080  308,819    308,819    308,769  310,992  0  310,992  0 

Borrowings

 112,930  113,076    113,076   

FHLB Borrowings

 109,977  111,462  0  111,462  0 

Accrued interest payable

 373  373    373    53  53  0  53  0 

 

Financial assets and liabilities other than investment securities are not traded in active markets. Estimated fair values require subjective judgments and are approximate. The estimates of fair value in the previous table are not necessarily representative of amounts that could be realized in actual market transactions, or of the underlying value of the Company. The methods and assumptions used by the Company in estimating fair values of financial instruments as set forth below in accordance with ASC Topic 825, Financial Instruments, as amended by ASU 2016-01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:

 

Securities - Fair values for investment securities are primarily measured using information from a third-party pricing service. The pricing service uses pricing models based on market data. In the event that limited or less transparent information is provided by the third-party pricing service, fair value is estimated using secondary pricing services or non-binding third-party broker quotes.

 

Loans receivable, net - At June 30, 2020March 31, 2021, the fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

 

Mortgage servicing rights, net - The estimated fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts when available. If no comparable contract is available, the estimated fair value is based on a valuation model that calculates the present value of estimated future net servicing income.

 

3233


Note 10- Subsequent Event

 

On April 15, 2021, the Company entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin"). Subsequent to quarter end, the Company partially fulfilled its commitment to extend $15.0 million to Quin under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of approximately $500,000.

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

 

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:

 

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the quality of our loan and investment portfolios;

 

estimates of our risks and future costs and benefits; and

 

statements concerning the potential effects of the COVID-19 pandemic on the Bank's business and financial results and conditions.

 

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

 

developmentsthe scope and changes in Federal and state laws and regulations, such as the recently enacted Coronavirus Aid Relief and Economic Security Act (“CARES Act”) addressing the economic effectsduration of the COVID-19 pandemic and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions;pandemic;

changes in general economic conditions, either nationally or in our market area, that are worse than expected;

changes in policy and regulation as it pertains to the Small Business Administration’s Paycheck Protection Program (“PPP”) and the bank’s participation as a lender in the PPP and similar program and its effect on the Bank’s liquidity, financial results, business and customers, including the availability of program funds and the ability of customers to comply with the requirements and otherwise perform with respect to loans obtained under such programs.

 

the effects of the COVID-19 pandemic, including on our credit risks of our lending activities, including changes in the levelquality and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;operations, as well as its impact on general economic conditions;

 

fluctuationslegislative or regulatory changes, including actions taken by governmental authorities in response to the COVID-19 pandemic;

the risks associated with lending and potential adverse changes in the demand forcredit quality of loans the number of unsold homes, land and other properties and fluctuations in real estate values in our market area; portfolio;

 

a decrease in the secondary market demand for loans that we originate for sale;

management’s assumptions in determining the adequacy of the allowance for loan losses;

 

our ability to control operating costs and expenses;

 

whether our management team can implement our operational strategy including but not limited to our efforts to achieve loan and revenue growth;

 

our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;frames;

 

staffing needs and associated expenses in responseour ability to product demand or the implementation of corporate strategies, including oursuccessfully execute on growth strategies related to the home lending centerour entry into new markets;

our ability to develop user-friendly digital applications to serve existing customers and attract new branches;customers;

 

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

 

changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

 

increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;

 

our ability to attract and retain deposits;

our ability to retain key members of our senior management team;

 

changes in consumer spending, borrowing and savings habits;habits, resulting in reduced demand for banking products and services;

our ability to successfully manage our growth in compliance with regulatory requirements;

 

results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, the Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;

 

legislative or regulatory changes in accounting policies and practices, as may be adopted by the financial institutions regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;that adversely affect our business;

 

disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

 

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

 

other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019.

2020.


 

 

Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on the Bank, its customers and third parties. These developments could have an adverse impact on our financial position and our results of operations.

 

Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

 

General

 

First Northwest is a bank holding company which primarily engages in the business activity of its subsidiary, First Federal.Fed. First FederalFed is a community-oriented financial institution serving Clallam, Jefferson, Kitsap, Whatcom, and King counties in Washington State, through its Seattle lending center and ten full-service branches. Our business and operating strategy is focused on building sustainable earnings through hiringemploying experienced bankers, geographic expansion, and diversifying our loan product mix, expanding our deposit product offerings that deliver value-added solutions, enhancing existing services and digital service delivery channels, and enhancing our infrastructure to support the changing needs and expectations of our customers.

 

We offer a wide range of products and services focused on the lendingfinancial security and depositorypayment needs of Western Washington. Whilethe communities we have a concentrationserve. Lending activities include the origination of first lien one- to four-family mortgage loans, wecommercial and multi-family real estate loans, construction and land loans (including lot loans), commercial business loans, and consumer loans, consisting primarily of automobile loans as well as home equity loans and lines of credit. We continue to increase ourthe origination and portfolio balances of commercial real estate, and multi-family real estate. Weestate, construction, and commercial business loans. More recently we have also increased our autoconsumer loan portfolio through our manufactured home and consumer loans, through indirect and purchased auto loan purchase programs, in order to diversifydiversity our asset portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase noninterest income and manage interest rate risk. We also retain one- to four-family first and second lien loans in our portfolio to generate interest income. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit for individuals, businesses, and nonprofit organizations. Deposits are our primary source of funds for lending and investing activities. We also borrow funds, typically from the Federal Home Loan Bank of Des Moines, as a way to provide additional fundingcost effective liquidity and manage interest rate risk management tools.risk.

 

 

First Northwest is affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing time deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, marketingbranding and promotion,customer acquisition, and the overall level of personal income and savings.savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.

 

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities.

 

An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations which is required to adequately provide for losses inherent in our loan portfolio through our allowance for loan losses. As credit metrics improve, such as a loan's risk rating, increased property values, increase,improvements in the economic environment, or recoveries of amounts previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net income.

 

Noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, advertising and promotion expenses, marketing and promotioncustomer acquisition expenses, expenses related to real estate and personal property owned, and other miscellaneous expenses.

 

Recent Developments. On March 22, 2021, the Company announced that First Fed has entered into an agreement with Sterling Bank and Trust of Southfield, Michigan to purchase its Bellevue, Washington branch, subject to applicable regulatory approvals and other customary closing conditions. The agreement includes the purchase of approximately $77.7 million in deposits as of the announcement date. First Fed anticipates closing the transaction by the end of the second quarter of 2021.

As discussed in more detail below under the subheading "Liabilities," on March 25, 2021, the Company issued $40.0 million in 3.75% fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and institutional accredited investors. The Company intends to use the net proceeds from the sale of the notes for general corporate purposes.

On April 15, 2021, the Company entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin"). Under the Joint Venture Agreement, the Company and POM have established Quin to develop a digital financial wellness platform that will offer personal financial services to the general public. Under a related Marketing and Banking Services Agreement, Quin will promote the services offered through the digital financial wellness platform and the Bank will provide banking services to the customers who utilize the platform. The Marketing and Banking Services Agreement sets forth the terms governing the parties' commercial and economic commitments and responsibilities, including the fees to be paid by the Bank to fund the costs of acquiring customers and the distribution of interchange fees. The Company also committed to extend $15.0 million to Quin under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of approximately $500,000.

Impact of COVID-19 Pandemic. The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals caused unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As initial restrictive measures were eased during 2020 and into 2021, the U.S. economy started to recover and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. As of March 31, 2021, the governor of Washington eased restrictions initially set in place, allowing businesses to increase capacities, but short of full capacity.

We recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue through the remainder of 2021, especially if new COVID-19 variant infections increase and new restrictions are mandated. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us. In late 2019addition, the economic pressures and early 2020,uncertainties related to the COVID-19 pandemic manifested itshave resulted in changes in consumer spending behaviors, which may negatively impact on individuals, companies,the demand for loans and governmental entities around the world. It significantly impacted the global economy and created a challenging operating environment. As economic conditions deterioratedother services we offer. Our borrowing base includes customers in mid-March 2020industries such as a result of the COVID-19 pandemic, we responded in several ways. Some of the key adjustments and developments include the following:

For our employees:

Enhanced the ability of our employees to work remotely, adjusting branch operating hours and restricting lobby access in most cases.

Provided significant support to employees by granting an increase in flexibility with paid leave, temporarily adjusting vacation policies, and increasing the cleaning of facilities to enable a safer environment for those employees that are not able to work from home.

Increased compensation for hourly employees and providing additional compensation for exempt employees below the level of Senior Vice President.

For our customers and communities:

Offering short-term loan payment and fee forbearance programs. Many borrowers requested and received temporary forbearance from obligations to assist them with the expected shortage in their near-term cash flow.

Facilitating government programs like the Small Business Administration's Paycheck Protection Program ("SBA PPP") and Main Street Lending Program ("MSLP") established by the Federal Reserve.

Investing in our communities. We plan to use a portion of the proceeds received from the SBA PPP loans and invest in the communities we serve.

For our shareholders and regulators:

Maintained our capital ratios at strong levels and materially increased our provision for loan losses to $2.8 million for the first half of 2020, compared to $669,000 for all of 2019.

Increasing on balance sheet liquidity, specifically Cash and Cash Equivalents increased by $849,000, a 1.7% increase over December 31, 2019. The investment portfolio, a secondary source of liquidity, increased by $48.7 million, or 16%, as well.

On March 23, 2020, the State of Washington announced the Stay Home, Stay Healthy order for all residents, resulting in the closing of businesses or a substantial reduction in business activity. Conditions have since improved in most of the counties within our footprint allowing many businesses to expand services or reopen under current guidelines. The sectors that continue to be most heavily impacted include hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments.establishments, all of which have been significantly impacted by the COVID-19 pandemic. At June 30, 2020,March 31, 2021, the Company’s exposure as a percent of the total loan portfolio to these industries was 5.1%4.4%, 0.2%, and 4.9%4.3%, respectively. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the pandemic. We continue to monitor these customers closely.

We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the pandemic include the duration of the COVID-19 outbreak and any related variant infections, the availability and effectiveness of COVID-19 vaccines, and the impact on our customers, employees, vendors and the economy. While uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.

We continue to provide banking and financial services to our customers, with drive-thru access available at all our branch locations and in-person services available by appointment. Our branch locations are currently open and operating, having returned to normal business hours at the beginning of May 2021. In addition, we continue to provide access to banking and financial services through online banking, Interactive Teller Machines ("ITMs"), Automated Teller Machines ("ATMs"), and by telephone. We continue to take additional precautions within all our locations, including providing personal protection equipment and enhanced cleaning procedures, to ensure the safety of our customers and our employees.

 

 

The Company has worked with loan customers on loan deferral and forbearance plans. As of June 30, 2020, the Company had granted payment deferral plans on 297 loans totaling $128.4 million compared to 23 loans totaling $1.4 million as of March 31, 2020. These modifications were not classified as TDRs at June 30, 2020, in accordance with the guidance of the CARES Act and related regulatory guidance. The Company is continuing to work on forbearance plans with customers impacted by the COVID-19 pandemic. For additional information on COVID-19 deferrals, see Note 3 of the Notes to Consolidated Financial Statements contained in "Item 1, Financial Statements."

During the quarter ended June 30, 2020, weWe provided assistance to many small businesses throughapplying for the SBA's Paycheck Protection Program. This program provides small businesses with funds to pay up to eight weeksProgram ("PPP") funding. As of payroll costs including benefits. A portion of the funds can also be used to pay interest on mortgages, rent, and utilities. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was enacted. Main provisions of the PPPFA extended the repayment period from two to five years, extended the covered expense period from eight to 24 weeks, and lowered the percent of forgiveness amount required to be used for eligible payroll costs to 60%. The PPPFA also extends the repayment start date until after the SBA makes a decision on the application for loan forgiveness.

WeMarch 31, 2021, we processed approximately $30.6$32.4 million of loans for 440307 customers through the current round of SBA PPP program as of June 30, 2020. Thefunding with an average loan amount approved was approximately $69,000.of $106,000. We processed $32.2 million of loans for 515 customers through the initial round of SBA PPP funding during 2020 with an average loan amount of $63,000. Payments by borrowers on these loans begin sixcan be deferred up to sixteen months after the note date, and interest, at 1%, will continue to accrue during the six-month deferment.deferment period. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with StreetSharesa third-party financial technology provider to assist our borrowers with the loan forgiveness application process. As of March 31, 2021, $16.6 million, or 51.4%, of the first-round loans were forgiven.

 

Loan processing fees paid to the Bank from the SBA of 5% on loans of $350,000 or less, 3% on loans of more than $350,000 but less than $2.0 million, and 1% for loans of $2.0 million or more are accounted for as loan origination fees. Net deferred fees are recognized over the life of the loan, or two years, as a yield adjustment on the loans. As of June 30, 2020, the Company had received $1.3 million in processing fees. If a loan is paid off or forgiven by the SBA prior to its maturity date, the remaining unamortized deferred fees will be recognized in interest income at that time. At such time that any of these loans are forgiven or repaid before the scheduled maturity, we expect an increase in interest income and the net interest margin during that period.

Critical Accounting Policies

 

There are no material changes to the critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.2020.

 

 

 

Comparison of Financial Condition at June 30, 2020March 31, 2021 and December 31, 20192020

 

Assets. Total assets increased to $1.48$1.74 billion at June 30, 2020March 31, 2021 from $1.31$1.65 billion at December 31, 2019.2020.

 

Total loans, excluding loans held for sale, increased $112.6$14.5 million to $996.4 million$1.16 billion at June 30, 2020,March 31, 2021, from $883.8 million$1.14 billion at December 31, 2019.2020. During the sixthree months ended June 30, 2020, one-March 31, 2021, auto and other consumer loans increased $10.9 million, with $7.3 million in purchases of manufactured home loans and $14.2 million in purchased auto loans offset by prepayment activity. One- to four-family residential loans increased $19.3decreased $14.0 million as we purchased a $28.0 million mortgage loan pool. Multi-familyprepayment of loans increased $7.2 million, as we continued to build this part ofexceeded originations during the loan portfolio. Commercial real estate loans increased by $11.5 million as we continue to build our lending presence in King and Whatcom Counties as well as in our legacy markets.period. Commercial business loans increased $57.9decreased $17.2 million as wenewly funded PPP loans were offset by PPP forgiveness payments received during the period and increased balances generated throughparticipation in the Northpointe Bank Mortgage Participation Program which provides interim financingdecreased to mortgage originators based on the contractual sale agreement of a mortgage loan during the first half of$5.7 million at March 31, 2021, from $47.3 million at December 31, 2020. Auto and other consumer loans decreased $2.9 million as we scaled back funding in our specialty auto loan portfolio. Competition for quality commercial credits remains; however, continuing impacts of the COVID-19 pandemic effect bothhave reduced the supply and demand for credit. An increase in refinance activity of one- to-four family residential loans also occurred during the period.

 

Construction and land loans increased $21.0,$33.7 million, or 56.4%27.2%, to $58.2$157.3 million at June 30, 2020,March 31, 2021, from $37.2$123.6 million at December 31, 2019. The majority of our2020. Our construction loans are geographically dispersed throughout the Puget Sound regionWestern Washington (with one loan in Oregon) and, as a result, these loans are susceptible to risks that may vary depending on the nature and location of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects and intend to begin utilizing internal staffing to monitor certain projects, which we expect will enhance fee income related to these loans. In March 2020, the vast majority of construction projects in Washington State were put on hold as a result of Governor Jay Inslee’s “Stay Home, Stay Safe” order. By June 30, 2020, most projects were able to restart under specific criteria. We continue to monitor the projects currently in our portfolio to determine the impact of COVID-19 on completion. As of this point in time, we have no reason to believe that any of the projects in process will not be completed.

 

We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, in order to prudently underwrite construction loans. For the majority of 2019, we decreased our construction lending, which resulted in a decline in construction balances at the end of the year compared to 2018. In the fourth quarter of 2019 and the first quarter of 2020, we increased production in construction lending and our commitments increased accordingly. We continually assess our lending strategies across all product lines and markets within which we do business in order to improve earnings while also prudently managing credit risk.

 

 

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

 

June 30, 2020

 

North Olympic Peninsula (1)

 

Puget Sound Region (2)

 

Other Washington

 

Total

March 31, 2021

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Total

 
 

(In thousands)

 

(In thousands)

 

Construction Commitment

                                

One- to four-family residential

 $17,475 $24,670 $405 $42,550 $18,268  $34,996  $1,472  $  $54,736 

Multi-family residential

  44,966  44,966 4,034  176,473  16,637  8,020  205,164 

Commercial real estate

 7,430 21,692 2,801 31,923  2,134   46,021   2,695      50,850 

Total commitment

 $24,905 $91,328 $3,206 $119,439 $24,436  $257,490  $20,804  $8,020  $310,750 
            

Construction Funds Disbursed

                                

One- to four-family residential

 $6,226 $12,432 $235 $18,893 $7,193  $17,871  $805  $  $25,869 

Multi-family residential

  20,492  20,492 3,687  79,566  15,300  856  99,409 

Commercial real estate

 6,810 4,814 54 11,678  1,763   20,047   1,027      22,837 

Total disbursed

 $13,036 $37,738 $289 $51,063 $12,643  $117,484  $17,132  $856  $148,115 
            

Undisbursed Commitment

                                

One- to four-family residential

 $11,249 $12,238 $170 $23,657 $11,075  $17,125  $667  $  $28,867 

Multi-family residential

  24,474  24,474 347  96,907  1,337  7,164  105,755 

Commercial real estate

 620 16,878 2,747 20,245  371   25,974   1,668      28,013 

Total undisbursed

 $11,869 $53,590 $2,917 $68,376 $11,793  $140,006  $3,672  $7,164  $162,635 
            

Land Funds Disbursed

                                

One- to four-family residential

 $4,677 $2,062 $351 $7,090 $4,521  $3,001  $343  $  $7,865 

Commercial real estate

         1,336         1,336 

Total disbursed for land

 $4,677 $2,062 $351 $7,090 $4,521  $4,337  $343  $  $9,201 

 

(1) Includes Clallam and Jefferson counties.

 

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

 

 

December 31, 2019

 

North Olympic Peninsula

  

Puget Sound Region

  

Other Washington

  

Total

 

December 31, 2020

 

North Olympic Peninsula (1)

  

Puget Sound Region (2)

  

Other Washington

  

Oregon

  

Total

 
 

(In thousands)

  

(In thousands)

 

Construction Commitment

                               

One- to four-family residential

 $14,915  $23,969  $496  $39,380  $15,473  $29,827  $1,477  $  $46,777 

Multi-family residential

   27,241    27,241  1,644  145,701  16,637  8,020  172,002 

Commercial real estate

  6,381   563   3,120   10,064   2,282   46,103   2,755      51,140 

Total Commitment

 $21,296  $51,773  $3,616  $76,685  $19,399  $221,631  $20,869  $8,020  $269,919 
            

Construction Funds Disbursed

                               

One- to four-family residential

 $5,242  $10,734  $151  $16,127  $7,208  $15,976  $845  $  $24,029 

Multi-family residential

   10,465    10,465  1,297  57,262  15,300    73,859 

Commercial real estate

  2,704   563   58   3,325   1,677   14,812   429      16,918 

Total disbursed

 $7,946  $21,762  $209  $29,917  $10,182  $88,050  $16,574  $  $114,806 
            

Undisbursed Commitment

                               

One- to four-family residential

 $9,673  $13,235  $345  $23,253  $8,265  $13,851  $632  $  $22,748 

Multi-family residential

   16,776    16,776  347  88,439  1,337  8,020  98,143 

Commercial real estate

  3,677      3,062   6,739   605   31,291   2,326      34,222 

Total undisbursed

 $13,350  $30,011  $3,407  $46,768  $9,217  $133,581  $4,295  $8,020  $155,113 
            

Land Funds Disbursed

                               

One- to four-family residential

 $4,904  $1,343  $  $6,247  $4,350  $2,728  $347  $53  $7,478 

Commercial real estate

  1,023         1,023      1,343         1,343 

Total disbursed for land

 $5,927  $1,343  $  $7,270  $4,350  $4,071  $347  $53  $8,821 

 

 

During the sixthree months ended June 30, 2020,March 31, 2021, the Company originated $276.3$187.0 million of loans, of which $145.1$125.1 million, or 52.5%66.8%, were originated in the Puget Sound region, $115.7$47.1 million, or 41.9%25.2%, in the North Olympic Peninsula, $11.9$2.9 million, or 4.3%1.6%, in other areas throughout Washington State, and $3.7$11.9 million, or 1.3%6.4%, in Oregon. The Company purchased an additional $28.0$14.2 million in one- to four-familyauto loans and $15.9$7.3 million in specialty automanufactured home loans during the sixthree months ended June 30, 2020.March 31, 2021. We will continue to evaluate opportunities to grow loansacquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.

 

Our allowance for loan losses increased $2.5 million,$418,000, or 25.8%3.0%, to $12.1$14.3 million at June 30, 2020,March 31, 2021, from $9.6$13.8 million at December 31, 2019.2020. The increase was due to a $2.8 million$500,000 loan loss provision, offset by net charge-offs of $285,000$82,000 for the six- monththree-month period. The provision is largely attributed to qualitative factor adjustments made in response to the economic impact of the COVID-19 pandemic, as well as to account for growth in the loan portfolio. We continue to monitor the economic impact of the COVID-19 pandemic and the anticipated impact is included in the qualitative factor adjustments. The allowance for loan losses as a percentage of total loans at June 30, 2020both March 31, 2021 and December 31, 20192020 was 1.2% and 1.1%, respectively..

 

Nonperforming loans increased $1.6 million,decreased $138,000, or 86.9%6.1%, to $3.4$2.1 million at June 30, 2020,March 31, 2021, from $1.8$2.3 million at December 31, 2019,2020, mainly attributable to an increaseimprovements in nonperforming one- to four-family loans of $845,000,$116,000 and multi-family loans of $297,000, construction$284,000, offset by additions in auto and landother consumer loans of $108,000, and commercial business loans of $308,000, partially offset by a decrease in commercial real estate loans of $74,000.$255,000. Nonperforming loans to total loans increased to 0.3% at June 30, 2020, fromwas 0.2% at both March 31, 2021 and December 31, 2019.2020. The allowance for loan losses as a percentage of nonperforming loans decreasedincreased to 360.8%668.1% at June 30, 2020,March 31, 2021, from 536.1%609.2% at December 31, 2019.2020.

 

At June 30, 2020,March 31, 2021, there were $2.5$2.0 million in restructured loans, of which $2.4$1.9 million were performing in accordance with their modified payment terms and returned to accrual status. Classified loans increased $154,000$6.6 million to $5.1$14.1 million at June 30, 2020,March 31, 2021, from $5.0$7.5 million at December 31, 20192020 due to one deteriorating commercial real estate loan.

 

Asset quality remains consistent with December 31, 2019. Net loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We recently adjustedremoved one of our indirect auto loan product offerings and underwriting criteriain 2020 to improve credit qualityeffectively eliminate new production and reduce future charge-off activity. We continue to monitor the indirect auto loan program in order to prudently balance risk and return within the portfolio. We believe our allowance for loan losses is adequate to absorb the known and inherent risks of loss in the loan portfolio as of June 30, 2020. WhileMarch 31, 2021. As the ultimate impact of the COVID-19 pandemic and response from Federal and State government remains to be seen, we increasedcontinue to incorporate this into the qualitative factor related to the economy this quarter.economy.

 

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

 

     

Increase (Decrease)

 
 

June 30, 2020

  

December 31, 2019

  

March 31, 2021

  

December 31, 2020

  

Amount

  

Percent

 
 

(In thousands)

  

(In thousands)

     

Real Estate:

                  

One-to-four family

 $325,349  $306,014  $295,831  $309,828  $(13,997) (4.5)%

Multi-family

 103,279  96,098  162,487  162,467  20   

Commercial real estate

 267,233  255,722  296,826  296,574  252  0.1 

Construction and land

  58,153   37,187   157,316   123,627   33,689  27.3 

Total real estate loans

 754,014  695,021  912,460  892,496  19,964  2.2 
          

Consumer:

                  

Home equity

 33,696  35,046  33,713  33,103  610  1.8 

Auto and other consumer

  109,214   112,119   139,134   128,233   10,901  8.5 

Total consumer loans

 142,910  147,165  172,847  161,336  11,511  7.1 
          

Commercial business loans

  99,477   41,571   83,033   100,201   (17,168) (17.1)
          

Total loans

 996,401  883,757  1,168,340  1,154,033  14,307  1.2 

Less:

                  

Net deferred loan fees

 1,842  206  4,983  4,346  637  14.7 

Premium on purchased loans, net

 (3,901) (4,514) (7,347) (6,129) (1,218) 19.9 

Allowance for loan losses

  12,109   9,628   14,265   13,847   418  3.0 

Loans receivable, net

 $986,351  $878,437  $1,156,439  $1,141,969  $14,470  1.3 

 

 

The following table represents nonperforming assets at the dates indicated.

 

     

Increase (Decrease)

 
 

June 30, 2020

  

December 31, 2019

  

March 31, 2021

  

December 31, 2020

  

Amount

  

Percent

 
 

(In thousands)

  

(In thousands)

     

Nonperforming loans:

                  

Real estate loans:

              

One- to four-family

 $1,543  $698  $796  $912  $(116) (12.7)%

Multi-family

 297      284  (284) (100.0)

Commercial real estate

 35  109  145  157  (12) (7.6)

Construction and land

  137   29   25   26   (1) (3.8)
 

Total real estate loans

 2,012  836  966  1,379  (413) (29.9)
          

Consumer loans:

              

Home equity

 140  112  93  73  20  27.4 

Auto and other consumer

  896   848   1,076   821   255  31.1 
 

Total consumer loans

  1,036   960   1,169   894   275  30.8 
          

Commercial business

 308          100.0 
              

Total nonperforming loans

  3,356   1,796   2,135   2,273   (138) (6.1)
          

Real estate owned:

                  

Land

  62   62      2   (2) (100.0)
 

Total real estate owned

  62   62      2   (2) (100.0)
          

Repossessed assets

  134   92           100.0 
          

Total nonperforming assets

 $3,552  $1,950  $2,135  $2,275  $(140) (6.2)
          

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

 0.3% 0.2% 0.2% 0.2% 0.0%  

 

Investment securities increased $48.7$29.2 million, or 15.4%8.0%, to $364.3$393.5 million at June 30, 2020,March 31, 2021, from $315.6$364.3 million at December 31, 2019,2020, due to the purchase and sale of securities, normal payments and prepayment activity, and an increase in the market value of the portfolio.activity. Mortgage-backed securities represent the largest portion of our investment securities portfolio and totaled $110.1$114.2 million at June 30, 2020,March 31, 2021, or 30.2%29.0% of the investment securities portfolio, a decreasean increase during the year of $58.4$25.0 million, or 34.7%28.0%, from $168.5$89.3 million at December 31, 2019.2020. Other investment securities, including municipal bonds and other asset-backed securities, were $254.2$279.3 million at June 30, 2020,March 31, 2021, or 69.8%71.0% of the total investment securities portfolio, an increase of $107.1$4.2 million from $147.1$275.0 million at December 31, 2019.2020. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 6.77.5 years as of June 30, 2020,March 31, 2021, and 5.07.3 years as of December 31, 2019,2020, and had an estimated average repricing term of 4.85.3 years as of June 30, 2020,March 31, 2021, and 3.75.0 years as of December 31, 2019,2020, based on the interest rate environment at those times. The net change in unrealized gains (losses) on our municipal bonds and mortgage-backed investment securities declined $4.4 million during the first quarter of 2021 as a result of declining market values.

 

The investment portfolio was comprised of 58.9%48.0% in amortizing securities at June 30, 2020both March 31, 2021 and 81.8% at December 31, 2019.2020. The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is impacted by prevailing mortgage interest rates. Management maintains a focus on enhancing the mix of earning assets by originating loans as a percentage of earning assets; however, we continue to purchase investment securities as a source of additional interest income. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

 

 

Liabilities. Total liabilities increased $172.1 million to $1.30$1.55 billion at June 30, 2020,March 31, 2021, from $1.13$1.47 billion at December 31, 2019,2020, primarily due to an increase in deposits of $168.7 million.$101.3 million and the issuance of subordinated debt of $40.0 million in March 2021.

 

Deposit balances increased 16.8%7.6%, to $1.17$1.43 billion at June 30, 2020,March 31, 2021, from $1.00$1.33 billion at December 31, 2019.2020. There was an $82.2a $66.1 million increase in money market accounts, a $62.7$34.9 million increase in transaction accounts, and a $6.8$21.7 million increase in savings accounts during the year.period while the balance of certificates of deposits decreased $21.5 million. The increase in deposits is in large part due to organic growth, the Federal government's continued response to the pandemic including stimulus payments, deposit of additional unemployment benefits,PPP funding, and deferrals of Federal tax payment due dates. These actions, coupled with decreased spending by consumersWe strategically increased noninterest-bearing and business, resulted in higher deposit balances.other core deposits to manage overall funding costs. In addition to collecting customer deposits, we utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds, reduce our reliance on public funds deposits, and allow flexibility when competing on retail rates. At June 30, 2020,March 31, 2021, we had $86.3$85.9 million in brokered CDs included in the $325.2$287.2 million balance of certificates of deposit.

On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-floating rate subordinated notes due 2031 (the “Notes”) to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the offering for general corporate purposes and has provided $20.0 million to the Bank as Tier 1 capital.

 

Equity. Total shareholders' equity decreased $536,000$4.2 million to $176.3$182.1 million for the sixthree months ended June 30, 2020.March 31, 2021. The decrease was due to $5.5an after-tax decline in unrealized gain on available-for-sale investments of $3.5 million and a $1.7 million adjustment in other comprehensive income reflecting the recognition of prior service cost related to the transfer out of participation in a multiemployer pension plan into a single employer plan. The Company recorded year-to-date net income of $3.1 million, partially offset by $2.2 million in repurchases of shares of common stock, largely offset by an after-tax increase in other comprehensive income of $2.3 million due to the increased value of our available-for-sale securities portfolio, as well as year-to-date net income of $2.9 million.stock.

 

 

 

Comparison of Results of Operations for the Three Months Ended June 30,March 31, 2021 and 2020 and 2019

 

General. Net income decreased $103,000,increased $2.2 million, or 4.9%257.4%, to $2.0$3.1 million for the three months ended June 30, 2020,March 31, 2021, compared to net income of $2.1 million$873,000 for the three months ended June 30, 2019. The decrease is mainlyMarch 31, 2020, due to a largeran increase in net interest income after provision for loan loss provision in the current periodlosses compared to the same period one year ago, which was partially offset byin 2020 and a decrease in net noninterest expense. Anmodest increase in noninterest income drivenpartially offset by mortgage revenue offset an increase in noninterest expense due primarily to higher compensation expenses.expense.

 

Net Interest Income. Net interest income increased $437,000$4.1 million to $10.1$13.5 million for the three months ended June 30, 2020., compared to $9.7March 31, 2021, from $9.4 million for the three months ended June 30, 2019 The yield on average interest-earning assets decreased 47 basis points to 3.79% for the three months ended June 30, 2020, compared to 4.26% for the same period in the prior year. This was due to a decrease in market interest rates and a decrease in the ratio of total loans to assets in the current period compared to one year ago from 67.4% to 69.9%.

The average cost of interest-bearing liabilities decreased 44 basis points to 0.89% for the three months ended June 30, 2020, compared to 1.33% for the same period last year. The decrease was due in part to a reduction in the level and cost of borrowings given the prepayment of higher costing FHLB borrowings in the first quarter ofMarch 31, 2020. As a result, our average cost of FHLB borrowings decreased to 1.13% in the first quarter of 2020 compared to 2.99% for the same period one year prior. The cost of interest-bearing deposits decreased by 17 basis points to 0.87% compared to 1.04% for the three months ended June 30, 2019, given decreasing market rates.

Due to the average yield on interest-earning assets decreasing at a faster pace than our interest-bearing liabilities, the net interest margin decreased 13 basis points to 3.10% for the three months ended June 30, 2020, from 3.23% for the same period in 2019. For additional information, see Rate/Volume Analysis contained in Item 2 of this Form 10-Q.

Interest Income. Totalinterest income decreased $425,000, or 3.3%, to $12.4 million for the three months ended June 30, 2020, from $12.8 million for the comparable period in 2019. Interest and fees on loans receivable decreased $237,000, to $10.2 million for the three months ended June 30, 2020, from $10.5 million for the three months ended June 30, 2019, due primarily to a decrease in the yield on loans and securities. Average loan yields decreased 34 basis points to 4.40% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to a decrease in market rates and an increase in the amount of lower yielding loans as a percentage of loans, including Northpointe and PPP loans.

Interest income on investment securities increased $347,000 to $1.3 million for the three months ended June 30, 2020, compared to $1.0 million for the three months ended June 30, 2019, due to a $96.6 million increase in average balances partially offset by an 86 basis point decrease in average yield related to a decrease in the yield on variable rate securities. The change in average yield on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the three months ended June 30, 2020 decreased $452,000, or 37.9%, compared to the three months ended June 30, 2019, the result of a decrease of $43.3 million in the average balance and a 49 basis point decrease in the average yield in the 2020 period.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:

  

Three Months Ended June 30,

    
  

2020

 

2019

    
  

Average Balance Outstanding

 

Yield

 

Average Balance Outstanding

 

Yield

 

Increase (Decrease) in Interest Income

  

(Dollars in thousands)

Loans receivable, net

 $931,344 4.40% $883,290 4.74% $(237)

Investment securities

 213,141 2.47 116,496 3.33 347

Mortgage-backed securities

 135,604 2.18 178,878 2.67 (452)

FHLB stock

 4,426 4.97 7,066 4.98 (33)

Interest-bearing deposits in banks

 20,922 0.15 13,118 1.77 (50)

Total interest-earning assets

 $1,305,437 3.79% $1,198,848 4.26% $(425)

Interest Expense. Total interest expense decreased $862,000, or 27.8%, to $2.2 million for the three months ended June 30, 2020, compared to $3.1 million for the three months ended June 30, 2019, mainly due to an 80.6% decrease in interest paid on borrowings. Interest expense on deposits decreased slightly for the three months ended June 30, 2020, due to lower rates offsetting the impact of increased balances. The average balance of interest-bearing deposits increased $141.2 million, or 17.7%, to $937.0 million for the three months ended June 30, 2020, from $795.8 million for the three months ended June 30, 2019, as we continued to target deposit growth in new and existing market areas as well as the industry-wide impact of surge deposits during the pandemic. During the three months ended June 30, 2020, the average balance of savings accounts increased $9.7 million and the related weighted-average cost decreased 29 basis points compared to the same period in 2019. The average balance of certificates of deposit balances grew $90.5 million and the weighed-average cost decreased by 51 basis points, mainly as a result of the utilization of brokered CDs. During the three months ended June 30, 2020, the average balance of money market accounts increased $34.0 million compared to the same period in the prior year. The average cost of deposits decreased by 17 basis points to 0.87% for the three months ended June 30, 2020, from 1.04% for the three months ended June 30, 2019. Borrowing costs decreased due to a decrease in balances and the average rate paid during the most recent quarter compared to the same period in 2019.

The following table details average balances, cost of funds and the change in interest expense for the periods shown:

  

Three Months Ended June 30,

    
  

2020

 

2019

    
  

Average Balance Outstanding

 

Rate

 

Average Balance Outstanding

 

Rate

 

Increase (Decrease) in Interest Expense

  

(Dollars in thousands)

Savings accounts

 $172,833 0.62% $163,106 0.91% $(103)

Transaction accounts

 122,951 0.01 115,914 0.12 (32)

Money market accounts

 291,526 0.55 257,548 0.49 87

Certificates of deposit

 349,658 1.57 259,203 2.08 21

Borrowings

 71,170 1.13 138,643 2.99 (835)

Total interest-bearing liabilities

 $1,008,138 0.89% $934,414 1.33% $(862)

Provision for Loan Losses. The provision for loan losses was $1.5 million during the three months ended June 30, 2020, compared to a $255,000 provision for loan losses for the three months ended June 30, 2019. This was mainly due to an increase to the economic qualitative factor resulting from the uncertainty surrounding COVID-19 and its potential impact on the loans in our portfolio.

The following table details activity and information related to the allowance for loan losses for the periods shown:

  

Three Months Ended June 30,

  

2020

 

2019

  

(Dollars in thousands)

Provision for loan losses

 $1,500 $255

Net charge-offs

 (221) (283)

Allowance for loan losses

 12,109 9,731

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

 1.2% 1.1%

Total nonaccrual loans

 3,356 1,291

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

 360.8% 753.8%

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

 0.3% 0.1%

Total loans

 $996,401 $879,054

Noninterest Income. Noninterest income increased $2.7 million, or 188.8%, to $4.1 million for the three months ended June 30, 2020, from $1.4 million for the three months ended June 30, 2019, primarily due to the gain on sales of mortgage loans of $1.9 million, the gain on sale of investment securities of $604,000, and an increase in the cash surrender value of bank owned life insurance of $482,000. Loan and deposit fees decreased by $230,000 due to fewer non-sufficient funds fees as transaction volume reduced during the quarter as well as customers generally carrying higher balances in their deposit accounts.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:

  

Three Months Ended June 30,

 

Increase (Decrease)

  

2020

 

2019

 

Amount

 

Percent

  

(Dollars in thousands)

Loan and deposit service fees

 $765 $995 $(230) (23.1)%

Mortgage servicing fees, net of amortization

 (172) 54 (226) (418.5)

Net gain on sale of loans

 2,001 88 1,913 2,173.9

Net gain on sale of investment securities

 661 57 604 1,059.6

Increase in cash surrender value of bank-owned life insurance

 627 145 482 332.4

Other income

 227 84 143 170.2

Total noninterest income

 $4,109 $1,423 $2,686 188.8%

Noninterest Expense. Noninterest expense increased $2.0 million or 24.3% during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, mainly due to a 25.5% increase in compensation and benefits driven by additional staffing and higher commissions paid on loan production, which increased 656.4%. Occupancy and equipment increased 18.0% and advertising increased 64.6%.

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

  

Three Months Ended June 30,

 

Increase (Decrease)

  

2020

 

2019

 

Amount

 

Percent

  

(Dollars in thousands)

Compensation and benefits

 $5,966 $4,753 $1,213 25.5%

Data processing

 769 667 102 15.3

Occupancy and equipment

 1,345 1,140 205 18.0

Supplies, postage, and telephone

 284 242 42 17.4

Regulatory assessments and state taxes

 223 195 28 14.4

Advertising

 377 229 148 64.6

Professional fees

 354 331 23 6.9

FDIC insurance premium

 70 77 (7) (9.1)

Other

 894 638 256 40.1

Total

 $10,282 $8,272 $2,010 24.3%

Provision for Income Tax. Income tax expense of $464,000 was recorded for the three months ended June 30, 2020, compared to $493,000 for the three months ended June 30, 2019, generally due to a decrease in income before taxes of $132,000. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019

General. Net income decreased $1.4 million, or 33.5%, to $2.9 million for the six months ended June 30, 2020, compared to net income of $4.3 million for the six months ended June 30, 2019, due to an increase in provision for loan losses and noninterest expense partially offset by an increase in noninterest income.

Net Interest Income. Net interest income increased $244,000 to $19.5 million for the six months ended June 30, 2020, from $19.3 million for the six months ended June 30, 2019. This increase was mainly the result of an increase in average earning assets of $60.7$341.0 million. The yield on average interest-earning assets decreased 3619 basis points to 3.87%3.78% for the sixthree months ended June 30, 2020,March 31, 2021, compared to 4.23%3.97% for the same period in the prior year.

The net interest margin decreased 11 basis pointsyear due to 3.11% for the six months ended June 30, 2020, from 3.22% for the same period in 2019. A 36 basis point decrease in asset yields was offset by a 30 basis point decrease in our cost of interest-bearing liabilities, reducing our net interest rate spread and net interest margin.

The $244,000 increase in net interest income during the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was the result of a $1.1 million decrease in interest expense driven by an improvement in the cost of interest-bearing liabilities which was partially offset by a decrease in interest income. The decrease in interest expense of borrowings of $1.4 million was the main contributor to the increase in net interest income.reinvestment loan and investment securities rates.

 

The average cost of interest-bearing liabilities decreased to 0.99%0.40% for the sixthree months ended June 30, 2020,March 31, 2021, compared to 1.29%1.11% for the same period last year, due primarily to decreasesa decrease in rates on interest-bearing deposits of 67 basis points combined with a decrease in borrowing volume of $905,000$24.2 million and decreases attributablelower borrowing rates due to the restructure of long-term FHLB advances and declining rates on short-term advances. Total cost of $486,000.funds decreased 63 basis points to 32 basis points for the three months ended March 31, 2021, from 95 basis points for the same period in 2020. The net interest margin increased 37 basis points to 3.48% for the three months ended March 31, 2021, from 3.11% for the same period in 2020.

 

Interest Income. Total interest income decreased $960,000,increased $2.7 million, or 3.8%22.2%, to $24.3$14.6 million for the sixthree months ended June 30, 2020,March 31, 2021, from $25.3$12.0 million for the comparable period in 2019,2020, primarily due to a decreasean increase in the average yieldsbalances on interest-earning assets. Interest and fees on loans receivable decreased $493,000,increased $2.7 million, to $20.1$12.5 million for the sixthree months ended June 30, 2020,March 31, 2021, from $20.6$9.8 million for the sixthree months ended June 30, 2019, in spite ofMarch 31, 2020, related to an increase in the average balance of net loans receivable of $24.0$261.5 million compared to the prior year. Average loan yields decreased 249 basis points to 4.45%4.43% for the sixthree months ended June 30, 2020March 31, 2021 compared to the sixthree months ended June 30, 2019.March 31, 2020.

 

Total interest income from securities decreased $344,000 to $4.1 million for the six months ended June 30, 2020 from $4.4 million for the same period in 2019. While the average balance of total securities increased $30.5 million, the average yield decreased 48 basis points. Interest income on investment securities increased $406,000, or 20.5% to $2.4 million for the six months ended June 30, 2020, compared to $2.0 million for the six months ended June 30, 2019, due to an increase in the average balance of $63.2 million partially offset by a decrease in average yield of 71 basis points compared to the same period in 2019. The change in average yields on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the six months ended June 30, 2020 decreased $750,000, or 30.6%, compared to the six months ended June 30, 2019, reflecting a $32.7 million decrease in the average balance and a decrease in yield of 41 basis points.

 

 

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:

 

 

Six Months Ended June 30,

    

Three Months Ended March 31,

    
 

2020

 

2019

    

2021

  

2020

    
 

Average Balance Outstanding

 

Yield

 

Average Balance Outstanding

 

Yield

 

Increase (Decrease) in Interest Income

 

Average Balance Outstanding

  

Yield

  

Average Balance Outstanding

  

Yield

  

Increase (Decrease) in Interest Income

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Loans receivable, net

 $901,116 4.45% $877,095 4.69% $(493) $1,132,194  4.43% $870,739  4.52% $2,705 

Investment securities

 181,586 2.63 118,423 3.34 406 276,229  2.27  149,954  2.85  501 

Mortgage-backed securities

 148,593 2.29 181,297 2.70 (750) 92,508  2.01  161,666  2.37  (495)

FHLB stock

 4,573 4.46 6,955 5.06 (74) 3,809  4.73  4,707  3.99  (2)

Interest-bearing deposits in banks

 21,110 0.72 12,495 2.00 (49)  44,576  0.12   21,248  1.28   (55)

Total interest-earning assets

 $1,256,978 3.87% $1,196,265 4.23% $(960) $1,549,316  3.78% $1,208,314  3.97% $2,654 

 

Interest Expense. Total interest expense decreased $1.2$1.4 million, or 20.0%55.3%, to $4.8$1.2 million for the sixthree months ended June 30, 2020,March 31, 2021, compared to $6.0$2.6 million for the sixthree months ended June 30, 2019,March 31, 2020, due to a decrease in borrowing costs of $1.4 million, or 68.7%. Interestinterest expense on deposit costs increased fordeposits of $1.2 million resulting from a 67 basis point decrease in the six months ended June 30, 2020, by $187,000 due to an increase in average cost of interest-bearing balances.deposits. The average balance of interest-bearing deposits increased $97.8$242.9 million, or 12.3%28.6%, to $893.0$1.09 billion for the three months ended March 31, 2021, from $849.2 million for the sixthree months ended June 30,March 31, 2020, from $795.2 million for the six months ended June 30, 2019, as we continued to target growth ingrew deposits in new and existing market areas and surge deposits relatedareas. Additionally, the growth was supported by many of the Government programs put in place to support the economy during the COVID-19 pandemic.

 

During the sixthree months ended June 30, 2020,March 31, 2021, interest expense on cost of certificates of deposit increaseddecreased due to an increase in average balance of $73.9 million partially offset by a decrease in the average balance of $19.8 million and a decrease of 99 basis points in the average rate paid, of 33 basis points, compared to the sixthree months ended June 30, 2019.March 31, 2020. During the same period, the average balances of savings, transaction, and money market accounts increased $11.0$7.7 million, $3.6$46.4 million and $9.3$208.5 million, respectively. The average cost of all deposit products decreased to 0.94%0.27% for the sixthree months ended June 30, 2020,March 31, 2021, from 1.00%0.85% for the sixthree months ended June 30, 2019.March 31, 2020, due in large part to the expiration of promotional rates and a shift in balances to transaction accounts. Borrowing costs decreased as higher rate long termthe average cost of FHLB advances were prepaid duringdecreased 80 basis points from declining short-term borrowing rates and lower rates on a long-term advance restructure in addition to a decrease in the six months.average balance of $24.2 million compared to the same period in 2020.

 

The following table details average balances, cost of funds and the change in interest expense for the periods shown:

 

 

Six Months Ended June 30,

    

Three Months Ended March 31,

    
 

2020

 

2019

    

2021

  

2020

    
 

Average Balance Outstanding

 

Rate

 

Average Balance Outstanding

 

Rate

 

Increase (Decrease) in Interest Expense

 

Average Balance Outstanding

  

Rate

  

Average Balance Outstanding

  

Rate

  

Increase (Decrease) in Interest Expense

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Savings accounts

 $169,371 0.72% $158,398 0.87% $(79) $173,647  0.09% $165,911  0.82% $(300)

Transaction accounts

 118,963 0.04 115,358 0.12 (49) 161,398  0.02  114,970  0.07  (12)

Money market accounts

 272,030 0.56 262,747 0.48 123 461,080  0.25  252,537  0.56  (70)

Certificates of deposit

 332,674 1.68 258,737 2.01 192 295,989  0.81  315,778  1.80  (822)

Borrowings

 75,574 1.68 136,545 2.97 (1,391)
FHLB advances 55,437 1.38  79,659 2.18  (243)

Subordinated debt

  3,192  3.13        25 

Total interest-bearing liabilities

 $968,612 0.99% $931,785 1.29% $(1,204) $1,150,743  0.40% $928,855  1.11% $(1,422)

 

Provision for Loan Losses. The provision for loan losses was $2.8 million during$500,000 for the sixthree months ended June 30,March 31, 2021, primarily due to growth in the loan portfolio, and was $1.3 million for the three months ended March 31, 2020, primarily due to the uncertainty in economic conditions created by the ongoing COVID-19 pandemic and growth in the loan portfolio, and was $590,000 for the six months ended June 30, 2019, primarily due to charge-off activity in our indirect auto loan portfolio.

42

 

The following table details activity and information related to the allowance for loan losses for the periods shown:

 

  

Six Months Ended June 30,

  

2020

 

2019

  

(Dollars in thousands)

Provision for loan losses

 $2,766 $590

Net charge-offs

 (285) (392)

Allowance for loan losses

 12,109 9,731

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

 1.2% 1.1%

Total nonaccrual loans

 3,356 1,291

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

 360.8% 753.8%

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

 0.3% 0.1%

Total loans

 $996,401 $879,054

  

Three Months Ended March 31,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 
Provision for loan losses $500  $1,266 

Net charge-offs

  (82)  (64)

Allowance for loan losses

  14,265   10,830 
Allowance for losses as a percentage of total gross loans receivable at the end of this period  1.2%  1.2%

Total nonaccrual loans

  2,135   1,740 
Allowance for loan losses as a percentage of nonaccrual loans at end of period  668.1%  622.4%
Nonaccrual and 90 days or more past due loans as a percentage of total loans  0.2%  0.2%

Total loans

 $1,168,340  $905,675 

 

Noninterest Income. Noninterest income increased $3.7 million,$386,000, or 140.4%16.7%, to $6.4 million for the six months ended June 30, 2020, from $2.7 million for the sixthree months ended June 30, 2019,March 31, 2021, from $2.3 million for the three months ended March 31, 2020, mainly due to an increase in gain on sale of mortgage loans of $2.2 million. Gain$954,000. No investment gains were earned or securities were sold in the first quarter of 2021, compared to gain on sale of investments of $605,000 for the six months ended June 30, 2020, totaled $1.2 million compared to $57,000 recognizedsame period in the first six months of 2019. The cash surrender value of bank-owned life insurance increased $667,000 in the first six months of 2020 due to a BOLI restructure that resulted in recognition of market gains as well as additional investment in BOLI.2020.

 

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:

 

Six Months Ended June 30,

 

Increase (Decrease)

 

Three Months Ended March 31,

  

Increase (Decrease)

 
 

2020

 

2019

 

Amount

 

Percent

 

2021

  

2020

  

Amount

  

Percent

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Loan and deposit service fees

 $1,646 $1,900 $(254) (13.4)% $837  $881  $(44) (5.0)%

Mortgage servicing fees, net of amortization

 (157) 99 (256) (258.6) 30  15  15  100.0 

Net gain on sale of loans

 2,384 175 2,209 1,262.3 1,337  383  954  249.1 

Net gain on sale of investment securities

 1,266 57 1,209 2,121.1   605  (605) (100.0)

Increase in cash surrender value of bank-owned life insurance

 955 288 667 231.6 244  328  (84) (25.6)

Other income

 333 155 178 114.8  256   106   150   141.5 

Total noninterest income

 $6,427 $2,674 $3,753 140.4% $2,704  $2,318  $386   16.7%

 

Noninterest Expense. Noninterest expense increased $3.6$2.7 million, or 22.3%28.9%, to $19.7$12.1 million for the sixthree months ended June 30, 2020,March 31, 2021, compared to $16.1$9.4 million for the sixthree months ended June 30, 2019,March 31, 2020, primarily as a result of an increase in compensation and benefits as well as occupancy and equipment as we added staff to manage the company and generate additional revenue. Compensation and benefits was also increasedhigher due to an $829,000a $511,000 increase in commissions paid on increased mortgage production as well as one-time pandemic related payments made to staff. We also incurred a one-time FHLB prepayment penalty of $210,000 as we retired long term debt to reduced interest expense.and commercial loan production.

 

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

 

 

Six Months Ended June 30,

 

Increase (Decrease)

 

Three Months Ended March 31,

  

Increase (Decrease)

 
 

2020

 

2019

 

Amount

 

Percent

 

2021

  

2020

  

Amount

  

Percent

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Compensation and benefits

 $11,327 $9,326 $2,001 21.5% $7,295  $5,361  $1,934  36.1%

Data processing

 1,459 1,298 161 12.4 739  690  49  7.1 

Occupancy and equipment

 2,696 2,248 448 19.9 1,623  1,351  272  20.1 

Supplies, postage, and telephone

 495 470 25 5.3 242  211  31  14.7 

Regulatory assessments and state taxes

 397 364 33 9.1 261  174  87  50.0 

Advertising

 649 372 277 74.5 445  272  173  63.6 

Professional fees

 754 629 125 19.9 522  400  122  30.5 

FDIC insurance premium

 70 154 (84) (54.5) 148    148  100.0 

FHLB prepayment penalty

 210  210 100.0   210  (210) (100.0)

Other

 1,607 1,211 396 32.7

Other expense

  819   713   106   14.9 

Total

 $19,664 $16,072 $3,592 22.3% $12,094  $9,382  $2,712   28.9%

 

Provision for Income Tax. An income tax expense of $668,000$473,000 was recorded for the sixthree months ended June 30, 2020,March 31, 2021, compared to $1.0 million$204,000 for the sixthree months ended June 30, 2019,March 31, 2020, due to a decreasean increase in income before taxes of $1.7$2.5 million. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

 

 

 

Average Balances, Interest and Average Yields/Cost

 

The following table set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultantnet spread at June 30, 2020as of March 31, 2021 and 2019.2020. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield.

 

    

Three Months Ended June 30,

 

Six Months Ended June 30,

     

Three Months Ended March 31,

 
 At June 30, 2020 

2020

 

2019

 

2020

 

2019

 

At March 31, 2021

  

2021

  

2020

 
   

Average

 

Interest

   

Average

 

Interest

   

Average

 

Interest

   

Average

 

Interest

      

Average

 

Interest

   

Average

 

Interest

   
 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 

Balance

 

Earned/

 

Yield/

 
 

Rate

 

Outstanding

 

Paid

 

Rate

 

Outstanding

 

Paid

 

Rate

 

Outstanding

 

Paid

 

Rate

 

Outstanding

 

Paid

 

Rate

 

Rate

  

Outstanding

  

Paid

  

Rate

  

Outstanding

  

Paid

  

Rate

 
 (Dollars in thousands) (Dollars in thousands)  

(Dollars in thousands)

 
Interest-earning assets:                                         

Loans receivable, net (1)

 4.38% $931,344 $10,236 4.40% $883,290 $10,473 4.74% $901,116 $20,072 4.45% $877,095 $20,565 4.69% 4.52% $1,132,194  $12,541  4.43% $870,739  $9,836  4.52%

Investment securities

 2.69 213,141 1,316 2.47 116,496 969 3.33 181,586 2,385 2.63 118,423 1,979 3.34 2.55  276,229  1,570  2.27  149,954  1,069  2.85 

Mortgage-backed securities

 2.10 135,604 740 2.18 178,878 1,192 2.67 148,593 1,699 2.29 181,297 2,449 2.70 2.19  92,508  464  2.01  161,666  959  2.37 

FHLB dividends

 4.87 4,426 55 4.97 7,066 88 4.98 4,573 102 4.46 6,955 176 5.06 4.25  3,809  45  4.73  4,707  47  3.99 

Interest-bearing deposits in banks

 0.11 20,922 8 0.15 13,118 58 1.77 21,110 76 0.72 12,495 125 2.00 0.08   44,576   13   0.12   21,248   68   1.28 

Total interest-earning assets (2)

 3.79 1,305,437 12,355 3.79 1,198,848 12,780 4.26 1,256,978 24,334 3.87 1,196,265 25,294 4.23  3.79   1,549,316   14,633   3.78   1,208,314   11,979   3.97 
                            

Interest-bearing liabilities:

                                                     

Savings accounts

 0.53 $172,833 $269 0.62 $163,106 $372 0.91 $169,371 $609 0.72 $158,398 $688 0.87 0.27  $173,647  $40  0.09  $165,911  $340  0.82 

Transaction accounts

 0.01 122,951 4 0.01 115,914 36 0.12 118,963 23 0.04 115,358 72 0.12   161,398  7  0.02  114,970  19  0.07 

Money market accounts

 0.44 291,526 400 0.55 257,548 313 0.49 272,030 756 0.56 262,747 633 0.48 0.23  461,080  286  0.25  252,537  356  0.56 

Certificates of deposit

 1.57 349,658 1,368 1.57 259,203 1,347 2.08 332,674 2,791 1.68 258,737 2,599 2.01 0.80   295,989   601   0.81   315,778   1,423   1.80 

Total deposits

 0.64 936,968 2,041 0.87 795,771 2,068 1.04 893,038 4,179 0.94 795,240 3,992 1.00 0.28  1,092,114  934  0.34  849,196  2,138  1.01 
Borrowings 0.73 71,170 201 1.13 138,643 1,036 2.99 75,574 635 1.68 136,545 2,026 2.97

FHLB borrowings

 1.46  55,437  191  1.38  79,659  434  2.18 

Subordinated debt

 3.74   3,192   25   3.13          

Total interest-bearing liabilities

 0.65 1,008,138 2,242 0.89 934,414 3,104 1.33 968,612 4,814 0.99 931,785 6,018 1.29  0.41   1,150,743   1,150   0.40   928,855   2,572   1.11 
                            

Net interest income

      $10,113      $9,676      $19,520      $19,276         $13,483       $9,407    

Net interest rate spread

 0.03      2.90      2.94      2.88      2.94 3.38       3.38       2.86 

Net earning assets

    $297,299      $264,434      $288,366      $264,480         $398,573       $279,459      

Net interest margin (3)

        3.10      3.23      3.11      3.22        3.48       3.11 

Average interest-earning assets to average interest-bearing liabilities

    129.5%      128.3%      129.8%      128.4%         134.6%      130.1%     

 

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

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

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

 

 

 

Rate/Volume Analysis

 

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

 

 

Three Months Ended

   

Six Months Ended

    

Three Months Ended

   
 

June 30, 2020 vs. 2019

   

June 30, 2020 vs. 2019

    

March 31, 2021 vs. 2020

    
 

Increase (Decrease) Due to

   

Increase (Decrease) Due to

    

Increase (Decrease) Due to

    
 

Volume

 

Rate

 

Total Increase (Decrease)

 

Volume

 

Rate

 

Total Increase (Decrease)

 

Volume

  

Rate

  

Total Increase (Decrease)

 
 

(In thousands)

 

(In thousands)

 

(In thousands)

 

Interest earning assets:

                  

Loans receivable, net

 $562 $(799) $(237) $575 $(1,068) $(493) $2,957  $(252) $2,705 

Investments

 516 (621) (105) 614 (958) (344) 490  (484) 6 

FHLB stock

 (33)  (33) (60) (14) (74) (9) 7  (2)

Other(1)

 35 (85) (50) 86 (135) (49)  75   (130)  (55)

Total interest-earning assets

 $1,080 $(1,505) $(425) $1,215 $(2,175) $(960) $3,513  $(859) $2,654 
  

Interest-bearing liabilities:

                  

Savings accounts

 $22 $(125) $(103) $48 $(127) $(79) $16  $(316) $(300)

Interest-bearing transaction accounts

 2 (34) (32) 2 (51) (49) 8  (20) (12)

Money market accounts

 41 46 87 22 101 123 294  (364) (70)

Certificates of deposit

 470 (449) 21 743 (551) 192 (89) (733) (822)

Borrowings

 (504) (331) (835) (905) (486) (1,391)

FHLB advances

 (132) (111) (243)

Subordinated debt

  25      25 

Total interest-bearing liabilities

 $31 $(893) $(862) $(90) $(1,114) $(1,204) $122  $(1,544) $(1,422)
  

Net change in interest income

 $1,049 $(612) $437 $1,305 $(1,061) $244 $3,391  $685  $4,076 

 

(1) Includes interest-bearing deposits (cash) at other financial institutions.

 

 

Off-Balance Sheet Activities

 

In the normal course of operations, First FederalFed 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 sixthree months ended June 30, 2020March 31, 2021 and the year ended December 31, 2019,2020, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

 

 

Contractual Obligations

 

At June 30, 2020,March 31, 2021, our scheduled maturities of contractual obligations were as follows:

 

 

Within

 

After 1 Year Through

 

After 3 Years Through

 

Beyond

 

Total

 

Within

 

After 1 Year Through

 

After 3 Years Through

 

Beyond

 

Total

 
 

1 Year

 

3 Years

 

5 Years

 

5 Years

 

Balance

 

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Balance

 
 

(In thousands)

 

(In thousands)

 
  
Certificates of deposit $240,053 $70,167 $14,944 $ $325,164 $184,108 $89,238 $13,880 $ $287,226 
FHLB advances 62,379 20,000 30,000  112,379  25,000 25,000  50,000 
Subordinated debt obligation    39,310 39,310 
Operating leases 432 715 698 2,228 4,073 479 880 922 3,349 5,630 

Borrower taxes and insurance

 1,403    1,403 2,000        2,000 
Deferred compensation 352 219 62 341 974  355  213  73  430  1,071 
Total contractual obligations $304,619 $91,101 $45,704 $2,569 $443,993 $186,942 $115,331 $39,875 $43,089 $385,237 

 

Commitments and Off-Balance Sheet Arrangements

 

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2020:March 31, 2021:

 

 

Amount of Commitment Expiration

 

Amount of Commitment Expiration

 
 Within After 1 Year Through After 3 Years Through Beyond Total Amounts Within After 1 Year Through After 3 Years Through Beyond Total Amounts 
 

1 Year

 

3 Years

 

5 Years

 

5 Years

 

Committed

 

1 Year

  

3 Years

  

5 Years

  

5 Years

  

Committed

 
 

(In thousands)

 

(In thousands)

 

Commitments to originate loans:

                      

Fixed-rate

 $1,602 $ $ $ $1,602 $224  $  $  $  $224 
Variable-rate 130    130 345    345 

Unfunded commitments under lines of credit or existing loans

 34,204 27,402  58,664 120,270 57,171  48,247  2,319  114,667  222,404 

Standby letters of credit

 182    182  182            182 

Total commitments

 $36,118 $27,402 $ $58,664 $122,184 $57,922  $48,247  $2,319  $114,667  $223,155 
 

 

Liquidity Management

 

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.

 

Management regularly adjusts our investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our interest-rate risk and investment policies.

 

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, 2020,March 31, 2021, cash and cash equivalents totaled $49.6$99.3 million, and unpledged securities classified as available-for-sale with a market value of $250.7$284.0 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of $112.4$433.0 million and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $46.2$24.4 million were pledged as of June 30, 2020.March 31, 2021.

 

At June 30, 2020,March 31, 2021, we had $1.7 million$569,000 in loan commitments outstanding, $120.5$222.6 million in undisbursed loans and standby letters of credit, including $68.4$162.6 million in undisbursed construction loan commitments.

 

 

Certificates of deposit due within one year as of June 30, 2020March 31, 2021 totaled $240.1$184.1 million, or 73.8%64.1% of certificates of deposit with a weighted-average rate of 1.20%0.81%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates have recently declined. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, 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 certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

 

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations.liquidity. At June 30, 2020,March 31, 2021, the Company, (onon an unconsolidated basis)basis, had liquid assets of $12.4$26.5 million. In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, funds paid for Company stock repurchases, and payments on subordinated notes held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

 

Capital Resources

 

At June 30, 2020,March 31, 2021, shareholders' equity totaled $176.3$182.1 million, or 11.9%10.5% of total assets. Our book value per share of common stock was $17.07$17.86 at June 30, 2020,March 31, 2021, compared to $16.48$18.20 at December 31, 2019.2020.

 

At June 30, 2020,March 31, 2021, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

 

The following table provides the capital requirements and actual results for First FederalFed at June 30, 2020.March 31, 2021.

 

 

Actual

 

Minimum Capital Requirements

 

Minimum Required to be Well-Capitalized

 

Actual

  

Minimum Capital Requirements

  

Minimum Required to be Well-Capitalized

 
 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
     

(Dollars in thousands)

          

(Dollars in thousands)

     

Tier I leverage capital (to average assets)

 $152,140 10.9% $55,853 4.0% $69,816 5.0% $182,690  11.2% $65,371  4.0% $81,714  5.0%

Common equity tier I (to risk-weighted assets)

 152,140 15.1 45,231 4.5 65,333 6.5 182,690  15.1  54,340  4.5  78,491  6.5 

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

 152,140 15.1 60,308 6.0 80,410 8.0 182,690  15.1  72,453  6.0  96,604  8.0 

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

 164,532 16.4 80,410 8.0 100,513 10.0 197,281  16.3  96,604  8.0  120,755  10.0 

 

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

 

Effect of Inflation and Changing Prices

 

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures.

 

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2020,March 31, 2021, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

 

(b) Changes in Internal Controls.

 

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2020,March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent every error or instance of fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

 

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

From time to time, the Company is engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations.

 

Item 1A. Risk Factors

 

The disclosures below supplement the risk factors previously disclosed under Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2019.2020.

 

The effects of the COVID-19 pandemic could adversely affect our customersthe future results of operations of our customers and/or the market price of our stock.

 

The COVID-19 pandemic continues to rapidly evolve, as do federal, state and local efforts to address it. Both the direct effects of the pandemic and the resulting United States governmental responses are of an unprecedented scope as it impacts both the health and the economy of our country and the world at large. No one can predict the extent or duration of the pandemic, or its effect on the markets that we serve. Further, the ongoing efforts and impact of the government in mitigating the health and the economic effects of the pandemic cannot currently be predicted, whether on our business or as to the economy as a whole. The pandemic has thus far resulted in significant volatility in international and United States markets, which could adversely affect the market price of our stock. To date, the pandemic has resulted in significant business disruption and volatility in the international and domestic markets, which has adversely affected the market price of our stock and stocks in generalstock.

 

The Company continues to manage through uncertainties and complexities created by the pandemic. As an essential business, our employees have been able to work safely in our branch locations and over 70% of our workforce has the ability to work from home. However, the economic downturn in local markets we serve could result in increased credit risk associated with the loan portfolio asto the extent that customers are unable to repay loans and meet their obligations, as well as adversely impactimpacting our earnings. We believe our strong capital position will be important in managing through the unknown impacteffects of the pandemic.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

Not applicable.

 

(b)

Not applicable.

 

(c)

The following table summarizes common stock repurchases during the three months ended June 30, 2020:March 31, 2021:

                 

Period

 

Total Number of Shares Purchased (1)

  

Average Price Paid per Share

  

Total Number of Shares Repurchased as Part of Publicly Announced Plans (2)

  

Maximum Number of Shares that May Yet Be Repurchased Under the Plans

 
                 

January 1, 2021 - January 31, 2021

  76,765  $16.03   76,615   931,252 

February 1, 2021 - March 1, 2021

  53,612   15.65   53,612   877,640 

March 2, 2021 - April 1, 2021

  6,060   16.40   5,610   872,030 

Total

  136,437  $15.89   135,837     
                 

(1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 150 shares, 0 shares, and 450 shares, respectively, for the periods indicated.

 

(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock issued and outstanding as of October 27, 2020. As of March 31, 2021, a total of 151,390 shares, or 14.8% percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average cost of $15.93 per share, leaving 872,030 shares available for future purchases.

 

 

          Total Number of Shares Repurchased as Part of Publicly Maximum Number of Shares that May Yet Be Repurchased

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 Announced Plans (1) Under the Plans
                 

April 1, 2020 - April 30, 2020

  $  272,030

May 1, 2020 - May 31, 2020

 54,181 12.32 54,181 217,849

June 1, 2020 - June 30, 2020

 76,056 13.16 76,056 141,793

Total

 130,237 $12.81 130,237    

(1) On December 5, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 535,097 shares of its common stock, or approximately 5% of its shares of common stock issued and outstanding as of December 2, 2019. As of June 30, 2020, a total of 393,304 shares, or 73.5% percent of the shares authorized in the December 2019 stock repurchase plan, have been purchased at an average cost of $12.88 per share, leaving 141,793 shares available for future purchases.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

COVID-19 Legislation and Regulation.

 

General. Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 emergency.pandemic. On March 27, 2020, the PresidentCARES Act was signed into law, the historic $2
trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
which included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program,”SBA PPP, along with direct stimulus payments (i.e., “economic"economic impact payments”payments" or “stimulus checks”"stimulus checks") for many eligible Americans. The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, which prompted Congress to negotiate additional funding. On April 24, 2020,Shortly thereafter, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenishand replenished funding to the Paycheck Protection ProgramSBA PPP and to provideprovided other spending for hospitals and virus testing. Further, on July 3,On June 5, 2020, the President extended the deadline for potential borrowers to apply for Paycheck Protection Program fundsFlexibility Act ("PPPFA") was enacted. Main provisions of the PPPFA extended the PPP loan repayment period from two to five years, extended the covered expense period from eight to 24 weeks, and lowered the percentage of forgiveness amount required to be used for eligible payroll costs to 60%. The PPPFA also extended the repayment start date until August 8, 2020.after the SBA finalized the application process for loan forgiveness. The legislativeConsolidated Appropriations Act, enacted in December 2020, included another $284 billion to fund an expansion of the SBA PPP, subject to certain changes in eligibility requirements and regulatory landscape surrounding COVID-19 is rapidly changing,program design. Most recently, the American Rescue Plan Act of 2021 became law in March 2021 and neither the Company nor the Bank can predictprovides for a $1.9 billion stimulus package that, among other financial aid measures, includes a new round of PPP funding with certainty the impact it will have on our operations or business.an application deadline of May 31, 2021.

 

 

Item 6. Exhibits

 

Exhibit

No.

Exhibit Description

Filed

Herewith

Form

Original Exhibit No.

Filing Date

SEC File No.

10.1*

Form of Restricted Shares Award Agreement under the First Northwest Bancorp 2020 Equity Incentive Plan

X

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

32

Certification pursuant to Section 906 of the Sarbanes-Oxley Act

X

101

The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Denotes a management contract or compensatory plan or arrangement.

Exhibit

No.

Exhibit Description

Filed

Herewith

Form

Original Exhibit No.

Filing Date

4.1Indenture dated March 25, 2021, by and between First Northwest Bancorp and UMB Bank, National Association, as Trustee 8-K4.13/25/2021
4.2Form of 3.75% Fixed-to-Floating Rate Subordinated Note due 2031 (included in Exhibit 4.1) 8-K4.23/25/2021
10.1Form of Subordinated Note Purchase Agreement dated March 25, 2021, by and between First Northwest Bancorp and the several Purchasers 8-K10.13/25/2021
10.2Form of Registration Rights Agreement dated March 25, 2021, by and between First Northwest Bancorp and the several Purchasers 8-K10.23/25/2021
10.3*First Federal Fiscal 2021 Officer Cash Incentive PlanX   

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

X

 

 

 

32

Certification pursuant to Section 906 of the Sarbanes-Oxley Act

X

 

 

 

101

The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Loss; (4) Consolidated Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Denotes a management contract or compensatory plan or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

FIRST NORTHWEST BANCORP

 

 

Date: August 10, 2020May 14, 2021

/s/ Matthew P. Deines

 

 

 

Matthew P. Deines

 

President, Chief Executive Officer and Director

 

(Principal Executive Officer)

 

 

 

 

Date: August 10, 2020May 14, 2021

/s/ Geraldine L. Bullard

 

 

 

Geraldine L. Bullard

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

 

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