3

4

5

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, 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

BALANCE, December 31, 2019
10,731,639 $ 107 $ 102,017 $ 86,156 $ (9,890 ) $ (1,539 ) $ 176,851

Net income
2,849 2,849
Common stock repurchased
(418,513 ) (4 ) (4,181 ) (1,317 ) (5,502 )
Restricted stock award grants net of forfeitures
13,100 — — —
Other comprehensive income, net of tax
2,256 2,256
Share-based compensation
555 555
ESOP shares committed to be released
30 331 361
Cash dividends declared and paid ($0.10 per share)
(1,055 ) (1,055 )

BALANCE, June 30, 2020
10,326,226 $ 103 $ 98,421 $ 86,633 $ (9,559 ) $ 717 $ 176,315

6

67

78

89

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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.

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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.

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(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~~September 30, 2020 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	$	94,006	$	3,232	$	(95	)	$	97,143
U.S. government agency issued asset-backed securities (ABS agency)		63,220		662		(3,063	)		60,819		73,915		1,123		(1,420	)		73,618
Corporate issued asset-backed securities (ABS corporate)		41,695		—		(1,891	)		39,804		33,553		7		(813	)		32,747
Corporate issued debt securities (Corporate debt)		22,486		134		(192	)		22,428		33,401		283		(454	)		33,230
U.S. Small Business Administration securities (SBA)		23,338		221		(12	)		23,547		23,623		242		(1	)		23,864
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)		100,113		2,578		(44	)		102,647		90,281		2,133		(12	)		92,402
Corporate issued mortgage-backed securities (MBS corporate)		7,873		4		(459	)		7,418		16,300		2		(195	)		16,107

Total securities available for sale	$	363,366	$	6,936	$	(6,029	)	$	364,273	$	365,079	$	7,022	$	(2,990	)	$	369,111

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 2019, 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	$	39,524	$	125	$	(367	)	$	39,282
ABS agency		29,796		—		(938	)		28,858		29,796		0		(938	)		28,858
ABS corporate		41,728		—		(873	)		40,855		41,728		0		(873	)		40,855
Corporate debt		9,986		—		(343	)		9,643		9,986		0		(343	)		9,643
SBA		28,423		72		(36	)		28,459		28,423		72		(36	)		28,459
Mortgage-backed securities:
MBS agency		159,697		811		(341	)		160,167		159,697		811		(341	)		160,167
MBS corporate		8,374		—		(58	)		8,316		8,374		0		(58	)		8,316

Total securities available for sale	$	317,528	$	1,008	$	(2,956	)	$	315,580	$	317,528	$	1,008	$	(2,956	)	$	315,580

There were 0 securities classified as held-to-maturity at ~~June~~September 30, 2020 and December 31, 2019.

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(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~~September 30, 2020:

	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	$	(95	)	$	7,757	$	0		$	0	$	(95	)	$	7,757
ABS agency		(318	)		8,086		(2,745	)		23,025		(3,063	)		31,111		(172	)		8,172		(1,248	)		25,933		(1,420	)		34,105
ABS corporate		(93	)		3,787		(1,798	)		36,017		(1,891	)		39,804		(85	)		3,801		(728	)		26,982		(813	)		30,783
Corporate debt		(3	)		997		(189	)		4,811		(192	)		5,808		(90	)		6,804		(364	)		9,622		(454	)		16,426
SBA		—			—		(12	)		4,020		(12	)		4,020		0			65		(1	)		3,775		(1	)		3,840
Mortgage-backed securities:
MBS agency		(44	)		13,994		—			7		(44	)		14,001		(12	)		2,221		0			6		(12	)		2,227
MBS corporate		(37	)		2,215		(422	)		3,750		(459	)		5,965		(31	)		1,979		(164	)		3,998		(195	)		5,977

Total available for sale	$	(863	)	$	43,594	$	(5,166	)	$	71,630	$	(6,029	)	$	115,224	$	(485	)	$	30,799	$	(2,505	)	$	70,316	$	(2,990	)	$	101,115

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, 2019:

	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	$	(367	)	$	29,928	$	0		$	0	$	(367	)	$	29,928
ABS agency		(59	)		3,855		(879	)		25,002		(938	)		28,857		(59	)		3,855		(879	)		25,002		(938	)		28,857
ABS corporate		(31	)		3,848		(842	)		37,007		(873	)		40,855		(31	)		3,848		(842	)		37,007		(873	)		40,855
Corporate debt		(17	)		4,983		(326	)		4,660		(343	)		9,643		(17	)		4,983		(326	)		4,660		(343	)		9,643
SBA		—			—		(36	)		15,034		(36	)		15,034		0			0		(36	)		15,034		(36	)		15,034
Mortgage-backed securities:
MBS agency		(166	)		18,744		(175	)		47,463		(341	)		66,207		(166	)		18,744		(175	)		47,463		(341	)		66,207
MBS corporate		—			—		(58	)		8,316		(58	)		8,316		0			0		(58	)		8,316		(58	)		8,316

Total available for sale	$	(640	)	$	61,358	$	(2,316	)	$	137,482	$	(2,956	)	$	198,840	$	(640	)	$	61,358	$	(2,316	)	$	137,482	$	(2,956	)	$	198,840

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At ~~June~~September 30, 2020 and December 31, 2019, there were 3330 and 62 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 ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

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(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				September 30, 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	$	—	$	—	$	0	$	0
Due after one through five years		8,574		8,791		11,956		12,175
Due after five through ten years		218		219		142		142
Due after ten years		99,194		101,055		94,483		96,192

Total mortgage-backed securities		107,986		110,065		106,581		108,509

All other investment securities:
Due within one year		—		—		0		0
Due after one through five years		3,034		3,112		4,524		4,563
Due after five through ten years		54,171		52,943		71,563		70,390
Due after ten years		198,175		198,153		182,411		185,649

Total all other investment securities		255,380		254,208		258,498		260,602

Total investment securities	$	363,366	$	364,273	$	365,079	$	369,111

	December 31, 2019				December 31, 2019
	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	$	—	$	—	$	0	$	0
Due after one through five years		13,360		13,391		13,360		13,391
Due after five through ten years		6,261		6,257		6,261		6,257
Due after ten years		148,450		148,835		148,450		148,835

Total mortgage-backed securities		168,071		168,483		168,071		168,483

All other investment securities:
Due within one year		—		—		0		0
Due after one through five years		2,043		2,084		2,043		2,084
Due after five through ten years		58,460		57,680		58,460		57,680
Due after ten years		88,954		87,333		88,954		87,333

Total all other investment securities		149,457		147,097		149,457		147,097

Total investment securities	$	317,528	$	315,580	$	317,528	$	315,580

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(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,					Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020			2019		2020			2019		2020			2019
	(In thousands)					(In thousands)					(In thousands)					(In thousands)
Proceeds from sales	$	54,359		$	3,558	$	94,432		$	3,558	$	47,844		$	0	$	142,276		$	3,558
Gross realized gains		867			57		1,504			57		1,593			0		3,097			57
Gross realized losses		(206	)		—		(238	)		—		(624	)		0		(862	)		0

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:

		June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
	��	(In thousands)						(In thousands)
Real Estate:
One-to-four family		$	325,349		$	306,014		$	317,755		$	306,014
Multi-family			103,279			96,098			127,569			96,098
Commercial real estate			267,233			255,722			283,390			255,722
Construction and land			58,153			37,187			75,204			37,187
Total real estate loans			754,014			695,021			803,918			695,021

Consumer:
Home equity			33,696			35,046			34,120			35,046
Auto and other consumer			109,214			112,119			111,782			112,119
Total consumer loans			142,910			147,165			145,902			147,165

Commercial business loans			99,477			41,571			123,036			41,571

Total loans			996,401			883,757			1,072,856			883,757

Less:
Net deferred loan fees			1,842			206			2,628			206
Premium on purchased loans, net			(3,901	)		(4,514	)		(4,196	)		(4,514	)
Allowance for loan losses			12,109			9,628			13,007			9,628

Total loans receivable, net		$	986,351		$	878,437		$	1,061,417		$	878,437

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.

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(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 September 30, 2020
	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		$	3,780	$	1,128	$	3,021	$	738	$	429		$	2,252		$	463	$	298		$	12,109
Provision for (recapture of) loan losses		383		205		299		146		(20	)		157			213		117		1,500			62		307		319		240		(4	)		427			0		(1	)		1,350
Charge-offs		—		—		—		—		—			(240	)		—		—		(240	)		0		0		0		0		0			(479	)		0		0			(479	)
Recoveries		1		—		—		—		—			18			—		—		19			2		0		0		1		0			24			0		0			27
Ending balance	$	3,780	$	1,128	$	3,021	$	738	$	429		$	2,252		$	463	$	298	$	12,109		$	3,844	$	1,435	$	3,340	$	979	$	425		$	2,224		$	463	$	297		$	13,007

	At or For the Six Months Ended June 30, 2020																					At or For the Nine Months Ended September 30, 2020
	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	$	3,024	$	888	$	2,243	$	399	$	454		$	2,261		$	208	$	151	$	9,628		$	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			764		547		1,097		577		(30	)		760			255		146		4,116
Charge-offs		—		—		—		—		—			(374	)		—		—		(374	)		0		0		0		0		0			(853	)		0		0		(853	)
Recoveries		54		—		—		2		1			32			—		—		89			56		0		0		3		1			56			0		0		116
Ending balance	$	3,780	$	1,128	$	3,021	$	738	$	429		$	2,252		$	463	$	298	$	12,109		$	3,844	$	1,435	$	3,340	$	979	$	425		$	2,224		$	463	$	297	$	13,007

	At June 30, 2020																		At September 30, 2020
	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	$	3,844	$	1,435	$	3,340	$	979	$	425	$	2,224	$	463	$	297	$	13,007
General reserve		3,734		1,128		3,021		737		421		2,096		463		298		11,898		3,791		1,435		3,339		978		421		2,036		463		297		12,760
Specific reserve		46		—		—		1		8		156		—		—		211		53		0		1		1		4		188		0		0		247

Total loans	$	325,349	$	103,279	$	267,233	$	58,153	$	33,696	$	109,214	$	99,477	$	—	$	996,401	$	317,755	$	127,569	$	283,390	$	75,204	$	34,120	$	111,782	$	123,036	$	0	$	1,072,856
Loans collectively evaluated (1)		321,575		102,982		266,076		58,016		33,402		108,318		99,170		—		989,539		313,744		127,282		282,103		75,179		33,983		111,174		123,036		0		1,066,501
Loans individually evaluated (2)		3,774		297		1,157		137		294		896		307		—		6,862		4,011		287		1,287		25		137		608		0		0		6,355

⁽¹⁾ Loans collectively evaluated for general reserves.

⁽²⁾ Loans individually evaluated for specific reserves.

1617

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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																								At or For the Three Months Ended September 30, 2019
	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	$	3,297	$	762		$	2,289	$	585	$	480		$	1,611		$	334		$	175		$	9,533		$	3,417		$	651		$	2,357	$	711	$	465		$	1,790		$	171		$	169		$	9,731
Provision for (recapture of) loan losses		117		(111	)		68		126		(36	)		593			(161	)		(6	)		590
(Recapture of) provision for loan losses																										(307	)		(64	)		47		16		(30	)		192			(13	)		(11	)		(170	)
Charge-offs		—		—			—		—		—			(548	)		(4	)		—			(552	)		0			0			0		0		0			(237	)		1			0			(236	)
Recoveries		3		—			—		—		21			134			2			—			160			1			0			0		1		23			93			0			0			118
Ending balance	$	3,417	$	651		$	2,357	$	711	$	465		$	1,790		$	171		$	169		$	9,731		$	3,111		$	587		$	2,404	$	728	$	458		$	1,838		$	159		$	158		$	9,443

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 Nine Months Ended September 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
(Recapture of) provision for loan losses		(190	)		(175	)		115		142		(66	)		785			(174	)		(17	)		420
Charge-offs		0			0			0		0		0			(785	)		(3	)		0			(788	)
Recoveries		4			0			0		1		44			227			2			0			278
Ending balance	$	3,111		$	587		$	2,404	$	728	$	458		$	1,838		$	159		$	158		$	9,443

	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		0		15		142		5		0		202

Total loans	$	306,014	$	96,098	$	255,722	$	37,187	$	35,046	$	112,119	$	41,571	$	0	$	883,757
Loans collectively evaluated (1)		303,026		95,991		253,839		37,158		34,775		111,271		41,308		0		877,368
Loans individually evaluated (2)		2,988		107		1,883		29		271		848		263		0		6,389

⁽¹⁾ Loans collectively evaluated for general reserves.

⁽²⁾ Loans individually evaluated for specific reserves.

Impaired loans. A loan is considered impaired when First Federal 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.

1718

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(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						September 30, 2020						December 31, 2019
	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	$	—	$	202	$	229	$	—	$	297	$	332	$	—
Multi-family		297		297		—		—		—		—		287		287		—		0		0		—
Commercial real estate		1,157		1,311		—		1,240		1,320		—		1,221		1,310		—		1,240		1,320		—
Construction and land		110		142		—		—		33		—		0		0		—		0		33		—
Home equity		62		119		—		45		110		—		37		94		—		45		110		—
Auto and other consumer		—		270		—		251		548		—		0		299		—		251		548		—
Commercial business		307		307		—		—		—		—		0		0		—		0		0		—
Total		2,249		2,790		—		1,833		2,343		—		1,747		2,219		—		1,833		2,343		—

With an allowance recorded:
One-to-four family	$	3,458	$	3,669	$	46		2,691		2,911		31	$	3,809	$	4,017	$	53		2,691		2,911		31
Multi-family		—		—		—		107		107		1		0		0		0		107		107		1
Commercial real estate		—		—		—		643		643		8		66		66		1		643		643		8
Construction and land		27		27		1		29		29		—		25		57		1		29		29		0
Home equity		232		292		8		226		286		15		100		159		4		226		286		15
Auto and other consumer		896		1,174		156		597		690		142		608		780		188		597		690		142
Commercial business		—		—		—		263		263		5		0		0		0		263		263		5
Total		4,613		5,162		211		4,556		4,929		202		4,608		5,079		247		4,556		4,929		202

Total impaired loans:
One-to-four family		3,774		4,013		46		2,988		3,243		31		4,011		4,246		53		2,988		3,243		31
Multi-family		297		297		—		107		107		1		287		287		0		107		107		1
Commercial real estate		1,157		1,311		—		1,883		1,963		8		1,287		1,376		1		1,883		1,963		8
Construction and land		137		169		1		29		62		—		25		57		1		29		62		0
Home equity		294		411		8		271		396		15		137		253		4		271		396		15
Auto and other consumer		896		1,444		156		848		1,238		142		608		1,079		188		848		1,238		142
Commercial business		307		307		—		263		263		5		0		0		0		263		263		5
Total	$	6,862	$	7,952	$	211	$	6,389	$	7,272	$	202	$	6,355	$	7,298	$	247	$	6,389	$	7,272	$	202

1819

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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:

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2020				June 30, 2020				September 30, 2020				September 30, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)				(In thousands)				(In thousands)				(In thousands)
With no allowance recorded:
One-to-four family	$	153	$	9	$	130	$	9	$	203	$	6	$	154	$	6
Multi-family		198		—		148		—		294		1		197		0
Commercial real estate		1,205		—		1,218		15		1,200		1		1,211		15
Construction and land		36		—		18		—		0		0		12		0
Home equity		48		1		46		—		38		1		43		1
Auto and other consumer		—		12		—		14		0		13		0		16
Commercial business		102		—		51		—		168		0		90		0
Total		1,742		22		1,611		38		1,903		22		1,707		38

With an allowance recorded:
One-to-four family		2,932		71		2,804		112	$	4,397	$	91	$	3,335	$	158
Multi-family		170		—		237		—		0		0		158		0
Commercial real estate		429		—		536		—		67		2		380		2
Construction and land		28		2		28		2		26		2		28		3
Home equity		246		5		247		10		140		3		212		7
Auto and other consumer		765		20		727		29		702		24		718		33
Commercial business		175		—		219		—		0		0		146		0
Total		4,745		98		4,798		153		5,332		122		4,977		203

Total impaired loans:
One-to-four family		3,085		80		2,934		121		4,600		97		3,489		164
Multi-family		368		—		385		—		294		1		355		0
Commercial real estate		1,634		—		1,754		15		1,267		3		1,591		17
Construction and land		64		2		46		2		26		2		40		3
Home equity		294		6		293		10		178		4		255		8
Auto and other consumer		765		32		727		43		702		37		718		49
Commercial business		277		—		270		—		168		0		236		0
Total	$	6,487	$	120	$	6,409	$	191	$	7,235	$	144	$	6,684	$	241

Interest income recognized on a cash basis on impaired loans for the three and ~~six~~nine months ended ~~June~~September 30, 2020, was ~~$56,000~~$84,000 and ~~$126,000,~~$181,000, respectively.

1920

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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 periods shown:

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2019				June 30, 2019				September 30, 2019				September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)				(In thousands)				(In thousands)				(In thousands)
With no allowance recorded:
One-to-four family	$	189	$	3	$	246	$	5	$	236	$	4	$	243	$	8
Commercial real estate		1,278		13		1,288		25		1,260		15		1,278		39
Home equity		55		9		190		17		52		14		144		30
Auto and other consumer		—		9		—		11		0		10		0		14
Commercial business										0		1		0		4
Total		1,522		34		1,724		58		1,548		44		1,665		95

With an allowance recorded:
One-to-four family		2,827		69		2,829		112		2,891		64		2,850		146
Multi-family		109		1		110		3		108		1		109		4
Commercial real estate		658		8		660		15		651		8		657		23
Construction and land		66		3		59		3		52		2		57		2
Home equity		307		8		303		13		289		6		297		14
Auto and other consumer		311		6		287		9		394		9		324		16
Commercial business		302		5		315		10		266		2		299		9
Total		4,580		100		4,563		165		4,651		92		4,593		214

Total impaired loans:
One-to-four family		3,016		72		3,075		117		3,127		68		3,093		154
Multi-family		109		1		110		3		108		1		109		4
Commercial real estate		1,936		21		1,948		40		1,911		23		1,935		62
Construction and land		66		3		59		3		52		2		57		2
Home equity		362		17		493		30		341		20		441		44
Auto and other consumer		311		15		287		20		394		19		324		30
Commercial business		302		5		315		10		266		3		299		13
Total	$	6,102	$	134	$	6,287	$	223	$	6,199	$	136	$	6,258	$	309

Interest income recognized on a cash basis on impaired loans for the three and ~~six~~nine months ended ~~June~~September 30, 2019, was ~~$94,000~~$99,000 and ~~$183,000,~~$271,000, respectively.

2021

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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		September 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
One-to-four family	$	1,543	$	698	$	1,939	$	698
Multi-family		297		—		287		0
Commercial real estate		35		109		166		109
Construction and land		137		29		25		29
Home equity		140		112		74		112
Auto and other consumer		896		848		607		848
Commercial business		308		—		0		0

Total nonaccrual loans	$	3,356	$	1,796	$	3,098	$	1,796

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~~September 30, 2020 and December 31, 2019.

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

	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	$	0	$	685	$	500	$	1,185	$	316,570	$	317,755
Multi-family		—		—		297		297		102,982		103,279		0		0		0		0		127,569		127,569
Commercial real estate		—		76		—		76		267,157		267,233		0		0		0		0		283,390		283,390
Construction and land		—		—		—		—		58,153		58,153		0		0		25		25		75,179		75,204
Total real estate loans		1,594		1,203		741		3,538		750,476		754,014		0		685		525		1,210		802,708		803,918

Consumer:
Home equity		78		—		36		114		33,582		33,696		0		12		0		12		34,108		34,120
Auto and other consumer		772		520		566		1,858		107,356		109,214		724		416		180		1,320		110,462		111,782
Total consumer loans		850		520		602		1,972		140,938		142,910		724		428		180		1,332		144,570		145,902

Commercial business loans		—		—		307		307		99,170		99,477		0		0		0		0		123,036		123,036

Total loans	$	2,444	$	1,723	$	1,650	$	5,817	$	990,584	$	996,401	$	724	$	1,113	$	705	$	2,542	$	1,070,314	$	1,072,856

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(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, 2019:

	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	$	928	$	92	$	116	$	1,136	$	304,878	$	306,014
Multi-family		—		—		—		—		96,098		96,098		0		0		0		0		96,098		96,098
Commercial real estate		—		—		—		—		255,722		255,722		0		0		0		0		255,722		255,722
Construction and land		38		—		—		38		37,149		37,187		38		0		0		38		37,149		37,187
Total real estate loans		966		92		116		1,174		693,847		695,021		966		92		116		1,174		693,847		695,021

Consumer:
Home equity		299		24		—		323		34,723		35,046		299		24		0		323		34,723		35,046
Auto and other consumer		1,423		370		614		2,407		109,712		112,119		1,423		370		614		2,407		109,712		112,119
Total consumer loans		1,722		394		614		2,730		144,435		147,165		1,722		394		614		2,730		144,435		147,165

Commercial business loans		—		115		—		115		41,456		41,571		0		115		0		115		41,456		41,571

Total loans	$	2,688	$	601	$	730	$	4,019	$	879,738	$	883,757	$	2,688	$	601	$	730	$	4,019	$	879,738	$	883,757

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 Federal 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 Federal 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 Federal 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 Federal 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.

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The following table represents the internally assigned grade as of ~~June~~September 30, 2020, 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	$	310,998	$	2,624	$	2,602	$	1,531	$	317,755
Multi-family		102,982		—		—		297		103,279		127,282		0		0		287		127,569
Commercial real estate		256,775		7,117		2,133		1,208		267,233		270,792		9,233		2,133		1,232		283,390
Construction and land		45,547		12,384		74		148		58,153		61,296		13,796		77		35		75,204
Total real estate loans		723,734		23,698		4,020		2,562		754,014		770,368		25,653		4,812		3,085		803,918

Consumer:
Home equity		32,724		697		126		149		33,696		33,503		394		100		123		34,120
Auto and other consumer		103,857		2,654		1,776		927		109,214		107,407		2,233		1,553		589		111,782
Total consumer loans		136,581		3,351		1,902		1,076		142,910		140,910		2,627		1,653		712		145,902

Commercial business loans		97,960		51		—		1,466		99,477		122,804		0		0		232		123,036

Total loans	$	958,275	$	27,100	$	5,922	$	5,104	$	996,401	$	1,034,082	$	28,280	$	6,465	$	4,029	$	1,072,856

The following table represents the internally assigned grade as of December 31, 2019, 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	$	301,312	$	2,685	$	1,148	$	869	$	306,014
Multi-family		95,694		—		107		297		96,098		95,694		0		107		297		96,098
Commercial real estate		251,531		97		2,800		1,294		255,722		251,531		97		2,800		1,294		255,722
Construction and land		35,897		1,184		77		29		37,187		35,897		1,184		77		29		37,187
Total real estate loans		684,434		3,966		4,132		2,489		695,021		684,434		3,966		4,132		2,489		695,021

Consumer:
Home equity		34,260		470		89		227		35,046		34,260		470		89		227		35,046
Auto and other consumer		107,327		3,243		594		955		112,119		107,327		3,243		594		955		112,119
Total consumer loans		141,587		3,713		683		1,182		147,165		141,587		3,713		683		1,182		147,165

Commercial business loans		39,653		376		263		1,279		41,571		39,653		376		263		1,279		41,571

Total loans	$	865,674	$	8,055	$	5,078	$	4,950	$	883,757	$	865,674	$	8,055	$	5,078	$	4,950	$	883,757

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The following table represents the credit risk profile based on payment activity as of ~~June~~September 30, 2020, 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	$	1,939	$	315,816	$	317,755
Multi-family		297		102,982		103,279		287		127,282		127,569
Commercial real estate		35		267,198		267,233		166		283,224		283,390
Construction and land		137		58,016		58,153		25		75,179		75,204

Consumer:
Home equity		140		33,556		33,696		74		34,046		34,120
Auto and other consumer		896		108,318		109,214		607		111,175		111,782

Commercial business		308		99,169		99,477		0		123,036		123,036

Total loans	$	3,356	$	993,045	$	996,401	$	3,098	$	1,069,758	$	1,072,856

The following table represents the credit risk profile based on payment activity as of December 31, 2019, 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	$	698	$	305,316	$	306,014
Multi-family		—		96,098		96,098		0		96,098		96,098
Commercial real estate		109		255,613		255,722		109		255,613		255,722
Construction and land		29		37,158		37,187		29		37,158		37,187

Consumer:
Home equity		112		34,934		35,046		112		34,934		35,046
Auto and other consumer		848		111,271		112,119		848		111,271		112,119

Commercial business		—		41,571		41,571		0		41,571		41,571

Total loans	$	1,796	$	881,961	$	883,757	$	1,796	$	881,961	$	883,757

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 Federal is granting the borrower a concession of some kind. First Federal 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. ~~As of~~Through ~~June~~September 30, 2020, the Company had ~~approved~~granted COVID-19 pandemic related temporary loan modifications ~~for 297~~on a total of 346 loans aggregating to ~~$128.4~~$174.9 million, or ~~12.9%~~16.3% 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.

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

	Count		Balance		Percent			Count		Balance		Percent
								(Dollars in Thousands)
Real Estate:
One-to-four family		38	$	11,157		8.7	%		16	$	5,097		3.4	%
Multi-family		8		25,150		19.6			10		29,587		19.8
Commercial real estate		37		70,800		55.1			44		98,895		66.1
Construction and land		13		6,939		5.4			6		5,987		4.0
Total real estate loans		96		114,046		88.8			76		139,566		93.3

Consumer:
Home equity		8		784		0.6			6		707		0.5
Auto and other consumer		182		9,620		7.5			88		4,741		3.2
Total consumer loans		190		10,404		8.1			94		5,448		3.7

Commercial business loans		11		3,970		3.1			13		4,528		3.0

Total loans		297	$	128,420		100.0	%		183	$	149,542		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		September 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
Total TDR loans	$	2,495	$	3,544	$	2,244	$	3,544
Allowance for loan losses related to TDR loans		31		41		28		41
Total nonaccrual TDR loans		110		81		108		81

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~~(Unaudited)~~

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

There were 0 TDR loans which incurred a payment default within 12 months of the restructure date during three and ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2019, by type of concession granted.

	Number		Rate		Term		Combination		Total		Number		Rate		Term		Combination		Total
	of Contracts		Modification		Modification		Modification		Modifications		of Contracts		Modification		Modification		Modification		Modifications
			(Dollars in thousands)										(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family		1	$	—	$	50	$	—	$	50		1	$	0	$	50	$	0	$	50

Post-modification outstanding recorded investment
One- to four-family		1	$	—	$	51	$	—	$	51		1	$	0	$	51	$	0	$	51

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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~~nine months ended ~~June~~September 30, 2019.

	Number		Rate		Term		Combination		Total		Number		Rate		Term		Combination		Total
	of Contracts		Modification		Modification		Modification		Modifications		of Contracts		Modification		Modification		Modification		Modifications
			(Dollars in thousands)										(Dollars in thousands)
TDR loans that subsequently defaulted
One- to four-family		1	$	—	$	—	$	48	$	48		1	$	0	$	0	$	48	$	48

NaN additional funds were committed to be advanced in connection with impaired loans at ~~June~~September 30, 2020.

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

	June 30, 2020						December 31, 2019						September 30, 2020						December 31, 2019
	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	$	2,072	$	108	$	2,180	$	2,290	$	81	$	2,371
Multi-family		—		—		—		107		—		107		0		0		0		107		0		107
Commercial real estate		—		—		—		643		—		643		0		0		0		643		0		643
Home equity		154		—		154		160		—		160		64		0		64		160		0		160
Commercial business		—		—		—		263		—		263		0		0		0		263		0		263

Total TDR loans	$	2,385	$	110	$	2,495	$	3,463	$	81	$	3,544	$	2,136	$	108	$	2,244	$	3,463	$	81	$	3,544

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~~September 30, 2020 and December 31, 2019, were ~~$94.0~~$73.0 million and $93.5 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:

	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
	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%		$ 171,905	0.17%		$ 168,983	0.86%
Transaction accounts		339,151	0.01%		276,496	0.03%		390,867	0.01%		276,496	0.03%
Money market accounts		330,261	0.44%		248,086	0.46%		398,144	0.31%		248,086	0.46%
Certificates of deposit		325,164	1.57%		308,080	1.85%		293,540	1.00%		308,080	1.85%

		$ 1,170,325	0.64%		$ 1,001,645	0.84%		$ 1,254,456	0.36%		$ 1,001,645	0.84%

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Maturities of certificates at the dates indicated are as follows:

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
	(In thousands)				(In thousands)
Within one year or less	$	240,053	$	241,127	$	190,613	$	241,127
After one year through two years		60,814		42,274		62,920		42,274
After two years through three years		9,353		11,167		25,020		11,167
After three years through four years		8,540		6,593		7,769		6,593
After four years through five years		6,404		6,919		7,218		6,919
After five years		—		—		0		0

	$	325,164	$	308,080	$	293,540	$	308,080

Brokered certificates of deposits of ~~$86.3~~$92.6 million and $51.6 million are included in the ~~June~~September 30, 2020 and December 31, 2019 certificate of deposits totals above, respectively.

Deposits at ~~June~~September 30, 2020 and December 31, 2019, included ~~$76.9~~$79.9 million and ~~$57.4~~$57.3 million, respectively, in public fund deposits. Investment securities with a carrying value of ~~$43.2~~$39.0 million and $35.5 million were pledged as collateral for these deposits at ~~June~~September 30, 2020 and December 31, 2019, 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				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)				(In thousands)				(In thousands)				(In thousands)
Savings	$	269	$	372	$	609	$	688	$	176	$	397	$	785	$	1,085
Transaction accounts		4		36		23		72		5		26		28		98
Money market accounts		400		313		756		633		362		312		1,118		945
Certificates of deposit		1,368		1,347		2,791		2,599		862		1,406		3,653		4,005

	$	2,041	$	2,068	$	4,179	$	3,992	$	1,405	$	2,141	$	5,584	$	6,133

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%~~24.4% and 18.9% for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2020 and 2019 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. An estimate for the penalty on the BOLI contract surrendered this year is included in the 2020 tax provision resulting in a higher effective tax rate.

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(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 ~~six~~nine months ended ~~June~~September 30, 2020 and 2019.

	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands, except share data)				(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	$	3,675	$	2,510	$	6,524	$	6,796

Denominator:
Basic weighted average common shares outstanding		9,373,253		9,856,423		9,488,197		9,916,423		9,257,252		9,854,973		9,409,754		9,930,069
Dilutive restricted stock grants		34,870		100,664		40,011		90,907		6,723		48,368		29,484		76,738
Diluted weighted average common shares outstanding		9,408,123		9,957,087		9,528,208		10,007,330		9,263,975		9,903,341		9,439,238		10,006,807

Basic earnings per share	$	0.21	$	0.21	$	0.30	$	0.43	$	0.40	$	0.25	$	0.69	$	0.68

Diluted earnings per share	$	0.21	$	0.21	$	0.30	$	0.43	$	0.40	$	0.25	$	0.69	$	0.68

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of ~~June~~September 30, 2020 and 2019, there were ~~767,522~~754,301 and ~~820,556~~794,042 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~~6,723 and 05,248 restricted stock award anti-dilutive weighted-average shares for the three months ended ~~June~~September 30, 2020 and 2019 respectively. There were ~~28,111~~29,484 and 017,344 restricted stock award anti-dilutive weighted-average shares for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 respectively.

Note 7 - Employee Benefits

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-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 annual principal and interest payment of $835,000 was made by the ESOP during the ~~six~~nine months ended ~~June~~September 30, 2020.

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.

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(Unaudited)

Compensation expense related to the ESOP for the three months ended ~~June~~September 30, 2020 and 2019, was ~~$109,000~~$99,000 and ~~$120,000,~~$185,000, respectively. Compensation expense related to the ESOP for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, was ~~$260,000~~$359,000 and ~~$327,000,~~$512,000, respectively.

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

	June 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
	(Dollars in thousands)				(Dollars in thousands)
Allocated shares		280,507		227,473		280,507		227,473
Committed to be released shares		—		26,514		13,221		26,514
Unallocated shares		767,522		794,042		754,301		794,042

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	$	7,468	$	14,396

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. At ~~June~~September 30, 2020, there were ~~520,000~~456,541 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. At ~~June~~September 30, 2020, there were 0 shares available for grant under the 2015 EIP. At this date, there ~~were 277,400~~are 273,800 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~~September 30, 2020and 2019, ~~27,500~~63,459 and ~~62,600~~23,400 shares of restricted stock were awarded, respectively, and 0 stock options were granted. There were 0126,059 and 23,400 shares of restricted stock awarded, respectively, during the ~~three~~ ~~and~~ ~~six~~nine months ended ~~June~~September 30, 2020 and 2019. 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~~September 30, 2020 and 2019, total compensation expense for the ~~2015~~ ~~EIP~~equity incentive plans was ~~$250,000~~$362,000 and ~~$270,000,~~$251,000, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, total compensation expense for the ~~2015~~ ~~EIP~~equity incentive plans was ~~$555,000~~$917,000 and ~~$553,000,~~$804,000, respectively.

Included in the above compensation expense for the three months ended ~~June~~September 30, 2020 and 2019, directors' compensation was ~~$86,000~~$102,000 and ~~$85,000,~~$86,000, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019, directors' compensation was ~~$171,000~~$273,000 and ~~$170,000,~~$256,000, 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 Six Months Ended						For the Three Months Ended
	June 30, 2020						September 30, 2020
	Shares			Weighted-Average Grant Date Fair Value			Shares			Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2020		264,300		$	14.60
Non-vested at July 1, 2020								277,400		$	14.68
Granted		62,600			14.03			63,459			11.93
Vested								(50,244	)		13.58
Canceled (1)								(10,088	)		13.58
Forfeited		(49,500	)		13.41			(3,600	)		12.70

Non-vested at June 30, 2020		277,400		$	14.68
Non-vested at September 30, 2020								276,927		$	14.32

(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 total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue.						(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 total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue.

	For the Nine Months Ended
	September 30, 2020
	Shares			Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2020		264,300		$	14.60
Granted		126,059			12.97
Vested		(50,244	)		13.58
Canceled (1)		(10,088	)		13.58
Forfeited		(53,100	)		13.36

Non-vested at September 30, 2020		276,927		$	14.32

(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 total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue.

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FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of ~~June~~September 30, 2020, there was ~~$3.1~~$3.4 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately ~~3.42~~3.20 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.

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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								September 30, 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	$	—	$	107,610	$	—	$	107,610	$	0	$	97,143	$	0	$	97,143
ABS agency		—		60,819		—		60,819		0		73,618		0		73,618
ABS corporate		—		39,804		—		39,804		0		32,747		0		32,747
Corporate debt		—		22,428		—		22,428		0		33,230		0		33,230
SBA		—		23,547		—		23,547		0		23,864		0		23,864
MBS agency		—		102,647		—		102,647		0		92,402		0		92,402
MBS corporate		—		7,418		—		7,418		0		16,107		0		16,107
	$	—	$	364,273	$	—	$	364,273	$	0	$	369,111	$	0	$	369,111

	December 31, 2019								December 31, 2019
	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	$	39,282	$	0	$	39,282
ABS agency		—		28,858		—		28,858		0		28,858		0		28,858
ABS corporate		—		40,855		—		40,855		0		40,855		0		40,855
Corporate debt		—		9,643		—		9,643		0		9,643		0		9,643
SBA		—		28,459		—		28,459		0		28,459		0		28,459
MBS agency		—		160,167		—		160,167		0		160,167		0		160,167
MBS corporate		—		8,316		—		8,316		0		8,316		0		8,316
	$	—	$	315,580	$	—	$	315,580	$	0	$	315,580	$	0	$	315,580

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.

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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

	September 30, 2020
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	0	$	0	$	6,355	$	6,355

December 31, 2019

Level 1

Level 2

Level 3

Total

(In thousands)

Impaired loans
$ — $ — $ 6,389 $ 6,389

	December 31, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	0	$	0	$	6,389	$	6,389

At ~~June~~September 30, 2020 and December 31, 2019, 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										September 30, 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	$	16,346	$	16,346	$	16,346	$	—	$	—	$	16,776	$	16,776	$	16,776	$	—	$	—
Investment securities available for sale		364,273		364,273		—		364,273		—		369,111		369,111		—		369,111		—
Loans held for sale		3,111		3,111		—		3,111		—		4,754		4,754		—		4,754		—
Loans receivable, net		986,351		975,116		—		—		975,116		1,061,417		1,055,850		—		—		1,055,850
FHLB stock		6,074		6,074		—		6,074		—		5,944		5,944		—		5,944		—
Accrued interest receivable		5,360		5,360		—		5,360		—		7,367		7,367		—		7,367		—
Mortgage servicing rights, net		1,098		1,467		—		—		1,467		1,545		1,710		—		—		1,710

Financial liabilities
Demand deposits	$	845,161	$	845,161	$	845,161	$	—	$	—	$	960,916	$	960,916	$	960,916	$	—	$	—
Time deposits		325,164		328,123		—		328,123		—		293,540		296,123		—		296,123		—
Borrowings		112,379		113,919		—		113,919		—		109,150		110,744		—		110,744		—
Accrued interest payable		253		253		—		253		—		51		51		—		51		—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	December 31, 2019										December 31, 2019
					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	$	—	$	—	$	48,739	$	48,739	$	48,739	$	0	$	0
Investment securities available for sale		315,580		315,580		—		315,580		—		315,580		315,580		0		315,580		0
Loans held for sale		503		503		—		503		—		503		503		0		503		0
Loans receivable, net		878,437		858,101		—		—		858,101		878,437		858,101		0		0		858,101
FHLB stock		6,034		6,034		—		6,034		—		6,034		6,034		0		6,034		0
Accrued interest receivable		3,931		3,931		—		3,931		—		3,931		3,931		0		3,931		0
Mortgage servicing rights, net		871		1,486		—		—		1,486		871		1,486		0		0		1,486

Financial liabilities
Demand deposits	$	693,565	$	693,565	$	693,565	$	—	$	—	$	693,565	$	693,565	$	693,565	$	0	$	0
Time deposits		308,080		308,819		—		308,819		—		308,080		308,819		0		308,819		0
Borrowings		112,930		113,076		—		113,076		—		112,930		113,076		0		113,076		0
Accrued interest payable		373		373		—		373		—		373		373		0		373		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~~September 30, 2020, 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.

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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:

•

developments 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 effects 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;

•

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 credit risks of our lending activities, including changes in the level 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;

•

fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;

•

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 loan 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;

•

staffing needs and associated expenses in response to product demand or the implementation of corporate strategies, including our growth strategies related to the home lending center and new branches;

•

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;

•

our ability to attract and retain deposits;

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•

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

•

changes in consumer spending, borrowing and savings habits;

•

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;

•

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;

•

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;

•

inability 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.

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. First Federal is a ~~community-oriented~~community financial institution serving Clallam, Jefferson, Kitsap, Whatcom, and King counties in Washington, through its Seattle lending center and ten full-service branches. Our business and operating strategy is focused on building sustainable earnings through ~~hiring~~employing 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 lending and depository needs of Western Washington. While we have a concentration of first lien one- to four-family mortgage loans, we continue to increase our origination and portfolio balances of commercial real estate and multi-family real estate. We have also increased our auto and consumer loans, through indirect and purchased auto loan programs, in order to diversify 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 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 funding~~cost effective liquidity and manage interest rate ~~risk management tools.~~risk.

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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, ~~marketing~~branding 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,~~ 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 ~~promotion~~customer acquisition expenses, expenses related to real estate and personal property owned, and other ~~miscellaneous~~ expenses.

COVID-19 Pandemic. In late 2019 and early 2020, the COVID-19 pandemic manifested its impact on individuals, companies, and governmental entities around the world. It significantly impacted the global economy and created a challenging operating environment. As economic conditions deteriorated in mid-March 2020 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~~contributed to ~~use a portion of the proceeds received from the SBA PPP loans~~ and ~~invest~~will continue to support non-profit organizations 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~~$4.1 million for the first ~~half~~nine months of 2020, compared to $669,000 for all of 2019.
	◦	~~Increasing~~Increased on balance sheet liquidity, specifically Cash and Cash Equivalents increased by ~~$849,000,~~$3.3 million, a ~~1.7%~~6.9% increase over December 31, 2019. The investment portfolio, a secondary source of liquidity, increased by ~~$48.7~~$53.5 million, or ~~16%~~17.0%, 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. At ~~June~~September 30, 2020, the Company’s exposure as a percent of the total loan portfolio to these industries was ~~5.1%~~4.9%, 0.2%, and ~~4.9%~~4.6%, respectively.

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The Company ~~has~~ worked with a number of loan customers on loan deferral and forbearance plans. As of ~~June~~September 30, 2020, the Company had granted payment deferral plans on 346 loans totaling $174.9 million compared to 297 loans totaling $128.4 million ~~compared to 23 loans totaling $1.4 million~~ as of ~~March 31,~~June 30, 2020. These modifications were not classified as TDRs at ~~June~~September 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~~September 30, 2020, we provided assistance to many small businesses through the SBA's Paycheck Protection Program. This program provides small businesses with funds to pay up to eight weeks 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~~finalizes the application process for loan forgiveness.

We processed ~~approximately $30.6~~$32.2 million of loans for ~~440~~515 customers through the SBA PPP program as of ~~June~~September 30, 2020. The average loan amount approved was approximately ~~$69,000.~~$63,000. Payments by borrowers on these loans begin six months after the note date, and interest, at 1%, will continue to accrue during the six-month deferment. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with ~~StreetShares~~a third-party financial technology provider to assist our borrowers with the loan forgiveness application process.

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~~September 30, 2020, the Company had received ~~$1.3~~$1.4 million in processing fees. IfWhen 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.

Comparison of Financial Condition at ~~June~~September 30, 2020 and December 31, 2019

Assets. Total assets increased to ~~$1.48~~$1.56 billion at ~~June~~September 30, 2020 from ~~$1.31~~$1.30 billion at December 31, 2019.

Total loans, excluding loans held for sale, increased ~~$112.6~~$182.9 million to ~~$996.4 million~~$1.06 billion at ~~June~~September 30, 2020, from ~~$883.8~~$878.4 million at December 31, 2019. During the ~~six~~nine months ended ~~June~~September 30, 2020, one- to four-family residential loans increased ~~$19.3~~$11.7 million, as we ~~purchased a $28.0 million mortgage loan pool.~~sold 65.6% of one- to four-family residential loans originated during the year. Multi-family loans increased ~~$7.2~~$31.4 million as we continued to build this part of the loan portfolio. Commercial real estate loans increased by ~~$11.5~~$27.6 million as we continue to build our lending presence in King and Whatcom Counties as well as continued lending in our legacy markets. Commercial business loans increased ~~$57.9~~$81.4 million as we funded PPP loans and increased balances generated through the Northpointe Bank Mortgage Participation Program ~~which~~(NBMPP) during 2020. The NBMPP provides interim financing to mortgage originators based on the contractual sale agreement of a mortgage ~~loan during the first half of 2020.~~loan. We are also attracting new commercial business clients due to our hiring efforts and investment into customer focused, experienced commercial bankers. Auto and other consumer loans decreased ~~$2.9 million as we scaled back funding in our specialty auto loan portfolio.~~$337,000. Competition for quality commercial credits remains; however, impacts of the COVID-19 pandemic effect both the supply and demand for credit. ~~An increase in refinance~~Refinance activity of one- to-four family residential loans ~~also occurred~~was robust during the nine-month period.

Construction and land loans increased ~~$21.0,~~$38.0 million, or ~~56.4%~~102.2%, to ~~$58.2~~$75.2 million at ~~June~~September 30, 2020, from $37.2 million at December 31, 2019. The majority of our construction loans are geographically dispersed throughout the Puget Sound region 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~~nine months 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.

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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
September 30, 2020									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	$	16,090	$	25,865	$	1,478	$	—	$	43,433
Multi-family residential		—		44,966		—		44,966		—		67,620		—		8,020		75,640
Commercial real estate		7,430		21,692		2,801		31,923		8,897		33,833		2,807		—		45,537
Total commitment	$	24,905	$	91,328	$	3,206	$	119,439	$	24,987	$	127,318	$	4,285	$	8,020	$	164,610

Construction Funds Disbursed
One- to four-family residential	$	6,226	$	12,432	$	235	$	18,893	$	7,762	$	14,579	$	565	$	—	$	22,906
Multi-family residential		—		20,492		—		20,492		—		25,634		—		—		25,634
Commercial real estate		6,810		4,814		54		11,678		7,877		10,313		55		—		18,245
Total disbursed	$	13,036	$	37,738	$	289	$	51,063	$	15,639	$	50,526	$	620	$	—	$	66,785

Undisbursed Commitment
One- to four-family residential	$	11,249	$	12,238	$	170	$	23,657	$	8,328	$	11,286	$	913	$	—	$	20,527
Multi-family residential		—		24,474		—		24,474		—		41,986		—		8,020		50,006
Commercial real estate		620		16,878		2,747		20,245		1,020		23,520		2,752		—		27,292
Total undisbursed	$	11,869	$	53,590	$	2,917	$	68,376	$	9,348	$	76,792	$	3,665	$	8,020	$	97,825

Land Funds Disbursed
One- to four-family residential	$	4,677	$	2,062	$	351	$	7,090	$	4,588	$	2,133	$	349	$	—	$	7,070
Commercial real estate		—		—		—		—		—		1,350		—		—		1,350
Total disbursed for land	$	4,677	$	2,062	$	351	$	7,090	$	4,588	$	3,483	$	349	$	—	$	8,420

(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		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	$	14,915	$	23,969	$	496	$	—	$	39,380
Multi-family residential		—		27,241		—		27,241		—		27,241		—		—		27,241
Commercial real estate		6,381		563		3,120		10,064		6,381		563		3,120		—		10,064
Total Commitment	$	21,296	$	51,773	$	3,616	$	76,685	$	21,296	$	51,773	$	3,616	$	—	$	76,685

Construction Funds Disbursed
One- to four-family residential	$	5,242	$	10,734	$	151	$	16,127	$	5,242	$	10,734	$	151	$	—	$	16,127
Multi-family residential		—		10,465		—		10,465		—		10,465		—		—		10,465
Commercial real estate		2,704		563		58		3,325		2,704		563		58		—		3,325
Total disbursed	$	7,946	$	21,762	$	209	$	29,917	$	7,946	$	21,762	$	209	$	—	$	29,917

Undisbursed Commitment
One- to four-family residential	$	9,673	$	13,235	$	345	$	23,253	$	9,673	$	13,235	$	345	$	—	$	23,253
Multi-family residential		—		16,776		—		16,776		—		16,776		—		—		16,776
Commercial real estate		3,677		—		3,062		6,739		3,677		—		3,062		—		6,739
Total undisbursed	$	13,350	$	30,011	$	3,407	$	46,768	$	13,350	$	30,011	$	3,407	$	—	$	46,768

Land Funds Disbursed
One- to four-family residential	$	4,904	$	1,343	$	—	$	6,247	$	4,904	$	1,343	$	—	$	—	$	6,247
Commercial real estate		1,023		—		—		1,023		1,023		—		—		—		1,023
Total disbursed for land	$	5,927	$	1,343	$	—	$	7,270	$	5,927	$	1,343	$	—	$	—	$	7,270

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During the ~~six~~nine months ended ~~June~~September 30, 2020, the Company originated ~~$276.3~~$498.5 million of loans, of which ~~$145.1~~$308.3 million, or ~~52.5%~~61.8%, were originated in the Puget Sound region, ~~$115.7~~$159.1 million, or ~~41.9%~~31.9%, in the North Olympic Peninsula, ~~$11.9~~$12.8 million, or ~~4.3%~~2.6%, in other areas throughout Washington State, and ~~$3.7~~$18.3 million, or ~~1.3%~~3.7%, in Oregon. The Company purchased an additional ~~$28.0~~$28.7 million in one- to four-family loans, ~~and $15.9~~$26.1 million in specialty auto loans, $2.1 million in other consumer loans, and $2.0 million in multifamily loans, during the ~~six~~nine months ended ~~June~~September 30, 2020. We will continue to evaluate opportunities to ~~grow loans~~acquire assets through wholesale channels in order to supplement our organic originations and increase net interest income.

Our allowance for loan losses increased ~~$2.5~~$3.3 million, or ~~25.8%~~35.1%, to ~~$12.1~~$13.0 million at ~~June~~September 30, 2020, from $9.6 million at December 31, 2019. The increase was due to a ~~$2.8~~$4.1 million loan loss provision, offset by net charge-offs of ~~$285,000~~$737,000 for the ~~six- month~~nine-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. The allowance for loan losses as a percentage of total loans at ~~June~~September 30, 2020 and December 31, 2019 was 1.2% and 1.1%, respectively.

Nonperforming loans increased ~~$1.6~~$1.3 million, or ~~86.9%~~72.5%, to ~~$3.4~~$3.0 million at ~~June~~September 30, 2020, from ~~$1.8~~$1.7 million at December 31, 2019, mainly attributable to an increase in nonperforming one- to four-family loans of ~~$845,000,~~$1.2 million, multi-family loans of ~~$297,000,~~$287,000, commercial real estate loans of $57,000, offset by decreases in construction and land loans of ~~$108,000, and commercial business~~$4,000, home equity loans of ~~$308,000, partially offset by a decrease in commercial real estate~~$38,000, and auto and other consumer loans of ~~$74,000.~~$241,000. Nonperforming loans to total loans increased to 0.3% at ~~June~~September 30, 2020, from 0.2% at December 31, 2019. The allowance for loan losses as a percentage of nonperforming loans decreased to ~~360.8%~~419.9% at ~~June~~September 30, 2020, from 536.1% at December 31, 2019.

At ~~June~~September 30, 2020, there were ~~$2.5~~$2.2 million in restructured loans, of which ~~$2.4~~$2.1 million were performing in accordance with their modified payment terms and returned to accrual status. Classified loans ~~increased $154,000~~decreased $921,000 to ~~$5.1~~$4.0 million at ~~June~~September 30, 2020, from $5.0 million at December 31, ~~2019~~2019.

~~Asset quality remains consistent with December 31, 2019.~~ Net loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We recently ~~adjusted~~removed one of our indirect auto loan product offerings ~~and underwriting criteria~~ to ~~improve credit quality~~effectively 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~~September 30, 2020. ~~While~~As the ultimate impact of the COVID-19 pandemic and response from Federal and State government remains to be seen, we increased the qualitative factor related to the economy this quarter.

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

													Increase (Decrease)
	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019			Amount			Percent
	(In thousands)						(In thousands)
Real Estate:
One-to-four family	$	325,349		$	306,014		$	317,755		$	306,014		$	11,741			3.8	%
Multi-family		103,279			96,098			127,569			96,098			31,471			32.7
Commercial real estate		267,233			255,722			283,390			255,722			27,668			10.8
Construction and land		58,153			37,187			75,204			37,187			38,017			102.2
Total real estate loans		754,014			695,021			803,918			695,021			108,897			15.7

Consumer:
Home equity		33,696			35,046			34,120			35,046			(926	)		(2.6	)
Auto and other consumer		109,214			112,119			111,782			112,119			(337	)		(0.3	)
Total consumer loans		142,910			147,165			145,902			147,165			(1,263	)		(0.9	)

Commercial business loans		99,477			41,571			123,036			41,571			81,465			196.0

Total loans		996,401			883,757			1,072,856			883,757			189,099			21.4
Less:
Net deferred loan fees		1,842			206			2,628			206			2,422			1,175.7
Premium on purchased loans, net		(3,901	)		(4,514	)		(4,196	)		(4,514	)		318			(7.0	)
Allowance for loan losses		12,109			9,628			13,007			9,628			3,379			35.1
Loans receivable, net	$	986,351		$	878,437		$	1,061,417		$	878,437		$	182,980			20.8

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The following table represents nonperforming assets at the dates indicated.

													Increase (Decrease)
	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019			Amount			Percent
	(In thousands)						(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	1,543		$	698		$	1,939		$	698		$	1,241			177.8	%
Multi-family		297			—			287			—			287			100.0
Commercial real estate		35			109			166			109			57			52.3
Construction and land		137			29			25			29			(4	)		(13.8	)

Total real estate loans		2,012			836			2,417			836			1,581			189.1

Consumer loans:
Home equity		140			112			74			112			(38	)		(33.9	)
Auto and other consumer		896			848			607			848			(241	)		(28.4	)

Total consumer loans		1,036			960			681			960			(279	)		(29.1	)

Commercial business		308			—			—			—			—			100.0

Total nonperforming loans		3,356			1,796			3,098			1,796			1,302			72.5

Real estate owned:
Land		62			62			—			62			(62	)		(100.0	)

Total real estate owned		62			62			—			62			(62	)		(100.0	)

Repossessed assets		134			92			170			92			78			84.8

Total nonperforming assets	$	3,552		$	1,950		$	3,268		$	1,950		$	1,318			67.6

Nonaccrual and 90 days or more past due loans as a percentage of total loans		0.3	%		0.2	%		0.3	%		0.2	%		0.1	%		50.0

Investment securities increased ~~$48.7~~$53.5 million, or ~~15.4%~~17.0%, to ~~$364.3~~$369.1 million at ~~June~~September 30, 2020, from $315.6 million at December 31, 2019, due to the purchase and sale of securities, normal payments and prepayment activity, and an increase in the market value of the portfolio. Mortgage-backed securities represent the largest portion of our investment securities portfolio and totaled ~~$110.1~~$108.5 million at ~~June~~September 30, 2020, or ~~30.2%~~29.4% of the investment securities portfolio, a decrease during the year of ~~$58.4~~$60.0 million, or ~~34.7%~~35.6%, from $168.5 million at December 31, 2019. Other investment securities, including municipal bonds and other asset-backed securities, were ~~$254.2~~$260.6 million at ~~June~~September 30, 2020, or ~~69.8%~~70.6% of the investment securities portfolio, an increase of ~~$107.1~~$113.5 million from $147.1 million at December 31, 2019. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 6.7 years as of ~~June~~September 30, 2020, and 5.0 years as of December 31, 2019, and had an estimated average repricing term of ~~4.8~~4.4 years as of ~~June~~September 30, 2020, and 3.7 years as of December 31, 2019, based on the interest rate environment at those times.

The investment portfolio was comprised of ~~58.9%~~59.8% in amortizing securities at ~~June~~September 30, 2020 and 81.8% at December 31, 2019. 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.

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Liabilities. Total liabilities increased ~~$172.1 million~~ to ~~$1.30~~$1.38 billion at ~~June~~September 30, 2020, from $1.13 billion at December 31, 2019, primarily due to an increase in deposits of ~~$168.7~~$252.8 million.

Deposit balances increased ~~16.8%~~25.2%, to ~~$1.17~~$1.25 billion at ~~June~~September 30, 2020, from $1.00 billion at December 31, 2019. There was ~~an $82.2~~a $150.0 million increase in money market accounts, a ~~$62.7~~$114.3 million increase in transaction accounts, and a ~~$6.8~~$2.9 million increase in savings accounts during the year. The increase in deposits is in large part due to the Federal government's response to the pandemic including stimulus payments, additional unemployment benefits, and deferrals of Federal tax payment due dates. These actions, coupled with decreased spending by consumers and business, resulted in higher deposit balances. 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~~September 30, 2020, we had ~~$86.3~~$92.6 million in brokered CDs included in the ~~$325.2~~$293.5 million balance of certificates of deposit.

Equity. Total shareholders' equity ~~decreased $536,000~~increased $3.8 million to ~~$176.3~~$180.6 million for the ~~six~~nine months ended ~~June~~September 30, 2020. The ~~decrease~~increase was due to ~~$5.5 million the in repurchases of shares of common stock, largely offset by~~ an after-tax increase in other comprehensive income of ~~$2.3~~$4.7 million due to the increased value of our available-for-sale securities portfolio offset by realized sales, as well as year-to-date net income of ~~$2.9 million.~~$6.5 million, partially offset by $7.2 million in repurchases of shares of common stock.

Comparison of Results of Operations for the Three Months Ended ~~June~~September 30, 2020 and 2019

General. Net income ~~decreased $103,000,~~increased $1.2 million, or ~~4.9%~~46.4%, to ~~$2.0~~$3.7 million for the three months ended ~~June~~September 30, 2020, compared to net income of ~~$2.1~~$2.5 million for the three months ended ~~June~~September 30, 2019. The ~~decrease~~increase is mainly due to ~~a larger loan loss provision in the current period compared to the same period one year ago, which was partially offset by a decrease~~an increase in net ~~noninterest expense. An increase in~~interest income, noninterest income driven by mortgage revenue, gain on sale of investments, and swap fee program fees which was offset by an increase in noninterest expense due primarily to higher compensation expenses.

Net Interest Income. Net interest income increased ~~$437,000~~$2.3 million to ~~$10.1~~$11.7 million for the three months ended ~~June~~September 30, ~~2020.,~~2020, compared to ~~$9.7~~$9.4 million for the three months ended ~~June~~September 30, 2019 The yield on average interest-earning assets decreased 4738 basis points to ~~3.79%~~3.82% for the three months ended ~~June~~September 30, 2020, compared to ~~4.26%~~4.20% for the same period in the prior year. ~~This~~The decrease was due to a ~~decrease in~~lower market interest rates ~~and~~offset by a ~~decrease~~small increase in the ratio of total loans to assets in the current period compared to one year ago from ~~67.4%~~67.7% to ~~69.9%~~68.6%.

The average cost of interest-bearing liabilities decreased 4467 basis points to ~~0.89%~~0.60% for the three months ended ~~June~~September 30, 2020, compared to ~~1.33%~~1.27% for the same period last year. The decrease was due in part to the management of deposit rates reflecting the low rate environment as well as a reduction in the level and cost of borrowings given the prepayment of higher costing FHLB borrowings in the fourth quarter of 2019 and the first quarter of 2020. ~~As a result, our~~Our average cost of FHLB borrowings for the three months ended September 30, 2020 decreased to ~~1.13%~~1.34% in the ~~first~~third quarter of 2020 compared to ~~2.99%~~3.16% for the same period one year prior. The cost of interest-bearing deposits decreased by 1750 basis points to ~~0.87%~~0.56% compared to ~~1.04%~~1.06% for the three months ended ~~June~~September 30, 2019, given decreasing market rates.

Due to the average yield on ~~interest-earning assets~~interest-bearing liabilities decreasing at a faster pace than our ~~interest-bearing liabilities,~~interest-earning assets, the net interest margin ~~decreased~~increased 13 basis points to ~~3.10%~~3.36% for the three months ended ~~June~~September 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. Total interest income ~~decreased $425,000,~~increased $1.1 million, or ~~3.3%~~9.1%, to ~~$12.4~~$13.3 million for the three months ended ~~June~~September 30, 2020, from ~~$12.8~~$12.2 million for the comparable period in 2019. Interest and fees on loans receivable ~~decreased $237,000,~~increased $1.0 million, to ~~$10.2~~$11.0 million for the three months ended ~~June~~September 30, 2020, from ~~$10.5~~$10.0 million for the three months ended ~~June~~September 30, 2019, due primarily to ~~a decrease~~an increase in the ~~yield on loans and securities.~~volume of average loans. Average loan yields decreased 3423 basis points to ~~4.40%~~4.45% for the three months ended ~~June~~September 30, 2020 compared to the three months ended ~~June~~September 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~~$682,000 to ~~$1.3~~$1.6 million for the three months ended ~~June~~September 30, 2020, compared to ~~$1.0 million~~$921,000 for the three months ended ~~June~~September 30, 2019, due to a ~~$96.6~~$156.2 million increase in average balances partially offset by an 8691 basis point decrease in average yield related to a decrease in the yield on variable rate ~~securities.~~securities and lower reinvestment market rates. 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~~September 30, 2020 decreased ~~$452,000,~~$522,000, or ~~37.9%~~48.0%, compared to the three months ended ~~June~~September 30, 2019, the result of a decrease of ~~$43.3~~$61.8 million in the average balance and a 4948 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,													Three Months Ended September 30,
	2020					2019								2020					2019
	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	$	931,344		4.40	%	$	883,290		4.74	%	$	(237	)	$	998,586		4.45	%	$	862,587		4.68	%	$	1,001
Investment securities		213,141		2.47			116,496		3.33			347			267,911		2.39			111,695		3.30			682
Mortgage-backed securities		135,604		2.18			178,878		2.67			(452	)		110,863		2.04			172,639		2.52			(522	)
FHLB stock		4,426		4.97			7,066		4.98			(33	)		4,028		9.63			5,019		7.33			5
Interest-bearing deposits in banks		20,922		0.15			13,118		1.77			(50	)		19,702		0.18			15,413		1.69			(56	)
Total interest-earning assets	$	1,305,437		3.79	%	$	1,198,848		4.26	%	$	(425	)	$	1,401,090		3.82	%	$	1,167,353		4.20	%	$	1,110

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Interest Expense. Total interest expense decreased ~~$862,000,~~$1.2 million, or ~~27.8%~~43.1%, to ~~$2.2~~$1.6 million for the three months ended ~~June~~September 30, 2020, compared to ~~$3.1~~$2.8 million for the three months ended ~~June~~September 30, 2019, mainly due to an ~~80.6%~~$736,000, or 34.0% decrease in interest paid on ~~borrowings.~~deposits. Interest on borrowings decreased $486,000 or 70.3%. Interest expense on deposits decreased ~~slightly~~ for the three months ended ~~June~~September 30, 2020, due to lower rates offsetting the impact of increased balances. The average balance of interest-bearing deposits increased ~~$141.2~~$202.3 million, or ~~17.7%~~25.1%, to ~~$937.0~~$1.01 billion for the three months ended September 30, 2020, from $806.7 million for the three months ended ~~June 30, 2020, from $795.8 million for the three months ended June~~September 30, 2019, as we continued to target deposit growth in new and existing market areas as well as the industry-wide impact of ~~surge~~stimulus related deposits during the pandemic. During the three months ended ~~June~~September 30, 2020, the average balance of savings accounts increased ~~$9.7~~$6.0 million and the related weighted-average cost decreased 2954 basis points compared to the same period in 2019. The average balance of certificates of deposit balances grew ~~$90.5~~$43.1 million and the weighed-average cost decreased by 5196 basis points, mainly as a result of the utilization of brokered CDs. During the three months ended ~~June~~September 30, 2020, the average balance of money market accounts increased ~~$34.0~~$125.7 million compared to the same period in the prior year. The average cost of deposits decreased by 1750 basis points to ~~0.87%~~0.56% for the three months ended ~~June~~September 30, 2020, from ~~1.04%~~1.06% for the three months ended ~~June~~September 30, 2019. Borrowing costs decreased due to the prepayment of higher cost term borrowings in the fourth quarter of 2019 and the first quarter of 2020and a ~~decrease~~reduction 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,													Three Months Ended September 30,
	2020					2019								2020					2019
	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	$	172,833		0.62	%	$	163,106		0.91	%	$	(103	)	$	174,475		0.40	%	$	168,495		0.94	%	$	(221	)
Transaction accounts		122,951		0.01			115,914		0.12			(32	)		143,890		0.01			116,328		0.09			(21	)
Money market accounts		291,526		0.55			257,548		0.49			87			371,335		0.39			245,640		0.51			50
Certificates of deposit		349,658		1.57			259,203		2.08			21			319,341		1.08			276,247		2.04			(544	)
Borrowings		71,170		1.13			138,643		2.99			(835	)		61,244		1.34			87,492		3.16			(486	)
Total interest-bearing liabilities	$	1,008,138		0.89	%	$	934,414		1.33	%	$	(862	)	$	1,070,285		0.60	%	$	894,202		1.27	%	$	(1,222	)

Provision for Loan Losses. The provision for loan losses was ~~$1.5~~$1.3 million during the three months ended ~~June~~September 30, 2020, compared to a ~~$255,000 provision for~~$170,000 recovery of loan losses for the three months ended ~~June~~September 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,						Three Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Provision for loan losses	$	1,500		$	255
Provision for (recovery of) loan losses							$	1,350		$	(170	)
Net charge-offs		(221	)		(283	)		(452	)		(118	)
Allowance for loan losses		12,109			9,731			13,007			9,443
Allowance for losses as a percentage of total gross loans receivable at the end of this period		1.2	%		1.1	%		1.2	%		1.1	%
Total nonaccrual loans		3,356			1,291			3,098			1,322
Allowance for loan losses as a percentage of nonaccrual loans at end of period		360.8	%		753.8	%		419.9	%		714.3	%
Nonaccrual and 90 days or more past due loans as a percentage of total loans		0.3	%		0.1	%		0.3	%		0.2	%
Total loans	$	996,401		$	879,054		$	1,072,856		$	846,057

Noninterest Income. Noninterest income increased ~~$2.7~~$2.8 million or ~~188.8%~~149.7%, to ~~$4.1~~$4.7 million for the three months ended ~~June~~September 30, 2020, from ~~$1.4~~$1.9 million for the three months ended ~~June~~September 30, 2019, primarily due to the gain on sales of mortgage loans of ~~$1.9~~$1.7 million, the gain on sale of investment securities of ~~$604,000,~~$969,000, and an increase in the cash surrender value of bank owned life insurance (BOLI) of ~~$482,000.~~$475,000. The increase in the cash surrender of BOLI in the third quarter of was due to a surrender of an underperforming policy and the subsequent reinvestment of the proceeds into a different policy. A yield enhancement on the new policy was captured up front which resulted in recognition of $406,000 in cash surrender value. Fees received from participation in a loan swap program generated $396,000. Loan and deposit fees decreased by ~~$230,000~~$131,000 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)						Three Months Ended September 30,				Increase (Decrease)
	2020			2019		Amount			Percent			2020		2019		Amount			Percent
	(Dollars in thousands)											(Dollars in thousands)
Loan and deposit service fees	$	765		$	995	$	(230	)		(23.1	)%	$	868	$	999	$	(131	)		(13.1	)%
Mortgage servicing fees, net of amortization		(172	)		54		(226	)		(418.5	)		148		44		104			236.4
Net gain on sale of loans		2,001			88		1,913			2,173.9			1,725		655		1,070			163.4
Net gain on sale of investment securities		661			57		604			1,059.6			969		—		969			100.0
Increase in cash surrender value of bank-owned life insurance		627			145		482			332.4			622		147		475			323.1
Other income		227			84		143			170.2			449		70		379			541.4
Total noninterest income	$	4,109		$	1,423	$	2,686			188.8	%	$	4,781	$	1,915	$	2,866			149.7	%

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Noninterest Expense. Noninterest expense increased ~~$2.0~~$1.6 million, or ~~24.3%~~19.7%, during the three months ended ~~June~~September 30, 2020, compared to the three months ended ~~June~~September 30, 2019, mainly due to a ~~25.5%~~27.2% increase in compensation and benefits driven by additional staffing and ~~higher~~a 366.3% increase in commissions paid on loan ~~production, which increased 656.4%.~~production. Occupancy and equipment increased ~~18.0%~~17.7% due to increased spending on infrastructure to support growth and advertising increased ~~64.6%.~~44.7%

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)						Three Months Ended September 30,					Increase (Decrease)
	2020		2019		Amount			Percent			2020		2019			Amount			Percent
	(Dollars in thousands)										(Dollars in thousands)
Compensation and benefits	$	5,966	$	4,753	$	1,213			25.5	%	$	6,070	$	4,771		$	1,299			27.2	%
Data processing		769		667		102			15.3			640		680			(40	)		(5.9	)
Occupancy and equipment		1,345		1,140		205			18.0			1,367		1,161			206			17.7
Supplies, postage, and telephone		284		242		42			17.4			254		208			46			22.1
Regulatory assessments and state taxes		223		195		28			14.4			262		209			53			25.4
Advertising		377		229		148			64.6			285		197			88			44.7
Professional fees		354		331		23			6.9			361		278			83			29.9
FDIC insurance premium		70		77		(7	)		(9.1	)		86		(72	)		158			(219.4	)
Other		894		638		256			40.1
FHLB prepayment penalty												—		344			(344	)		(100.0	)
Other expense												756		648			108			16.7
Total	$	10,282	$	8,272	$	2,010			24.3	%	$	10,081	$	8,424		$	1,657			19.7	%

Provision for Income Tax. Income tax expense of ~~$464,000~~$1.4 million was recorded for the three months ended ~~June~~September 30, 2020, compared to ~~$493,000~~$580,000 for the three months ended ~~June~~September 30, 2019, generally due to a decrease in income before taxes of ~~$132,000.~~$2.0 million and a penalty recorded related to the surrender of the bank owned life insurance policy. 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~~Nine Months Ended ~~June~~September 30, 2020 and 2019

General. Net income decreased ~~$1.4 million,~~$272,000, or ~~33.5%~~4.0%, to ~~$2.9~~$6.5 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to net income of ~~$4.3~~$6.7 million for the ~~six~~nine months ended ~~June~~September 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~~$2.5 million to ~~$19.5~~$31.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~$19.3~~$28.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019. This increase was mainly the result of an increase in average earning assets of ~~$60.7~~$118.7 million. The yield on average interest-earning assets decreased 3637 basis points to ~~3.87%~~3.85% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~4.23%~~4.22% for the same period in the prior ~~year.~~

year due to the decrease in market rates. The net interest margin decreased 113 basis points to ~~3.11%~~3.20% for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~3.22%~~3.23% 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~~$2.5 million increase in net interest income during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to the ~~six~~nine months ended ~~June~~September 30, 2019, was the result of a ~~$1.1~~$2.4 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~~$1.8 million was the main contributor to the increase in net interest income.

The average cost of interest-bearing liabilities decreased to ~~0.99%~~0.85% for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~1.29%~~1.28% for the same period last year, due primarily to decreases in borrowing volume of ~~$905,000~~$1.1 million and decreases attributable to rates of ~~$486,000.~~$760,000.

Interest Income. Total interest income ~~decreased $960,000,~~increased $150,000, or ~~3.8%~~0.4%, to ~~$24.3~~$37.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~$25.3~~$37.5 million for the comparable period in 2019, primarily due to a decrease in the average yields on interest-earning assets. Interest and fees on loans receivable ~~decreased $493,000,~~increased $508,000, to ~~$20.1~~$31.1 million for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~$20.6~~$30.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, ~~in spite of~~related to an increase in the average balance of net loans receivable of ~~$24.0~~$61.6 million compared to the prior year. Average loan yields decreased 24 basis points to 4.45% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to the ~~six~~nine months ended ~~June~~September 30, 2019.

~~Total interest~~Interest income from total securities decreased ~~$344,000~~$184,000 to ~~$4.1~~$6.3 million for the ~~six~~nine months ended ~~June~~September 30, 2020 from ~~$4.4~~$6.4 million for the same period in 2019. While the average balance of total securities increased ~~$30.5~~$51.9 million, the average yield decreased 4850 basis points. Interest income on investment securities increased ~~$406,000,~~$1.1 million, or ~~20.5%~~37.5%, to ~~$2.4~~$4.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$2.0~~$2.9 million for the ~~six~~nine months ended ~~June~~September 30, 2019, due to an increase in the average balance of ~~$63.2~~$94.4 million partially offset by a decrease in average yield of 7180 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~~nine months ended ~~June~~September 30, 2020 decreased ~~$750,000,~~$1.3 million, or ~~30.6%~~36.0%, to $2.3 million compared to $3.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019, reflecting a ~~$32.7~~$42.5 million decrease in the average balance and a decrease in yield of 4142 basis points.

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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,													Nine Months Ended September 30,
	2020					2019								2020					2019
	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	)	$	933,843		4.45	%	$	872,259		4.69	%	$	508
Investment securities		181,586		2.63			118,423		3.34			406			210,571		2.53			116,180		3.33			1,088
Mortgage-backed securities		148,593		2.29			181,297		2.70			(750	)		135,925		2.22			178,411		2.64			(1,272	)
FHLB stock		4,573		4.46			6,955		5.06			(74	)		4,390		6.04			6,310		5.66			(69	)
Interest-bearing deposits in banks		21,110		0.72			12,495		2.00			(49	)		20,637		0.55			13,468		1.88			(105	)
Total interest-earning assets	$	1,256,978		3.87	%	$	1,196,265		4.23	%	$	(960	)	$	1,305,366		3.85	%	$	1,186,628		4.22	%	$	150

Interest Expense. Total interest expense decreased ~~$1.2~~$2.4 million, or ~~20.0%~~27.4%, to ~~$4.8~~$6.4 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$6.0~~$8.9 million for the ~~six~~nine months ended ~~June~~September 30, 2019, due to a decrease in borrowing costs of ~~$1.4~~$1.9 million, or ~~68.7%~~69.1%. Interest expense on deposit costs ~~increased~~decreased for the ~~six~~nine months ended ~~June~~September 30, 2020, by ~~$187,000~~$549,000 due to ~~an increase~~a 22 basis point decrease in the average ~~interest-bearing balances.~~cost. The average balance of interest-bearing deposits increased ~~$97.8~~$132.9 million, or ~~12.3%~~16.6%, to ~~$893.0~~$932.0 million for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~$795.2~~$799.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019, as we continued to target growth in deposits in new and existing market areas and ~~surge~~stimulus deposits related to the pandemic.

During the ~~six~~nine months ended ~~June~~September 30, 2020, interest expense on cost of certificates of deposit increased due to an increase in average balance of ~~$73.9~~$63.6 million partially offset by a decrease in the average rate paid of 3354 basis points, compared to the ~~six~~nine months ended ~~June~~September 30, 2019. During the same period, the average balances of savings, transaction, and money market accounts increased ~~$11.0~~$9.3 million, ~~$3.6~~$11.7 million and ~~$9.3~~$48.3 million, respectively. The average cost of all deposit products decreased to ~~0.94%~~0.80% for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~1.00%~~1.02% for the ~~six~~nine months ended ~~June~~September 30, 2019. Borrowing costs decreased as higher rate long term advances were prepaid during the six months.

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

	Six Months Ended June 30,													Nine Months Ended September 30,
	2020					2019								2020					2019
	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	)	$	171,085		0.61	%	$	161,764		0.89	%	$	(300	)
Transaction accounts		118,963		0.04			115,358		0.12			(49	)		127,333		0.03			115,681		0.11			(70	)
Money market accounts		272,030		0.56			262,747		0.48			123			305,373		0.49			257,045		0.49			173
Certificates of deposit		332,674		1.68			258,737		2.01			192			328,197		1.48			264,573		2.02			(352	)
Borrowings		75,574		1.68			136,545		2.97			(1,391	)		70,763		1.58			120,194		3.01			(1,877	)
Total interest-bearing liabilities	$	968,612		0.99	%	$	931,785		1.29	%	$	(1,204	)	$	1,002,751		0.85	%	$	919,257		1.28	%	$	(2,426	)

Provision for Loan Losses. The provision for loan losses was ~~$2.8~~$4.1 million during the ~~six~~nine months ended ~~June~~September 30, 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~~$420,000 for the ~~six~~nine months ended ~~June~~September 30, 2019, primarily due to charge-off activity in our indirect auto loan portfolio.

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

	Six Months Ended June 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Provision for loan losses	$	2,766		$	590		$	4,116		$	420
Net charge-offs		(285	)		(392	)		(737	)		(510	)
Allowance for loan losses		12,109			9,731			13,007			9,443
Allowance for losses as a percentage of total gross loans receivable at the end of this period		1.2	%		1.1	%		1.2	%		1.1	%
Total nonaccrual loans		3,356			1,291			3,098			1,322
Allowance for loan losses as a percentage of nonaccrual loans at end of period		360.8	%		753.8	%		419.9	%		714.3	%
Nonaccrual and 90 days or more past due loans as a percentage of total loans		0.3	%		0.1	%		0.3	%		0.2	%
Total loans	$	996,401		$	879,054		$	1,072,856		$	846,057

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Noninterest Income. Noninterest income increased ~~$3.7~~$6.6 million, or ~~140.4%~~144.2%, to ~~$6.4~~$11.2 million for the ~~six~~nine months ended ~~June~~September 30, 2020, from ~~$2.7~~$4.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, mainly due to an increase in gain on sale of mortgage loans of ~~$2.2~~$3.3 million. Gain on sale of investments for the ~~six~~nine months ended ~~June~~September 30, 2020, totaled ~~$1.2~~$2.2 million compared to $57,000 recognized in the first ~~six~~nine months of 2019. The cash surrender value of bank-owned life insurance increased ~~$667,000~~$1.1 million in the first ~~six~~nine months of 2020 due to a BOLI restructure that resulted in recognition of market gains as well as additional investment in BOLI.

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)						Nine Months Ended September 30,					Increase (Decrease)
	2020			2019		Amount			Percent			2020			2019		Amount			Percent
	(Dollars in thousands)											(Dollars in thousands)
Loan and deposit service fees	$	1,646		$	1,900	$	(254	)		(13.4	)%	$	2,514		$	2,899	$	(385	)		(13.3	)%
Mortgage servicing fees, net of amortization		(157	)		99		(256	)		(258.6	)		(9	)		143		(152	)		(106.3	)
Net gain on sale of loans		2,384			175		2,209			1,262.3			4,109			830		3,279			395.1
Net gain on sale of investment securities		1,266			57		1,209			2,121.1			2,235			57		2,178			3,821.1
Increase in cash surrender value of bank-owned life insurance		955			288		667			231.6			1,577			435		1,142			262.5
Other income		333			155		178			114.8			782			225		557			247.6
Total noninterest income	$	6,427		$	2,674	$	3,753			140.4	%	$	11,208		$	4,589	$	6,619			144.2	%

Noninterest Expense. Noninterest expense increased ~~$3.6~~$5.2 million, or ~~22.3%~~21.4%, to ~~$19.7~~$29.7 million for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$16.1~~$24.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019, primarily as a result of an increase in compensation and benefits as well as occupancy and equipment as we added staff to generate revenue. Compensation and benefits also increased due to an ~~$829,000~~$1.6 million increase in commissions paid on increased mortgage and commercial loan 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.

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)						Nine Months Ended September 30,				Increase (Decrease)
	2020		2019		Amount			Percent			2020		2019		Amount			Percent
	(Dollars in thousands)										(Dollars in thousands)
Compensation and benefits	$	11,327	$	9,326	$	2,001			21.5	%	$	17,397	$	14,097	$	3,300			23.4	%
Data processing		1,459		1,298		161			12.4			2,099		1,978		121			6.1
Occupancy and equipment		2,696		2,248		448			19.9			4,063		3,409		654			19.2
Supplies, postage, and telephone		495		470		25			5.3			749		678		71			10.5
Regulatory assessments and state taxes		397		364		33			9.1			659		573		86			15.0
Advertising		649		372		277			74.5			934		569		365			64.1
Professional fees		754		629		125			19.9			1,115		907		208			22.9
FDIC insurance premium		70		154		(84	)		(54.5	)		156		82		74			90.2
FHLB prepayment penalty		210		—		210			100.0			210		344		(134	)		(39.0	)
Other		1,607		1,211		396			32.7
Other expense												2,363		1,859		504			27.1
Total	$	19,664	$	16,072	$	3,592			22.3	%	$	29,745	$	24,496	$	5,249			21.4	%

Provision for Income Tax. An income tax expense of ~~$668,000~~$2.1 million was recorded for the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$1.0~~$1.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, due to ~~a decrease~~an increase in income before taxes of ~~$1.7 million.~~$250,000 and recognition of a tax penalty for early surrender of a BOLI investment. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

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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 resultant spread at ~~June~~September 30, 2020 and 2019. 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 September 30,														Nine Months Ended September 30,
	At June 30, 2020		2020							2019							2020							2019							At September 30, 2020		2020							2019							2020							2019
			Average			Interest				Average			Interest				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/		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		Outstanding			Paid		Rate		Outstanding			Paid		Rate
	(Dollars in thousands)																(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	%	4.28	%	$	998,586		$	11,097	4.45	%	$	862,587		$	10,096	4.68	%	$	933,843		$	31,169	4.45	%	$	872,259		$	30,661	4.69	%
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		2.61			267,911			1,603	2.39			111,695			921	3.30			210,571			3,988	2.53			116,180			2,900	3.33
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		2.07			110,863			565	2.04			172,639			1,087	2.52			135,925			2,264	2.22			178,411			3,536	2.64
FHLB dividends	4.87			4,426			55	4.97			7,066			88	4.98			4,573			102	4.46			6,955			176	5.06		4.85			4,028			97	9.63			5,019			92	7.33			4,390			199	6.04			6,310			268	5.66
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		0.10			19,702			9	0.18			15,413			65	1.69			20,637			85	0.55			13,468			190	1.88
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		3.72			1,401,090			13,371	3.82			1,167,353			12,261	4.20			1,305,366			37,705	3.85			1,186,628			37,555	4.22

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		0.17		$	174,475		$	176	0.40		$	168,495		$	397	0.94		$	171,085		$	785	0.61		$	161,764		$	1,085	0.89
Transaction accounts	0.01			122,951			4	0.01			115,914			36	0.12			118,963			23	0.04			115,358			72	0.12		0.01			143,890			5	0.01			116,328			26	0.09			127,333			28	0.03			115,681			98	0.11
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		0.31			371,335			362	0.39			245,640			312	0.51			305,373			1,118	0.49			257,045			945	0.49
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		1.00			319,341			862	1.08			276,247			1,406	2.04			328,197			3,653	1.48			264,573			4,005	2.02
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		0.36			1,009,041			1,405	0.56			806,710			2,141	1.06			931,988			5,584	0.80			799,063			6,133	1.02
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		0.75			61,244			205	1.34			87,492			691	3.16			70,763			840	1.58			120,194			2,717	3.01
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		0.39			1,070,285			1,610	0.60			894,202			2,832	1.27			1,002,751			6,424	0.85			919,257			8,850	1.28

Net interest income						$	10,113						$	9,676						$	19,520						$	19,276								$	11,761						$	9,429						$	31,281						$	28,705
Net interest rate spread	0.03							2.90							2.94							2.88							2.94		3.33							3.22							2.93							3.00							2.94
Net earning assets			$	297,299						$	264,434						$	288,366						$	264,480								$	330,805						$	273,151						$	302,615						$	267,371
Net interest margin (3)								3.10							3.23							3.11							3.22									3.36							3.23							3.20							3.23
Average interest-earning assets to average interest-bearing liabilities				129.5	%						128.3	%						129.8	%						128.4	%								130.9	%						130.5	%						130.2	%						129.1	%

(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.

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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									Nine Months Ended
	June 30, 2020 vs. 2019									June 30, 2020 vs. 2019									September 30, 2020 vs. 2019									September 30, 2020 vs. 2019
	Increase (Decrease) Due to									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)			Volume			Rate			Total Increase (Decrease)
	(In thousands)									(In thousands)									(In thousands)									(In thousands)
Interest earning assets:
Loans receivable, net	$	562		$	(799	)	$	(237	)	$	575		$	(1,068	)	$	(493	)	$	1,583		$	(582	)	$	1,001		$	2,177		$	(1,669	)	$	508
Investments		516			(621	)		(105	)		614			(958	)		(344	)		899			(739	)		160			1,514			(1,698	)		(184	)
FHLB stock		(33	)		—			(33	)		(60	)		(14	)		(74	)		(18	)		23			5			(82	)		13			(69	)
Other(1)		35			(85	)		(50	)		86			(135	)		(49	)		18			(74	)		(56	)		101			(206	)		(105	)
Total interest-earning assets	$	1,080		$	(1,505	)	$	(425	)	$	1,215		$	(2,175	)	$	(960	)	$	2,482		$	(1,372	)	$	1,110		$	3,710		$	(3,560	)	$	150

Interest-bearing liabilities:
Savings accounts	$	22		$	(125	)	$	(103	)	$	48		$	(127	)	$	(79	)	$	14		$	(235	)	$	(221	)	$	63		$	(363	)	$	(300	)
Interest-bearing transaction accounts		2			(34	)		(32	)		2			(51	)		(49	)		6			(27	)		(21	)		10			(80	)		(70	)
Money market accounts		41			46			87			22			101			123			160			(110	)		50			178			(5	)		173
Certificates of deposit		470			(449	)		21			743			(551	)		192			219			(763	)		(544	)		963			(1,315	)		(352	)
Borrowings		(504	)		(331	)		(835	)		(905	)		(486	)		(1,391	)		(207	)		(279	)		(486	)		(1,117	)		(760	)		(1,877	)
Total interest-bearing liabilities	$	31		$	(893	)	$	(862	)	$	(90	)	$	(1,114	)	$	(1,204	)	$	192		$	(1,414	)	$	(1,222	)	$	97		$	(2,523	)	$	(2,426	)

Net change in interest income	$	1,049		$	(612	)	$	437		$	1,305		$	(1,061	)	$	244		$	2,290		$	42		$	2,332		$	3,613		$	(1,037	)	$	2,576

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

Off-Balance Sheet Activities

In the normal course of operations, First Federal engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the ~~six~~nine months ended ~~June~~September 30, 2020 and the year ended December 31, 2019, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

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Contractual Obligations

At ~~June~~September 30, 2020, 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	$	190,613	$	87,940	$	14,987	$	—	$	293,540
FHLB advances		62,379		20,000		30,000		—		112,379		59,150		25,000		25,000		—		109,150
Operating leases		432		715		698		2,228		4,073		461		766		782		2,241		4,250
Borrower taxes and insurance		1,403		—		—		—		1,403		1,986		—		—		—		1,986
Deferred compensation		352		219		62		341		974		389		230		64		356		1,039
Total contractual obligations	$	304,619	$	91,101	$	45,704	$	2,569	$	443,993	$	252,599	$	113,936	$	40,833	$	2,597	$	409,965

Commitments and Off-Balance Sheet Arrangements

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

	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	$	2,918	$	—	$	—	$	—	$	2,918
Variable-rate		130		—		—		—		130		7,600		—		—		—		7,600
Unfunded commitments under lines of credit or existing loans		34,204		27,402		—		58,664		120,270		38,366		37,919		—		72,484		148,769
Standby letters of credit		182		—		—		—		182		182		—		—		—		182
Total commitments	$	36,118	$	27,402	$	—	$	58,664	$	122,184	$	49,066	$	37,919	$	—	$	72,484	$	159,469

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~~September 30, 2020, cash and cash equivalents totaled ~~$49.6~~$52.1 million, and unpledged securities classified as available-for-sale with a market value of ~~$250.7~~$281.9 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of ~~$112.4~~$267.4 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~~$29.4 million were pledged as of ~~June~~September 30, 2020.

At ~~June~~September 30, 2020, we had ~~$1.7~~$10.5 million in loan commitments outstanding, ~~$120.5~~$149.0 million in undisbursed loans and standby letters of credit, including ~~$68.4~~$97.8 million in undisbursed construction loan commitments.

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Certificates of deposit due within one year as of ~~June~~September 30, 2020 totaled ~~$240.1~~$190.6 million, or ~~73.8%~~64.9% of certificates of deposit with a weighted-average rate of ~~1.20%~~0.73%. 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. At ~~June~~September 30, 2020, the Company (on an unconsolidated basis) had liquid assets of ~~$12.4~~$9.6 million.

Capital Resources

At ~~June~~September 30, 2020, shareholders' equity totaled ~~$176.3~~$180.7 million, or ~~11.9%~~11.5% of total assets. Our book value per share of common stock was ~~$17.07~~$17.65 at ~~June~~September 30, 2020, compared to $16.48 at December 31, 2019.

At ~~June~~September 30, 2020, 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 Federal at ~~June~~September 30, 2020.

	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	%	$	156,405		10.5	%	$	59,428		4.0	%	$	74,285		5.0	%
Common equity tier I (to risk-weighted assets)		152,140		15.1			45,231		4.5			65,333		6.5			156,405		14.7			47,826		4.5			69,083		6.5
Tier I risk-based capital (to risk-weighted assets)		152,140		15.1			60,308		6.0			80,410		8.0			156,405		14.7			63,769		6.0			85,025		8.0
Total risk-based capital (to risk-weighted assets)		164,532		16.4			80,410		8.0			100,513		10.0			169,690		16.0			85,025		8.0			106,281		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, 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.

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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.

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~~September 30, 2020, 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~~September 30, 2020, 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.

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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.

The effects of the COVID-19 pandemic could adversely affect our customers future results of operations 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 general~~stock.

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 as customers are unable to repay loans and meet their obligations, as well as adversely impact our earnings. We believe our strong capital position will be important in managing through the unknown impact 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~~September 30, 2020:


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

July 1, 2020 - July 31, 2020		74,005	$	11.90		64,237		77,556
August 1, 2020 - August 31, 2020		41,717		11.38		41,717		35,839
September 1, 2020 - September 30, 2020		39,759		11.80		35,839		—
Total		155,481	$	11.72		141,793

(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 9,768 shares, 0 shares, and 320 shares, respectively, for the periods indicated. The Company also repurchased 0, 0, and 3,600 of unvested restricted stock awards, respectively, upon a participant's separation from service.
(2) 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 September 30, 2020, a total of 535,097 shares, or 100.0% percent of the shares authorized in the December 2019 stock repurchase plan, have been purchased at an average cost of $12.58 per share, leaving 0 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.

5052

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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. On March 27, 2020 the President 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,” along with direct stimulus payments (i.e., “economic impact payments” or “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, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. Further, on July 3, 2020 the President extended the deadline for potential borrowers to apply for Paycheck Protection Program funds until August 8, 2020. The legislative and regulatory landscape surrounding COVID-19 is rapidly changing, and neither the Company nor the Bank can predict with certainty the impact it will have on our operations or business.

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

5254

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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,~~November 6, 2020	/s/ Matthew P. Deines

	Matthew P. Deines
	President, Chief Executive Officer and Director
	(Principal Executive Officer)


Date: ~~August 10,~~November 6, 2020	/s/ Geraldine L. Bullard

	Geraldine L. Bullard
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

5355


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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2020			2019			2020			2019			2020			2019			2020			2019

NET INCOME	$	1,976		$	2,079		$	2,849		$	4,286		$	3,675		$	2,510		$	6,524		$	6,796

Other comprehensive income:
Unrealized holding gains arising during the period		12,018			2,313			4,121			4,343			4,094			856			8,215			5,199
Income tax provision related to unrealized holding gains		(2,523	)		(487	)		(865	)		(914	)		(859	)		(181	)		(1,724	)		(1,095	)
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
Reclassification adjustment for net (gains) losses on sales of securities realized in income														(969	)		0			(2,235	)		(57	)
Income tax benefit related to reclassification adjustment on sales of securities														203			0			469			12

Other comprehensive income, net of tax		8,973			1,781			2,256			3,384			2,469			675			4,725			4,059

COMPREHENSIVE INCOME	$	10,949		$	3,860		$	5,105		$	7,670		$	6,144		$	3,185		$	11,249		$	10,855

	Six Months Ended June 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,849		$	4,286		$	6,524		$	6,796
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		675			667			1,034			1,000
Amortization and accretion of premiums and discounts on investments, net		954			920			1,251			1,373
(Accretion) amortization of deferred loan fees, net		(767	)		486			(1,003	)		(822	)
Amortization of mortgage servicing rights, net		347			119			315			181
Additions to mortgage servicing rights, net		(574	)		(27	)		(989	)		(60	)
Net increase (decrease) on the valuation allowance on mortgage servicing rights		—			(3	)		0			(3	)
Provision for loan losses		2,766			590			4,116			420
Allocation of ESOP shares		361			420			512			636
Share-based compensation		555			553			917			804
Gain on sale of loans, net		(2,384	)		(175	)		(4,109	)		(830	)
Gain on sale of securities available for sale, net		(1,266	)		(57	)		(2,235	)		(57	)
Increase in cash surrender value of life insurance, net		(955	)		(288	)		(1,577	)		(435	)
Origination of loans held for sale		(79,472	)		(10,432	)		(129,495	)		(25,050	)
Proceeds from loans held for sale		79,248			8,091			129,353			23,825
Change in assets and liabilities:
Increase in accrued interest receivable		(1,429	)		(46	)
(Increase) decrease in accrued interest receivable								(3,436	)		322
Increase in prepaid expenses and other assets		(2,659	)		(3,606	)		(1,500	)		(3,294	)
Decrease in accrued interest payable		(120	)		(132	)		(322	)		(259	)
Increase in accrued expenses and other liabilities		3,792			6,996			3,967			6,767

Net cash from operating activities		1,921			8,362			3,323			11,314

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale		(166,253	)		—			(234,527	)		(9,456	)
Proceeds from maturities, calls, and principal repayments of securities available for sale		26,296			12,860			45,684			21,592
Proceeds from sales of securities available for sale		94,432			3,558			142,276			3,558
Proceeds from maturities, calls, and principal repayments of securities held to maturity		—			5,433			0			5,756
(Purchase) redemption of FHLB stock		(40	)		154
Purchase of bank-owned life insurance		(6,500	)		—
Net increase in loans receivable		(110,316	)		(11,182	)
Redemption of FHLB stock								90			1,996
Purchase of bank-owned life insurance, net of surrenders								(6,500	)		0
Net (increase) decrease in loans receivable								(186,588	)		22,837
Purchase of premises and equipment, net		(521	)		(131	)		(1,429	)		(188	)

Net cash from investing activities		(162,902	)		10,692			(240,994	)		46,095

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended ~~June~~September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _____ to _____

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	3335

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	4951

Item 4 - Controls and Procedures	4951

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	5052

Item 1A - Risk Factors	5052

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	5052

Item 3 - Defaults Upon Senior Securities	5153

Item 4 - Mine Safety Disclosures	5153

Item 5 - Other Information	5153

Item 6 - Exhibits	5254

SIGNATURES	5355

	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)			Total Shareholders'
	Shares			Amount			Capital			Earnings			Shares			Income, Net of Tax			Equity			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
BALANCE, June 30, 2019																							10,925,181		$	109		$	104,064		$	83,795		$	(10,220	)	$	(1,347	)	$	176,401

Net income											2,079									2,079												2,510									2,510
Common stock repurchased		(63,000	)		(1	)		(628	)		(392	)								(1,021	)		(131,400	)		(1	)		(1,314	)		(835	)								(2,150	)
Restricted stock award forfeitures		(4,000	)		—			—												—
Restricted stock award grants net of forfeitures																							23,400			—			—												—
Restricted stock awards canceled																							(16,249	)		0			(266	)											(266	)
Other comprehensive income, net of tax																	1,781			1,781																		675			675
Share-based compensation								270												270									251												251
ESOP shares committed to be released								48						165						213									51						165						216
Cash dividends declared and paid ($0.03 per share)											(328	)								(328	)											(327	)								(327	)

BALANCE, June 30, 2019		10,925,181		$	109		$	104,064		$	83,795		$	(10,220	)	$	(1,347	)	$	176,401
BALANCE, September 30, 2019																							10,800,932		$	108		$	102,786		$	85,143		$	(10,055	)	$	(672	)	$	177,310


BALANCE, March 31, 2020		10,432,963		$	104		$	99,479		$	85,549		$	(9,725	)	$	(8,256	)	$	167,151
BALANCE, June 30, 2020																							10,326,226		$	103		$	98,421		$	86,633		$	(9,559	)	$	717		$	176,315

Net income											1,976									1,976												3,675								��	3,675
Common stock repurchased		(130,237	)		(1	)		(1,301	)		(370	)								(1,672	)		(141,793	)		(1	)		(1,418	)		(248	)								(1,667	)
Restricted stock award forfeitures net of grants		23,500			—			—												—
Restricted stock award grants net of forfeitures																							59,859			—			—												—
Restricted stock awards canceled																							(10,088	)		0			(123	)											(123	)
Other comprehensive income, net of tax																	8,973			8,973																		2,469			2,469
Share-based compensation								251												251									362												362
ESOP shares committed to be released								(8	)					166						158									(13	)					164						151
Cash dividends declared and paid ($0.05 per share)											(522	)								(522	)
Cash dividends declared and paid ($0.05 per share)																																(514	)								(514	)

BALANCE, June 30, 2020		10,326,226		$	103		$	98,421		$	86,633		$	(9,559	)	$	717		$	176,315
BALANCE, September 30, 2020																							10,234,204		$	102		$	97,229		$	89,546		$	(9,395	)	$	3,186		$	180,668

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

	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