UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended ~~June 30, 2019~~March 31, 2020



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

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)



Washington		46-1259100
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer I.D. Number)

105 West 8th Street, Port Angeles, Washington		98362
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code:		(360) 457-0461

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



Title of each class:	Trading Symbol(s):	Name of each exchange on which registered:
Common Stock, par value $0.01 per share	FNWB	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ý No ¨

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



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	x
Emerging growth company	x

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

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

Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of ~~July 31, 2019,~~May 1, 2020, there were ~~10,919,932~~10,428,963 shares of common stock, ~~$.01~~$0.01 par value per share, outstanding.

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS



PART 1 - FINANCIAL INFORMATION
	Page
Item 1 - Financial Statements (Unaudited)	3

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	3734

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	5450

Item 4 - Controls and Procedures	5450

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	5551

Item 1A - Risk Factors	5551

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	5551

Item 3 - Defaults Upon Senior Securities	5551

Item 4 - Mine Safety Disclosures	5551

Item 5 - Other Information	5551

Item 6 - Exhibits	5653

SIGNATURES	5754

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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


ASSETS	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019

Cash and due from banks	$	15,275		$	15,430		$	15,531		$	13,519
Interest-bearing deposits in banks	13,547			10,893			91,633			35,220
Investment securities available for sale, at fair value	250,051			262,967			317,520			315,580
Investment securities held to maturity, at amortized cost	37,990			43,503
Loans held for sale	2,516			—			4,531			503
Loans receivable (net of allowance for loan losses of $9,731 and $9,533)	873,958			863,852
Loans receivable (net of allowance for loan losses of $10,830 and $9,628)							899,154			878,437
Federal Home Loan Bank (FHLB) stock, at cost	6,773			6,927			7,581			6,034
Accrued interest receivable	4,094			4,048			4,124			3,931
Premises and equipment, net	14,719			15,255			14,231			14,342
Mortgage servicing rights, net	955			1,044			843			871
Bank-owned life insurance, net	29,607			29,319			30,355			30,027
Prepaid expenses and other assets	8,225			5,520			11,436			8,872

Total assets	$	1,257,710		$	1,258,758		$	1,396,939		$	1,307,336


LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits	$	933,265		$	940,260		$	1,063,905		$	1,001,645
Borrowings	131,337			136,552			150,021			112,930
Accrued interest payable	389			521			194			373
Accrued expenses and other liabilities	15,067			8,071			15,225			14,392
Advances from borrowers for taxes and insurance	1,251			1,090			443			1,145

Total liabilities	1,081,309			1,086,494			1,229,788			1,130,485

Shareholders' Equity
Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding	—			—			—			—
Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,925,181 shares at June 30, 2019, and 11,170,018 shares at December 31, 2018	109			112
Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,432,963 shares at March 31, 2020, and 10,731,639 shares at December 31, 2019							104			107
Additional paid-in capital	104,064			105,825			99,479			102,017
Retained earnings	83,795			81,607			85,549			86,156
Accumulated other comprehensive loss, net of tax	(1,347		)	(4,731		)	(8,256		)	(1,539		)
Unearned employee stock ownership plan (ESOP) shares	(10,220		)	(10,549		)	(9,725		)	(9,890		)

Total shareholders' equity	176,401			172,264			167,151			176,851

Total liabilities and shareholders' equity	$	1,257,710		$	1,258,758		$	1,396,939		$	1,307,336

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
INTEREST INCOME
Interest and fees on loans receivable	$	10,093	$	8,952	$	20,025	$	17,535	$	9,836	$	10,092
Interest on mortgage-backed securities	1,192		1,237		2,449		2,534		959		1,257
Interest on investment securities	969		973		1,979		1,835		1,069		1,010
Interest on deposits and other	58		41		125		86		68		67
FHLB dividends	88		78		176		137		47		88

Total interest income	12,400		11,281		24,754		22,127		11,979		12,514
INTEREST EXPENSE
Deposits	2,068		1,125		3,992		2,110		2,138		1,924
Borrowings	1,036		997		2,026		1,886		434		990

Total interest expense	3,104		2,122		6,018		3,996		2,572		2,914

Net interest income	9,296		9,159		18,736		18,131		9,407		9,600
PROVISION FOR LOAN LOSSES	255		395		590		705		1,266		335

Net interest income after provision for loan losses	9,041		8,764		18,146		17,426		8,141		9,265
NONINTEREST INCOME
Loan and deposit service fees	1,375		915		2,440		1,808		881		905
Mortgage servicing fees, net of amortization	54		70		99		132		15		45
Net gain on sale of loans	88		150		175		317		383		87
Net gain on sale of investment securities	57		13		57		135		605		—
Increase in cash surrender value of bank-owned life insurance	145		149		288		298		328		143
Other income	84		108		155		197		106		71

Total noninterest income	1,803		1,405		3,214		2,887		2,318		1,251

NONINTEREST EXPENSE
Compensation and benefits	4,753		4,745		9,326		9,556		5,361		4,573
Data processing	667		677		1,298		1,305		690		631
Occupancy and equipment	1,140		1,127		2,248		2,229		1,351		1,108
Supplies, postage, and telephone	242		243		470		474		211		228
Regulatory assessments and state taxes	195		155		364		281		174		169
Advertising	229		290		372		614		272		143
Professional fees	331		458		629		780		400		298
FDIC insurance premium	77		79		154		155		—		77
FHLB prepayment penalty									210		—
Other	638		524		1,211		1,179		713		573

Total noninterest expense	8,272		8,298		16,072		16,573		9,382		7,800

INCOME BEFORE PROVISION FOR INCOME TAXES	2,572		1,871		5,288		3,740
INCOME BEFORE PROVISION FOR INCOME TAX									1,077		2,716

PROVISION FOR INCOME TAXES	493		345		1,002		691
PROVISION FOR INCOME TAX									204		509

NET INCOME	$	2,079	$	1,526	$	4,286	$	3,049	$	873	$	2,207

Basic and diluted earnings per share	$	0.21	$	0.15	$	0.43	$	0.29	$	0.09	$	0.22

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME ~~(LOSS)~~

(In thousands) (Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018

NET INCOME $ 2,079
$ 1,526
$ 4,286
$ 3,049

Other comprehensive income (loss), net of tax
Unrealized gain on securities:
Unrealized holding gain (loss), net of tax provision (benefit) of $487, $(290), $914, and $(841), respectively 1,826
(1,100 ) 3,429
(3,178 )
Reclassification adjustment for net (gain) loss on sales of securities realized in income, net of taxes of $(12), $3, $(12), and $(23), respectively (45 ) 11
(45 ) (85 )

Other comprehensive income (loss), net of tax 1,781
(1,089 ) 3,384
(3,263 )

COMPREHENSIVE INCOME (LOSS) $ 3,860
$ 437
$ 7,670
$ (214 )



	Three Months Ended
	March 31,
	2020			2019

NET INCOME	$	873		$	2,207

Other comprehensive (loss) income, net of tax
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain, net of tax (benefit) provision of $(1,658) and $427, respectively	(6,239		)	1,603
Reclassification adjustment for net (gain) loss on sales of securities realized in income, net of taxes of $(127) and $0, respectively	(478		)	—

Other comprehensive (loss) income, net of tax	(6,717		)	1,603

COMPREHENSIVE (LOSS) INCOME	$	(5,844	)	$	3,810

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

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


	Common Stock					Additional Paid-in Capital			Retained Earnings				Unearned ESOP Shares				Accumulated Other Comprehensive (Loss) Income, Net of Tax				Total Shareholders' Equity			Common Stock					Additional Paid-in Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive (Loss) Income, Net of Tax			Total Shareholders' Equity
	Shares		Amount									Shares								Amount

BALANCE, March 31, 2018	11,577,394		$	116		$	109,354		$	78,822				$	(11,043	)		$	(3,747	)				$	173,502
BALANCE, December 31, 2018																								11,170,018		$	112		$	105,825		$	81,607		$	(10,549	)	$	(4,731	)	$	172,264

Net income									1,526												1,526											2,207									2,207
Common stock repurchased	(88,900	)	(1		)	(886		)	(581		)										(1,468		)	(177,837	)	(2		)	(1,777		)	(1,047		)							(2,826		)
Restricted stock award forfeitures	(5,000	)	—			—															—
Other comprehensive loss, net of tax																	(1,089		)		(1,089		)
Share-based compensation						259															259
ESOP shares committed to be released						53							164								217

BALANCE, June 30, 2018	11,483,494		$	115		$	108,780		$	79,767			$	(10,879	)		$	(4,836	)		$	172,947


BALANCE, March 31, 2019	10,992,181		$	110		$	104,374		$	82,436			$	(10,385	)		$	(3,128	)		$	173,407

Net income									2,079												2,079
Common stock repurchased	(63,000	)	(1		)	(628		)	(392		)										(1,021		)
Restricted stock award forfeitures	(4,000	)	—			—															—
Other comprehensive income, net of tax																	1,781				1,781																	1,603			1,603
Share-based compensation						270															270								283												283
ESOP shares committed to be released						48							165								213								43						164						207
Cash dividends declared and paid ($0.03 per share)									(328		)										(328		)									(331		)							(331		)

BALANCE, June 30, 2019	10,925,181		$	109		$	104,064		$	83,795			$	(10,220	)		$	(1,347	)		$	176,401
BALANCE, March 31, 2019																								10,992,181		$	110		$	104,374		$	82,436		$	(10,385	)	$	(3,128	)	$	173,407


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

Net income																																873									873
Common stock repurchased																								(288,276	)	(3		)	(2,880		)	(947		)							(3,830		)
Restricted stock award forfeitures net of grants																								(10,400	)	—			—												—
Other comprehensive loss, net of tax																																						(6,717		)	(6,717		)
Share-based compensation																													304												304
ESOP shares committed to be released																													38						165						203
Cash dividends declared and paid ($0.05 per share)																																(533		)							(533		)

BALANCE, March 31, 2020																								10,432,963		$	104		$	99,479		$	85,549		$	(9,725	)	$	(8,256	)	$	167,151

See selected notes to the consolidated financial statements.

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY~~

~~For the Six Months Ended June 30, 2019 and 2018~~

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

Common Stock Additional Paid-in Capital Retained Earnings Unearned ESOP Shares Accumulated Other Comprehensive (Loss) Income, Net of Tax Total Shareholders' Equity
Shares Amount

BALANCE, December 31, 2017 11,785,507
$ 118
$ 111,106
$ 78,602
$ (11,208 ) $ (1,573 ) $ 177,045

Net income 3,049
3,049
Common stock repurchased (297,013 ) (3 ) (2,966 ) (1,884 ) (4,853 )
Restricted stock award forfeitures (5,000 ) —
—
—
Other comprehensive loss, net of tax (3,263 ) (3,263 )
Share-based compensation 532
532
ESOP shares committed to be released 108
329
437

BALANCE, June 30, 2018 11,483,494
$ 115
$ 108,780
$ 79,767
$ (10,879 ) $ (4,836 ) $ 172,947

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



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

	Three Months Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	873		$	2,207
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	338			333
Amortization and accretion of premiums and discounts on investments, net	477			458
(Accretion) amortization of deferred loan fees, net	(436		)	167
Amortization of mortgage servicing rights, net	82			66
Additions to mortgage servicing rights, net	(54		)	(20		)
Net increase (decrease) on the valuation allowance on mortgage servicing rights	—			(3		)
Provision for loan losses	1,266			335
Allocation of ESOP shares	203			207
Share-based compensation	304			283
Gain on sale of loans, net	(383		)	(87		)
Gain on sale of securities available for sale, net	(605		)	—
Increase in cash surrender value of life insurance, net	(328		)	(143		)
Origination of loans held for sale	(20,027		)	(4,420		)
Proceeds from loans held for sale	16,382			3,538
Change in assets and liabilities:
Increase in accrued interest receivable	(193		)	(66		)
Increase in prepaid expenses and other assets	(382		)	(3,916		)
Decrease in accrued interest payable	(179		)	(242		)
Increase in accrued expenses and other liabilities	833			6,949

Net cash from operating activities	(1,829		)	5,646

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale	(66,372		)	—
Proceeds from maturities, calls, and principal repayments of securities available for sale	15,984			6,108
Proceeds from sales of securities available for sale	40,073			—
Proceeds from maturities, calls, and principal repayments of securities held to maturity	—			434
(Purchase) redemption of FHLB stock	(1,547		)	—
Net increase in loans receivable	(21,943		)	(19,845		)
Purchase of premises and equipment, net	(227		)	(33		)

Net cash from investing activities	(34,032		)	(13,336		)

See selected notes to the consolidated financial statements.



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

	Three Months Ended March 31,
	2020			2019
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	62,260		$	12,495
Net increase (decrease) in advances from the FHLB	37,091			(1,378		)
Net (decrease) increase in advances from borrowers for taxes and insurance	(702		)	1,064
Dividends paid	(533		)	(331		)
Repurchase of common stock	(3,830		)	(2,826		)

Net cash from financing activities	94,286			9,024

NET INCREASE IN CASH AND CASH EQUIVALENTS	58,425			1,334

CASH AND CASH EQUIVALENTS, beginning of period	48,739			26,323

CASH AND CASH EQUIVALENTS, end of period	$	107,164		$	27,657

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	2,751		$	3,156

NONCASH INVESTING ACTIVITIES
Unrealized (loss) gain on securities available for sale	$	(8,502	)	$	2,030

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses	$	396		$	74

See selected notes to the consolidated financial statements.

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

Six Months Ended June 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,286
$ 3,049
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 667
662
Amortization and accretion of premiums and discounts on investments, net 920
965
Amortization (accretion) of deferred loan fees, net 486
(78 )
Amortization of mortgage servicing rights, net 119
92
Additions to mortgage servicing rights, net (27 ) (98 )
Net (decrease) increase on the valuation allowance on mortgage servicing rights (3 ) —
Provision for loan losses 590
705
Allocation of ESOP shares 420
437
Share-based compensation 553
532
Gain on sale of loans, net (175 ) (317 )
Gain on sale of securities available for sale, net (57 ) (108 )
Gain on sale of securities held to maturity, net —
(27 )
Increase in cash surrender value of life insurance, net (288 ) (298 )
Origination of loans held for sale (10,432 ) (11,684 )
Proceeds from loans held for sale 8,091
11,227
Change in assets and liabilities:
Increase in accrued interest receivable (46 ) (154 )
Increase in prepaid expenses and other assets (3,606 ) (147 )
(Decrease) increase in accrued interest payable (132 ) 49
Increase in accrued expenses and other liabilities 6,996
1,406

Net cash from operating activities 8,362
6,213

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale —
(37,681 )
Proceeds from maturities, calls, and principal repayments of securities available for sale 12,860
13,348
Proceeds from sales of securities available for sale 3,558
54,704
Proceeds from maturities, calls, and principal repayments of securities held to maturity 5,433
5,542
Proceeds from sales of securities held to maturity —
2,702
Redemption of FHLB stock 154
502
Proceeds from sale of real estate owned and repossessed assets —
46
Net increase in loans receivable (11,182 ) (42,958 )
Purchase of premises and equipment, net (131 ) (1,712 )

Net cash from investing activities 10,692
(5,507 )

~~See selected notes to the consolidated financial statements.~~

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

Six Months Ended June 30,
2019 2018
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits $ (6,995 ) $ 8,294
Net decrease in FHLB short-term advances (5,215 ) (17,829 )
Net increase (decrease) in advances from borrowers for taxes and insurance 161
(235 )
Dividends paid (659 ) —
Repurchase of common stock (3,847 ) (4,853 )

Net cash from financing activities (16,555 ) (14,623 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,499
(13,917 )

CASH AND CASH EQUIVALENTS, beginning of period 26,323
36,801

CASH AND CASH EQUIVALENTS, end of period $ 28,822
$ 22,884

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 6,151
$ 3,947

Income taxes $ 990
$ 250

NONCASH INVESTING ACTIVITIES
Unrealized gain (loss) on securities available for sale $ 4,286
$ (4,127 )

Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses $ 160
$ 102

~~See selected notes to the consolidated financial statements.~~

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation and Critical Accounting Policies

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

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

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

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

Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. The Company changed its fiscal year end from June 30 to December 31 effective December 31, 2017. Operating results for the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, are not necessarily indicative of the results that may be expected for future periods.

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

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

Subsequent Events - The Company has evaluated subsequent events for potential recognition and disclosure and ~~determined there are no such events or transactions requiring recognition or disclosure.~~has included additional information where appropriate.

Recently adopted accounting pronouncements

In ~~February 2016, the~~August 2018, FASB issued ASU No. ~~2016-02,~~2018-13, ~~Leases~~Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement~~. ASU 2016-02 is intended~~, which removes, modifies, and adds certain disclosure requirements related to ~~increase transparency~~fair value measurements in ASC 820. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The ASU requires a lessee to recognize on the balance sheet assetsreasons

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, ~~for leases with lease terms~~and information about the measurement uncertainty of ~~more than 12 months. Consistent with current GAAP,~~Level 3 fair value measurements as of the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this updatereporting date. This guidance is effective for ~~interim and annual periods beginning after December 15, 2018. The adoption of ASU No. 2016-02 effective January 1, 2019 resulted~~public companies in a right-of-use asset and corresponding lease obligation liability of $3,919,000. The Corporation chose the effective date as the date of initial application. Consequently, prior period financial information has not been updated or restated. The right-of-use asset is included in other assets and the lease obligation liability is included in other liabilities on the June 30, 2019, consolidated balance sheet.

~~In August 2017, FASB issued ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815).~~ This ASU was issued to provide investors better insight to an entity’s risk management hedging strategies by permitting companies to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving non-financial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, ~~2018, and~~2019, with early adoption is permitted. ~~Adoption of~~This ASU ~~2017-12 did not have a material impact on the Company’s consolidated financial statements.~~

~~In June 2018, FASB issued ASU No. 2018-07,~~ ~~Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~. These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, ~~Revenue from Contracts with Customers~~. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2020. Early adoption is permitted but not earlier than the adoption of Topic 606. Adoption of this ASU did not have a material effect on the Company's consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.

~~In July 2018, FASB issued ASU No. 2018-09,~~ ~~Codification Improvements~~. These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement - Reporting Comprehensive Income - Overall), 470-50 (Debt - Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity - Overall), 718-740 (Compensation - Stock Compensation - Income Taxes), 805-740 (Business Combinations - Income Taxes), 815-10 (Derivatives and Hedging - Overall), and 820-10 (Fair Value Measurement - Overall). Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance; however, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. Adoption of ASU 2018-09 did not have a material impact on the Company's consolidated financial statements.

In ~~October~~August 2018, ~~the~~ FASB issued ASU No. ~~2018-16~~2018-15, ~~Derivatives and Hedging (Topic 815)~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, ~~Inclusion of~~to provide guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU aligns the ~~Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate~~accounting for ~~Hedge Accounting Purposes~~. The amendments in this ASU permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The amendments in this ASU are required to be adopted concurrentlysuch costs with the ~~amendments~~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, ~~2017-12. For public companies, this would be~~which is effective for ~~fiscal years, and interim periods within those~~ fiscal years beginning after December 15, ~~2018. Adoption of ASU 2018-16~~2019, did not have a material impact on the ~~Company's consolidated~~Company’s financial statements.

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Recently adopted regulatory rule~~

In ~~August 2018,~~March 2020, the ~~Securities~~FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. The amendments represent clarification and ~~Exchange Commission issued~~improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a ~~final rule that amends certain of its disclosure requirements. The rule simplifies various disclosure requirements for public companies including primarily that it (i) eliminates~~material effect on the requirement for public companies to disclose in their filings a schedule of earnings to fixed charges, (ii) requires an analysis of changes in stockholders’ equity for the current and comparative year-to-date interim periods in interim reports, and (iii) reduces the requirements for market price information disclosures in annual reports. These changes are effective for public companies beginning on November 5, 2018. The Company will be complying with these new requirements beginning with the Quarterly Report for the period ended March 31, 2019, on Form 10-Q.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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment.

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 ~~this ASU~~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 ~~August 2018,~~December 2019, FASB issued ASU No. ~~2018-13,~~2019-12, ~~Disclosure Framework — Changes~~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 ~~Disclosure Requirements for Fair Value Measurement~~ ~~which removes, modifies,~~general principles in Topic 740. The standard also clarifies and ~~adds certain disclosure requirements related~~amends existing guidance to fair value measurements in ASC 820. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This guidance is effective for public companies in fiscal years beginning after December 15, 2019, with early adoption permitted. This ASU is not expected to have a material impact on the Company's consolidated financial statements.

~~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.improve consistent application. This ASU, which is effective for fiscal years beginning after December 15, ~~2019,~~2020, is not expected to have a material impact on the ~~Company’s~~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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at ~~June 30, 2019~~March 31, 2020 are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)									(In thousands)
Available for Sale
Municipal bonds	$	881	$	51	$	—		$	932	$	52,238	$	708	$	(692	)	$	52,254
U.S. government agency issued asset-backed securities (ABS agency)	25,995		—		(559		)	25,436		46,495		403		(4,773		)	42,125
Corporate issued asset-backed securities (ABS corporate)	37,877		—		(667		)	37,210		41,716		—		(7,643		)	34,073
Corporate issued debt securities (Corporate debt)	9,986		—		(504		)	9,482		9,986		49		(596		)	9,439
U.S. Small Business Administration securities (SBA)	31,865		151		(41		)	31,975		25,185		190		(12		)	25,363
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)	135,337		499		(597		)	135,239		142,881		2,806		(548		)	145,139
Corporate issued mortgage-backed securities (MBS corporate)	9,841		3		(67		)	9,777		9,469		—		(342		)	9,127

Total securities available for sale	$	251,782	$	704	$	(2,435	)	$	250,051	$	327,970	$	4,156	$	(14,606	)	$	317,520

Held to Maturity
Municipal bonds	$	7,080	$	71	$	—		$	7,151
SBA	144		—		—			144
Mortgage-backed securities:
MBS agency	30,766		639		(25		)	31,380

Total securities held to maturity	$	37,990	$	710	$	(25	)	$	38,675

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at December 31, ~~2018,~~2019, are summarized as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)									(In thousands)
Available for Sale
Municipal bonds	$	882	$	—	$	(13	)	$	869	$	39,524	$	125	$	(367	)	$	39,282
ABS agency	26,125		—		(373		)	25,752		29,796		—		(938		)	28,858
ABS corporate	37,897		—		(1,174		)	36,723		41,728		—		(873		)	40,855
Corporate debt	9,986		98		(196		)	9,888		9,986		—		(343		)	9,643
SBA	35,936		23		(289		)	35,670		28,423		72		(36		)	28,459
Mortgage-backed securities:
MBS agency	147,205		12		(3,762		)	143,455		159,697		811		(341		)	160,167
MBS corporate	10,953		—		(343		)	10,610		8,374		—		(58		)	8,316

Total securities available for sale	$	268,984	$	133	$	(6,150	)	$	262,967	$	317,528	$	1,008	$	(2,956	)	$	315,580

Held to Maturity
Municipal bonds	$	11,919	$	43	$	—		$	11,962
SBA	302		—		(1		)	301
Mortgage-backed securities:
MBS agency	31,282		40		(595		)	30,727

Total securities held to maturity	$	43,503	$	83	$	(596	)	$	42,990

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of June 30, 2019:

Less Than Twelve Months Twelve Months or Longer Total
Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value
(In thousands)
Available for Sale
ABS agency $ —
$ —
$ (559 ) $ 25,436
$ (559 ) $ 25,436
ABS corporate —
—
(667 ) 37,210
(667 ) 37,210
Corporate debt (136 ) 4,864
(368 ) 4,618
(504 ) 9,482
SBA —
—
(41 ) 9,146
(41 ) 9,146
Mortgage-backed securities:
MBS agency —
—
(597 ) 82,736
(597 ) 82,736
MBS corporate —
—
(67 ) 7,259
(67 ) 7,259

Total available for sale $ (136 ) $ 4,864
$ (2,299 ) $ 166,405
$ (2,435 ) $ 171,269

Held to Maturity
Mortgage-backed securities:
MBS agency —
—
(25 ) 13,782
(25 ) 13,782

Total held to maturity $ —
$ —
$ (25 ) $ 13,782
$ (25 ) $ 13,782

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	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	$	(8	)	$	757	$	(5	)	$	110	$	(13	)	$	867	$	(692	)	$	20,954	$	—		$	—	$	(692	)	$	20,954
ABS agency	(302		)	23,286		(71		)	2,466		(373		)	25,752		(450		)	9,536		(4,323		)	21,499		(4,773		)	31,035
ABS corporate	(571		)	14,527		(603		)	22,196		(1,174		)	36,723		(202		)	3,678		(7,441		)	30,395		(7,643		)	34,073
Corporate debt	—			—		(196		)	4,791		(196		)	4,791		—			—		(596		)	4,404		(596		)	4,404
SBA	(44		)	13,400		(245		)	13,089		(289		)	26,489		—			—		(12		)	4,101		(12		)	4,101
Mortgage-backed securities:	Mortgage-backed securities:
MBS agency	(28		)	17,996		(3,734		)	120,617		(3,762		)	138,613		(547		)	32,889		(1		)	807		(548		)	33,696
MBS corporate	—			—		(343		)	10,610		(343		)	10,610		(62		)	2,216		(280		)	6,911		(342		)	9,127

Total available for sale	$	(953	)	$	69,966	$	(5,197	)	$	173,879	$	(6,150	)	$	243,845	$	(1,953	)	$	69,273	$	(12,653	)	$	68,117	$	(14,606	)	$	137,390

Held to Maturity
SBA	$	(1	)	$	—	$	—		$	301	$	(1	)	$	301
Mortgage-backed securities:
MBS agency	(70		)	6,241		(525		)	18,073		(595		)	24,314

Total held to maturity	$	(71	)	$	6,241	$	(525	)	$	18,374	$	(596	)	$	24,615



	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	(367	)	$	29,928	$	—		$	—	$	(367	)	$	29,928
ABS agency	(59		)	3,855		(879		)	25,002		(938		)	28,857
ABS corporate	(31		)	3,848		(842		)	37,007		(873		)	40,855
Corporate debt	(17		)	4,983		(326		)	4,660		(343		)	9,643
SBA	—			—		(36		)	15,034		(36		)	15,034
Mortgage-backed securities:
MBS agency	(166		)	18,744		(175		)	47,463		(341		)	66,207
MBS corporate	—			—		(58		)	8,316		(58		)	8,316

Total available for sale	$	(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 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were 4741 and 6962 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, ~~and~~ market demand, and ~~not~~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 no OTTI losses during the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2019								March 31, 2020
	Available-for-Sale				Held-to-Maturity				Available-for-Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)								(In thousands)
Mortgage-backed securities:
Due within one year	$	—	$	—	$	—	$	—	$	—	$	—
Due after one through five years	7,122		7,156		421		425		6,179		6,264
Due after five through ten years	11,341		11,312		1,768		1,749		7,077		7,404
Due after ten years	126,715		126,548		28,577		29,206		139,094		140,598

Total mortgage-backed securities	145,178		145,016		30,766		31,380		152,350		154,266

All other investment securities:
Due within one year	—		—		—		—		—		—
Due after one through five years	—		—		794		812		3,040		3,096
Due after five through ten years	28,628		28,143		6,430		6,483		49,249		44,707
Due after ten years	77,976		76,892		—		—		123,331		115,451

Total all other investment securities	106,604		105,035		7,224		7,295		175,620		163,254

Total investment securities	$	251,782	$	250,051	$	37,990	$	38,675	$	327,970	$	317,520


	December 31, 2018								December 31, 2019
	Available-for-Sale				Held-to-Maturity				Available-for-Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)								(In thousands)
Mortgage-backed securities:
Due within one year	$	—	$	—	$	—	$	—	$	—	$	—
Due after one through five years	7,204		7,089		578		569		13,360		13,391
Due after five through ten years	11,862		11,637		2,035		1,978		6,261		6,257
Due after ten years	139,092		135,339		28,669		28,180		148,450		148,835

Total mortgage-backed securities	158,158		154,065		31,282		30,727		168,071		168,483

All other investment securities:
Due within one year	—		—		—		—		—		—
Due after one through five years	—		—		734		741		2,043		2,084
Due after five through ten years	19,564		19,362		6,728		6,743		58,460		57,680
Due after ten years	91,262		89,540		4,759		4,779		88,954		87,333

Total all other investment securities	110,826		108,902		12,221		12,263		149,457		147,097

Total investment securities	$	268,984	$	262,967	$	43,503	$	42,990	$	317,528	$	315,580

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended March 31,
	2019		2018			2019		2018			2020			2019
	(In thousands)										(In thousands)
Proceeds from sales	$	3,558	$	21,845		$	3,558	$	54,704		$	40,073		$	—
Gross realized gains	57		69			57		233			637			—
Gross realized losses	—		(83		)	—		(125		)	(32		)	—

During the six months ended June 30, 2018, the Bank sold certain held to maturity investments that had substantially reached maturity, allowing us to sell the securities without tainting the remaining held to maturity securities portfolio. The held-to-maturity designation of the remaining securities is unchanged. Gross proceeds on the sale of these securities totaled $2,702,000 with gross realized gains and losses of $32,000 and $5,000, respectively.

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In thousands)						(In thousands)
Real Estate:
One-to-four family	$	331,748		$	336,178		$	302,688		$	306,014
Multi-family	68,440			82,331			88,794			96,098
Commercial real estate	250,250			253,235			260,321			255,722
Construction and land	63,741			54,102			48,565			37,187
Total real estate loans	714,179			725,846			700,368			695,021

Consumer:
Home equity	37,194			37,629			35,260			35,046
Auto and other consumer	112,583			87,357			114,194			112,119
Total consumer loans	149,777			124,986			149,454			147,165

Commercial business loans	15,098			18,898			55,853			41,571

Total loans	879,054			869,730			905,675			883,757

Less:
Net deferred loan fees	103			292			433			206
Premium on purchased loans, net	(4,738		)	(3,947		)	(4,742		)	(4,514		)
Allowance for loan losses	9,731			9,533			10,830			9,628

Total loans receivable, net	$	873,958		$	863,852		$	899,154		$	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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	At or For the Three Months Ended June 30, 2019																									At or For the Three Months Ended March 31, 2020
	One-to- four family			Multi-family			Commercial real estate		Construction and land		Home equity			Auto and other consumer			Commercial business			Unallocated			Total			One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity			Auto and other consumer			Commercial business		Unallocated		Total
	(In thousands)																									(In thousands)
ALLL:
Beginning balance	$	3,441		$	769		$	2,337	$	700	$	467		$	1,678		$	191		$	176		$	9,759		$	3,024	$	888	$	2,243	$	399	$	454		$	2,261		$	208	$	151	$	9,628
Provision for loan losses	(25		)	(118		)	20		11		(22		)	416			(20		)	(7		)	255			319		35		479		191		(6		)	176			42		30		1,266
Charge-offs	—			—			—		—		—			(362		)	—			—			(362		)	—		—		—		—		—			(134		)	—		—		(134		)
Recoveries	1			—			—		—		20			58			—			—			79			53		—		—		2		1			14			—		—		70
Ending balance	$	3,417		$	651		$	2,357	$	711	$	465		$	1,790		$	171		$	169		$	9,731		$	3,396	$	923	$	2,722	$	592	$	449		$	2,317		$	250	$	181	$	10,830

At or For the Six Months Ended June 30, 2019

One-to-
four family
Multi-family
Commercial
real estate

Construction
and land

Home
equity

Auto and other
consumer

Commercial
business
Unallocated Total
(In thousands)
ALLL:
Beginning balance $ 3,297
$ 762
$ 2,289
$ 585
$ 480
$ 1,611
$ 334
$ 175
$ 9,533
Provision for loan losses 117
(111 ) 68
126
(36 ) 593
(161 ) (6 ) 590
Charge-offs —
—
—
—
—
(548 ) (4 ) —
(552 )
Recoveries 3
—
—
—
21
134
2
—
160
Ending balance $ 3,417
$ 651
$ 2,357
$ 711
$ 465
$ 1,790
$ 171
$ 169
$ 9,731



	At March 31, 2020
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,396	$	923	$	2,722	$	592	$	449	$	2,317	$	250	$	181	$	10,830
General reserve	3,363		922		2,713		591		443		2,263		245		181		10,721
Specific reserve	33		1		9		1		6		54		5		—		109

Total loans	$	302,688	$	88,794	$	260,321	$	48,565	$	35,260	$	114,194	$	55,853	$	—	$	905,675
Loans collectively evaluated ⁽¹⁾	299,947		88,391		258,451		48,537		34,971		113,485		55,590		—		899,372
Loans individually evaluated ⁽²⁾	2,741		403		1,870		28		289		709		263		—		6,303


⁽¹⁾ Loans collectively evaluated for general reserves.
⁽²⁾ Loans individually evaluated for specific reserves.

At June 30, 2019

One-to-
four family
Multi-family
Commercial
real estate

Construction
and land

Home
equity

Auto and other
consumer

Commercial
business
Unallocated Total
(In thousands)
Total ALLL $ 3,417
$ 651
$ 2,357
$ 711
$ 465
$ 1,790
$ 171
$ 169
$ 9,731
General reserve 3,381
650
2,347
710
458
1,740
164
169
9,619
Specific reserve 36
1
10
1
7
50
7
—
112

Total loans $ 331,748
$ 68,440
$ 250,250
$ 63,741
$ 37,194
$ 112,583
$ 15,098
$ —
$ 879,054
Loans collectively evaluated ⁽¹⁾
328,739
68,331
248,320
63,676
36,793
112,343
14,800
—
873,002
Loans individually evaluated ⁽²⁾
3,009
109
1,930
65
401
240
298
—
6,052

⁽¹⁾ Loans collectively evaluated for general reserves.
⁽²⁾ Loans individually evaluated for specific reserves.



	At or For the Three Months Ended March 31, 2019
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity			Auto and other consumer			Commercial business			Unallocated		Total
ALLL:	(In thousands)
Beginning balance	$	3,297	$	762	$	2,289	$	585	$	480		$	1,611		$	334		$	175	$	9,533
Provision for loan losses	142		7		48		115		(14		)	177			(141		)	1		335
Charge-offs	—		—		—		—		—			(186		)	(4		)	—		(190		)
Recoveries	2		—		—		—		1			76			2			—		81
Ending balance	$	3,441	$	769	$	2,337	$	700	$	467		$	1,678		$	191		$	176	$	9,759

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At or For the Three Months Ended June 30, 2018

One-to-
four family
Multi-family
Commercial
real estate

Construction
and land

Home
equity

Auto and other
consumer

Commercial
business
Unallocated Total
ALLL: (In thousands)
Beginning balance $ 3,167
$ 647
$ 2,053
$ 679
$ 744
$ 948
$ 709
$ 37
$ 8,984
Provision for loan losses (102 ) 194
107
(166 ) (110 ) 476
6
(10 ) 395
Charge-offs (16 ) —
—
—
—
(134 ) —
—
(150 )
Recoveries 1
—
—
1
8
42
1
—
53
Ending balance $ 3,050
$ 841
$ 2,160
$ 514
$ 642
$ 1,332
$ 716
$ 27
$ 9,282

At or For the Six Months Ended June 30, 2018

One-to-
four family
Multi-family
Commercial
real estate

Construction
and land

Home
equity

Auto and other
consumer

Commercial
business
Unallocated Total
ALLL: (In thousands)
Beginning balance $ 3,061
$ 648
$ 1,847
$ 648
$ 787
$ 712
$ 265
$ 792
$ 8,760
Provision for loan losses 3
193
313
(135 ) (161 ) 807
450
(765 ) 705
Charge-offs (16 ) —
—
—
—
(257 ) —
—
(273 )
Recoveries 2
—
—
1
16
70
1
—
90
Ending balance $ 3,050
$ 841
$ 2,160
$ 514
$ 642
$ 1,332
$ 716
$ 27
$ 9,282


	At December 31, 2018																		At December 31, 2019
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total		One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total
	(In thousands)																		(In thousands)
Total ALLL	$	3,297	$	762	$	2,289	$	585	$	480	$	1,611	$	334	$	175	$	9,533	$	3,024	$	888	$	2,243	$	399	$	454	$	2,261	$	208	$	151	$	9,628
General reserve	3,262		761		2,281		584		474		1,552		168		175		9,257		2,993		887		2,235		399		439		2,119		203		151		9,426
Specific reserve	35		1		8		1		6		59		166		—		276		31		1		8		—		15		142		5		—		202

Total loans	$	336,178	$	82,331	$	253,235	$	54,102	$	37,629	$	87,357	$	18,898	$	—	$	869,730	$	306,014	$	96,098	$	255,722	$	37,187	$	35,046	$	112,119	$	41,571	$	—	$	883,757
Loans collectively evaluated ⁽¹⁾	333,062		82,221		251,263		54,058		37,002		87,113		18,453		—		863,172		303,026		95,991		253,839		37,158		34,775		111,271		41,308		—		877,368
Loans individually evaluated ⁽²⁾	3,116		110		1,972		44		627		244		445		—		6,558		2,988		107		1,883		29		271		848		263		—		6,389


⁽¹⁾ Loans collectively evaluated for general reserves.	⁽¹⁾ Loans collectively evaluated for general reserves.																		⁽¹⁾ Loans collectively evaluated for general reserves.
⁽²⁾ Loans individually evaluated for specific reserves.	⁽²⁾ Loans individually evaluated for specific 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. In the process of identifying loans as impaired, management takes into consideration factors that include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case-by-case basis after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. 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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2019							December 31, 2018						March 31, 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	$	188		$	222	$	—	$	306	$	339	$	—	$	72	$	99	$	—	$	297	$	332	$	—
Multi-family														296		296		—		—		—		—
Commercial real estate	1,274			1,346		—		1,308		1,374		—		1,227		1,310		—		1,240		1,320		—
Construction and land	—			—		—		—		1		—		—		32		—		—		33		—
Home equity	57			161		—		330		478		—		42		114		—		45		110		—
Auto and other consumer	(7		)	504		—		—		276		—		—		271		—		251		548		—
Commercial business	—			—		—		—		3		—		—		—		—		—		—		—
Total	1,512			2,233		—		1,944		2,471		—		1,637		2,122		—		1,833		2,343		—

With an allowance recorded:
One-to-four family	2,821			3,088		36		2,810		3,085		35		2,669		2,884		33		2,691		2,911		31
Multi-family	109			109		1		110		110		1		107		107		1		107		107		1
Commercial real estate	656			656		10		664		663		8		643		643		9		643		643		8
Construction and land	65			99		1		44		71		1		28		28		1		29		29		—
Home equity	344			410		7		297		364		6		247		307		6		226		286		15
Auto and other consumer	247			247		50		244		244		59		709		818		54		597		690		142
Commercial business	298			298		7		445		445		166		263		263		5		263		263		5
Total	4,540			4,907		112		4,614		4,982		276		4,666		5,050		109		4,556		4,929		202

Total impaired loans:
One-to-four family	3,009			3,310		36		3,116		3,424		35		2,741		2,983		33		2,988		3,243		31
Multi-family	109			109		1		110		110		1		403		403		1		107		107		1
Commercial real estate	1,930			2,002		10		1,972		2,037		8		1,870		1,953		9		1,883		1,963		8
Construction and land	65			99		1		44		72		1		28		60		1		29		62		—
Home equity	401			571		7		627		842		6		289		421		6		271		396		15
Auto and other consumer	240			751		50		244		520		59		709		1,089		54		848		1,238		142
Commercial business	298			298		7		445		448		166		263		263		5		263		263		5
Total	$	6,052		$	7,140	$	112	$	6,558	$	7,453	$	276	$	6,303	$	7,172	$	109	$	6,389	$	7,272	$	202

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
	June 30, 2019				June 30, 2019				March 31, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)								(In thousands)
With no allowance recorded:
One-to-four family	$	189	$	3	$	246	$	5	$	108	$	1
Multi-family									99		—
Commercial real estate	1,278		13		1,288		25		1,231		15
Home equity	55		9		190		17		42		3
Auto and other consumer	—		9		—		11		—		10
Commercial business									—		—
Total	1,522		34		1,724		58		1,480		29

With an allowance recorded:
One-to-four family	2,827		69		2,829		112		2,676		64
Multi-family	109		1		110		3		305		—
Commercial real estate	658		8		660		15		643		—
Construction and land	66		3		59		3		28		2
Home equity	307		8		303		13		248		6
Auto and other consumer	311		6		287		9		689		17
Commercial business	302		5		315		10		263		—
Total	4,580		100		4,563		165		4,852		89

Total impaired loans:
One-to-four family	3,016		72		3,075		117		2,784		65
Multi-family	109		1		110		3		404		—
Commercial real estate	1,936		21		1,948		40		1,874		15
Construction and land	66		3		59		3		28		2
Home equity	362		17		493		30		290		9
Auto and other consumer	311		15		287		20		689		27
Commercial business	302		5		315		10		263		—
Total	$	6,102	$	134	$	6,287	$	223	$	6,332	$	118

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the 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
	June 30, 2018				June 30, 2018				March 31, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)								(In thousands)
With no allowance recorded:
One-to-four family	$	407	$	6	$	408	$	10	$	304	$	5
Commercial real estate	2,720		13		2,554		26		1,296		12
Construction and land	2,486		—		2,487		—		—		—
Home equity	356		9		358		9		324		10
Auto and other consumer	—		5		—		9		—		7
Total	5,969		33		5,807		54		1,924		34

With an allowance recorded:
One-to-four family	2,779		62		3,080		102		2,831		68
Multi-family	113		1		114		3		110		1
Commercial real estate	785		7		790		17		663		7
Construction and land	49		3		50		4		53		2
Home equity	268		6		277		11		300		7
Auto and other consumer	116		4		108		5		263		7
Commercial business	862		33		769		36		328		5
Total	4,972		116		5,188		178		4,548		97

Total impaired loans:
One-to-four family	3,186		68		3,488		112		3,135		73
Multi-family	113		1		114		3		110		1
Commercial real estate	3,505		20		3,344		43		1,959		19
Construction and land	2,535		3		2,537		4		53		2
Home equity	624		15		635		20		624		17
Auto and other consumer	116		9		108		14		263		14
Commercial business	862		33		769		36		328		5
Total	$	10,941	$	149	$	10,995	$	232	$	6,472	$	131

Interest income recognized on a cash basis on impaired loans for the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, was ~~$111,000 and $194,000, respectively.~~$92,000.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In thousands)				(In thousands)
One-to-four family	$	685	$	759	$	467	$	698
Multi-family					297		—
Commercial real estate	123		133		106		109
Construction and land	65		44		28		29
Home equity	148		369		133		112
Auto and other consumer	240		245		709		848
Commercial business	30		173		—		—

Total nonaccrual loans	$	1,291	$	1,723	$	1,740	$	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 no loans past due 90 days or more and still accruing interest at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

The following table presents past due loans, net of partial loan charge-offs, by class, as of ~~June 30, 2019:~~March 31, 2020:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)												(In thousands)
Real Estate:
One-to-four family	$	685	$	—	$	100	$	785	$	330,963	$	331,748	$	1,791	$	—	$	—	$	1,791	$	300,897	$	302,688
Multi-family	—		—		—		—		68,440		68,440		—		107		297		404		88,390		88,794
Commercial real estate	—		—		—		—		250,250		250,250		—		643		—		643		259,678		260,321
Construction and land	—		—		31		31		63,710		63,741		689		—		—		689		47,876		48,565
Total real estate loans	685		—		131		816		713,363		714,179		2,480		750		297		3,527		696,841		700,368

Consumer:
Home equity	145		—		25		170		37,024		37,194		13		12		24		49		35,211		35,260
Auto and other consumer	795		158		15		968		111,615		112,583		2,157		324		380		2,861		111,333		114,194
Total consumer loans	940		158		40		1,138		148,639		149,777		2,170		336		404		2,910		146,544		149,454

Commercial business loans	—		—		30		30		15,068		15,098		417		263		—		680		55,173		55,853

Total loans	$	1,625	$	158	$	201	$	1,984	$	877,070	$	879,054	$	5,067	$	1,349	$	701	$	7,117	$	898,558	$	905,675

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents past due loans, net of partial loan charge-offs, by class, as of December 31, ~~2018:~~2019:


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)												(In thousands)
Real Estate:
One-to-four family	$	289	$	176	$	164	$	629	$	335,549	$	336,178	$	928	$	92	$	116	$	1,136	$	304,878	$	306,014
Multi-family	—		—		—		—		82,331		82,331		—		—		—		—		96,098		96,098
Commercial real estate	—		—		—		—		253,235		253,235		—		—		—		—		255,722		255,722
Construction and land	35		14		31		80		54,022		54,102		38		—		—		38		37,149		37,187
Total real estate loans	324		190		195		709		725,137		725,846		966		92		116		1,174		693,847		695,021

Consumer:
Home equity	97		30		9		136		37,493		37,629		299		24		—		323		34,723		35,046
Auto and other consumer	471		92		—		563		86,794		87,357		1,423		370		614		2,407		109,712		112,119
Total consumer loans	568		122		9		699		124,287		124,986		1,722		394		614		2,730		144,435		147,165

Commercial business loans	923		—		—		923		17,975		18,898		—		115		—		115		41,456		41,571

Total loans	$	1,815	$	312	$	204	$	2,331	$	867,399	$	869,730	$	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 ~~particular~~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 ~~sufficient~~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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the internally assigned grade as of ~~June 30, 2019,~~March 31, 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	$	326,047	$	3,761	$	1,136	$	804	$	331,748	$	297,391	$	3,455	$	1,206	$	636	$	302,688
Multi-family	68,028		303		109		—		68,440		88,390		—		107		297		88,794
Commercial real estate	242,070		3,821		3,026		1,333		250,250		256,166		94		2,782		1,279		260,321
Construction and land	62,102		1,527		47		65		63,741		37,987		10,353		186		39		48,565
Total real estate loans	698,247		9,412		4,318		2,202		714,179		679,934		13,902		4,281		2,251		700,368

Consumer:
Home equity	36,119		648		154		273		37,194		34,196		712		127		225		35,260
Auto and other consumer	110,265		1,668		356		294		112,583		108,858		3,806		759		771		114,194
Total consumer loans	146,384		2,316		510		567		149,777		143,054		4,518		886		996		149,454

Commercial business loans	13,015		87		1,635		361		15,098		53,894		60		570		1,329		55,853

Total loans	$	857,646	$	11,815	$	6,463	$	3,130	$	879,054	$	876,882	$	18,480	$	5,737	$	4,576	$	905,675

The following table represents the internally assigned grade as of December 31, ~~2018,~~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	$	330,476	$	3,767	$	957	$	978	$	336,178	$	301,312	$	2,685	$	1,148	$	869	$	306,014
Multi-family	82,221		—		110		—		82,331		95,694		—		107		297		96,098
Commercial real estate	244,919		6,281		663		1,372		253,235		251,531		97		2,800		1,294		255,722
Construction and land	51,480		2,578		—		44		54,102		35,897		1,184		77		29		37,187
Total real estate loans	709,096		12,626		1,730		2,394		725,846		684,434		3,966		4,132		2,489		695,021

Consumer:
Home equity	36,559		465		123		482		37,629		34,260		470		89		227		35,046
Auto and other consumer	85,579		1,310		151		317		87,357		107,327		3,243		594		955		112,119
Total consumer loans	122,138		1,775		274		799		124,986		141,587		3,713		683		1,182		147,165

Commercial business loans	16,520		1,733		472		173		18,898		39,653		376		263		1,279		41,571

Total loans	$	847,754	$	16,134	$	2,476	$	3,366	$	869,730	$	865,674	$	8,055	$	5,078	$	4,950	$	883,757

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the credit risk profile based on payment activity as of ~~June 30, 2019,~~March 31, 2020, by class of loans:


	Nonperforming		Performing		Total		Nonperforming		Performing		Total
	(In thousands)						(In thousands)
Real Estate:
One-to-four family	$	685	$	331,063	$	331,748	$	467	$	302,221	$	302,688
Multi-family	—		68,440		68,440		297		88,497		88,794
Commercial real estate	123		250,127		250,250		106		260,215		260,321
Construction and land	65		63,676		63,741		28		48,537		48,565

Consumer:
Home equity	148		37,046		37,194		133		35,127		35,260
Auto and other consumer	240		112,343		112,583		709		113,485		114,194

Commercial business	30		15,068		15,098		—		55,853		55,853

Total loans	$	1,291	$	877,763	$	879,054	$	1,740	$	903,935	$	905,675

The following table represents the credit risk profile based on payment activity as of December 31, ~~2018,~~2019, by class of loans:


	Nonperforming		Performing		Total		Nonperforming		Performing		Total
	(In thousands)						(In thousands)
Real Estate:
One-to-four family	$	759	$	335,419	$	336,178	$	698	$	305,316	$	306,014
Multi-family	—		82,331		82,331		—		96,098		96,098
Commercial real estate	133		253,102		253,235		109		255,613		255,722
Construction and land	44		54,058		54,102		29		37,158		37,187

Consumer:
Home equity	369		37,260		37,629		112		34,934		35,046
Auto and other consumer	245		87,112		87,357		848		111,271		112,119

Commercial business	173		18,725		18,898		—		41,571		41,571

Total loans	$	1,723	$	868,007	$	869,730	$	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.

Upon identifying a receivable as a TDR loan, First Federal classifies the loan as impaired for purposes of determining the allowance for loan losses. This requires the loan to initially be evaluated individually for impairment, generally based on the expected cash flows under the new terms discounted at the loan’s original effective interest rates. For TDR loans that subsequently default, the method of determining impairment is generally the fair value of the collateral less estimated selling costs.

TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of repayment performance, usually six months or longer, and there is a reasonable assurance that repayment will continue. First Federal allows reclassification of a troubled debt restructuring back into the general loan pool (as a non-troubled debt restructuring) if the borrower is able to refinance the loan at then-current market rates and meet all of the underwriting criteria of First Federal

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~required of other borrowers. The refinance must be based on the borrower’s ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.~~

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


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In thousands)				(In thousands)
Total TDR loans	$	3,744	$	3,745	$	3,523	$	3,544
Allowance for loan losses related to TDR loans	48		43		44		41
Total nonaccrual TDR loans	134		84		81		81

~~The following table presents~~

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no newly restructured and renewals or modifications of existing TDR loans ~~by class~~ that occurred during the three ~~and six~~ months ended ~~June 30, 2019, by type~~March 31, 2020 or March 31, 2019.

There were no TDR loans which incurred a payment default within 12 months of ~~concession granted.~~

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

Post-modification outstanding recorded investment
One- to four-family 1
$ —
$ 51
$ —
$ 51
the restructure date during the three months ended March 31, 2020.

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the ~~six~~three months ended ~~June 30,~~March 31, 2019.



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

~~There were no newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three months ended June 30, 2018, by type of concession granted.~~

~~The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the six months ended June 30, 2018, by type of concession granted.~~

Number
of Contracts

Rate
Modification

Term
Modification
Combination
Modification
Total
Modifications
(Dollars in thousands)
Pre-modification outstanding recorded investment
One- to four-family 2
$ —
$ —
$ 180
$ 180

Post-modification outstanding recorded investment
One- to four-family 2
$ —
$ —
$ 179
$ 179

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~There were no TDR loans which incurred a payment default within 12 months of the restructure date during the three and six months ended June 30, 2018.~~

No additional funds were committed to be advanced in connection with impaired loans at ~~June 30, 2019.~~March 31, 2020.

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


	June 30, 2019						December 31, 2018						March 31, 2020						December 31, 2019
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
	(In thousands)												(In thousands)
One-to-four family	$	2,324	$	134	$	2,458	$	2,358	$	84	$	2,442	$	2,273	$	81	$	2,354	$	2,290	$	81	$	2,371
Multi-family	109		—		109		110		—		110		107		—		107		107		—		107
Commercial real estate	656		—		656		663		—		663		642		—		642		643		—		643
Home equity	253		—		253		258		—		258		157		—		157		160		—		160
Commercial business	268		—		268		272		—		272		263		—		263		263		—		263

Total TDR loans	$	3,610	$	134	$	3,744	$	3,661	$	84	$	3,745	$	3,442	$	81	$	3,523	$	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 30, 2019~~March 31, 2020 and December 31, ~~2018, was $87.8~~2019, were $106.1 million and ~~$107.0~~$93.5 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:


	June 30, 2019			December 31, 2018			March 31, 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	$	164,190	0.94%	$	143,412	0.74%	$	165,747	0.72%	$	168,983	0.86%
Transaction accounts	260,701		0.06%	262,152		0.05%	286,283		0.01%	276,496		0.03%
Money market accounts	251,002		0.43%	273,344		0.43%	253,198		0.48%	248,086		0.46%
Certificates of deposit	257,372		2.11%	261,352		1.86%	358,677		1.67%	308,080		1.85%

	$	933,265	0.88%	$	940,260	0.77%	$	1,063,905	0.79%	$	1,001,645	0.84%

~~Maturities of certificates at the dates indicated are as follows:~~

June 30, 2019 December 31, 2018
(In thousands)
Within one year or less $ 179,950
$ 148,119
After one year through two years 50,195
78,966
After two years through three years 14,079
20,934
After three years through four years 4,441
6,759
After four years through five years 8,707
6,574
After five years —
—

$ 257,372
$ 261,352

Brokered certificates of deposits of $13.7 million are included in the June 30, 2019, certificate of deposits total. As needed, we will increase our portfolio of these brokered deposits as a source of additional funding in future periods.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Deposits~~Maturities of certificates at ~~June 30, 2019~~the dates indicated are as follows:



	March 31, 2020		December 31, 2019
	(In thousands)
Within one year or less	$	289,742	$	241,127
After one year through two years	44,215		42,274
After two years through three years	9,772		11,167
After three years through four years	7,864		6,593
After four years through five years	7,084		6,919
After five years	—		—

	$	358,677	$	308,080

Brokered certificates of deposits of $90.4 million and $51.6 million are included in the March 31, 2020 and December 31, ~~2018,~~2019 certificate of deposits totals above, respectively.

Deposits at March 31, 2020 and December 31, 2019, included ~~$56.2~~$68.7 million and ~~$80.0~~$57.4 million, respectively, in public fund deposits. Investment securities with a carrying value of ~~$43.1~~$32.1 million and ~~$47.6~~$35.5 million were pledged as collateral for these deposits at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~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
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands)								(In thousands)
Savings	$	372	$	28	$	688	$	44	$	340	$	316
Transaction accounts	36		9		72		13		19		36
Insured money market accounts	313		282		633		497		356		320
Certificates of deposit	1,347		806		2,599		1,556		1,423		1,252

	$	2,068	$	1,125	$	3,992	$	2,110	$	2,138	$	1,924

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.

Under current Federal income tax regulations, charitable contribution deductions are limited to 10% of taxable income. Due to this limitation, the Company currently has a valuation allowance of $1.2 million for financial statement reporting purposes related to its contribution to the Foundation. The contribution carryforward and related valuation allowance will expire in 2020. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates whether its deferred tax assets will be realized and adjusts the amount of its valuation allowance, if necessary.

Effective January 1, 2018, the corporate U.S. statutory federal income tax rate was reduced from 35% to 21% under the Tax Cuts and Jobs Act. The Company completed its accounting under ASC 740 in December 2017 for all material deferred tax assets and liabilities with provisional amounts recorded for immaterial items.

The effective tax rates were 18.9% and ~~18.5%~~18.7% for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2019 and 2018 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.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 - Earnings per Share

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

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019.


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands, except share data)								(In thousands, except share data)
Numerator:
Net income	$	2,079	$	1,526	$	4,286	$	3,049	$	873	$	2,207

Denominator:
Basic weighted average common shares outstanding	9,856,423		10,329,680		9,916,423		10,412,704		9,624,727		9,973,125
Dilutive restricted stock grants	100,664		126,666		90,907		120,526		51,650		77,143
Diluted weighted average common shares outstanding	9,957,087		10,456,346		10,007,330		10,533,230		9,676,377		10,050,268

Basic earnings per share	$	0.21	$	0.15	$	0.43	$	0.29	$	0.09	$	0.22

Diluted earnings per share	$	0.21	$	0.15	$	0.43	$	0.29	$	0.09	$	0.22

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ there were ~~820,556~~780,785 and ~~873,445~~833,782 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 no16,256 and zero restricted stock award anti-dilutive weighted-average shares ~~at June 30,~~for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ 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~~No principal ~~and~~or interest ~~payment of $835,000~~ was ~~made~~paid by the ESOP during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

Compensation expense related to the ESOP for the three months ended ~~June 30,~~March 31, 2020 and 2019, was $151,000 and ~~2018, was $120,000 and $217,000,~~$207,000, respectively. ~~For the six months ended June 30, 2019 and 2018 compensation expense related to the ESOP was $327,000 and $437,000, respectively.~~

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(Dollars in thousands)				(Dollars in thousands)
Allocated shares	227,473		174,584		253,987		253,987
Committed to be released shares	—		26,442		13,257		—
Unallocated shares	820,556		847,003		780,785		794,042

Total ESOP shares issued	1,048,029		1,048,029		1,048,029		1,048,029

Fair value of unallocated shares	$	13,334	$	12,561	$	8,487	$	14,396

Note 8 - Stock-based Compensation

On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units to eligible participants. The cost of awards under the 2015 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 2015 EIP is 1,834,050. The 2015 EIP provides for the use of authorized but unissued shares or shares that have been reacquired by First Northwest to fund share-based awards. At ~~June 30, 2019,~~March 31, 2020, there were ~~1,316,550~~1,322,050 total shares available for grant under the 2015 EIP, including ~~76,014~~12,014 shares available to be granted as restricted stock.

During the three ~~and six~~ months ended ~~June 30, 2019 and 2018, no~~March 31, 2020, 35,100 shares of restricted stock were awarded and no stock options were granted. There were no shares of restricted stock awarded during the three and three months ended March 31, 2019. Awarded shares of restricted stock vest ratably over five years from the date of grant ~~as long as~~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.

For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ total compensation expense for the 2015 EIP was ~~$270,000~~$304,000 and ~~$259,000, respectively. For the six months ended June 30, 2019 and 2018, total compensation expense for the 2015 EIP was $553,000 and $532,000,~~$283,000, respectively.

Included in the above compensation expense for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, was directors' compensation of $85,000 and $85,000, respectively. For the six months ended June 30, 2019 and 2018,~~ directors' compensation was ~~$170,000~~$85,000 and ~~$170,000,~~$85,000, respectively.

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

For the Three Months Ended
June 30, 2019
Shares Weighted-Average Grant Date Fair Value
Non-vested at April 1, 2019 290,600
$ 13.72
Granted —
—
Vested —
—
Forfeited (4,000 ) 16.07

Non-vested at June 30, 2019 286,600
13.69



	For the Three Months Ended
	March 31, 2020
	Shares		Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2020	264,300		$	14.60
Granted	35,100		16.22
Forfeited	(45,500	)	13.31

Non-vested at March 31, 2020	253,900		15.05

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

For the Six Months Ended
June 30, 2019
Shares Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2019 290,600
$ 13.72
Granted —
—
Vested —
—
Canceled (1) —
—
Forfeited (4,000 ) 16.07

Non-vested at June 30, 2019 286,600
13.69

(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.

As of ~~June 30, 2019,~~March 31, 2020, there was ~~$2.9~~$3.1 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 ~~2.84~~3.46 years.

Subsequent to quarter-end, on May 5, 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan (the "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. 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. The 2020 EIP provides for the use of authorized but unissued shares or shares that have been reacquired by First Northwest to fund share-based awards. The 2020 EIP is separate from the 2015 EIP. The adoption of the 2020 EIP neither affects nor is affected by the continued existence of the 2015 EIP, except that after May 5, 2020, no further awards will be granted under the 2015 EIP.

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.

~~FIRST NORTHWEST BANCORP AND SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 ~~a particular~~an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	June 30, 2019								March 31, 2020
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)								(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	932	$	—	$	932	$	—	$	52,254	$	—	$	52,254
ABS agency	—		25,436		—		25,436		—		42,125		—		42,125
ABS corporate	—		37,210		—		37,210		—		34,073		—		34,073
Corporate debt	—		9,482		—		9,482		—		9,439		—		9,439
SBA	—		31,975		—		31,975		—		25,363		—		25,363
MBS agency	—		135,239		—		135,239		—		145,139		—		145,139
MBS corporate	—		9,777		—		9,777		—		9,127		—		9,127
	$	—	$	250,051	$	—	$	250,051	$	—	$	317,520	$	—	$	317,520


	December 31, 2018								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	$	—	$	869	$	—	$	869	$	—	$	39,282	$	—	$	39,282
ABS agency	—		25,752		—		25,752		—		28,858		—		28,858
ABS corporate	—		36,723		—		36,723		—		40,855		—		40,855
Corporate debt	—		9,888		—		9,888		—		9,643		—		9,643
SBA	—		35,670		—		35,670		—		28,459		—		28,459
MBS agency	—		143,455		—		143,455		—		160,167		—		160,167
MBS corporate	—		10,610		—		10,610		—		8,316		—		8,316
	$	—	$	262,967	$	—	$	262,967	$	—	$	315,580	$	—	$	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.

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, 2019								March 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
Impaired loans	$	—	$	—	$	6,052	$	6,052	$	—	$	—	$	6,303	$	6,303


	December 31, 2018								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
Impaired loans	$	—	$	—	$	6,558	$	6,558	$	—	$	—	$	6,389	$	6,389

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no 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, 2019													March 31, 2020
	Carrying Amount		Estimated Fair Value			Fair Value Measurements Using:								Carrying Amount			Estimated Fair Value		Fair Value Measurements Using:
					Level 1			Level 2			Level 3					Level 1			Level 2		Level 3
	(In thousands)														(In thousands)
Financial assets
Cash and cash equivalents	$	28,822	$	28,822		$	28,822		$	—		$	—	$	107,164		$	107,164	$	107,164	$	—	$	—
Investment securities available for sale	250,051		250,051			—			250,051			—		317,520			317,520		—		317,520		—
Investment securities held to maturity	37,990		38,675			—			38,675			—
Loans held for sale	2,516		2,516			—			2,516			—		4,531			4,531		—		4,531		—
Loans receivable, net	873,958		856,059			—			—			856,059		899,154			894,671		—		—		894,671
FHLB stock	6,773		6,773			—			6,773			—		7,581			7,581		—		7,581		—
Accrued interest receivable	4,094		4,094			—			4,094			—		4,124			4,124		—		4,124		—
Mortgage servicing rights, net	955		1,934			—			—			1,934		843			1,160		—		—		1,160

Financial liabilities
Demand deposits	$	675,893	$	675,893		$	675,893		$	—		$	—	$	705,228		$	705,228	$	705,228	$	—	$	—
Time deposits	257,372		257,629			—			257,629			—		358,677			361,726		—		361,726		—
Borrowings	131,337		132,099			—			132,099			—		150,021			151,073		—		151,073		—
Accrued interest payable	389		389			—			389			—		194			194		—		194		—

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2018													December 31, 2019
	Carrying Amount		Estimated Fair Value			Fair Value Measurements Using:								Carrying Amount			Estimated Fair Value		Fair Value Measurements Using:
					Level 1			Level 2			Level 3					Level 1			Level 2		Level 3
	(In thousands)														(In thousands)
Financial assets
Cash and cash equivalents	$	26,323	$	26,323		$	26,323		$	—		$	—	$	48,739		$	48,739	$	48,739	$	—	$	—
Investment securities available for sale	262,967		262,967			—			262,967			—		315,580			315,580		—		315,580		—
Investment securities held to maturity	43,503		42,990			—			42,990			—
Loans held for sale														503			503		—		503		—
Loans receivable, net	863,852		840,861			—			—			840,861		878,437			858,101		—		—		858,101
FHLB stock	6,927		6,927			—			6,927			—		6,034			6,034		—		6,034		—
Accrued interest receivable	4,048		4,048			—			4,048			—		3,931			3,931		—		3,931		—
Mortgage servicing rights, net	1,044		1,479			—			—			1,479		871			1,486		—		—		1,486

Financial liabilities
Demand deposits	$	678,908	$	678,908		$	678,908		$	—		$	—	$	693,565		$	693,565	$	693,565	$	—	$	—
Time deposits	261,352		259,549			—			259,549			—		308,080			308,819		—		308,819		—
Borrowings	136,552		137,153			—			137,153			—		112,930			113,076		—		113,076		—
Accrued interest payable	521		521			—			521			—		373			373		—		373		—

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

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

Loans receivable, net - At ~~June 30, 2019,~~March 31, 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.

Note 10 - ~~Noninterest Income~~Subsequent Event

~~On January 1, 2018,~~As one of the first regions to experience COVID-19 infections, Washington State moved quickly to mandate business closures and implement quarantine measures. Consequently, the Company ~~adopted~~incorporated several COVID-19 pandemic measures to assist the ~~amendments of ASU 2014-09 Revenue from Contracts~~communities we serve. We are actively assisting customers and supporting the businesses in our communities. Our loan officers are contacting borrowers who are affected by declining economic activity, offering their assistance with ~~Customers (Topic 606)~~payment deferrals and ~~all subsequent ASUs that modified Topic 606. The Company has included~~interest only payment options. Additionally, we continue to help our small business borrowers navigate the ~~following table regarding the Company’s noninterest income for the periods presented.~~Small Business Administration’s Paycheck Protection Program. We processed approximately $29.1

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
(In thousands)
Noninterest income:
Loan fees (1) $ 482
$ 132
$ 721
$ 257
Deposit fees 463
369
910
761
Debit interchange income 27
37
49
69
Credit card interchange income 457
447
859
853
Investment securities gain (loss), net (1) 57
13
57
135
Gain on loan sales, net (1) 88
150
175
317
Increase in cash surrender value of BOLI (1) 145
149
288
298
Other income:

Investment services revenue 60
83
108
157
Gain or loss on subsidiary (1) 18
18
32
32
Remaining other income 6
7
15
8
Total other income 84
108
155
197

Total noninterest income $ 1,803
$ 1,405
$ 3,214
$ 2,887

(1) Not within scope of Topic 606

~~The Company recognizes revenue~~million of PPP loans for more than 377 customers in SBA PPP loan fundings as ~~it is earned~~of May 7, 2020, with an average loan amount approved of approximately $77,000. Payments by borrowers on these loans begin six months after the note date, and ~~noted no impact~~interest, at 1%, will continue to ~~its revenue recognition policies as a result of~~accrue during the ~~adoption of ASU 2014-09. The following is a discussion of key revenues within the scope of the new revenue guidance.~~six-month deferment. Loans can be forgiven in whole or part (up to full principal and any accrued interest).

~~Deposit fees~~ - The ~~Company earns fees from its deposit customers~~success of our banking operation relies entirely on the safety and well-being of our employees and customers. On March 20, 2020, we began restricting lobby activities at all branches to appointment only and encouraged the use of drive-up services, ITM/ATM machines, digital banking applications and our contact center. On March 23, 2020, the State of Washington announced the Stay Home, Stay Healthy order for ~~account maintenance, transaction-based activity~~all residents, resulting in the closing of businesses or a substantial reduction in business activity. Nearly 70% of our staff are able to work remotely, and ~~overdraft services. Account maintenance fees consist primarily~~we will continue operating in this manner until the mandated Stay Home, Stay Healthy order is lifted by the State of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.Washington.

~~Debit interchange income~~ - Debit and Automated Teller Machine ("ATM") interchange income represent fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit cardholder transactions through card networks. In addition, the Company earns interchange fees for use of its ATM by customers of other banking institutions. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder's debit card. Certain expenses directly associated with the credit and debit card are netted against interchange income.

~~Credit card interchange income~~- Credit card interchange income represents fees earned when a credit card issued by the Bank through a third-party vendor is used. Similar to the debit card interchange, the Bank earns an interchange fee for each transaction made with a Bank-branded credit card. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder's credit card. Certain expenses directly related to the credit card interchange contract are netted against interchange income.

~~Investment services revenue~~ ~~- Commissions received on the sale of investment related products is determined by a percentage of underlying instruments sold and is recognized when the sale is finalized.~~

~~Sale of other real estate owned (OREO)~~ - Gains/losses on the sale of OREO are included in non-interest expense and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at time of each real estate closing.

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; ~~and~~

estimates of our risks and future costs and ~~benefits.~~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;

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, ~~2018.~~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~~forward-looking statements that we make in this report and in other ~~public~~ 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 ~~foresee.~~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. ~~In light of~~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 ~~Bancorp (the "Company")~~ is a bank holding company which primarily engages in the business activity of its subsidiary, First ~~Federal Savings and Loan Association of Port Angeles ("First Federal" or the "Bank").~~Federal. First Federal is a community-oriented financial institution serving ~~Western Washington. Our thirteen locations include~~Clallam, Jefferson, Kitsap, Whatcom, and King counties in Washington, through its Seattle lending center and ten full-service banking offices, two locations primarily serving our customers through the use of Interactive Teller Machines ("ITM"), and a Home Lending Center ("HLC"), which is focused on the origination of loans secured by one- to four-family residential properties.branches. Our business and operating strategy is focused on diversifying our loan portfolio through geographic expansion and loan product mix, expanding our deposit product offerings by ~~upgrading~~adding additional value-added products, enhancing existing services and ~~use of technology,~~digital service delivery channels, and enhancing our infrastructure to support ~~our changing lending and deposit capabilities in order to meet~~ 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 the communities we serve. While we have a ~~large~~ concentration of first lien one- to four-family mortgage loans, over the past five years, we ~~have~~ increased our origination and portfolio balances of commercial real estate, multi-family real estate, and ~~construction~~have increased our auto and consumer loans, ~~as well as engaging in~~through indirect auto lending and purchased auto loan ~~purchase~~ programs, in order to diversify our asset portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and ~~may~~regularly sell conforming loans into the secondary market to increase noninterest income and improve our interest rate ~~risk, or we may~~risk. We also retain one- to four-family first and second lien loans in our portfolio to enhance interest income. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit for individuals, businesses, and nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities. We also

borrow funds, typically from the Federal Home Loan Bank of Des Moines, which provides additional funding and interest rate risk tools to the Bank.

First Federal is significantly 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 ~~a number of~~several factors, including interest rates paid on competing time deposits, alternative investment options available ~~alternative investments,~~to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, marketing and promotion, and the overall level of personal income and savings. 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, 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, 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 ~~probable~~ losses inherent in our loan ~~portfolio.~~portfolio through our allowance for loan losses. As a loan's risk rating improves, 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 ~~interest~~ income.

The noninterest expenses we incur in operating our business consist of salaries and employee ~~benefits and expenses,~~benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, advertising and promotion expenses, marketing and promotion 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:


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


◦	Providing 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.


◦	Increasing 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. May 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").


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

For our shareholders and regulators:


◦	Maintaining our capital ratios at strong levels and materially increasing our provision for loan losses to $1.3 million for the first quarter of 2020, compared to $669,000 for all of 2019.


◦	Increasing on balance sheet liquidity, specifically Cash and Cash Equivalents increased by $58.4 million, a 120% increase over December 31, 2019.

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. The sectors that have been most heavily impacted include hospitality; restaurant and food services; lessors of commercial real estate to hospitality, restaurant, and retail establishments; and professional services. At March 31, 2020, the Company’s exposure as a percent of the total loan portfolio to these industries was 5.6%, 0.2%, 5.3%, and 1.6%, respectively.

Subsequent to March 31, 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.

We processed approximately $29.1 million of PPP loans for more than 377 customers in SBA PPP loan fundings as of May 7, 2020. The average loan amount approved was approximately $77,000. 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).

Loan processing fees paid to the Bank from the SBA 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. If a loan is paid off or forgiven by the SBA prior to its maturity date, the remaining unamortized deferred fees will be recognized in interest income at that time. At such time that any of these loans are forgiven or repaid before the scheduled maturity, we expect an increase in interest income and the net interest margin during that period.

Critical Accounting Policies

There are no material changes to the critical accounting policies as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Comparison of Financial Condition at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019

Assets. Total assets ~~were $1.26~~increased to $1.40 billion at ~~both June 30, 2019 and~~March 31, 2020 from $1.31 billion at December 31, ~~2018.~~2019.

Total loans, excluding loans held for sale, increased ~~$9.3~~$21.9 million to ~~$879.1~~$905.7 million at ~~June 30, 2019,~~March 31, 2020, from ~~$869.7~~$883.8 million at December 31, ~~2018, a result of~~2019. During the three months ended March 31, 2020, one- to four-family residential loans declined $3.3 million, due to repayment and secondary market sale activity exceeding new originations held in portfolio. Multi-family loans decreased $7.3 million, due to prepayment activity outpacing new loan ~~originations~~originations. Commercial real estate loans increased by $4.6 million as we continue to build our lending presence in King and ~~loan purchases partially offset by loan sales and repayment activity. Growth~~Whatcom Counties as well as in ~~auto~~our legacy markets. Auto and other consumer and construction and land loans ~~of $25.2~~increased $2.1 million and ~~$9.6~~$11.4 million, respectfully, was partially offset by decreases in multi-family, one- to four-family residential, commercial business, commercial real estate, and home equity loans of $13.9 million, $4.4 million, $3.8 million, $3.0 million, and $435,000, respectively. Loan growth was muted during the most recent quarter with some unexpected early repayments withinrespectively, as we maintain our ~~multi-family~~specialty auto loan portfolio ~~coupled with strong competition~~and fund construction loan commitments. Competition for quality commercial credits remains; however, impacts of the COVID-19 pandemic is impacting both the supply and ~~our continuing efforts to originate~~demand for credit. An increase in refinance activity of one- to-four family residential loans ~~for sale.~~also occurred during the period.

Construction and land loans increased ~~17.7%~~30.6% to ~~$63.7~~$48.6 million at ~~June 30, 2019,~~March 31, 2020, from ~~$54.1~~$37.2 million at December 31, ~~2018.~~2019. The majority of our construction loans are geographically ~~disbursed~~dispersed throughout the Puget Sound region and, as a result, these loans are susceptible to risks that may ~~be different~~vary depending on the nature and location of the project. We manage ~~all of~~ our construction lending by utilizing a licensed ~~third party~~third-party vendor to assist us in monitoring our construction ~~projects.~~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 May 5, 2020, certain projects were able to restart under specific criteria. We do not believe any of the projects currently in our portfolio will not be completed due to the order and subsequent impacts of COVID-19.

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. ~~We have seen a slowing~~For the majority of 2019, we decreased our construction lending, which ~~has~~ resulted in a decline in construction balances at the end of the year compared to 2019. In the fourth quarter of 2019 and ~~land loan commitments. While~~the first quarter of 2020, we ~~continue to focus on~~increased production in construction ~~loan origination activity, we may see a decline in outstanding construction loan balances over time if we are unable to source quality construction loans to replace completed projects.~~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 ~~our~~ earnings ~~potential over time~~ while also prudently managing credit risk.

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


June 30, 2019		North Olympic Peninsula ⁽¹⁾		Puget Sound Region ⁽²⁾		Other Washington		Total
March 31, 2020										March 31, 2020	North Olympic Peninsula ⁽¹⁾		Puget Sound Region ⁽²⁾		Other Washington		Total
		(In thousands)									(In thousands)
Construction Commitment	Construction Commitment									Construction Commitment
	One- to four-family residential	$	12,814	$	18,938	$	406	$	32,158	One- to four-family residential	$	14,371	$	23,550	$	496	$	38,417
	Multi-family residential	—		43,958		—		43,958		Multi-family residential	—		44,947		—		44,947
	Commercial real estate	7,717		10,915		—		18,632		Commercial real estate	7,514		17,484		2,795		27,793
	Total commitment	$	20,531	$	73,811	$	406	$	94,748	Total commitment	$	21,885	$	85,981	$	3,291	$	111,157

Construction Funds Disbursed	Construction Funds Disbursed									Construction Funds Disbursed
	One- to four-family residential	$	6,053	$	7,197	$	55	$	13,305	One- to four-family residential	$	5,777	$	11,088	$	189	$	17,054
	Multi-family residential	—		31,877		—		31,877		Multi-family residential	—		17,382		—		17,382
	Commercial real estate	2,143		8,675		—		10,818		Commercial real estate	5,422		1,543		52		7,017
	Total disbursed	$	8,196	$	47,749	$	55	$	56,000	Total disbursed	$	11,199	$	30,013	$	241	$	41,453

Undisbursed Commitment	Undisbursed Commitment									Undisbursed Commitment
	One- to four-family residential	$	6,761	$	11,741	$	351	$	18,853	One- to four-family residential	$	8,594	$	12,462	$	307	$	21,363
	Multi-family residential	—		12,081		—		12,081		Multi-family residential	—		27,565		—		27,565
	Commercial real estate	5,574		2,240		—		7,814		Commercial real estate	2,092		15,941		2,743		20,776
	Total undisbursed	$	12,335	$	26,062	$	351	$	38,748	Total undisbursed	$	10,686	$	55,968	$	3,050	$	69,704

Land Funds Disbursed	Land Funds Disbursed									Land Funds Disbursed
	One- to four-family residential	$	5,331	$	2,130	$	—	$	7,461	One- to four-family residential	$	4,867	$	2,074	$	171	$	7,112
	Commercial real estate	—		280		—		280		Commercial real estate	—		—		—		—
	Total disbursed for land	$	5,331	$	2,410	$	—	$	7,741	Total disbursed for land	$	4,867	$	2,074	$	171	$	7,112

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


December 31, 2018		North Olympic Peninsula		Puget Sound Region		Other Washington		Total
December 31, 2019										December 31, 2019	North Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)									(In thousands)
Construction Commitment	Construction Commitment									Construction Commitment
	One- to four-family residential	$	16,814	$	18,550	$	—	$	35,364	One- to four-family residential	$	14,915	$	23,969	$	496	$	39,380
	Multi-family residential	—		45,313		—		45,313		Multi-family residential	—		27,241		—		27,241
	Commercial real estate	1,868		20,147		—		22,015		Commercial real estate	6,381		563		3,120		10,064
	Total Commitment	$	18,682	$	84,010	$	—	$	102,692	Total Commitment	$	21,296	$	51,773	$	3,616	$	76,685

Construction Funds Disbursed	Construction Funds Disbursed									Construction Funds Disbursed
	One- to four-family residential	$	8,321	$	8,998	$	—	$	17,319	One- to four-family residential	$	5,242	$	10,734	$	151	$	16,127
	Multi-family residential	—		17,348		—		17,348		Multi-family residential	—		10,465		—		10,465
	Commercial real estate	1,584		9,424		—		11,008		Commercial real estate	2,704		563		58		3,325
	Total disbursed	$	9,905	$	35,770	$	—	$	45,675	Total disbursed	$	7,946	$	21,762	$	209	$	29,917

Undisbursed Commitment	Undisbursed Commitment									Undisbursed Commitment
	One- to four-family residential	$	8,493	$	9,552	$	—	$	18,045	One- to four-family residential	$	9,673	$	13,235	$	345	$	23,253
	Multi-family residential	—		27,965		—		27,965		Multi-family residential	—		16,776		—		16,776
	Commercial real estate	284		10,723		—		11,007		Commercial real estate	3,677		—		3,062		6,739
	Total undisbursed	$	8,777	$	48,240	$	—	$	57,017	Total undisbursed	$	13,350	$	30,011	$	3,407	$	46,768

Land Funds Disbursed	Land Funds Disbursed									Land Funds Disbursed
	One- to four-family residential	$	6,124	$	2,023	$	—	$	8,147	One- to four-family residential	$	4,904	$	1,343	$	—	$	6,247
	Commercial real estate	—		280		—		280		Commercial real estate	1,023		—		—		1,023
	Total disbursed for land	$	6,124	$	2,303	$	—	$	8,427	Total disbursed for land	$	5,927	$	1,343	$	—	$	7,270

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company originated ~~$70.6~~$98.8 million of loans, of which ~~$32.5~~$69.0 million, or ~~46.0%~~69.9%, were originated in the Puget Sound region, ~~of Washington, $36.0~~$29.5 million, or ~~50.9%~~29.9%, in the North Olympic Peninsula, and ~~$2.2~~$0.2 million, or ~~3.1%~~0.2%, in other areas ~~in Washington.~~throughout Washington State. The Company purchased an additional ~~$34.6~~$11.6 million in ~~loans, mainly~~ specialty auto loans, ~~of $28.4 million,~~ during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. We will continue to evaluate opportunities to grow loans through wholesale channels in order to supplement our organic originations and improve net interest income, if the credit risk profile of such loans appears appropriate.

Our allowance for loan losses increased ~~$198,000,~~$1.2 million, or ~~2.1%~~12.5%, to ~~$9.7~~$10.8 million at ~~June 30, 2019,~~March 31, 2020, from ~~$9.5~~$9.6 million at December 31, ~~2018, mainly~~2019. The increase was due to a $1.3 million loan loss provision made in the first quarter due to qualitative factor adjustments made in response to the economic impact of the COVID-19 pandemic, as ~~a result of loan growth.~~well as to account for growth in the portfolio. The allowance for loan losses as a percentage of total loans ~~remained~~ at ~~1.1% at both June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was 1.2% and 1.1%, respectively.

Nonperforming loans decreased ~~$432,000,~~$56,000, or ~~25.1%~~3.1%, to ~~$1.3~~$1.7 million at ~~June 30, 2019,~~March 31, 2020, from ~~$1.7~~$1.8 million at December 31, ~~2018,~~2019, mainly attributable to a ~~decreases~~decrease in nonperforming ~~home equity~~one- to four-family loans of ~~$221,000~~$231,000 and ~~commercial business~~other consumer loans of ~~$143,000.~~$139,000, partially offset by an increase multi-family loans of $297,000. Nonperforming loans to total loans ~~decreased to 0.1%~~remained the same at ~~June 30, 2019 from~~ 0.2% at both March 31, 2020 and December 31, ~~2018.~~2019. The allowance for loan losses as a percentage of nonperforming loans increased to ~~753.8%~~622.4% at ~~June 30, 2019,~~March 31, 2020, from ~~553.3%~~536.1% at December 31, ~~2018,~~2019, and classified loans decreased ~~$236,000~~$374,000 to ~~$3.1~~$4.6 million at ~~June 30, 2019,~~March 31, 2020, from ~~$3.4~~$5.0 million at December 31, ~~2018.~~2019.

At ~~June 30, 2019,~~March 31, 2020, there were ~~$3.7~~$3.5 million in restructured loans, of which ~~$3.6~~$3.4 million were performing in accordance with their modified payment terms and returned to accrual status.

Asset quality remains ~~strong~~consistent with ~~net~~December 31, 2019. Net loan charge-offs are concentrated mainly in our auto loan portfolio. We ~~have~~recently adjusted our indirect auto loan product offerings ~~in an effort~~and underwriting criteria to improve credit quality and reduce future charge-off activity. We continue to monitor ~~and make changes to~~ the indirect auto loan program in order to prudently balance risk and return within the ~~auto loan~~ portfolio. We believe ~~that~~ our allowance for loan losses ~~was~~is adequate to absorb the known and inherent risks of loss in the loan portfolio as of ~~June 30, 2019.~~March 31, 2020. While the ultimate impact of the COVID-19

pandemic and response from the Federal and State governments remains to be seen, we increased the qualitative factor related to the economy this quarter to account for losses inherent in the loan portfolio.

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


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In thousands)						(In thousands)
Real Estate:
One-to-four family	$	331,748		$	336,178		$	302,688		$	306,014
Multi-family	68,440			82,331			88,794			96,098
Commercial real estate	250,250			253,235			260,321			255,722
Construction and land	63,741			54,102			48,565			37,187
Total real estate loans	714,179			725,846			700,368			695,021

Consumer:
Home equity	37,194			37,629			35,260			35,046
Auto and other consumer	112,583			87,357			114,194			112,119
Total consumer loans	149,777			124,986			149,454			147,165

Commercial business loans	15,098			18,898			55,853			41,571

Total loans	879,054			869,730			905,675			883,757
Less:
Net deferred loan fees	103			292			433			206
Premium on purchased loans, net	(4,738		)	(3,947		)	(4,742		)	(4,514		)
Allowance for loan losses	9,731			9,533			10,830			9,628
Loans receivable, net	$	873,958		$	863,852		$	899,154		$	878,437

The following table represents nonperforming assets at the dates indicated.


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In thousands)						(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	685		$	759		$	467		$	698
Multi-family							297			—
Commercial real estate	123			133			106			109
Construction and land	65			44			28			29

Total real estate loans	873			936			898			836

Consumer loans:
Home equity	148			369			133			112
Other	240			245			709			848

Total consumer loans	388			614			842			960

Commercial business	30			173			—			—

Total nonperforming loans	1,291			1,723			1,740			1,796

Real estate owned:
Land	72			72			62			62

Total real estate owned	72			72			62			62

Repossessed assets	19			52			422			92

Total nonperforming assets	$	1,382		$	1,847		$	2,224		$	1,950

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

Total investment securities ~~decreased $18.4~~increased $1.9 million, or ~~6.0%~~0.6%, to ~~$288.0~~$317.5 million at ~~June 30, 2019,~~March 31, 2020, from ~~$306.5~~$315.6 million at December 31, ~~2018,~~2019, due to a net increase of purchases and sales ~~calls,~~of certain securities, and normal repayment ~~activity.~~and prepayment activity, which were partially offset by a decrease in the market value of the portfolio. As of March 31, 2020, corporate collateralized loan obligations and agency student loan market values decreased by $10.5 million. We believe the impact to the valuations on these securities is temporary and was driven by market liquidity disruptions related to the COVID-19 pandemic. Mortgage-backed securities represent the largest portion of our investment securities portfolio and totaled ~~$175.8~~$154.3 million at ~~June 30, 2019,~~March 31, 2020, or ~~61.0%~~48.6% of the investment securities portfolio, a decrease during the year of ~~$9.5~~$14.2 million, or ~~5.2%~~8.4%, from ~~$185.3~~$168.5 million at December 31, ~~2018.~~2019. Other investment securities, including municipal bonds and other asset-backed securities, were ~~$112.3~~$163.3 million at ~~June 30, 2019,~~March 31, 2020, or ~~39.0%~~51.4% of the investment securities portfolio, ~~a decrease~~an increase of ~~$8.9~~$16.2 million from ~~$121.1~~$147.1 million at December 31, ~~2018.~~2019. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of ~~4.6~~5.3 years as of ~~June 30, 2019,~~March 31, 2020, and 5.0 years as of December 31, ~~2018,~~2019, and had an estimated average repricing term of ~~3.3~~3.6 years as of ~~June 30, 2019,~~March 31, 2020, and 3.7 years as of December 31, ~~2018,~~2019, based on the interest rate environment at those times.

The investment portfolio was comprised of ~~92.4%~~77.9% in amortizing securities at ~~June 30, 2019~~March 31, 2020 and ~~91.6%~~81.8% at December 31, ~~2018.~~2019. As a result, the projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is ~~generally~~ affected by ~~changing~~prevailing mortgage interest rates. Management ~~continues to~~maintains a focus on improving the mix of earning assets by originating loans ~~and decreasing securities~~ as a percentage of earning assets; however, we ~~may~~continue to purchase investment securities as a source of additional interest ~~income and also in lieu of carrying higher cash balances at nominal interest rates.~~income. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Liabilities. Total liabilities increased ~~$5.2~~$99.3 million to ~~$1.08~~$1.23 billion at ~~June 30, 2019,~~March 31, 2020, from ~~$1.09~~$1.13 billion at December 31, ~~2018,~~2019, primarily ~~the result~~due to an increase in borrowings of ~~growth~~$37.1 million and an increase in ~~the~~ deposit account balances and accrued expenses and other liabilities. FHLB borrowings decreased by $5.3 million, to $131.3 million at June 30, 2019, as strong deposit growth alleviated the need to borrow. We may continue to utilize both FHLB short-term advances and FHLB overnight borrowings to manage liquidity.of $62.3 million.

Deposit balances ~~decreased $7.0 million, or 0.7%~~increased 6.2%, to ~~$933.3 million~~$1.1 billion at ~~June 30, 2019,~~March 31, 2020, from ~~$940.3 million~~$1.0 billion at December 31, ~~2018, which~~2019. There was ~~primarily due to~~ a ~~decrease~~$5.1 million increase in money market accounts ~~of $22.3 million, partially~~ offset by ~~an increase~~a $3.2 million decrease in savings accounts ~~of $20.8 million. Our promotional savings product carries a twelve month rate guarantee that provides greater flexibility in~~during the ~~event the rate environment remains stable or decreases within the next 12~~quarter. In addition to ~~24 months. We anticipate that robust competition for~~collecting customer deposits, ~~with other financial institutions and financial intermediaries will continue in our markets affecting our cost of funds. During the most recent quarter,~~ we ~~began actively utilizing~~utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds more effectively, reduce our reliance on public funds deposits, and become more selective when competing on rate. At ~~June 30, 2019,~~March 31, 2020, we had ~~$13.7~~$90.4 million in brokered CDs included in our balance of certificates of deposit.

Equity. Total shareholders' equity ~~increased $4.1~~decreased $9.7 million during the year to ~~$176.4~~$167.2 million at ~~June 30, 2019, mainly~~March 31, 2020. The decrease was due to the ~~result of net income of $4.3 million and an increase~~decline in the value of our available-for-sale securities portfolio, ~~resulting~~which resulted in a ~~$3.4~~$6.7 million decrease in our accumulated other comprehensive loss, net of ~~tax. These increases were partially offset by~~tax, as well as a $3.8 million ~~decrease due to the repurchase~~in repurchases of shares of common stock during the quarter. The decrease was partially offset by net income of $873,000 in net income.

Comparison of Results of Operations for the Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

General. Net income ~~increased $553,000,~~decreased $1.3 million, or ~~36.2%~~60.4%, to ~~$2.1~~$873,000 for the three months ended March 31, 2020, compared to net income of $2.2 million for the three months ended ~~June 30, 2019,~~March 31, 2019. The decrease is mainly due to a combination of a decrease in net interest income, higher operating expenses, and a larger loan loss provision in the current period compared to ~~net income of $1.5 million for~~ the ~~three months ended June 30, 2018. The increase in net income was primarily due to an increase in noninterest income from early prepayment fees on loans.~~same period one year ago.

Net Interest Income. Net interest income ~~increased $137,000~~decreased $193,000 to ~~$9.3~~$9.4 million for the three months ended June 30, 2019, from $9.2 million for the three months ended June 30, 2018, mainly as the result of an increase in interest income on loans receivable, partially offset by an increase in deposit costs.March 31, 2020. The yield on average interest-earning assets ~~increased 18~~decreased twenty-two basis points to ~~4.14%~~3.97% for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~3.96%~~4.19% for the same period in the prior ~~year,~~year. This was due ~~primarily~~ to ~~an increase~~a decrease in ~~the average balance of loans receivable coupled with~~market interest rates and a decrease in the ~~average balance~~ratio of ~~investment securities. We continued~~total loans to ~~increase our concentration of loans receivable as a percentage of interest-earning assets.~~assets in the current period compared to one year ago.

The average cost of interest-bearing liabilities ~~increased 37~~decreased 14 basis points to ~~1.33%~~1.11% for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~0.96%~~1.25% for the same period last year, due primarily to ~~increases~~a decrease in market deposit and borrowing rates. This was partially due to the prepayment of higher costing FHLB borrowings in the fourth quarter of 2019 and first quarter of 2020. As a result, our average ~~balance and~~ cost of ~~deposits.~~

FHLB borrowings decreased to 2.18% in the first quarter of 2020 compared to 2.95% for the same period one year prior.

Due to the average ~~cost of interest-bearing liabilities increasing~~yield on interest-earning assets decreasing at a faster pace than our ~~interest-earning assets,~~interest-bearing liabilities, the net interest margin decreased ~~twelve~~eleven basis points to ~~3.10%~~3.11% for the three months ended ~~June 30, 2019,~~March 31, 2020, from 3.22% for the same period in ~~2018.~~

~~The $137,000 increase~~2019. For additional information, see Rate/Volume Analysis contained in ~~net interest income during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was due to a combination~~Item 2 of an increase of $724,000 as a result of an increase in volume, and a decrease of $587,000 due to changes in rates. The increase in loans receivable was the main contributor to the increase in net interest income with $810,000 due to an increase in average volumes and $331,000 due to increases in rates; however, this increase was mostly offset by a $1.0 million increase in the cost of interest-bearing liabilities attributable to increased rates. The cost of savings and certificates of deposits were the main drivers of the increase in interest expense, contributing and increase of $328,000 and $466,000, respectively, due to rates. Management has expanded its use of funding sources during the most recent quarter to include brokered CDs, and continues to focus on expanding its net interest margin. While establishing a stronger pricing discipline over loans and deposits is one of our strategies, we expect margin compression to continue as a result of economic conditions affecting our business, such as a continued flat yield curve and low interest rate environment.Form 10-Q.

Interest Income. Total interest income ~~increased $1.1 million,~~decreased $535,000, or ~~9.9%~~4.3%, to ~~$12.4~~$12.0 million for the three months ended ~~June 30, 2019,~~March 31, 2020, from ~~$11.3~~$12.5 million for the comparable period in ~~2018, primarily due to an increase in the average balance of, and yields earned on, loans receivable.~~2019. Interest and fees on loans receivable ~~increased $1.1~~decreased $256,000, to $9.8 million tofor the three months ended March 31, 2020, from $10.1 million for the three months ended ~~June 30,~~March 31, 2019, ~~from $9.0 million~~due primarily to a decrease in the yield on loans and securities. Average loan yields decreased 12 basis points to 4.52% for the three months ended June 30, 2018, due primarily to an increase in the average balance of net loans receivable of $73.5 million compared to the prior year. Average loan yields increased 15 basis points to 4.57% for the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018, as we continued to increase our balance of higher yielding loans, including auto and consumer lending through our indirect and purchased auto loan programs. We also benefited from increases in short-term interest rates on our adjustable rate loans, such as construction, commercial business, and home equity lines of credit.March 31, 2019.

Interest income on investment securities ~~decreased $4,000~~increased $59,000 to ~~$969,000~~$1.1 million for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$973,000~~$1.0 million for the three months ended ~~June 30, 2018,~~March 31, 2019, due to ~~an $8.9~~a $29.6 million ~~decrease~~increase in ~~the~~ average balance partially offset by a 2351 basis point ~~increase~~decrease in average ~~yield during the quarter, compared to the same period in 2018.~~yield. The change in average yield on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the three months ended ~~June 30, 2019~~March 31, 2020 decreased ~~$45,000,~~$298,000, or ~~3.6%~~23.7%, compared to the three months ended ~~June 30, 2018,~~March 31, 2019, the result of a decrease of ~~$7.5~~$22.0 million in the average balance ~~partially offset by~~and a 237 basis point ~~increase~~decrease in the average ~~yield.~~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 March 31,
	2019				2018				Increase (Decrease) in Interest Income			2020				2019				Increase (Decrease) in Interest Income
	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	$	883,290	4.57	%	$	809,839	4.42	%	$	1,141		$	870,739	4.52	%	$	870,901	4.64	%	$	(256	)
Investment securities	116,496		3.33		125,442		3.10		(4		)	149,954		2.85		120,350		3.36		59
Mortgage-backed securities	178,878		2.67		186,385		2.65		(45		)	161,666		2.37		183,716		2.74		(298		)
FHLB stock	7,066		4.98		7,605		4.10		10			4,707		3.99		6,844		5.14		(41		)
Interest-bearing deposits in banks	13,118		1.77		9,111		1.80		17			21,248		1.28		11,873		2.26		1
Total interest-earning assets	$	1,198,848	4.14		$	1,138,382	3.96		$	1,119		$	1,208,314	3.97		$	1,193,684	4.19		$	(535	)

Interest Expense. Total interest expense ~~increased $982,000,~~decreased $342,000, or ~~46.3%~~11.7%, to ~~$3.1~~$2.6 million for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$2.1~~$2.9 million for the three months ended ~~June 30, 2018,~~March 31, 2019, mainly due to an ~~83.8%~~11.1% increase in deposit costs, ~~and~~which was offset by a ~~3.9% increase~~56.2% decrease in borrowing costs. ~~Deposit costs~~Interest expense on deposits increased for the three months ended ~~June 30, 2019,~~March 31, 2020, due to increased ~~interest rates~~balances and ~~customers transferring~~a reallocation of non-maturity deposits into higher-yielding accounts. The average balance of interest-bearing deposits increased ~~$62.6~~$54.5 million, or ~~8.5%~~6.9%, to ~~$795.8~~$849.2 million for the three months ended ~~June 30, 2019,~~March 31, 2020, from ~~$733.1~~$794.7 million for the three months ended ~~June 30, 2018,~~March 31, 2019, as we continued to target deposit growth ~~in deposits~~ in new and existing market areas. During the three months ended ~~June 30, 2019,~~March 31, 2020, the average balance ~~and related cost~~ of savings accounts increased ~~$58.0~~$12.2 million and ~~80 basis points, respectfully,~~the related weighted-average cost remained flat, compared to the same period in ~~2018, the result of a savings promotion targeting growth in newer markets. During the same~~

~~period, as compared to 2018, the~~2019. The average balance of certificates of deposit balances grew ~~$22.0~~$57.5 million ~~with an increase in~~and the ~~average rate paid of 72~~weighed-average cost increased by 14 basis points, mainly as a result of ~~our customers placing more money into higher-yielding certificates~~the utilization of ~~deposit as rates have increased.~~brokered CDs. During the three months ended ~~June 30, 2019,~~March 31, 2020, the average balance of money market accounts decreased ~~$19.6~~$15.4 million compared to the same period in the prior year, as customers moved money into higher-yielding ~~accounts at other financial institutions or into higher-yielding~~ certificates of deposit and savings accounts at First Federal. The average cost of ~~all deposit products~~deposits increased by 4 basis points to ~~1.04%~~1.01% for the three months ended ~~June 30, 2019,~~March 31, 2020, from ~~0.61%~~0.97% for the three months ended ~~June 30, 2018, as we paid higher rates to attract new and retain existing deposit balances and customer relationships.~~March 31, 2019. Borrowing costs ~~increased~~decreased due ~~primarily~~ to ~~an increase~~a decrease in balances and the average rate paid ~~of 39 basis points~~ during the most recent quarter as compared to the same period in ~~2018.~~2019. We prepaid $25.0 million in FHLB advances during the most recent quarter that had an average rate of 3.81%, which better positions us to align our funding costs more closely with earning asset yields going forward. The prepayment penalty for this transaction was $210,000.

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 March 31,
	2019				2018				Increase (Decrease) in Interest Expense		2020				2019				Increase (Decrease) in Interest Expense
	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	$	163,106	0.91	%	$	105,067	0.11	%	$	344	$	165,911	0.82	%	$	153,689	0.82	%	$	24
Transaction accounts	115,914		0.12		113,666		0.03		27		114,970		0.07		114,801		0.13		(17		)
Money market accounts	257,548		0.49		277,186		0.41		31		252,537		0.56		267,947		0.48		36
Certificates of deposit	259,203		2.08		237,216		1.36		541		315,778		1.80		258,272		1.94		171
Borrowings	138,643		2.99		153,362		2.60		39		79,659		2.18		134,447		2.95		(556		)
Total interest-bearing liabilities	$	934,414	1.33		$	886,497	0.96		$	982	$	928,855	1.11		$	929,156	1.25		$	(342	)

Provision for Loan Losses. ~~The~~There was a provision for loan losses ~~was $255,000~~of $1.3 million during the three months ended ~~June 30, 2019, primarily due~~March 31, 2020, compared to ~~charge-off activity in our auto and consumer~~a $335,000 provision for loan ~~portfolio related to our indirect auto loan portfolio, and $395,000~~losses for the three months ended ~~June 30, 2018.~~March 31, 2019. This was mainly due to an increase to the economic qualitative factor resulting from the uncertainty surrounding COVID-19 and its economic impact.

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 March 31,
	2019			2018			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Provision for loan losses	$	255		$	395		$	1,266		$	335
Net charge-offs	(283		)	(97		)	(64		)	(109		)
Allowance for loan losses	9,731			9,282			10,830			9,759
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.1		%	1.1		%	1.2		%	1.1		%
Total nonaccruing loans	1,291			2,062
Total nonaccrual loans							1,740			1,606
Allowance for loan losses as a percentage of nonaccrual loans at end of period	753.8		%	450.1		%	622.4		%	607.7		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.1		%	0.2		%	0.2		%	0.2		%
Total loans	$	879,054		$	828,229		$	905,675		$	888,926

Noninterest Income. Noninterest income increased ~~$398,000,~~$1.1 million, or ~~28.3%~~85.3%, to ~~$1.8~~$2.3 million for the three months ended ~~June 30, 2019,~~March 31, 2020, from ~~$1.4~~$1.3 million for the three months ended ~~June 30, 2018,~~March 31, 2019, primarily due to the gain on sale of investment securities of $605,000, the net gain on sale of loans, and an increase in ~~loan and deposit service fees, as noted above.~~the cash surrender value of bank owned life insurance.

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 March 31,				Increase (Decrease)
	2019		2018		Amount			Percent		2020		2019		Amount			Percent
	(Dollars in thousands)									(Dollars in thousands)
Loan and deposit service fees	$	1,375	$	915	$	460		50.3	%	$	881	$	905	$	(24	)	(2.7	)%
Mortgage servicing fees, net of amortization	54		70		(16		)	(22.9	)	15		45		(30		)	(66.7	)
Net gain on sale of loans	88		150		(62		)	(41.3	)	383		87		296			340.2
Net gain on sale of investment securities	57		13		44			338.5
Net gain (loss) on sale of investment securities										605		—		605			100.0
Increase in cash surrender value of bank-owned life insurance	145		149		(4		)	(2.7	)	328		143		185			129.4
Other income	84		108		(24		)	(22.2	)	106		71		35			49.3
Total noninterest income	$	1,803	$	1,405	$	398		28.3	%	$	2,318	$	1,251	$	1,067		85.3	%

Noninterest Expense. Noninterest expense ~~decreased slightly~~increased $1.6 million or 20.3% during the three months ended ~~June 30, 2019,~~March 31, 2020, compared to the three months ended ~~June 30, 2018,~~March 31, 2019, mainly due to a 17.2% increase in compensation and benefits as we ~~continued~~hired additional bankers, a 90.2% increase to ~~strive for better efficiencies~~advertising expense, and ~~cost management in the absence~~a one-time FHLB prepayment penalty of ~~new branching initiatives.~~$210,000.

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 March 31,				Increase (Decrease)
	2019		2018		Amount			Percent		2020		2019		Amount			Percent
	(Dollars in thousands)									(Dollars in thousands)
Compensation and benefits	$	4,753	$	4,745	$	8		0.2	%	$	5,361	$	4,573	$	788		17.2	%
Data processing	667		677		(10		)	(1.5	)	690		631		59			9.4
Occupancy and equipment	1,140		1,127		13			1.2		1,351		1,108		243			21.9
Supplies, postage, and telephone	242		243		(1		)	(0.4	)	211		228		(17		)	(7.5	)
Regulatory assessments and state taxes	195		155		40			25.8		174		169		5			3.0
Advertising	229		290		(61		)	(21.0	)	272		143		129			90.2
Professional fees	331		458		(127		)	(27.7	)	400		298		102			34.2
FDIC insurance premium	77		79		(2		)	(2.5	)	—		77		(77		)	(100.0	)
FHLB prepayment penalty										210		—		210			100.0
Other	638		524		114			21.8		713		573		140			24.4
Total	$	8,272	$	8,298	$	(26	)	(0.3	)%	$	9,382	$	7,800	$	1,582		20.3	%

Provision for Income Tax. An income tax expense of ~~$493,000~~$204,000 was recorded for the three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$345,000~~$509,000 for the three months ended ~~June 30, 2018,~~March 31, 2019, generally due to ~~an increase~~a decrease in income before taxes of ~~$701,000.~~$1.6 million. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

~~Comparison of Results of Operations for the Six Months Ended June 30, 2019 and 2018~~

~~General.~~ Net income increased $1.2 million, or 40.6%, to $4.3 million for the six months ended June 30, 2019, compared to net income of $3.0 million for the six months ended June 30, 2018, primarily due to an increase in net interest income coupled with a decrease in noninterest expenses.

~~Net Interest Income.~~ Net interest income increased $605,000 to $18.7 million for the six months ended June 30, 2019, from $18.1 million for the six months ended June 30, 2018. This increase was mainly the result of a change in the mix of earning assets, with a decrease in the investment portfolio and an increase in loans receivable, combined with changes in the yield curve, which resulted in higher yields on all interest-earning assets as highlighted in the following table. The yield on average interest-earning assets increased 25 basis points to 4.14% for the six months ended June 30, 2019, compared to 3.89% for the same period in the prior year.

The net interest margin decreased six basis points to 3.13% for the six months ended June 30, 2019, from 3.19% for the same period in 2018. While we experienced a 25 basis point increase in asset yields, our cost of interest-bearing liabilities increased 39 basis points, reducing our net interest rate spread and net interest margin.

Of the $605,000 increase in net interest income during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, $1.5 million was the result of an increase in volume, partially offset by $867,000 due to changes in rates. The increase in loans receivable was the main contributor to the increase in net interest income with $1.7 million due to an increase in average volumes and $786,000 due to increases in rates for a total of $2.5 million.

The average cost of interest-bearing liabilities increased to 1.29% for the six months ended June 30, 2019, compared to 0.90% for the same period last year, due primarily to promotional rates on, and increases in the average balance of, savings accounts and certificates of deposit used to attract and retain deposits.

~~Interest Income.~~ ~~Total~~interest income increased $2.6 million, or 11.9%, to $24.8 million for the six months ended June 30, 2019, from $22.1 million for the comparable period in 2018, primarily due to an increase in the average balance of and yields earned on loans receivable. Interest and fees on loans receivable increased $2.5 million, to $20.0 million for the six months ended June 30, 2019, from $17.5 million for the six months ended June 30, 2018, due primarily to an increase in the average balance of net loans receivable of $77.8 million compared to the prior year. Average loan yields increased 18 basis points to 4.57% for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, as we continued to increase our balance of higher yielding loans, such as auto, commercial real estate and multi-family. We also benefited from increases in short-term interest rates on our adjustable rate loans, such as commercial business and home equity lines of credit.

Interest income on investment securities increased $144,000, or 7.8% to $2.0 million for the six months ended June 30, 2019, compared to $1.8 million for the six months ended June 30, 2018, due to an increase in average yield of 49 basis points partially offset by a decrease in the average balance of $10.6 million compared to the same period in 2018. The change in average yields on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the six months ended June 30, 2019 decreased $85,000 compared to the six months ended June 30, 2018, reflecting an $11.3 million decrease in the average balance partially offset by an increase in yield of 7 basis points.

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

Six Months Ended June 30,
2019 2018 Increase (Decrease) in Interest Income
Average Balance Outstanding Yield Average Balance Outstanding Yield
(Dollars in thousands)
Loans receivable, net $ 877,095
4.57% $ 799,288
4.39% $ 2,490
Investment securities 118,423
3.34 128,963
2.85 144
Mortgage-backed securities 181,297
2.70 192,645
2.63 (85 )
FHLB stock 6,955
5.06 7,419
3.69 39
Interest-bearing deposits in banks 12,495
2.00 10,123
1.70 39
Total interest-earning assets $ 1,196,265
4.14 $ 1,138,438
3.89 $ 2,627

~~Interest Expense.~~ Total interest expense increased $2.0 million, or 50.6%, to $6.0 million for the six months ended June 30, 2019, compared to $4.0 million for the six months ended June 30, 2018, due to an increase in deposit costs of $1.9 million, or 89.2%, and an increase in borrowing costs of $140,000, or 7.4%. Deposit costs increased for the six months ended June 30, 2019, due to a combination of promotional products and higher rates needed to compete to attract new and retain existing deposit customers. We also experienced disintermediation as existing customers transferred all or a portion of existing, lower-rate deposit accounts into higher-yielding certificates of deposit and other accounts. The average balance of interest-bearing deposits increased $63.0 million, or 8.6%, to $795.2 million for the six months ended June 30, 2019, from $732.2 million for the six months ended June 30, 2018, as we continued to target growth in deposits in new and existing market areas.

During the six months ended June 30, 2019, the cost of savings accounts increased mainly due to an increase in average balance of $51.8 million and an increase in the average rate paid of 79 basis points, and the cost of certificates of deposit increased due to an increase in average balance of $20.1 million and an increase in the average rate paid of 71 basis points, compared to the six months ended June 30, 2018. During the same period, the average balance of money market accounts declined $10.2 million while the average balance of transaction accounts remained relatively stable with a modest $1.4 million increase. The average cost of all deposit products increased to 1.00% for the six months ended June 30, 2019, from 0.58% for the six months ended June 30, 2018. Borrowing costs increased primarily due to a 48 basis point increase in average rates paid, partially offset by a decrease in the average balance of $14.7 million.

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

Six Months Ended June 30,
2019 2018 Increase (Decrease) in Interest Expense
Average Balance Outstanding Rate Average Balance Outstanding Rate
(Dollars in thousands)
Savings accounts $ 158,398
0.87% $ 106,610
0.08% $ 644
Transaction accounts 115,358
0.12 113,933
0.02 59
Money market accounts 262,747
0.48 272,991
0.36 136
Certificates of deposit 258,737
2.01 238,687
1.30 1,043
Borrowings 136,545
2.97 151,243
2.49 140
Total interest-bearing liabilities $ 931,785
1.29 $ 883,464
0.90 $ 2,022

~~Provision for Loan Losses.~~ The provision for loan losses was $590,000 during the six months ended June 30, 2019, primarily due to charge-off activity related to our indirect auto loan portfolio, and was $705,000 for the six months ended June 30, 2018, also due to charge-off activity in our auto portfolio as well as a specific reserve taken for a commercial business loan.

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

Six Months Ended June 30,
2019 2018
(Dollars in thousands)
Provision for loan losses $ 590
$ 705
Net charge-offs (392 ) (183 )
Allowance for loan losses 9,731
9,282
Allowance for losses as a percentage of total gross loans receivable at the end of this period 1.1 % 1.1 %
Total nonaccruing loans 1,291
2,062
Allowance for loan losses as a percentage of nonaccrual loans at end of period 753.8 % 450.1 %
Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.1 % 0.2 %
Total loans $ 879,054
$ 828,229

~~Noninterest Income.~~ Noninterest income increased $327,000, or 11.3%, to $3.2 million for the six months ended June 30, 2019, from $2.9 million for the six months ended June 30, 2018, mainly the result of an increase in loan and deposit service fees related to the early prepayment of commercial and multi-family real estate loans as well as an increase in deposit fees related to changes in our account offerings.

~~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)
2019 2018 Amount Percent
(Dollars in thousands)
Loan and deposit service fees $ 2,440
$ 1,808
$ 632
35.0 %
Mortgage servicing fees, net of amortization 99
132
(33 ) (25.0 )
Net gain on sale of loans 175
317
(142 ) (44.8 )
Net gain on sale of investment securities 57
135
(78 ) (57.8 )
Increase in cash surrender value of bank-owned life insurance 288
298
(10 ) (3.4 )
Other income 155
197
(42 ) (21.3 )
Total noninterest income $ 3,214
$ 2,887
$ 327
11.3 %

~~Noninterest Expense.~~ Noninterest expense decreased $501,000, or 3.0%, to $16.1 million for the six months ended June 30, 2019, compared to $16.6 million for the six months ended June 30, 2018, primarily as a result of a decrease in advertising costs and compensation and benefits. We received a $441,000 credit from our health insurance carrier as a result of a lower than anticipated claims experience level during the most recent plan year, $391,000 of which partially offset compensation and benefits expense during the six months ended June 30, 2019, and $50,000 of which is being held for the benefit of our employees to help offset the burden of future insurance premium increases. Advertising expenses were lower as a result of a combination of advertising expenses incurred during the six months ended June 30, 2018 related to the opening of our Bainbridge Island branch that were not incurred during the same period in 2019, as well as managing the determination and timing of current advertising and promotional expenses for the current year.

~~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)
2019 2018 Amount Percent
(Dollars in thousands)
Compensation and benefits $ 9,326
$ 9,556
$ (230 ) (2.4 )%
Data processing 1,298
1,305
(7 ) (0.5 )
Occupancy and equipment 2,248
2,229
19
0.9
Supplies, postage, and telephone 470
474
(4 ) (0.8 )
Regulatory assessments and state taxes 364
281
83
29.5
Advertising 372
614
(242 ) (39.4 )
Professional fees 629
780
(151 ) (19.4 )
FDIC insurance premium 154
155
(1 ) (0.6 )
Other 1,211
1,179
32
2.7
Total $ 16,072
$ 16,573
$ (501 ) (3.0 )%

~~Provision for Income Tax.~~ An income tax expense of $1.0 million was recorded for the six months ended June 30, 2019, compared to $691,000 for the six months ended June 30, 2018, generally due to an increase in income before taxes of $1.5 million. For additional information, see ~~Note 5~~ ~~of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.~~

Average Balances, Interest and Average Yields/Cost

The following table set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest‑earning assets and interest expense on average interest‑bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest‑earning assets), and the ratio of average interest‑earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. ~~Nonaccruing~~Nonaccrual loans have been included in the table as loans carrying a zero yield.


	At June 30, 2019		Three Months Ended June 30,														Six Months Ended June 30,														At March 31, 2020		Three Months Ended March 31,
	At June 30, 2019		2019							2018							2019							2018							At March 31, 2020		2020							2019
	Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate		Average Balance Outstanding			Interest Earned/ Paid		Yield/ Rate

Interest-earning assets:	(Dollars in thousands)																														(Dollars in thousands)
Loans receivable, net ⁽¹⁾	4.72	%	$	883,290		$	10,093	4.57	%	$	809,839		$	8,952	4.42	%	$	877,095		$	20,025	4.57	%	$	799,288		$	17,535	4.39	%	4.56	%	$	870,739		$	9,836	4.52	%	$	870,901		$	10,092	4.64	%
Investment securities	4.38		116,496			969		3.33		125,442			973		3.10		118,423			1,979		3.34		128,963			1,835		2.85		3.32		149,954			1,069		2.85		120,350			1,010		3.36
Mortgage-backed securities	2.61		178,878			1,192		2.67		186,385			1,237		2.65		181,297			2,449		2.70		192,645			2,534		2.63		2.09		161,666			959		2.37		183,716			1,257		2.74
FHLB dividends	5.20		7,066			88		4.98		7,605			78		4.10		6,955			176		5.06		7,419			137		3.69		5.25		4,707			47		3.99		6,844			88		5.14
Interest-bearing deposits in banks	1.79		13,118			58		1.77		9,111			41		1.80		12,495			125		2.00		10,123			86		1.70		0.21		21,248			68		1.28		11,873			67		2.26
Total interest-earning assets ⁽²⁾	4.32		1,198,848			12,400		4.14		1,138,382			11,281		3.96		1,196,265			24,754		4.14		1,138,438			22,127		3.89		3.80		1,208,314			11,979		3.97		1,193,684			12,514		4.19

Interest-bearing liabilities:	Interest-bearing liabilities:																														Interest-bearing liabilities:
Savings accounts	0.94		$	163,106		$	372	0.91		$	105,067		28		0.11		$	158,398		$	688	0.87		$	106,610		44		0.08		0.72		$	165,911		$	340	0.82		$	153,689		316		0.82
Transaction accounts	0.06		115,914			36		0.12		113,666			9		0.03		115,358			72		0.12		113,933			13		0.02		0.01		114,970			19		0.07		114,801			36		0.13
Money market accounts	0.43		257,548			313		0.49		277,186			282		0.41		262,747			633		0.48		272,991			497		0.36		0.48		252,537			356		0.56		267,947			320		0.48
Certificates of deposit	2.11		259,203			1,347		2.08		237,216			806		1.36		258,737			2,599		2.01		238,687			1,556		1.30		1.67		315,778			1,423		1.80		258,272			1,252		1.94
Total deposits	0.88		795,771			2,068		1.04		733,135			1,125		0.61		795,240			3,992		1.00		732,221			2,110		0.58		0.79		849,196			2,138		1.01		794,709			1,924		0.97
Borrowings	2.84		138,643			1,036		2.99		153,362			997		2.60		136,545			2,026		2.97		151,243			1,886		2.49		1.01		79,659			434		2.18		134,447			990		2.95
Total interest-bearing liabilities	1.12		934,414			3,104		1.33		886,497			2,122		0.96		931,785			6,018		1.29		883,464			3,996		0.90		0.82		928,855			2,572		1.11		929,156			2,914		1.25

Net interest income						$	9,296						$	9,159						$	18,736						$	18,131								$	9,407						$	9,600
Net interest rate spread	3.20							2.81							3.00							2.85							2.99		2.98							2.86							2.94
Net earning assets			$	264,434						$	251,885						$	264,480						$	254,974								$	279,459						$	264,528
Net interest margin ⁽³⁾								3.10							3.22							3.13							3.19									3.11							3.22
Average interest-earning assets to average interest-bearing liabilities			128.3		%					128.4		%					128.4		%					128.9		%							130.1		%					128.5		%

(1) The average loans receivable, net balances include nonaccruing loans. (2) Includes interest-bearing deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.
(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.																															(1) The average loans receivable, net balances include nonaccrual loans. (2) Includes interest-bearing deposits (cash) at other financial institutions. (3) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

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


	Three Months Ended										Six Months Ended										Three Months Ended
	June 30, 2019 vs. 2018										June 30, 2019 vs. 2018										March 31, 2020 vs. 2019
	Increase (Decrease) Due to						Total Increase (Decrease)				Increase (Decrease) Due to							Total Increase (Decrease)			Increase (Decrease) Due to							Total Increase (Decrease)
	Volume			Rate						Volume				Rate				Total Increase (Decrease)		Volume				Rate				Total Increase (Decrease)
	(In thousands)																			(In thousands)
Interest earning assets:							Total Increase (Decrease)
Loans receivable, net	$	810		$	331		$	1,141			$	1,704			$	786		$	2,490		$	(2	)		$	(254	)	$	(256	)
Investments	(123		)	74			(49		)		(298		)		357			59			100				(339		)	(239		)
FHLB stock	(6		)	16			10				(9		)		48			39			(27		)		(14		)	(41		)
Other⁽¹⁾	18			(1		)	17				20				19			39			53				(52		)	1
Total interest-earning assets	$	699		$	420		$	1,119			$	1,417			$	1,210		$	2,627		$	124			$	(659	)	$	(535	)

Interest-bearing liabilities:
Savings accounts	$	16		$	328		$	344			$	21			$	623		$	644		$	24			$	—		$	24
Interest-bearing transaction accounts	—			27			27				—				59			59			—				(17		)	(17		)
Money market accounts	(20		)	51			31				(20		)		156			136			(17		)		53			36
Certificates of deposit	75			466			541				127				916			1,043			281				(110		)	171
Borrowings	(96		)	135			39				(183		)		323			140			(403		)		(153		)	(556		)
Total interest-bearing liabilities	$	(25	)	$	1,007		$	982			$	(55	)		$	2,077		$	2,022		$	(115	)		$	(227	)	$	(342	)

Net change in interest income	$	724		$	(587	)	$	137			$	1,472			$	(867	)	$	605		$	239			$	(432	)	$	(193	)

(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~~three months ended ~~June 30, 2019~~March 31, 2020 and the year ended December 31, ~~2018,~~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.

Contractual Obligations

At ~~June 30, 2019,~~March 31, 2020, our scheduled maturities of contractual obligations were as follows:


	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Balance		Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Balance
	(In thousands)										(In thousands)

Certificates of deposit	$	179,950	$	64,274	$	13,148	$	—	$	257,372	$	289,742	$	53,987	$	14,948	$	—	$	358,677
FHLB advances	101,337		30,000		—		—		131,337		100,021		20,000		30,000		—		150,021
Operating leases	321		541		438		1,814		3,114		356		584		543		2,085		3,568
Borrower taxes and insurance	1,251		—		—		—		1,251		443		—		—		—		443
Deferred compensation	54		—		53		836		943		152		362		49		261		824
Total contractual obligations	$	282,913	$	94,815	$	13,639	$	2,650	$	394,017	$	390,714	$	74,933	$	45,540	$	2,346	$	513,533

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of ~~June 30, 2019:~~March 31, 2020:


	Amount of Commitment Expiration										Amount of Commitment Expiration
	Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Amounts Committed		Within 1 Year		After 1 Year Through 3 Years		After 3 Years Through 5 Years		Beyond 5 Years		Total Amounts Committed
	(In thousands)										(In thousands)
Commitments to originate loans:
Fixed-rate	$	27	$	—	$	—	$	—	$	27	$	630	$	—	$	—	$	—	$	630
Adjustable-rate	658		—		—		—		658
Unfunded commitments under lines of credit or existing loans	2,122		25,833		4,089		47,307		79,351		27,833		20,346		—		62,448		110,627
Standby letters of credit	—		214		—		—		214		182		—		—		—		182
Total commitments	$	2,807	$	26,047	$	4,089	$	47,307	$	80,250	$	28,645	$	20,346	$	—	$	62,448	$	111,439

Liquidity Management

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

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

Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At ~~June 30, 2019,~~March 31, 2020, cash and cash equivalents totaled ~~$28.8~~$107.2 million, and unpledged securities classified as available-for-sale with a market value of ~~$250.1~~$212.8 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of ~~$131.3~~$150.0 million and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which ~~no collateral has been~~available-for-sale securities with a market value of $50.9 million were pledged as of ~~June 30, 2019.~~March 31, 2020.

At ~~June 30, 2019,~~March 31, 2020, we had ~~$685,000~~$630,000 in loan commitments outstanding, ~~and an additional $79.6~~$110.8 million in undisbursed loans and standby letters of credit, including ~~$38.7~~$69.7 million in undisbursed construction loan commitments.

Certificates of deposit due within one year as of ~~June 30, 2019~~March 31, 2020 totaled ~~$180.0~~$289.7 million, or ~~69.9%~~80.8% of certificates of ~~deposit.~~deposit with a weighted-average rate of 1.60%. 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 interest rates have begun to rise. A significant portion of our money market accounts have rolled into certificates of deposit over the past twelve months, which management believes, based on past experience, is commensurate with our customers' behavior during periods of rising interest rates.dropped. 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.~~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 afford us ~~sufficient foreseeable~~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 30, 2019,~~March 31, 2020, the Company (on an unconsolidated basis) had liquid assets of ~~$20.6~~$14.0 million.

Capital Resources

At ~~June 30, 2019,~~March 31, 2020, shareholders' equity totaled ~~$176.4~~$167.2 million, or ~~14.0%~~12.0% of total assets. Our book value per share of common stock was ~~$16.15~~$16.02 at ~~June 30, 2019,~~March 31, 2020, compared to ~~$15.42~~$16.48 at December 31, ~~2018. Consistent with our goals to operate a sound and profitable organization, our policy for First Federal is to maintain its “well-capitalized” status in accordance with regulatory standards.~~2019.

At ~~June 30, 2019,~~March 31, 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 30, 2019.~~March 31, 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)	$	145,397	11.6	%		$	50,305	4.0	%	$	62,881	5.0	%	$	149,708	11.8	%		$	50,968	4.0	%	$	63,710	5.0	%
Common equity tier I (to risk-weighted assets)	145,397		17.4			37,692		4.5		54,445		6.5		149,708		16.8			40,064		4.5		57,871		6.5
Tier I risk-based capital (to risk-weighted assets)	145,397		17.4			50,256		6.0		67,009		8.0		149,708		16.8			53,419		6.0		71,225		8.0
Total risk-based capital (to risk-weighted assets)	155,316		18.5			67,009		8.0		83,761		10.0		160,800		18.1			71,225		8.0		89,032		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. This new capital conservation buffer requirement was phased in starting in January 2016 requiring a~~ buffer of ~~0.625% of risk-weighted assets and will increase each year until fully implemented to an amount of~~ 2.5% ~~of risk-weighted assets in January 2019. As of June 30, 2019, the conservation buffer was 2.500%~~.

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.

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, ~~2018.~~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 30, 2019,~~March 31, 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 30, 2019,~~March 31, 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.

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

~~There have been no material changes to~~The disclosures below supplement the risk factors ~~set forth in~~previously disclosed under Part I. Item 1A of the Company's Form 10-K for the year ended December 31, ~~2018.~~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

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 30, 2019:~~March 31, 2020:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans Maximum Number of Shares that May Yet Be Repurchased Under the Plans

April 1, 2019 - April 30, 2019 2,400
$ 16.27
2,400
322,809
May 1, 2019 - May 31, 2019 39,400
16.18
39,400
283,409
June 1, 2019 - June 30, 2019 21,200
16.24
21,200
262,209
Total 63,000
$ 16.20
63,000



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans (1)	Maximum Number of Shares that May Yet Be Repurchased Under the Plans

January 1, 2020 - January 31, 2020	30,509	$	17.17	30,509	(5,300	)
February 1, 2020 - February 29, 2020	61,200	16.61		61,200	(66,500	)
March 1, 2020 - March 31, 2020	196,567	11.65		196,567	(263,067	)
Total	288,276	$	13.29	288,276

(1) On September 26, 2017, the Board of Directors authorized the repurchase of up to 1,166,659 shares, or approximately 10% of its shares of common stock issued and outstanding as of September 18, 2017. The repurchase program permits shares to be repurchased in the open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with the SEC's Rule 10b5-1. As of ~~June 30, 2019,~~March 31, 2020, a total of ~~904,450~~1,166,659 shares, or ~~77.5%~~100.0% percent of the shares authorized in the September 2017 stock repurchase plan, have been purchased at an average cost of ~~$16.06~~$16.24 per ~~share, leaving 262,209~~share. There are no remaining shares available for future purchases.

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 March 31, 2020, a total of 263,067 shares, or 49.2% percent of the shares authorized in the December 2019 stock repurchase plan, have been purchased at an average cost of $12.90 per share, leaving 272,030 shares available for future purchases.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Not applicable.~~First Northwest Bancorp 2020 Equity Incentive Plan

On May 5, 2020, the shareholders of the Company approved the adoption of the First Northwest Bancorp 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan replaces the Company's 2015 Equity Incentive Plan. Under the 2020 Plan, the Company may grant awards of stock options, stock appreciation rights, restricted awards and performance share awards to the Company's employees and non-employee directors. The Company may grant stock-based awards for up to 520,000 shares of the Company's common stock under the 2020 Plan.

For more details regarding the 2020 Plan, please see the Company's Proxy Statement filed with the Securities and Exchange Commission under cover of Schedule 14A on March 20, 2020, under the caption "Proposal 2 – Approval of First Northwest Bancorp 2020 Equity Incentive Plan." The above description of the 2020 Plan does not purport to be complete and is qualified in its entirety by reference to the complete text of the 2020 Plan, which is attached to this report as Exhibit 10.2 and is incorporated herein by reference.

COVID-19 Legislation and Regulation.

Governments at all levels are rapidly taking steps to address and remediate 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 includes many provisions that will impact us and our customers. For example, the CARES Act includes $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program” of the U.S. Small Business Administration and an additional $500 billion for the U.S. Department of Treasury to make loans to distressed American businesses. The various banking agencies have strongly encouraged banks to work with borrowers impacted by COVID-19, and the CARES Act authorizes banks to elect to suspend GAAP for certain loan modifications that would otherwise be classified as a troubled debt restructure (which, in part, allows banks to provide immediate relief to their impacted borrowers). To ease the financial impacts of COVID-19, these agencies have further encouraged banks to consider offering responsible small-dollar loans to their consumers and small businesses affected by the pandemic.

The CARES Act also provides for direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans, subject to certain income thresholds. These economic impact payments will typically range from $1,200 to $3,400 and are designed to provide a level of financial relief to those most impacted by COVID-19. We anticipate that many of our customers will receive these economic impact payments, which the IRS intends to distribute via direct deposit to their accounts or by mailing paper checks. Overall, the legislative and regulatory landscape surrounding COVID-19 is rapidly changing, and we cannot predict with certainty the impact it will have on our operations or business.

The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, leaving many pending loan applications in limbo as Congress negotiated additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. In part, the bill includes an additional $320 billion to make new loans under the Paycheck Protection Program, set aside $30

billion of the loans for banks and credit unions with $10 billion to $50 billion in assets, and set aside another $30 billion for even smaller institutions. The bill also includes $60 billion in loans and grants under the Economic Industry Disaster Loan program and makes farms and ranches eligible for loans. The SBA resumed accepting applications under the Paycheck Protection Program on April 27, 2020.

Item 6. Exhibits



Exhibit No.	Exhibit Description	Filed Herewith	Form	Original Exhibit No.	Filing Date	SEC File No.
10.1*	Form of Executive Employment Agreement with Geraldine Bullard and Randall T. Riffle		10-K	10.4	3/15/2019
10.2*	First Northwest Bancorp 2020 Equity Incentive Plan	X
10.3*	First Federal Fiscal 2020 Cash Incentive Plan	X
10.4*	Form of First Federal Fiscal 2020 Cash Incentive Plan Participation Agreement	X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act	X
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2019,~~March 31, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive ~~Income ;~~Income; (4) Consolidated Statements of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements

* Denotes a management contract or compensatory plan or arrangement.

SIGNATURES

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



	FIRST NORTHWEST BANCORP

Date: ~~August 7, 2019~~May 11, 2020	/s/ ~~Laurence J. Hueth~~Matthew P. Deines

	~~Laurence J. Hueth~~ Matthew P. Deines
	President, Chief Executive Officer and Director
	(Principal Executive Officer)


Date: ~~August 7, 2019~~May 11, 2020	/s/ ~~Regina M. Wood~~Geraldine L. Bullard

	~~Regina M. Wood~~Geraldine L. Bullard
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

5754



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

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



	For the Six Months Ended
	June 30, 2019
	Shares		Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2019	290,600		$	13.72
Granted	—		—
Vested	—		—
Canceled (1)	—		—
Forfeited	(4,000	)	16.07

Non-vested at June 30, 2019	286,600		13.69

(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.