UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended September 30, | |||
or
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 1, 2019,October 30, 2020, there were 10,734,33210,234,204 shares of common stock, $0.01 par value per share, outstanding.
FORM 10-Q TABLE OF CONTENTS PART 1 - FINANCIAL INFORMATION Page Item 1 - Financial Statements (Unaudited) Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures About Market Risk Item 4 - Controls and Procedures PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 1A - Risk Factors Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds Item 3 - Defaults Upon Senior Securities Item 4 - Mine Safety Disclosures Item 5 - Other Information Item 6 - Exhibits SIGNATURES 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 FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) (Unaudited) September 30, 2020 December 31, 2019 ASSETS Cash and due from banks Interest-bearing deposits in banks Investment securities available for sale, at fair value Loans held for sale Loans receivable (net of allowance for loan losses of $13,007 and $9,628) Federal Home Loan Bank (FHLB) stock, at cost Accrued interest receivable Premises and equipment, net Mortgage servicing rights, net Bank-owned life insurance, net Prepaid expenses and other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Borrowings Accrued interest payable Accrued expenses and other liabilities Advances from borrowers for taxes and insurance Total liabilities 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 10,234,204 shares at September 30, 2020, and 10,731,639 shares at December 31, 2019 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss), net of tax Unearned employee stock ownership plan (ESOP) shares Total shareholders' equity Total liabilities and shareholders' equity 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 INTEREST INCOME Interest and fees on loans receivable Interest on mortgage-backed securities Interest on investment securities Interest on deposits and other FHLB dividends Total interest income INTEREST EXPENSE Deposits Borrowings Total interest expense Net interest income PROVISION FOR LOAN LOSSES Net interest income after provision for loan losses NONINTEREST INCOME Loan and deposit service fees Mortgage servicing fees, net of amortization Net gain on sale of loans Net gain on sale of investment securities Increase in cash surrender value of bank-owned life insurance Other income Total noninterest income NONINTEREST EXPENSE Compensation and benefits Data processing Occupancy and equipment Supplies, postage, and telephone Regulatory assessments and state taxes Advertising Professional fees FDIC insurance premium FHLB prepayment penalty Other expense Total noninterest expense INCOME BEFORE PROVISION FOR INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME Basic and diluted earnings per common share See selected notes to the consolidated financial statements. FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 NET INCOME Other comprehensive income: Income tax provision related to unrealized holding gains Reclassification adjustment for net (gains) losses on sales of securities realized in income Other comprehensive income, net of tax COMPREHENSIVE INCOME 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 September 30, (Dollars in thousands, except share information) (Unaudited) Common Stock Additional Paid-in Retained Unearned ESOP Total Shareholders' Shares Amount Capital Earnings Shares Income, Net of Tax Equity BALANCE, June 30, 2019 Net income Common stock repurchased Other comprehensive income, net of tax Share-based compensation ESOP shares committed to be released Cash dividends declared and paid ($0.03 per share) BALANCE, September 30, 2019 BALANCE, June 30, 2020 Net income Common stock repurchased Restricted stock award grants net of forfeitures Other comprehensive income, net of tax Share-based compensation ESOP shares committed to be released Cash dividends declared and paid ($0.05 per share) BALANCE, September 30, 2020 FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands, except share information) (Unaudited) Common Stock Additional Paid-in Retained Unearned ESOP Total Shareholders' Shares Amount Capital Earnings Shares Income, Net of Tax Equity BALANCE, December 31, 2018 Net income Common stock repurchased Other comprehensive income, net of tax Share-based compensation ESOP shares committed to be released Cash dividends declared and paid ($0.09 per share) BALANCE, September 30, 2019 BALANCE, December 31, 2019 Net income Common stock repurchased Restricted stock award grants net of forfeitures Other comprehensive income, net of tax Share-based compensation ESOP shares committed to be released Cash dividends declared and paid ($0.15 per share) BALANCE, September 30, 2020 See selected notes to the consolidated financial statements. FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization Amortization and accretion of premiums and discounts on investments, net (Accretion) amortization of deferred loan fees, net Amortization of mortgage servicing rights, net Additions to mortgage servicing rights, net Net increase (decrease) on the valuation allowance on mortgage servicing rights Provision for loan losses Allocation of ESOP shares Share-based compensation Gain on sale of loans, net Gain on sale of securities available for sale, net Increase in cash surrender value of life insurance, net Origination of loans held for sale Proceeds from loans held for sale Change in assets and liabilities: (Increase) decrease in accrued interest receivable Increase in prepaid expenses and other assets Decrease in accrued interest payable Increase in accrued expenses and other liabilities Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale Proceeds from maturities, calls, and principal repayments of securities available for sale Proceeds from sales of securities available for sale Proceeds from maturities, calls, and principal repayments of securities held to maturity Redemption of FHLB stock Net (increase) decrease in loans receivable Purchase of premises and equipment, net Net cash from investing activities See selected notes to the consolidated financial statements. FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Proceeds from long-term FHLB advances Repayment of long-term FHLB advances Net decrease in short-term FHLB advances Net increase in advances from borrowers for taxes and insurance Dividends paid Repurchase of common stock Net cash from financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest on deposits and borrowings Income taxes NONCASH INVESTING ACTIVITIES Unrealized gain on securities available for sale Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses Lease liabilities arising from obtaining right-of-use assets See selected notes to the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation and Critical Accounting Policies Organization and Nature of business 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 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 Subsequent Events Recently adopted accounting pronouncements In FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In In Credit Losses In June 2016, the FASB issued ASU No.2016-13,Financial Instruments - Credit Loss Additional updates were issued in ASU No. In addition, new updates were issued through ASU No. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In The Company is evaluating the provisions of ASU No. Other Pronouncements In 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.2020-04Reference 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 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 Gross Gross Estimated Amortized Cost Unrealized Gains Unrealized Losses (In thousands) Available for Sale Municipal bonds U.S. government agency issued asset-backed securities (ABS agency) Corporate issued asset-backed securities (ABS corporate) Corporate issued debt securities (Corporate debt) U.S. Small Business Administration securities (SBA) Mortgage-backed securities: U.S. government agency issued mortgage-backed securities (MBS agency) Corporate issued mortgage-backed securities (MBS corporate) Total securities available for sale The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale Gross Gross Estimated Amortized Cost Unrealized Gains Unrealized Losses (In thousands) Available for Sale Municipal bonds ABS agency ABS corporate Corporate debt SBA Mortgage-backed securities: MBS agency MBS corporate Total securities available for sale There were 0 securities classified as held-to-maturity at September 30, 2020 and December 31, 2019. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of September 30, 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 ABS agency ABS corporate Corporate debt SBA Mortgage-backed securities: MBS agency MBS corporate Total available for sale The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 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 ABS agency ABS corporate Corporate debt SBA Mortgage-backed securities: MBS agency MBS corporate Total available for sale The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At September 30, We believe that the unrealized losses on our investment securities relate principally to the general change in interest rates, There were 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. September 30, 2020 Available-for-Sale Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year Due after one through five years Due after five through ten years Due after ten years Total mortgage-backed securities All other investment securities: Due within one year Due after one through five years Due after five through ten years Due after ten years Total all other investment securities Total investment securities December 31, 2019 Available-for-Sale Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year Due after one through five years Due after five through ten years Due after ten years Total mortgage-backed securities All other investment securities: Due within one year Due after one through five years Due after five through ten years Due after ten years Total all other investment securities Total investment securities 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Proceeds from sales Gross realized gains Gross realized losses Note 3 - Loans Receivable Loans receivable consisted of the following at the dates indicated: September 30, 2020 December 31, 2019 (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans Less: Net deferred loan fees Premium on purchased loans, net Allowance for loan losses Total loans receivable, net Allowance for Loan Losses. 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 September 30, 2020 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total (In thousands) ALLL: Beginning balance Provision for (recapture of) loan losses Charge-offs Recoveries Ending balance At or For the Nine Months Ended September 30, 2020 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total (In thousands) ALLL: Beginning balance Provision for (recapture of) loan losses Charge-offs Recoveries Ending balance At September 30, 2020 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total (In thousands) Total ALLL General reserve Specific reserve Total loans Loans collectively evaluated (1) Loans individually evaluated (2) (1) Loans collectively evaluated for general reserves. (2) Loans individually evaluated for specific reserves. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At or For the Three Months Ended September 30, 2019 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total ALLL: Beginning balance (Recapture of) provision for loan losses Charge-offs Recoveries Ending balance At or For the Nine Months Ended September 30, 2019 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total ALLL: Beginning balance (Recapture of) provision for loan losses Charge-offs Recoveries Ending balance At December 31, 2019 One-to- Commercial Construction Home Auto and other Commercial four family Multi-family real estate and land equity consumer business Unallocated Total (In thousands) Total ALLL General reserve Specific reserve Total loans Loans collectively evaluated (1) Loans individually evaluated (2) (1) Loans collectively evaluated for general reserves. (2) Loans individually evaluated for specific reserves. Impaired 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: September 30, 2020 December 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance (In thousands) With no allowance recorded: Total With an allowance recorded: Total Total impaired loans: One-to-four family Multi-family Commercial real estate Construction and land Home equity Auto and other consumer Commercial business Total 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 Nine Months Ended September 30, 2020 September 30, 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) (In thousands) With no allowance recorded: Total With an allowance recorded: Total Total impaired loans: One-to-four family Multi-family Commercial real estate Construction and land Home equity Auto and other consumer Commercial business Total Interest income recognized on a cash basis on impaired loans for the three and nine months ended September 30, 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 Nine Months Ended September 30, 2019 September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) (In thousands) With no allowance recorded: One-to-four family Commercial real estate Home equity Auto and other consumer Total With an allowance recorded: One-to-four family Multi-family Commercial real estate Construction and land Home equity Auto and other consumer Commercial business Total Total impaired loans: One-to-four family Multi-family Commercial real estate Construction and land Home equity Auto and other consumer Commercial business Total Interest income recognized on a cash basis on impaired loans for the three and nine months ended September 30, 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: September 30, 2020 December 31, 2019 (In thousands) One-to-four family Multi-family Commercial real estate Construction and land Home equity Auto and other consumer Commercial business Total nonaccrual loans Past due loans. The following table presents past due loans, net of partial loan charge-offs, by class, as of September 30, 30-59 Days 60-89 Days 90 Days or More Total Past Due Past Due Past Due Past Due Current Total Loans (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans 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, 30-59 Days 60-89 Days 90 Days or More Total Past Due Past Due Past Due Past Due Current Total Loans (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans Credit quality indicator. 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 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 September 30, Pass Watch Special Mention Substandard Total (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans The following table represents the internally assigned grade as of December 31, Pass Watch Special Mention Substandard Total (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans 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 September 30, Nonperforming Performing Total (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Consumer: Home equity Auto and other consumer Commercial business Total loans The following table represents the credit risk profile based on payment activity as of December 31, Nonperforming Performing Total (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Consumer: Home equity Auto and other consumer Commercial business Total loans Troubled debt restructuring. The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020, ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (i.e., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. Through September 30, 2020, the Company had granted COVID-19 pandemic related temporary loan modifications on a total of 346 loans aggregating to $174.9 million, or 16.3% of total loans. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table is a summary of COVID-19 modified loans that remain on deferral as of September 30, 2020: Count Balance Percent Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated: September 30, 2020 December 31, 2019 (In thousands) Total nonaccrual TDR loans There were There were 0 TDR loans which incurred a payment default within 12 months of the restructure date during three and nine months ended September 30, 2020. The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three and nine months ended September 30, 2019, by type of concession granted. Number Rate Term Combination Total of Contracts Modification Modification Modification Modifications (Dollars in thousands) Pre-modification outstanding recorded investment One- to four-family Post-modification outstanding recorded investment One- to four-family FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three and nine months ended September 30, Number Rate Term Combination Total of Contracts Modification Modification Modification Modifications (Dollars in thousands) TDR loans that subsequently defaulted One- to four-family NaN additional funds were committed to be advanced in connection with impaired loans at September 30, The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status. September 30, 2020 December 31, 2019 Accrual Nonaccrual Total Accrual Nonaccrual Total (In thousands) One-to-four family Multi-family Commercial real estate Home equity Commercial business Total TDR loans Note 4 - Deposits The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently September 30, 2020 December 31, 2019 Amount Weighted-Average Interest Rate Amount Weighted-Average Interest Rate (Dollars in thousands) Savings Transaction accounts Money market accounts Certificates of deposit FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Maturities of certificates at the dates indicated are as follows: September 30, 2020 December 31, 2019 (In thousands) Within one year or less After one year through two years After two years through three years After three years through four years After four years through five years After five years Brokered certificates of deposits of Deposits at September 30, Interest on deposits by type for the periods shown was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands) (In thousands) Savings Transaction accounts Money market accounts Certificates of deposit Note 5 - Federal Taxes on Income Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities. The effective tax rates were FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 6 - Earnings per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. In addition, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share. The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and nine months ended September 30, Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (In thousands, except share data) (In thousands, except share data) Numerator: Net income Denominator: Basic weighted average common shares outstanding Dilutive restricted stock grants Diluted weighted average common shares outstanding Basic earnings per share Diluted earnings per share Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of September 30, Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. There were 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 Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. An annual principal and interest payment of $835,000 was made by the ESOP during the nine months ended September 30, As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Compensation expense related to the ESOP for the three months ended September 30, Shares issued to the ESOP as of the dates indicated are as follows: September 30, 2020 December 31, 2019 (Dollars in thousands) Allocated shares Committed to be released shares Unallocated shares Total ESOP shares issued Fair value of unallocated shares Note 8 - Stock-based Compensation In May 2020, the Company's shareholders approved the First Northwest Bancorp As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and 0 additional awards will be made. At September 30, 2020, there were 0 shares available for grant under the 2015 EIP. At this date, there are 273,800 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions. During the three For the three months ended September 30, Included in the above compensation expense for the three months ended September 30, The following For the Three Months Ended September 30, 2020 Shares Weighted-Average Grant Date Fair Value Non-vested at July 1, 2020 Granted Vested Canceled (1) Forfeited Non-vested at September 30, 2020 (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue. For the Nine Months Ended September 30, 2020 Shares Weighted-Average Grant Date Fair Value Non-vested at January 1, 2020 Granted Vested Canceled (1) Forfeited Non-vested at September 30, 2020 (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. FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of September 30, 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 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 Level 1 Level 2 Level 3 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 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 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: September 30, 2020 Significant Other Observable Inputs (Level 1) (Level 2) (Level 3) Total (In thousands) Securities available-for-sale Municipal bonds ABS agency ABS corporate Corporate debt SBA MBS agency MBS corporate December 31, 2019 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total (In thousands) Securities available-for-sale Municipal bonds ABS agency ABS corporate Corporate debt SBA MBS agency MBS corporate Assets and liabilities measured at fair value on a nonrecurring basis 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: September 30, 2020 Level 1 Level 2 Level 3 Total (In thousands) Impaired loans December 31, 2019 Level 1 Level 2 Level 3 Total (In thousands) Impaired loans At September 30, The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated: September 30, 2020 Fair Value Measurements Using: Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents Investment securities available for sale Loans held for sale FHLB stock Accrued interest receivable Mortgage servicing rights, net Financial liabilities Demand deposits Accrued interest payable FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 2019 Fair Value Measurements Using: Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents Investment securities available for sale Loans held for sale Loans receivable, net FHLB stock Accrued interest receivable Mortgage servicing rights, net Financial liabilities Demand deposits Time deposits Borrowings Accrued interest payable 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, Securities Loans receivable, net Mortgage servicing rights, net Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q constitute • statements of our goals, intentions and expectations; • statements regarding our business plans, prospects, growth and operating strategies; • statements regarding the quality of our loan and investment portfolios; • estimates of our risks and future costs and benefits; and • statements concerning the potential effects of the COVID-19 pandemic on the Bank's business and financial results and conditions. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors: • developments and changes in Federal and state laws and regulations, such as the recently enacted Coronavirus Aid Relief and Economic Security Act (“CARES Act”) addressing the economic effects of the COVID-19 pandemic and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions; • changes in general economic conditions, either nationally or in our market area, that are worse than expected; • changes in policy and regulation as it pertains to the Small Business Administration’s Paycheck Protection Program (“PPP”) and the bank’s participation as a lender in the PPP and similar program and its effect on the Bank’s liquidity, financial results, business and customers, including the availability of program funds and the ability of customers to comply with the requirements and otherwise perform with respect to loans obtained under such programs. • the credit risks of our lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; • fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area; • a decrease in the secondary market demand for loans that we originate for sale; • management’s assumptions in determining the adequacy of the allowance for loan losses; • our ability to control operating costs and expenses; • whether our management team can implement our operational strategy, including but not limited to our loan growth; • our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; • staffing needs and associated expenses in response to product demand or the implementation of corporate strategies, including our growth strategies related to the home lending center and new branches; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources; • increased competitive pressures among financial services companies; • our ability to attract and retain deposits; • our ability to retain key members of our senior management team; • changes in consumer spending, borrowing and savings habits; • our ability to successfully manage our growth in compliance with regulatory requirements; • results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, the Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings; • changes in accounting policies and practices, as may be adopted by the financial institutions regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; • inability of key third-party vendors to perform their obligations to us; and • other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019. Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to Any of the General First Northwest We offer a wide range of products and services focused on the lending and depository needs of First Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, and gains and losses from sales of securities. An offset to net interest income is the provision for loan losses, which represents the periodic charge to operations which is required to adequately provide for Noninterest expenses we incur in operating our business consist of salaries and employee COVID-19 Pandemic. In late 2019 and early 2020, the COVID-19 pandemic manifested its impact on individuals, companies, and governmental entities around the world. It significantly impacted the global economy and created a challenging operating environment. As economic conditions deteriorated in mid-March 2020 as a result of the COVID-19 pandemic, we responded in several ways. Some of the key adjustments and developments include the following: • For our employees: ◦ Enhanced the ability of our employees to work remotely, adjusting branch operating hours and restricting lobby access in most cases. ◦ Provided significant support to employees by granting an increase in flexibility with paid leave, temporarily adjusting vacation policies, and increasing the cleaning of facilities to enable a safer environment for those employees that are not able to work from home. ◦ Increased compensation for hourly employees and providing additional compensation for exempt employees below the level of Senior Vice President. • For our customers and communities: ◦ Offering short-term loan payment and fee forbearance programs. Many borrowers requested and received temporary forbearance from obligations to assist them with the expected shortage in their near-term cash flow. ◦ Facilitating government programs like the Small Business Administration's Paycheck Protection Program ("SBA PPP") and Main Street Lending Program ("MSLP") established by the Federal Reserve. ◦ Investing in our communities. We contributed to and will continue to support non-profit organizations in the communities we serve. • For our shareholders and regulators: ◦ Maintained our capital ratios at strong levels and materially increased our provision for loan losses to $4.1 million for the first nine months of 2020, compared to $669,000 for all of 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. Conditions have since improved in most of the counties within our footprint allowing many businesses to expand services or reopen under current guidelines. The sectors that continue to be most heavily impacted include hospitality; restaurant and food services; and lessors of commercial real estate to hospitality, restaurant, and retail establishments. At September 30, 2020, the Company’s exposure as a percent of the total loan portfolio to these industries was 4.9%, 0.2%, and 4.6%, respectively. The Company worked with a number of loan customers on loan deferral and forbearance plans. As of September 30, 2020, the Company had granted payment deferral plans on 346 loans totaling $174.9 million compared to 297 loans totaling $128.4 million as of June 30, 2020. These modifications were not classified as TDRs at September 30, 2020, in accordance with the guidance of the CARES Act and related regulatory guidance. The Company is continuing to work on forbearance plans with customers impacted by the COVID-19 pandemic. For additional information on COVID-19 deferrals, see Note 3 of the Notes to Consolidated Financial Statements contained in "Item 1, Financial Statements." During the quarter ended September 30, 2020, we provided assistance to many small businesses through the SBA's Paycheck Protection Program. This program provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. A portion of the funds can also be used to pay interest on mortgages, rent, and utilities. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was enacted. Main provisions of the PPPFA extended the repayment period from two to five years, extended the covered expense period from eight to 24 weeks, and lowered the percent of forgiveness amount required to be used for eligible payroll costs to 60%. The PPPFA also extends the repayment start date until after the SBA finalizes the application process for loan forgiveness. We processed $32.2 million of loans for 515 customers through the SBA PPP program as of September 30, 2020. The average loan amount approved was approximately $63,000. Payments by borrowers on these loans begin six months after the note date, and interest, at 1%, will continue to accrue during the six-month deferment. Loans can be forgiven in whole or part (up to full principal and any accrued interest). We partnered with a third-party financial technology provider to assist our borrowers with the loan forgiveness application process. Loan processing fees paid to the Bank from the SBA of 5% on loans of $350,000 or less, 3% on loans of more than $350,000 but less than $2.0 million, and 1% for loans of $2.0 million or more are accounted for as loan origination fees. Net deferred fees are recognized over the life of the loan, or two years, as a yield adjustment on the loans. As of September 30, 2020, the Company had received $1.4 million in processing fees. When 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, Comparison of Financial Condition at September 30, Assets Total loans, excluding loans held for sale, Construction and land loans increased 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. The following tables show our construction commitments by type and geographic concentrations at the dates indicated: September 30, 2020 North Olympic Peninsula (1) Puget Sound Region (2) Other Washington Oregon Total (In thousands) Construction Commitment One- to four-family residential Multi-family residential Commercial real estate Total commitment Construction Funds Disbursed One- to four-family residential Multi-family residential Commercial real estate Total disbursed Undisbursed Commitment One- to four-family residential Multi-family residential Commercial real estate Total undisbursed Land Funds Disbursed One- to four-family residential Commercial real estate Total disbursed for land (1) Includes Clallam and Jefferson counties. (2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties. December 31, 2019 North Olympic Peninsula (1) Puget Sound Region (2) Other Washington Oregon Total (In thousands) Construction Commitment One- to four-family residential Multi-family residential Commercial real estate Total Commitment Construction Funds Disbursed One- to four-family residential Multi-family residential Commercial real estate Total disbursed Undisbursed Commitment One- to four-family residential Multi-family residential Commercial real estate Total undisbursed Land Funds Disbursed One- to four-family residential Commercial real estate Total disbursed for land During the nine months ended September 30, Our allowance for loan losses Nonperforming loans At September 30, Net loan charge-offs are concentrated mainly in our indirect auto loan portfolio. We Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated Increase (Decrease) September 30, 2020 December 31, 2019 Amount Percent (In thousands) Real Estate: One-to-four family Multi-family Commercial real estate Construction and land Total real estate loans Consumer: Home equity Auto and other consumer Total consumer loans Commercial business loans Total loans Less: Net deferred loan fees Premium on purchased loans, net Allowance for loan losses Loans receivable, net Increase (Decrease) September 30, 2020 December 31, 2019 Amount Percent (In thousands) Nonperforming loans: Real estate loans: One- to four-family Multi-family Commercial real estate Construction and land Total real estate loans Consumer loans: Home equity Auto and other consumer Total consumer loans Commercial business Total nonperforming loans Real estate owned: Land Total real estate owned Repossessed assets Total nonperforming assets Nonaccrual and 90 days or more past due loans as a percentage of total loans Investment securities The investment portfolio was comprised of Liabilities. Total liabilities Deposit balances increased Equity Comparison of Results of Operations for the Three Months Ended September 30, General. Net Interest Income. Net interest income increased $2.3 million to $11.7 million for the three months ended September 30, The average cost of interest-bearing liabilities Due to the average Interest Income. Interest income on The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown: Three Months Ended September 30, 2020 2019 Average Balance Outstanding Yield Average Balance Outstanding Yield Increase (Decrease) in Interest Income (Dollars in thousands) Loans receivable, net Investment securities Mortgage-backed securities FHLB stock Interest-bearing deposits in banks Total interest-earning assets Interest Expense. Total interest expense The following table details average balances, cost of funds and the change in interest expense for the periods shown: Three Months Ended September 30, 2020 2019 Average Balance Outstanding Rate Average Balance Outstanding Rate Increase (Decrease) in Interest Expense (Dollars in thousands) Savings accounts Transaction accounts Money market accounts Certificates of deposit Borrowings Total interest-bearing liabilities Provision for Loan Losses. The following table details activity and information related to the allowance for loan losses for the periods shown: Three Months Ended September 30, 2020 2019 (Dollars in thousands) Net charge-offs Allowance for loan losses Total nonaccrual loans Total loans Noninterest Income. The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown: Three Months Ended September 30, Increase (Decrease) 2020 2019 Amount Percent (Dollars in thousands) Loan and deposit service fees Mortgage servicing fees, net of amortization Net gain on sale of loans Increase in cash surrender value of bank-owned life insurance Other income Total noninterest income Noninterest Expense. Noninterest expense The following table provides an analysis of the changes in the components of noninterest expense for the periods shown: Three Months Ended September 30, Increase (Decrease) 2020 2019 Amount Percent (Dollars in thousands) Compensation and benefits Data processing Occupancy and equipment Supplies, postage, and telephone Regulatory assessments and state taxes Advertising Professional fees FDIC insurance premium Other expense Total Provision for Income Tax. Comparison of Results of Operations for the Nine Months Ended September 30, General. Net Interest Income. Net interest income The The average cost of interest-bearing liabilities Interest Income. Totalinterest income increased $150,000, or 0.4%, to $37.7 million for the nine months ended September 30, 2020, from $37.5 million for the comparable period in 2019, primarily due to a decrease in the average Interest income from total securities decreased $184,000 to $6.3 million for the nine months ended September 30, The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown: Nine Months Ended September 30, 2020 2019 Average Balance Outstanding Yield Average Balance Outstanding Yield Increase (Decrease) in Interest Income (Dollars in thousands) Loans receivable, net Investment securities Mortgage-backed securities FHLB stock Interest-bearing deposits in banks Total interest-earning assets Interest Expense. During the nine months ended September 30, The following table details average balances, cost of funds and the change in interest expense for the periods shown: Nine Months Ended September 30, 2020 2019 Average Balance Outstanding Rate Average Balance Outstanding Rate Increase (Decrease) in Interest Expense (Dollars in thousands) Savings accounts Transaction accounts Money market accounts Certificates of deposit Borrowings Total interest-bearing liabilities Provision for Loan Losses. The following table details activity and information related to the allowance for loan losses for the periods shown: Nine Months Ended September 30, 2020 2019 (Dollars in thousands) Net charge-offs Allowance for loan losses Total nonaccrual loans Total loans Noninterest Income. Noninterest income increased The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown: Nine Months Ended September 30, Increase (Decrease) 2020 2019 Amount Percent (Dollars in thousands) Loan and deposit service fees Mortgage servicing fees, net of amortization Net gain on sale of loans Net gain on sale of investment securities Increase in cash surrender value of bank-owned life insurance Other income Total noninterest income Noninterest Expense. The following table provides an analysis of the changes in the components of noninterest expense for the periods shown: Nine Months Ended September 30, Increase (Decrease) 2020 2019 Amount Percent (Dollars in thousands) Compensation and benefits Data processing Occupancy and equipment Supplies, postage, and telephone Regulatory assessments and state taxes Advertising Professional fees FDIC insurance premium FHLB prepayment penalty Other expense Total Provision for Income Tax. 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 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Average Interest Average Interest Average Interest Average Interest Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/ Balance Earned/ Yield/ Rate Outstanding Paid Rate Outstanding Paid Rate Outstanding Paid Rate Outstanding Paid Rate Loans receivable, net (1) Investment securities Mortgage-backed securities FHLB dividends Interest-bearing deposits in banks Total interest-earning assets (2) Interest-bearing liabilities: Savings accounts Transaction accounts Money market accounts Certificates of deposit Total deposits Total interest-bearing liabilities Net interest income Net interest rate spread Net earning assets Net interest margin (3) Average interest-earning assets to average interest-bearing liabilities (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. 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 Nine Months Ended September 30, 2020 vs. 2019 September 30, 2020 vs. 2019 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Total Increase (Decrease) Volume Rate Total Increase (Decrease) (In thousands) (In thousands) Interest earning assets: Loans receivable, net Investments FHLB stock Other(1) Total interest-earning assets Interest-bearing liabilities: Savings accounts Interest-bearing transaction accounts Money market accounts Certificates of deposit Borrowings Total interest-bearing liabilities Net change in interest income (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 nine months ended September 30, At September 30, Within After 1 Year Through After 3 Years Through Beyond Total 1 Year 3 Years 5 Years 5 Years Balance (In thousands) Borrower taxes and insurance Commitments and Off-Balance Sheet Arrangements The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of September 30, Amount of Commitment Expiration 1 Year 3 Years 5 Years 5 Years Committed (In thousands) Commitments to originate loans: Fixed-rate Unfunded commitments under lines of credit or existing loans Standby letters of credit Total commitments 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 September 30, At September 30, Certificates of deposit due within one year as of September 30, 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 September 30, Capital Resources At September 30, At September 30, The following table provides the capital requirements and actual results for First Federal at September 30, Actual Minimum Capital Requirements Minimum Required to be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets) Common equity tier I (to risk-weighted assets) Tier I risk-based capital (to risk-weighted assets) Total risk-based capital (to risk-weighted assets) In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%. Effect of Inflation and Changing Prices The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 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, (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 September 30, (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 September 30, 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 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. The disclosures below supplement the risk factors 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. 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 September 30, 2020: Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans (2) Maximum Number of Shares that May Yet Be Repurchased Under the Plans July 1, 2020 - July 31, 2020 August 1, 2020 - August 31, 2020 September 1, 2020 - September 30, 2020 Total (1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation of restricted stock to pay withholding taxes totaling 9,768 shares, 0 shares, and 320 shares, respectively, for the periods indicated. The Company also repurchased 0, 0, and 3,600 of unvested restricted stock awards, respectively, upon a participant's separation from service. (2) On December 5, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 535,097 shares of its common stock, or approximately 5% of its shares of common stock issued and outstanding as of December 2, 2019. As of September 30, 2020, a total of 535,097 shares, or 100.0% percent of the shares authorized in the December 2019 stock repurchase plan, have been purchased at an average cost of $12.58 per share, leaving 0 shares available for future purchases. Not applicable. Not applicable. COVID-19 Legislation and Regulation. General. Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 emergency. On March 27, 2020 the President signed into law the historic $2 Exhibit No. Exhibit Description Filed Herewith Form Original Exhibit No. Filing Date SEC File No. 31.1 X 31.2 X 32 X 101 The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 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: November /s/ Matthew P. Deines President, Chief Executive Officer and Director (Principal Executive Officer) Date: November /s/ Geraldine L. Bullard Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) $ 16,776 $ 13,519 35,303 35,220 369,111 315,580 4,754 503 1,061,417 878,437 5,944 6,034 7,367 3,931 14,737 14,342 1,545 871 38,104 30,027 9,612 8,872 $ 1,564,670 $ 1,307,336 $ 1,254,456 $ 1,001,645 109,150 112,930 51 373 18,359 14,392 1,986 1,145 1,384,002 1,130,485 0 0 102 107 97,229 102,017 89,546 86,156 3,186 (1,539 ) (9,395 ) (9,890 ) 180,668 176,851 $ 1,564,670 $ 1,307,336 ASSETS September 30, 2019 December 31, 2018 Cash and due from banks $ 15,659 $ 15,430 Interest-bearing deposits in banks 40,822 10,893 Investment securities available for sale, at fair value 251,196 262,967 Investment securities held to maturity, at amortized cost 37,649 43,503 Loans held for sale 2,055 — Loans receivable (net of allowance for loan losses of $9,443 and $9,533) 841,146 863,852 Federal Home Loan Bank (FHLB) stock, at cost 4,931 6,927 Accrued interest receivable 3,726 4,048 Premises and equipment, net 14,443 15,255 Mortgage servicing rights, net 926 1,044 Bank-owned life insurance, net 29,754 29,319 Prepaid expenses and other assets 8,003 5,520 Total assets $ 1,250,310 $ 1,258,758 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 970,700 $ 940,260 Borrowings 85,324 136,552 Accrued interest payable 262 521 Accrued expenses and other liabilities 14,838 8,071 Advances from borrowers for taxes and insurance 1,876 1,090 Total liabilities 1,073,000 1,086,494 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 10,800,932 shares at September 30, 2019, and 11,170,018 shares at December 31, 2018 108 112 Additional paid-in capital 102,786 105,825 Retained earnings 85,143 81,607 Accumulated other comprehensive loss, net of tax (672 ) (4,731 ) Unearned employee stock ownership plan (ESOP) shares (10,055 ) (10,549 ) Total shareholders' equity 177,310 172,264 Total liabilities and shareholders' equity $ 1,250,310 $ 1,258,758 $ 11,097 $ 10,096 $ 31,169 $ 30,661 565 1,087 2,264 3,536 1,603 921 3,988 2,900 9 65 85 190 97 92 199 268 13,371 12,261 37,705 37,555 1,405 2,141 5,584 6,133 205 691 840 2,717 1,610 2,832 6,424 8,850 11,761 9,429 31,281 28,705 1,350 (170 ) 4,116 420 10,411 9,599 27,165 28,285 868 999 2,514 2,899 148 44 (9 ) 143 1,725 655 4,109 830 969 0 2,235 57 622 147 1,577 435 449 70 782 225 4,781 1,915 11,208 4,589 6,070 4,771 17,397 14,097 640 680 2,099 1,978 1,367 1,161 4,063 3,409 254 208 749 678 262 209 659 573 285 197 934 569 361 278 1,115 907 86 (72 ) 156 82 0 344 210 344 756 648 2,363 1,859 10,081 8,424 29,745 24,496 5,111 3,090 8,628 8,378 1,436 580 2,104 1,582 $ 3,675 $ 2,510 $ 6,524 $ 6,796 $ 0.40 $ 0.25 $ 0.69 $ 0.68 Three Months Ended Nine Months Ended September 30, September 30, 2019 2018 2019 2018 INTEREST INCOME Interest and fees on loans receivable $ 9,930 $ 9,257 $ 29,955 $ 26,792 Interest on mortgage-backed securities 1,087 1,196 3,536 3,730 Interest on investment securities 921 952 2,900 2,787 Interest on deposits and other 65 50 190 136 FHLB dividends 92 100 268 237 Total interest income 12,095 11,555 36,849 33,682 INTEREST EXPENSE Deposits 2,141 1,498 6,133 3,608 Borrowings 691 792 2,717 2,678 Total interest expense 2,832 2,290 8,850 6,286 Net interest income 9,263 9,265 27,999 27,396 (RECAPTURE OF) PROVISION FOR LOAN LOSSES (170 ) 197 420 902 Net interest income after (recapture of) provision for loan losses 9,433 9,068 27,579 26,494 NONINTEREST INCOME Loan and deposit service fees 1,165 1,122 3,605 2,930 Mortgage servicing fees, net of amortization 44 23 143 155 Net gain on sale of loans 655 139 830 456 Net gain (loss) on sale of investment securities — (58 ) 57 77 Increase in cash surrender value of bank-owned life insurance 147 150 435 448 Other income 70 44 225 241 Total noninterest income 2,081 1,420 5,295 4,307 NONINTEREST EXPENSE Compensation and benefits 4,771 4,740 14,097 14,296 Data processing 680 676 1,978 1,981 Occupancy and equipment 1,161 1,119 3,409 3,348 Supplies, postage, and telephone 208 211 678 685 Regulatory assessments and state taxes 209 172 573 453 Advertising 197 185 569 799 Professional fees 278 319 907 1,099 FDIC insurance premium (72 ) 76 82 231 FHLB prepayment penalty 344 — 344 — Other 648 621 1,859 1,800 Total noninterest expense 8,424 8,119 24,496 24,692 INCOME BEFORE PROVISION FOR INCOME TAX 3,090 2,369 8,378 6,109 PROVISION FOR INCOME TAX 580 443 1,582 1,134 NET INCOME $ 2,510 $ 1,926 $ 6,796 $ 4,975 Basic earnings per share $ 0.25 $ 0.19 $ 0.68 $ 0.48 Diluted earnings per share $ 0.25 $ 0.19 $ 0.68 $ 0.47 $ 3,675 $ 2,510 $ 6,524 $ 6,796 Unrealized holding gains arising during the period 4,094 856 8,215 5,199 (859 ) (181 ) (1,724 ) (1,095 ) (969 ) 0 (2,235 ) (57 ) Income tax benefit related to reclassification adjustment on sales of securities 203 0 469 12 2,469 675 4,725 4,059 $ 6,144 $ 3,185 $ 11,249 $ 10,855 Three Months Ended Nine Months Ended September 30, September 30, 2019 2018 2019 2018 NET INCOME $ 2,510 $ 1,926 $ 6,796 $ 4,975 Other comprehensive income (loss), net of tax Unrealized gain (loss) on securities: Unrealized holding gain (loss), net of tax provision (benefit) of $181, $(295), $1,095, and $(1,136), respectively 675 (1,117 ) 4,104 (4,295 ) Reclassification adjustment for net loss (gain) on sales of securities realized in income, net of taxes of $0, $12, $(12), and $(11), respectively — 46 (45 ) (39 ) Other comprehensive income (loss), net of tax 675 (1,071 ) 4,059 (4,334 ) COMPREHENSIVE INCOME $ 3,185 $ 855 $ 10,855 $ 641 20192020 and 2018 Accumulated Other Comprehensive (Loss) 10,925,181 $ 109 $ 104,064 $ 83,795 $ (10,220 ) $ (1,347 ) $ 176,401 2,510 2,510 (131,400 ) (1 ) (1,314 ) (835 ) (2,150 ) Restricted stock award grants net of forfeitures 23,400 — — — Restricted stock awards canceled (16,249 ) 0 (266 ) (266 ) 675 675 251 251 51 165 216 (327 ) (327 ) 10,800,932 $ 108 $ 102,786 $ 85,143 $ (10,055 ) $ (672 ) $ 177,310 10,326,226 $ 103 $ 98,421 $ 86,633 $ (9,559 ) $ 717 $ 176,315 3,675 �� 3,675 (141,793 ) (1 ) (1,418 ) (248 ) (1,667 ) 59,859 — — — Restricted stock awards canceled (10,088 ) 0 (123 ) (123 ) 2,469 2,469 362 362 (13 ) 164 151 (514 ) (514 ) 10,234,204 $ 102 $ 97,229 $ 89,546 $ (9,395 ) $ 3,186 $ 180,668 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, June 30, 2018 11,483,494 $ 115 $ 108,780 $ 79,767 $ (10,879 ) $ (4,836 ) $ 172,947 Net income 1,926 1,926 Common stock repurchased (126,200 ) (1 ) (1,262 ) (813 ) (2,076 ) Restricted stock award forfeitures net of grants (13,600 ) — — — Restricted stock awards canceled (18,076 ) (1 ) (292 ) (293 ) Other comprehensive loss, net of tax (1,071 ) (1,071 ) Share-based compensation 256 256 ESOP shares committed to be released 49 165 214 BALANCE, September 30, 2018 11,325,618 $ 113 $ 107,531 $ 80,880 $ (10,714 ) $ (5,907 ) $ 171,903 BALANCE, June 30, 2019 10,925,181 $ 109 $ 104,064 $ 83,795 $ (10,220 ) $ (1,347 ) $ 176,401 Net income 2,510 2,510 Common stock repurchased (131,400 ) (1 ) (1,314 ) (835 ) (2,150 ) Restricted stock award grants net of forfeitures 23,400 — — — Restricted stock awards canceled (16,249 ) — (266 ) (266 ) Other comprehensive income, net of tax 675 675 Share-based compensation 251 251 ESOP shares committed to be released 51 165 216 Cash dividends declared and paid ($0.03 per share) (327 ) (327 ) BALANCE, September 30, 2019 10,800,932 $ 108 $ 102,786 $ 85,143 $ (10,055 ) $ (672 ) $ 177,310 Accumulated Other Comprehensive (Loss) 11,170,018 $ 112 $ 105,825 $ 81,607 $ (10,549 ) $ (4,731 ) $ 172,264 6,796 6,796 (372,237 ) (4 ) (3,719 ) (2,274 ) (5,997 ) Restricted stock award grants net of forfeitures 19,400 — — — Restricted stock awards canceled (16,249 ) 0 (266 ) (266 ) 4,059 4,059 804 804 142 494 636 (986 ) (986 ) 10,800,932 $ 108 $ 102,786 $ 85,143 $ (10,055 ) $ (672 ) $ 177,310 10,731,639 $ 107 $ 102,017 $ 86,156 $ (9,890 ) $ (1,539 ) $ 176,851 6,524 6,524 (560,306 ) (5 ) (5,599 ) (1,565 ) (7,169 ) 72,959 — — — Restricted stock awards canceled (10,088 ) 0 (123 ) (123 ) 4,725 4,725 917 917 17 495 512 (1,569 ) (1,569 ) 10,234,204 $ 102 $ 97,229 $ 89,546 $ (9,395 ) $ 3,186 $ 180,668 6FIRST NORTHWEST BANCORP AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFor the Nine Months Ended September 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 4,975 4,975 Common stock repurchased (423,213 ) (4 ) (4,228 ) (2,697 ) (6,929 ) Restricted stock award forfeitures net of grants (18,600 ) — — — Restricted stock awards canceled (18,076 ) (1 ) (292 ) (293 ) Other comprehensive loss, net of tax (4,334 ) (4,334 ) Share-based compensation 788 788 ESOP shares committed to be released 157 494 651 BALANCE, September 30, 2018 11,325,618 $ 113 $ 107,531 $ 80,880 $ (10,714 ) $ (5,907 ) $ 171,903 BALANCE, December 31, 2018 11,170,018 $ 112 $ 105,825 $ 81,607 $ (10,549 ) $ (4,731 ) $ 172,264 Net income 6,796 6,796 Common stock repurchased (372,237 ) (4 ) (3,719 ) (2,274 ) (5,997 ) Restricted stock award grants net of forfeitures 19,400 — — — Restricted stock awards canceled (16,249 ) — (266 ) (266 ) Other comprehensive income, net of tax 4,059 4,059 Share-based compensation 804 804 ESOP shares committed to be released 142 494 636 Cash dividends declared and paid ($0.09 per share) (986 ) (986 ) BALANCE, September 30, 2019 10,800,932 $ 108 $ 102,786 $ 85,143 $ (10,055 ) $ (672 ) $ 177,310 $ 6,524 $ 6,796 1,034 1,000 1,251 1,373 (1,003 ) (822 ) 315 181 (989 ) (60 ) 0 (3 ) 4,116 420 512 636 917 804 (4,109 ) (830 ) (2,235 ) (57 ) (1,577 ) (435 ) (129,495 ) (25,050 ) 129,353 23,825 (3,436 ) 322 (1,500 ) (3,294 ) (322 ) (259 ) 3,967 6,767 3,323 11,314 (234,527 ) (9,456 ) 45,684 21,592 142,276 3,558 0 5,756 90 1,996 Purchase of bank-owned life insurance, net of surrenders (6,500 ) 0 (186,588 ) 22,837 (1,429 ) (188 ) (240,994 ) 46,095 7FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,796 $ 4,975 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,000 993 Amortization and accretion of premiums and discounts on investments, net 1,373 1,433 (Accretion) amortization of deferred loan fees, net (822 ) 25 Amortization of mortgage servicing rights, net 181 180 Additions to mortgage servicing rights, net (60 ) (159 ) Net (decrease) increase on the valuation allowance on mortgage servicing rights (3 ) — Provision for loan losses 420 902 Allocation of ESOP shares 636 651 Share-based compensation 804 788 Gain on sale of loans, net (830 ) (456 ) Gain on sale of securities available for sale, net (57 ) (50 ) Gain on sale of securities held to maturity, net — (27 ) Increase in cash surrender value of life insurance, net (435 ) (448 ) Origination of loans held for sale (25,050 ) (16,054 ) Proceeds from loans held for sale 23,825 17,107 Change in assets and liabilities: Decrease (increase) in accrued interest receivable 322 (169 ) Increase in prepaid expenses and other assets (3,567 ) (412 ) (Decrease) increase in accrued interest payable (259 ) 35 Increase in accrued expenses and other liabilities 6,767 2,600 Net cash from operating activities 11,041 11,914 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale (9,456 ) (63,046 ) Proceeds from maturities, calls, and principal repayments of securities available for sale 21,592 20,164 Proceeds from sales of securities available for sale 3,558 56,683 Proceeds from maturities, calls, and principal repayments of securities held to maturity 5,756 6,010 Proceeds from sales of securities held to maturity — 2,702 Redemption of FHLB stock 1,996 697 Proceeds from sale of real estate owned and repossessed assets 273 — Net decrease (increase) in loans receivable 22,837 (61,274 ) Purchase of premises and equipment, net (188 ) (2,714 ) Net cash from investing activities 46,368 (40,778 ) $ 252,811 $ 30,440 30,000 15,000 (30,000 ) (25,000 ) (3,780 ) (41,228 ) 841 786 (1,569 ) (986 ) Net share settlement of stock awards (123 ) (266 ) (7,169 ) (5,997 ) 241,011 (27,251 ) 3,340 30,158 48,739 26,323 $ 52,079 $ 56,481 $ 6,746 $ 9,109 $ 1,400 $ 1,210 $ 5,980 $ 5,142 $ 495 $ 271 $ 902 $ 0 8FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2019 2018 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 30,440 $ 46,573 Net decrease in advances from the FHLB (51,228 ) (22,574 ) Net increase in advances from borrowers for taxes and insurance 786 620 Dividends paid (986 ) — Net share settlement of stock awards (266 ) (293 ) Repurchase of common stock (5,997 ) (6,929 ) Net cash from financing activities (27,251 ) 17,397 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,158 (11,467 ) CASH AND CASH EQUIVALENTS, beginning of period 26,323 36,801 CASH AND CASH EQUIVALENTS, end of period $ 56,481 $ 25,334 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest on deposits and borrowings $ 9,109 $ 6,251 Income taxes $ 1,210 $ 700 NONCASH INVESTING ACTIVITIES Unrealized gain (loss) on securities available for sale $ 5,142 $ (5,481 ) Loans transferred to real estate owned and repossessed assets, net of deferred loan fees and allowance for loan losses $ 271 $ 154 See selected notes to the consolidated financial statements.(Unaudited)10-K10-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 nine months ended September 30, 2019,2020, are not necessarily indicative of the results that may be expected for future periods.determined there are no such events or transactions requiring recognition or disclosure.February 2016, the August 2018, FASB issued ASU No. 2016-02, Leases. ASU 2016-022018-13,Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is intended to increase transparencycalculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and comparability among organizations by requiringout of Level 3 of the recognitionfair value hierarchy, purchases and issuances of lease assets and lease liabilities on the balance sheet andFIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)disclosure of key information about leasing arrangements. The ASU requires a lessee to recognize on the balance sheetLevel 3 assets and liabilities, for leases with lease termsand information about the measurement uncertainty of more than 12 months. Consistent with current GAAP, 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 be recognized on the balance sheet. For public companies, this update is effective for interim and annual periods beginning after December 15, 2018. The adoption of ASU No. 2016-02 effective January 1, 2019, resulted 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 September 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 hedging strategies in the 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 andLevel 3 fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effectmeasurements as 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 early adoption is permitted. Adoption of 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.reporting date. This guidance is effective for public companies in fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2020. Early2019, with early adoption is permitted but not earlier than the adoption of Topic 606. Adoption of thispermitted. 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.OctoberAugust 2018, the FASB issued ASU No. 2018-16 Derivatives and Hedging (Topic 815)2018-15,Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, Inclusion ofto 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 Rateaccounting 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 amendmentsguidance 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 bewhich 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 consolidatedCompany’s financial statements.FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)Recently adopted regulatory ruleAugust 2018, the Securities and Exchange Commission issued 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 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 started complying with these new requirements beginning with the Quarterly Report for the period ended March 31, 2019, on Form 10-Q.Recently issued accounting pronouncements not yet adoptedIn June 2016, 2020, the FASB issued ASU No. 2016-13, 2020-03,Codification Improvements to Financial Instruments. The amendments represent clarification and improvements to the codification and correct unintended application. This standard was effective immediately upon issuance and its adoption did not have a material effect on the Company’s financial statements. 2016-132016-13 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. 2019-04, 825)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. 2019-05, 326)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 326-20326-20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment.OctoberNovember 2019, the FASB confirmed that it will be moving forward with finalizing its proposal to deferissued 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. For this effective date deferral to take effect, the FASB must issue the final ASU which we expect to be issued in mid-November. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. Upon issuanceThe Company plans to defer adoption of the final ASU, we plan to adopt this guidance on CECL until January 1, 2023. 2016-13,2016-13, ASU No. 2019-042019-04 and ASU No. 2019-05,2019-05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of these ASUs will have on the Company's consolidated financial statements. The Company's internal project management team continues to review models, work with our third-partythird-party vendor, and discuss changes to processes and procedures to ensure the Company is fully compliant with the amendments at the adoption date.August 2018, December 2019, FASB issued ASU No. 2018-13, Disclosure Framework — Changes2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies various aspects related to accounting for income taxes by removing certain exceptions to the Disclosure Requirements for Fair Value Measurement which removes, modifies,general principles in Topic 740. The standard also clarifies and adds certain disclosure requirements relatedamends existing guidance to fair value measurements in ASC 820. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasonsFIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES 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, 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’sCompany's financial statements.(Unaudited)and held-to-maturity at September 30, 20192020 are summarized as follows: Amortized Cost (In thousands) Available for Sale Municipal bonds $ 10,337 $ 69 $ — $ 10,406 U.S. government agency issued asset-backed securities (ABS agency) 25,934 — (668 ) 25,266 Corporate issued asset-backed securities (ABS corporate) 37,864 — (768 ) 37,096 Corporate issued debt securities (Corporate debt) 9,986 — (350 ) 9,636 U.S. Small Business Administration securities (SBA) 29,729 125 (39 ) 29,815 Mortgage-backed securities: U.S. government agency issued mortgage-backed securities (MBS agency) 128,937 1,025 (236 ) 129,726 Corporate issued mortgage-backed securities (MBS corporate) 9,284 — (33 ) 9,251 Total securities available for sale $ 252,071 $ 1,219 $ (2,094 ) $ 251,196 Held to Maturity Municipal bonds $ 7,041 $ 58 $ — $ 7,099 SBA 138 — — 138 Mortgage-backed securities: MBS agency 30,470 1,342 (14 ) 31,798 Total securities held to maturity $ 37,649 $ 1,400 $ (14 ) $ 39,035 FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) Fair Value $ 94,006 $ 3,232 $ (95 ) $ 97,143 73,915 1,123 (1,420 ) 73,618 33,553 7 (813 ) 32,747 33,401 283 (454 ) 33,230 23,623 242 (1 ) 23,864 90,281 2,133 (12 ) 92,402 16,300 2 (195 ) 16,107 $ 365,079 $ 7,022 $ (2,990 ) $ 369,111 and held-to-maturity at December 31, 2018,2019, are summarized as follows: Fair Value $ 39,524 $ 125 $ (367 ) $ 39,282 29,796 0 (938 ) 28,858 41,728 0 (873 ) 40,855 9,986 0 (343 ) 9,643 28,423 72 (36 ) 28,459 159,697 811 (341 ) 160,167 8,374 0 (58 ) 8,316 $ 317,528 $ 1,008 $ (2,956 ) $ 315,580 Amortized Cost (In thousands) Available for Sale Municipal bonds $ 882 $ — $ (13 ) $ 869 ABS agency 26,125 — (373 ) 25,752 ABS corporate 37,897 — (1,174 ) 36,723 Corporate debt 9,986 98 (196 ) 9,888 SBA 35,936 23 (289 ) 35,670 Mortgage-backed securities: MBS agency 147,205 12 (3,762 ) 143,455 MBS corporate 10,953 — (343 ) 10,610 Total securities available for sale $ 268,984 $ 133 $ (6,150 ) $ 262,967 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 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 $ (462 ) $ 14,259 $ (206 ) $ 11,006 $ (668 ) $ 25,265 ABS corporate — — (768 ) 37,096 (768 ) 37,096 Corporate debt (89 ) 4,911 (261 ) 4,725 (350 ) 9,636 SBA — — (39 ) 8,867 (39 ) 8,867 Mortgage-backed securities: MBS agency — — (236 ) 37,175 (236 ) 37,175 MBS corporate — — (33 ) 9,251 (33 ) 9,251 Total available for sale $ (551 ) $ 19,170 $ (1,543 ) $ 108,120 $ (2,094 ) $ 127,290 Held to Maturity SBA $ — $ — $ — $ 63 $ — $ 63 Mortgage-backed securities: MBS agency — — (14 ) 1,592 (14 ) 1,592 Total held to maturity $ — $ — $ (14 ) $ 1,655 $ (14 ) $ 1,655 FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) $ (95 ) $ 7,757 $ 0 $ 0 $ (95 ) $ 7,757 (172 ) 8,172 (1,248 ) 25,933 (1,420 ) 34,105 (85 ) 3,801 (728 ) 26,982 (813 ) 30,783 (90 ) 6,804 (364 ) 9,622 (454 ) 16,426 0 65 (1 ) 3,775 (1 ) 3,840 (12 ) 2,221 0 6 (12 ) 2,227 (31 ) 1,979 (164 ) 3,998 (195 ) 5,977 $ (485 ) $ 30,799 $ (2,505 ) $ 70,316 $ (2,990 ) $ 101,115 2018: 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 $ (8 ) $ 757 $ (5 ) $ 110 $ (13 ) $ 867 ABS agency (302 ) 23,286 (71 ) 2,466 (373 ) 25,752 ABS corporate (571 ) 14,527 (603 ) 22,196 (1,174 ) 36,723 Corporate debt — — (196 ) 4,791 (196 ) 4,791 SBA (44 ) 13,400 (245 ) 13,089 (289 ) 26,489 Mortgage-backed securities: MBS agency (28 ) 17,996 (3,734 ) 120,617 (3,762 ) 138,613 MBS corporate — — (343 ) 10,610 (343 ) 10,610 Total available for sale $ (953 ) $ 69,966 $ (5,197 ) $ 173,879 $ (6,150 ) $ 243,845 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 $ (367 ) $ 29,928 $ 0 $ 0 $ (367 ) $ 29,928 (59 ) 3,855 (879 ) 25,002 (938 ) 28,857 (31 ) 3,848 (842 ) 37,007 (873 ) 40,855 (17 ) 4,983 (326 ) 4,660 (343 ) 9,643 0 0 (36 ) 15,034 (36 ) 15,034 (166 ) 18,744 (175 ) 47,463 (341 ) 66,207 0 0 (58 ) 8,316 (58 ) 8,316 $ (640 ) $ 61,358 $ (2,316 ) $ 137,482 $ (2,956 ) $ 198,840 20192020 and December 31, 2018,2019, there were 3730 and 6962 investment securities in an unrealized loss position, respectively.and market demand, and notrelated 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.no0 OTTI losses during the three and nine months ended September 30, 2019 2020 and 2018.2019. $ 0 $ 0 11,956 12,175 142 142 94,483 96,192 106,581 108,509 0 0 4,524 4,563 71,563 70,390 182,411 185,649 258,498 260,602 $ 365,079 $ 369,111 $ 0 $ 0 13,360 13,391 6,261 6,257 148,450 148,835 168,071 168,483 0 0 2,043 2,084 58,460 57,680 88,954 87,333 149,457 147,097 $ 317,528 $ 315,580 September 30, 2019 Available-for-Sale Held-to-Maturity Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year $ — $ — $ — $ — Due after one through five years 7,082 7,149 354 358 Due after five through ten years 11,071 11,089 1,597 1,583 Due after ten years 120,068 120,739 28,519 29,857 Total mortgage-backed securities 138,221 138,977 30,470 31,798 All other investment securities: Due within one year — — — — Due after one through five years — — 1,094 1,112 Due after five through ten years 44,838 44,367 6,085 6,125 Due after ten years 69,012 67,852 — — Total all other investment securities 113,850 112,219 7,179 7,237 Total investment securities $ 252,071 $ 251,196 $ 37,649 $ 39,035 December 31, 2018 Available-for-Sale Held-to-Maturity Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year $ — $ — $ — $ — Due after one through five years 7,204 7,089 578 569 Due after five through ten years 11,862 11,637 2,035 1,978 Due after ten years 139,092 135,339 28,669 28,180 Total mortgage-backed securities 158,158 154,065 31,282 30,727 All other investment securities: Due within one year — — — — Due after one through five years — — 734 741 Due after five through ten years 19,564 19,362 6,728 6,743 Due after ten years 91,262 89,540 4,759 4,779 Total all other investment securities 110,826 108,902 12,221 12,263 Total investment securities $ 268,984 $ 262,967 $ 43,503 $ 42,990 $ 47,844 $ 0 $ 142,276 $ 3,558 1,593 0 3,097 57 (624 ) 0 (862 ) 0 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 (In thousands) Proceeds from sales $ — $ 1,979 $ 3,558 $ 56,683 Gross realized gains — — 57 233 Gross realized losses — (58 ) — (183 ) During the nine months ended September 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 $2.7 million with gross realized gains and losses of $32,000 and $5,000, respectively. September 30, 2019 December 31, 2018 (In thousands) Real Estate: One-to-four family $ 302,337 $ 336,178 Multi-family 62,173 82,331 Commercial real estate 254,058 253,235 Construction and land 64,954 54,102 Total real estate loans 683,522 725,846 Consumer: Home equity 36,898 37,629 Auto and other consumer 111,312 87,357 Total consumer loans 148,210 124,986 Commercial business loans 14,325 18,898 Total loans 846,057 869,730 Less: Net deferred loan fees 117 292 Premium on purchased loans, net (4,649 ) (3,947 ) Allowance for loan losses 9,443 9,533 Total loans receivable, net $ 841,146 $ 863,852 $ 317,755 $ 306,014 127,569 96,098 283,390 255,722 75,204 37,187 803,918 695,021 34,120 35,046 111,782 112,119 145,902 147,165 123,036 41,571 1,072,856 883,757 2,628 206 (4,196 ) (4,514 ) 13,007 9,628 $ 1,061,417 $ 878,437 $ 3,780 $ 1,128 $ 3,021 $ 738 $ 429 $ 2,252 $ 463 $ 298 $ 12,109 62 307 319 240 (4 ) 427 0 (1 ) 1,350 0 0 0 0 0 (479 ) 0 0 (479 ) 2 0 0 1 0 24 0 0 27 $ 3,844 $ 1,435 $ 3,340 $ 979 $ 425 $ 2,224 $ 463 $ 297 $ 13,007 $ 3,024 $ 888 $ 2,243 $ 399 $ 454 $ 2,261 $ 208 $ 151 $ 9,628 764 547 1,097 577 (30 ) 760 255 146 4,116 0 0 0 0 0 (853 ) 0 0 (853 ) 56 0 0 3 1 56 0 0 116 $ 3,844 $ 1,435 $ 3,340 $ 979 $ 425 $ 2,224 $ 463 $ 297 $ 13,007 $ 3,844 $ 1,435 $ 3,340 $ 979 $ 425 $ 2,224 $ 463 $ 297 $ 13,007 3,791 1,435 3,339 978 421 2,036 463 297 12,760 53 0 1 1 4 188 0 0 247 $ 317,755 $ 127,569 $ 283,390 $ 75,204 $ 34,120 $ 111,782 $ 123,036 $ 0 $ 1,072,856 313,744 127,282 282,103 75,179 33,983 111,174 123,036 0 1,066,501 4,011 287 1,287 25 137 608 0 0 6,355 At or For the Three Months Ended September 30, 2019 Multi-family Unallocated Total (In thousands) ALLL: Beginning balance $ 3,417 $ 651 $ 2,357 $ 711 $ 465 $ 1,790 $ 171 $ 169 $ 9,731 (Recapture of) provision for loan losses (307 ) (64 ) 47 16 (30 ) 192 (13 ) (11 ) (170 ) Charge-offs — — — — — (237 ) 1 — (236 ) Recoveries 1 — — 1 23 93 — — 118 Ending balance $ 3,111 $ 587 $ 2,404 $ 728 $ 458 $ 1,838 $ 159 $ 158 $ 9,443 At or For the Nine Months Ended September 30, 2019 Multi-family Unallocated Total (In thousands) ALLL: Beginning balance $ 3,297 $ 762 $ 2,289 $ 585 $ 480 $ 1,611 $ 334 $ 175 $ 9,533 Provision for loan losses (190 ) (175 ) 115 142 (66 ) 785 (174 ) (17 ) 420 Charge-offs — — — — — (785 ) (3 ) — (788 ) Recoveries 4 — — 1 44 227 2 — 278 Ending balance $ 3,111 $ 587 $ 2,404 $ 728 $ 458 $ 1,838 $ 159 $ 158 $ 9,443 At September 30, 2019 Multi-family Unallocated Total (In thousands) Total ALLL $ 3,111 $ 587 $ 2,404 $ 728 $ 458 $ 1,838 $ 159 $ 158 $ 9,443 General reserve 3,080 586 2,394 728 454 1,735 153 158 9,288 Specific reserve 31 1 10 — 4 103 6 — 155 Total loans $ 302,337 $ 62,173 $ 254,058 $ 64,954 $ 36,898 $ 111,312 $ 14,325 $ — $ 846,057 299,496 62,065 252,152 64,925 36,619 110,836 14,059 — 840,152 2,841 108 1,906 29 279 476 266 — 5,905 At or For the Three Months Ended September 30, 2018 Multi-family Unallocated Total ALLL: (In thousands) Beginning balance $ 3,050 $ 841 $ 2,160 $ 514 $ 642 $ 1,332 $ 716 $ 27 $ 9,282 Provision for loan losses 3 (31 ) (47 ) 28 (81 ) 179 (31 ) 177 197 Charge-offs (2 ) — — — — (265 ) — — (267 ) Recoveries 2 — — — 7 114 — — 123 Ending balance $ 3,053 $ 810 $ 2,113 $ 542 $ 568 $ 1,360 $ 685 $ 204 $ 9,335 At or For the Nine Months Ended September 30, 2018 Multi-family Unallocated Total ALLL: (In thousands) Beginning balance $ 3,061 $ 648 $ 1,847 $ 648 $ 787 $ 712 $ 265 $ 792 $ 8,760 Provision for loan losses 6 162 266 (107 ) (242 ) 986 419 (588 ) 902 Charge-offs (18 ) — — — — (522 ) — — (540 ) Recoveries 4 — — 1 23 184 1 — 213 Ending balance $ 3,053 $ 810 $ 2,113 $ 542 $ 568 $ 1,360 $ 685 $ 204 $ 9,335 At December 31, 2018 Multi-family Unallocated Total (In thousands) Total ALLL $ 3,297 $ 762 $ 2,289 $ 585 $ 480 $ 1,611 $ 334 $ 175 $ 9,533 General reserve 3,262 761 2,281 584 474 1,552 168 175 9,257 Specific reserve 35 1 8 1 6 59 166 — 276 Total loans $ 336,178 $ 82,331 $ 253,235 $ 54,102 $ 37,629 $ 87,357 $ 18,898 $ — $ 869,730 333,062 82,221 251,263 54,058 37,002 87,113 18,453 — 863,172 3,116 110 1,972 44 627 244 445 — 6,558 (In thousands) $ 3,417 $ 651 $ 2,357 $ 711 $ 465 $ 1,790 $ 171 $ 169 $ 9,731 (307 ) (64 ) 47 16 (30 ) 192 (13 ) (11 ) (170 ) 0 0 0 0 0 (237 ) 1 0 (236 ) 1 0 0 1 23 93 0 0 118 $ 3,111 $ 587 $ 2,404 $ 728 $ 458 $ 1,838 $ 159 $ 158 $ 9,443 (In thousands) $ 3,297 $ 762 $ 2,289 $ 585 $ 480 $ 1,611 $ 334 $ 175 $ 9,533 (190 ) (175 ) 115 142 (66 ) 785 (174 ) (17 ) 420 0 0 0 0 0 (785 ) (3 ) 0 (788 ) 4 0 0 1 44 227 2 0 278 $ 3,111 $ 587 $ 2,404 $ 728 $ 458 $ 1,838 $ 159 $ 158 $ 9,443 $ 3,024 $ 888 $ 2,243 $ 399 $ 454 $ 2,261 $ 208 $ 151 $ 9,628 2,993 887 2,235 399 439 2,119 203 151 9,426 31 1 8 0 15 142 5 0 202 $ 306,014 $ 96,098 $ 255,722 $ 37,187 $ 35,046 $ 112,119 $ 41,571 $ 0 $ 883,757 303,026 95,991 253,839 37,158 34,775 111,271 41,308 0 877,368 2,988 107 1,883 29 271 848 263 0 6,389 One-to-four family $ 202 $ 229 $ — $ 297 $ 332 $ — Multi-family 287 287 — 0 0 — Commercial real estate 1,221 1,310 — 1,240 1,320 — Construction and land 0 0 — 0 33 — Home equity 37 94 — 45 110 — Auto and other consumer 0 299 — 251 548 — Commercial business 0 0 — 0 0 — 1,747 2,219 — 1,833 2,343 — One-to-four family $ 3,809 $ 4,017 $ 53 2,691 2,911 31 Multi-family 0 0 0 107 107 1 Commercial real estate 66 66 1 643 643 8 Construction and land 25 57 1 29 29 0 Home equity 100 159 4 226 286 15 Auto and other consumer 608 780 188 597 690 142 Commercial business 0 0 0 263 263 5 4,608 5,079 247 4,556 4,929 202 4,011 4,246 53 2,988 3,243 31 287 287 0 107 107 1 1,287 1,376 1 1,883 1,963 8 25 57 1 29 62 0 137 253 4 271 396 15 608 1,079 188 848 1,238 142 0 0 0 263 263 5 $ 6,355 $ 7,298 $ 247 $ 6,389 $ 7,272 $ 202 September 30, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance (In thousands) With no allowance recorded: One-to-four family $ 235 $ 270 $ — $ 306 $ 339 $ — Commercial real estate 1,256 1,332 — 1,308 1,374 — Construction and land — — — — 1 — Home equity 49 143 — 330 478 — Auto and other consumer — 360 — — 276 — Commercial business — — — — 3 — Total 1,540 2,105 — 1,944 2,471 — With an allowance recorded: One-to-four family 2,606 2,817 31 2,810 3,085 35 Multi-family 108 108 1 110 110 1 Commercial real estate 650 650 10 664 663 8 Construction and land 29 63 — 44 71 1 Home equity 230 290 4 297 364 6 Auto and other consumer 476 622 103 244 244 59 Commercial business 266 266 6 445 445 166 Total 4,365 4,816 155 4,614 4,982 276 Total impaired loans: One-to-four family 2,841 3,087 31 3,116 3,424 35 Multi-family 108 108 1 110 110 1 Commercial real estate 1,906 1,982 10 1,972 2,037 8 Construction and land 29 63 — 44 72 1 Home equity 279 433 4 627 842 6 Auto and other consumer 476 982 103 244 520 59 Commercial business 266 266 6 445 448 166 Total $ 5,905 $ 6,921 $ 155 $ 6,558 $ 7,453 $ 276 Three Months Ended Nine Months Ended September 30, 2019 September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) With no allowance recorded: One-to-four family $ 236 $ 4 $ 243 $ 8 Commercial real estate 1,260 15 1,278 39 Home equity 52 14 144 30 Auto and other consumer — 10 — 14 Commercial business — 1 — 4 Total 1,548 44 1,665 95 With an allowance recorded: One-to-four family 2,891 64 2,850 146 Multi-family 108 1 109 4 Commercial real estate 651 8 657 23 Construction and land 52 2 57 2 Home equity 289 6 297 14 Auto and other consumer 394 9 324 16 Commercial business 266 2 299 9 Total 4,651 92 4,593 214 Total impaired loans: One-to-four family 3,127 68 3,093 154 Multi-family 108 1 109 4 Commercial real estate 1,911 23 1,935 62 Construction and land 52 2 57 2 Home equity 341 20 441 44 Auto and other consumer 394 19 324 30 Commercial business 266 3 299 13 Total $ 6,199 $ 136 $ 6,258 $ 309 One-to-four family $ 203 $ 6 $ 154 $ 6 Multi-family 294 1 197 0 Commercial real estate 1,200 1 1,211 15 Construction and land 0 0 12 0 Home equity 38 1 43 1 Auto and other consumer 0 13 0 16 Commercial business 168 0 90 0 1,903 22 1,707 38 One-to-four family $ 4,397 $ 91 $ 3,335 $ 158 Multi-family 0 0 158 0 Commercial real estate 67 2 380 2 Construction and land 26 2 28 3 Home equity 140 3 212 7 Auto and other consumer 702 24 718 33 Commercial business 0 0 146 0 5,332 122 4,977 203 4,600 97 3,489 164 294 1 355 0 1,267 3 1,591 17 26 2 40 3 178 4 255 8 702 37 718 49 168 0 236 0 $ 7,235 $ 144 $ 6,684 $ 241 2019,2020, was $99,000$84,000 and $271,000,$181,000, respectively. Three Months Ended Nine Months Ended September 30, 2018 September 30, 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) With no allowance recorded: One-to-four family $ 401 $ 9 $ 405 $ 12 Commercial real estate 1,334 13 2,148 34 Construction and land — — 1,658 — Home equity 344 3 353 3 Auto and other consumer — 7 — 11 Total 2,079 32 4,564 60 With an allowance recorded: One-to-four family 2,978 74 3,046 156 Multi-family 112 1 113 4 Commercial real estate 708 9 763 26 Construction and land 71 5 57 6 Home equity 266 7 274 16 Auto and other consumer 76 3 98 4 Commercial business 852 14 796 50 Total 5,063 113 5,147 262 Total impaired loans: One-to-four family 3,379 83 3,451 168 Multi-family 112 1 113 4 Commercial real estate 2,042 22 2,911 60 Construction and land 71 5 1,715 6 Home equity 610 10 627 19 Auto and other consumer 76 10 98 15 Commercial business 852 14 796 50 Total $ 7,142 $ 145 $ 9,711 $ 322 $ 236 $ 4 $ 243 $ 8 1,260 15 1,278 39 52 14 144 30 0 10 0 14 Commercial business 0 1 0 4 1,548 44 1,665 95 2,891 64 2,850 146 108 1 109 4 651 8 657 23 52 2 57 2 289 6 297 14 394 9 324 16 266 2 299 9 4,651 92 4,593 214 3,127 68 3,093 154 108 1 109 4 1,911 23 1,935 62 52 2 57 2 341 20 441 44 394 19 324 30 266 3 299 13 $ 6,199 $ 136 $ 6,258 $ 309 2018,2019, was $101,000$99,000 and $278,000,$271,000, respectively. September 30, 2019 December 31, 2018 (In thousands) One-to-four family $ 586 $ 759 Commercial real estate 116 133 Construction and land 29 44 Home equity 116 369 Auto and other consumer 475 245 Commercial business — 173 Total nonaccrual loans $ 1,322 $ 1,723 $ 1,939 $ 698 287 0 166 109 25 29 74 112 607 848 0 0 $ 3,098 $ 1,796 no0 loans past due 90 days or more and still accruing interest at September 30, 20192020 and December 31, 2018.2019:2020: $ 0 $ 685 $ 500 $ 1,185 $ 316,570 $ 317,755 0 0 0 0 127,569 127,569 0 0 0 0 283,390 283,390 0 0 25 25 75,179 75,204 0 685 525 1,210 802,708 803,918 0 12 0 12 34,108 34,120 724 416 180 1,320 110,462 111,782 724 428 180 1,332 144,570 145,902 0 0 0 0 123,036 123,036 $ 724 $ 1,113 $ 705 $ 2,542 $ 1,070,314 $ 1,072,856 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or More
Past Due Total
Past Due Current Total Loans (In thousands) Real Estate: One-to-four family $ — $ 510 $ 26 $ 536 $ 301,801 $ 302,337 Multi-family — — — — 62,173 62,173 Commercial real estate — — — — 254,058 254,058 Construction and land — 33 — 33 64,921 64,954 Total real estate loans — 543 26 569 682,953 683,522 Consumer: Home equity 208 25 — 233 36,665 36,898 Auto and other consumer 1,148 496 177 1,821 109,491 111,312 Total consumer loans 1,356 521 177 2,054 146,156 148,210 Commercial business loans — — — — 14,325 14,325 Total loans $ 1,356 $ 1,064 $ 203 $ 2,623 $ 843,434 $ 846,057 2018: 30-59 Days
Past Due 60-89 Days
Past Due 90 Days or More
Past Due Total
Past Due Current Total Loans (In thousands) Real Estate: One-to-four family $ 289 $ 176 $ 164 $ 629 $ 335,549 $ 336,178 Multi-family — — — — 82,331 82,331 Commercial real estate — — — — 253,235 253,235 Construction and land 35 14 31 80 54,022 54,102 Total real estate loans 324 190 195 709 725,137 725,846 Consumer: Home equity 97 30 9 136 37,493 37,629 Auto and other consumer 471 92 — 563 86,794 87,357 Total consumer loans 568 122 9 699 124,287 124,986 Commercial business loans 923 — — 923 17,975 18,898 Total loans $ 1,815 $ 312 $ 204 $ 2,331 $ 867,399 $ 869,730 $ 928 $ 92 $ 116 $ 1,136 $ 304,878 $ 306,014 0 0 0 0 96,098 96,098 0 0 0 0 255,722 255,722 38 0 0 38 37,149 37,187 966 92 116 1,174 693,847 695,021 299 24 0 323 34,723 35,046 1,423 370 614 2,407 109,712 112,119 1,722 394 614 2,730 144,435 147,165 0 115 0 115 41,456 41,571 $ 2,688 $ 601 $ 730 $ 4,019 $ 879,738 $ 883,757 8-point8-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.particularcertain 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 sufficientenough 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 1-31-3 in our risk rating system.2019,2020, by class of loans: Pass Watch Special Mention Substandard Total (In thousands) Real Estate: One-to-four family $ 297,192 $ 2,913 $ 1,142 $ 1,090 $ 302,337 Multi-family 61,767 — 406 — 62,173 Commercial real estate 246,300 3,447 2,999 1,312 254,058 Construction and land 63,272 1,541 112 29 64,954 Total real estate loans 668,531 7,901 4,659 2,431 683,522 Consumer: Home equity 36,055 536 27 280 36,898 Auto and other consumer 107,432 2,721 598 561 111,312 Total consumer loans 143,487 3,257 625 841 148,210 Commercial business loans 12,356 354 266 1,349 14,325 Total loans $ 824,374 $ 11,512 $ 5,550 $ 4,621 $ 846,057 $ 310,998 $ 2,624 $ 2,602 $ 1,531 $ 317,755 127,282 0 0 287 127,569 270,792 9,233 2,133 1,232 283,390 61,296 13,796 77 35 75,204 770,368 25,653 4,812 3,085 803,918 33,503 394 100 123 34,120 107,407 2,233 1,553 589 111,782 140,910 2,627 1,653 712 145,902 122,804 0 0 232 123,036 $ 1,034,082 $ 28,280 $ 6,465 $ 4,029 $ 1,072,856 2018,2019, by class of loans: $ 301,312 $ 2,685 $ 1,148 $ 869 $ 306,014 95,694 0 107 297 96,098 251,531 97 2,800 1,294 255,722 35,897 1,184 77 29 37,187 684,434 3,966 4,132 2,489 695,021 34,260 470 89 227 35,046 107,327 3,243 594 955 112,119 141,587 3,713 683 1,182 147,165 39,653 376 263 1,279 41,571 $ 865,674 $ 8,055 $ 5,078 $ 4,950 $ 883,757 Pass Watch Special Mention Substandard Total (In thousands) Real Estate: One-to-four family $ 330,476 $ 3,767 $ 957 $ 978 $ 336,178 Multi-family 82,221 — 110 — 82,331 Commercial real estate 244,919 6,281 663 1,372 253,235 Construction and land 51,480 2,578 — 44 54,102 Total real estate loans 709,096 12,626 1,730 2,394 725,846 Consumer: Home equity 36,559 465 123 482 37,629 Auto and other consumer 85,579 1,310 151 317 87,357 Total consumer loans 122,138 1,775 274 799 124,986 Commercial business loans 16,520 1,733 472 173 18,898 Total loans $ 847,754 $ 16,134 $ 2,476 $ 3,366 $ 869,730 2019,2020, by class of loans: Nonperforming Performing Total (In thousands) Real Estate: One-to-four family $ 586 $ 301,751 $ 302,337 Multi-family — 62,173 62,173 Commercial real estate 116 253,942 254,058 Construction and land 29 64,925 64,954 Consumer: Home equity 116 36,782 36,898 Auto and other consumer 475 110,837 111,312 Commercial business — 14,325 14,325 Total loans $ 1,322 $ 844,735 $ 846,057 $ 1,939 $ 315,816 $ 317,755 287 127,282 127,569 166 283,224 283,390 25 75,179 75,204 74 34,046 34,120 607 111,175 111,782 0 123,036 123,036 $ 3,098 $ 1,069,758 $ 1,072,856 2018,2019, by class of loans: Nonperforming Performing Total (In thousands) Real Estate: One-to-four family $ 759 $ 335,419 $ 336,178 Multi-family — 82,331 82,331 Commercial real estate 133 253,102 253,235 Construction and land 44 54,058 54,102 Consumer: Home equity 369 37,260 37,629 Auto and other consumer 245 87,112 87,357 Commercial business 173 18,725 18,898 Total loans $ 1,723 $ 868,007 $ 869,730 $ 698 $ 305,316 $ 306,014 0 96,098 96,098 109 255,613 255,722 29 37,158 37,187 112 34,934 35,046 848 111,271 112,119 0 41,571 41,571 $ 1,796 $ 881,961 $ 883,757 (Dollars in Thousands) 16 $ 5,097 3.4 % 10 29,587 19.8 44 98,895 66.1 6 5,987 4.0 76 139,566 93.3 6 707 0.5 88 4,741 3.2 94 5,448 3.7 13 4,528 3.0 183 $ 149,542 100.0 % September 30, 2019 December 31, 2018 (In thousands) Total TDR loans $ 3,576 $ 3,745 Allowance for loan losses related to TDR loans 45 43 Total nonaccrual TDR loans 133 84 FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) Total TDR loans $ 2,244 $ 3,544 Allowance for loan losses related to TDR loans 28 41 108 81 no0 newly restructured and renewals or modifications of existing TDR loans that occurred during the three and nine months ended September 30, 2019. 1 $ 0 $ 50 $ 0 $ 50 1 $ 0 $ 51 $ 0 $ 51 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 2019. Combination
Modification (Dollars in thousands) TDR loans that subsequently defaulted One- to four-family 1 $ — $ — $ 48 $ 48 The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the three months ended September 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 1 $ — $ — $ 49 $ 49 Post-modification outstanding recorded investment One- to four-family 1 $ — $ — $ 47 $ 47 FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)The following table presents newly restructured and renewals or modifications of existing TDR loans by class that occurred during the nine months ended September 30, 2018, by type of concession granted. Combination
Modification (Dollars in thousands) Pre-modification outstanding recorded investment One- to four-family 3 $ — $ — $ 229 $ 229 Post-modification outstanding recorded investment One- to four-family 3 $ — $ — $ 260 $ 260 There were no TDR loans which incurred a payment default within 12 months of the restructure date during the three and nine months ended September 30, 2018.No2019. 1 $ 0 $ 0 $ 48 $ 48 2019. $ 2,072 $ 108 $ 2,180 $ 2,290 $ 81 $ 2,371 0 0 0 107 0 107 0 0 0 643 0 643 64 0 64 160 0 160 0 0 0 263 0 263 $ 2,136 $ 108 $ 2,244 $ 3,463 $ 81 $ 3,544 September 30, 2019 December 31, 2018 Accrual Nonaccrual Total Accrual Nonaccrual Total (In thousands) One-to-four family $ 2,255 $ 133 $ 2,388 $ 2,358 $ 84 $ 2,442 Multi-family 108 — 108 110 — 110 Commercial real estate 650 — 650 663 — 663 Home equity 164 — 164 258 — 258 Commercial business 266 — 266 272 — 272 Total TDR loans $ 3,443 $ 133 $ 3,576 $ 3,661 $ 84 $ 3,745 $250,000,$250,000, at September 30, 20192020 and December 31, 2018, was $85.62019, were $73.0 million and $107.0$93.5 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows: $ 171,905 0.17% $ 168,983 0.86% 390,867 0.01% 276,496 0.03% 398,144 0.31% 248,086 0.46% 293,540 1.00% 308,080 1.85% $ 1,254,456 0.36% $ 1,001,645 0.84% September 30, 2019 December 31, 2018 Amount Weighted-Average Interest Rate Amount Weighted-Average Interest Rate (Dollars in thousands) Savings $ 173,786 0.96% $ 143,412 0.74% Transaction accounts 274,660 0.03% 262,152 0.05% Money market accounts 243,189 0.44% 273,344 0.43% Certificates of deposit 279,065 2.02% 261,352 1.86% $ 970,700 0.87% $ 940,260 0.77% September 30, 2019 December 31, 2018 (In thousands) Within one year or less $ 214,390 $ 148,119 After one year through two years 40,622 78,966 After two years through three years 11,053 20,934 After three years through four years 5,232 6,759 After four years through five years 7,768 6,574 After five years — — $ 279,065 $ 261,352 $ 190,613 $ 241,127 62,920 42,274 25,020 11,167 7,769 6,593 7,218 6,919 0 0 $ 293,540 $ 308,080 $37.2$92.6 million and $51.6 million are included in the September 30, 2020 and December 31, 2019 certificate of deposits total.20192020 and December 31, 2018,2019, included $54.8$79.9 million and $80.0$57.3 million, respectively, in public fund deposits. Investment securities with a carrying value of $42.2$39.0 million and $47.6$35.5 million were pledged as collateral for these deposits at September 30, 20192020 and December 31, 2018,2019, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. $ 176 $ 397 $ 785 $ 1,085 5 26 28 98 362 312 1,118 945 862 1,406 3,653 4,005 $ 1,405 $ 2,141 $ 5,584 $ 6,133 Three Months Ended Nine Months Ended �� September 30, September 30, 2019 2018 2019 2018 (In thousands) Savings $ 397 $ 104 $ 1,085 $ 148 Transaction accounts 26 25 98 38 Insured money market accounts 312 317 945 814 Certificates of deposit 1,406 1,052 4,005 2,608 $ 2,141 $ 1,498 $ 6,133 $ 3,608 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.FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)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.18.9%24.4% and 18.6%18.9% for the nine months ended September 30, 2019 2020 and 2018,2019, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 20192020 and 20182019 of 21%, largely due to the nontaxable earnings on bank owned life insurance and tax-exempt interest income earned on certain investment securities and loans. An estimate for the penalty on the BOLI contract surrendered this year is included in the 2020 tax provision resulting in a higher effective tax rate.2019 2020 and 2018. Three Months Ended Nine Months Ended September 30, September 30, 2019 2018 2019 2018 (In thousands, except share data) Numerator: Net income $ 2,510 $ 1,926 $ 6,796 $ 4,975 Denominator: Basic weighted average common shares outstanding 9,854,973 10,324,048 9,930,069 10,447,231 Dilutive restricted stock grants 48,368 73,556 76,738 48,884 Diluted weighted average common shares outstanding 9,903,341 10,397,604 10,006,807 10,496,115 Basic earnings per share $ 0.25 $ 0.19 $ 0.68 $ 0.48 Diluted earnings per share $ 0.25 $ 0.19 $ 0.68 $ 0.47 $ 3,675 $ 2,510 $ 6,524 $ 6,796 9,257,252 9,854,973 9,409,754 9,930,069 6,723 48,368 29,484 76,738 9,263,975 9,903,341 9,439,238 10,006,807 $ 0.40 $ 0.25 $ 0.69 $ 0.68 $ 0.40 $ 0.25 $ 0.69 $ 0.68 2019 2020 and 2018,2019, there were 807,299754,301 and 860,224794,042 shares in the ESOP that remain unallocated, respectively.5,2486,723 and 9165,248 restricted stock award anti-dilutive weighted-average shares for the three months ended September 30, 2019 2020 and 2018,2019 respectively. There were 17,34429,484 and 017,344 restricted stock award anti-dilutive weighted-average shares for the nine months ended September 30, 2019 2020 and 2018,2019 respectively.12-month12-month period are eligible to participate in the ESOP.FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)2019.2019 2020 and 2018,2019, was $99,000 and $185,000, and $214,000, respectively. For the nine months ended September 30, 2019 and 2018 compensationCompensation expense related to the ESOP for the nine months ended September 30, 2020 and 2019, was $359,000 and $512,000, and $651,000, respectively. 280,507 227,473 13,221 26,514 754,301 794,042 1,048,029 1,048,029 $ 7,468 $ 14,396 September 30, 2019 December 31, 2018 (Dollars in thousands) Allocated shares 227,473 174,584 Committed to be released shares 13,257 26,442 Unallocated shares 807,299 847,003 Total ESOP shares issued 1,048,029 1,048,029 Fair value of unallocated shares $ 13,982 $ 12,561 On November 16, 2015, 20152020 Equity Incentive Plan (the "2015("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock andshares or restricted stock units, and performance share awards to eligible participants. participants through May 2030. The cost of awards under the 20152020 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 20152020 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.520,000. At September 30, 2019,2020, there were 1,293,150456,541 total shares available for grant under the 20152020 EIP, including 52,614 sharesall of which are available to be granted as restricted stock. and nine months ended September 30, 2020 and 2019, 63,459 and 23,400 shares of restricted stock were awarded, respectively, and no0 stock options were granted. There were 20,000126,059 and 23,400 shares of restricted stock awarded, respectively, during the three and nine months ended September 30, 2018.2020 and 2019. Awarded shares of restricted stock vest ratably over periods ranging from three to five years from the date of grant as long asprovided 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.2019 2020 and 2018,2019, total compensation expense for the 2015 EIPequity incentive plans was $251,000$362,000 and $256,000,$251,000, respectively. For the nine months ended September 30, 2019 2020 and 2018,2019, total compensation expense for the 2015 EIPequity incentive plans was $917,000 and $804,000, and $788,000, respectively.2019 2020 and 2018, was2019, directors' compensation of $86,000was $102,000 and $86,000, respectively. For the nine months ended September 30, 2019 2020 and 2018,2019, directors' compensation was $256,000$273,000 and $256,000, respectively.FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)tablestable provide a summary of changes in non-vested restricted stock awards for the periodsperiod shown: 277,400 $ 14.68 63,459 11.93 (50,244 ) 13.58 (10,088 ) 13.58 (3,600 ) 12.70 276,927 $ 14.32 264,300 $ 14.60 126,059 12.97 (50,244 ) 13.58 (10,088 ) 13.58 (53,100 ) 13.36 276,927 $ 14.32 For the Three Months Ended September 30, 2019 Shares Weighted-Average Grant Date Fair Value Non-vested at July 1, 2019 286,600 $ 13.69 Granted 23,400 16.27 Vested (58,951 ) 13.24 Canceled (1) (16,249 ) 13.24 Non-vested at September 30, 2019 234,800 14.08 (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the total cost of the vested shares. The surrendered shares are canceled and are unavailable for reissue. For the Nine Months Ended September 30, 2019 Shares Weighted-Average Grant Date Fair Value Non-vested at January 1, 2019 290,600 $ 13.72 Granted 23,400 16.27 Vested (58,951 ) 13.24 Canceled (1) (16,249 ) 13.24 Forfeited (4,000 ) 16.07 Non-vested at September 30, 2019 234,800 14.08 (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. 2019,2020, there was $2.9$3.4 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.893.20 years.third-partythird-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.three-levelthree-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:FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)a particularan instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3. September 30, 2019 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total (In thousands) Securities available-for-sale Municipal bonds $ — $ 10,406 $ — $ 10,406 ABS agency — 25,266 — 25,266 ABS corporate — 37,096 — 37,096 Corporate debt — 9,636 — 9,636 SBA — 29,815 — 29,815 MBS agency — 129,726 — 129,726 MBS corporate — 9,251 — 9,251 $ — $ 251,196 $ — $ 251,196 FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) December 31, 2018 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total (In thousands) Securities available-for-sale Municipal bonds $ — $ 869 $ — $ 869 ABS agency — 25,752 — 25,752 ABS corporate — 36,723 — 36,723 Corporate debt — 9,888 — 9,888 SBA — 35,670 — 35,670 MBS agency — 143,455 — 143,455 MBS corporate — 10,610 — 10,610 $ — $ 262,967 $ — $ 262,967 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Unobservable Inputs $ 0 $ 97,143 $ 0 $ 97,143 0 73,618 0 73,618 0 32,747 0 32,747 0 33,230 0 33,230 0 23,864 0 23,864 0 92,402 0 92,402 0 16,107 0 16,107 $ 0 $ 369,111 $ 0 $ 369,111 $ 0 $ 39,282 $ 0 $ 39,282 0 28,858 0 28,858 0 40,855 0 40,855 0 9,643 0 9,643 0 28,459 0 28,459 0 160,167 0 160,167 0 8,316 0 8,316 $ 0 $ 315,580 $ 0 $ 315,580 September 30, 2019 Level 1 Level 2 Level 3 Total (In thousands) Impaired loans $ — $ — $ 5,905 $ 5,905 December 31, 2018 Level 1 Level 2 Level 3 Total (In thousands) Impaired loans $ — $ — $ 6,558 $ 6,558 $ 0 $ 0 $ 6,355 $ 6,355 $ 0 $ 0 $ 6,389 $ 6,389 20192020 and December 31, 2018,2019, there were no0 impaired loans with discounts to appraisal disposition value or other unobservable inputs.FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) $ 16,776 $ 16,776 $ 16,776 $ — $ — 369,111 369,111 — 369,111 — 4,754 4,754 — 4,754 — Loans receivable, net 1,061,417 1,055,850 — — 1,055,850 5,944 5,944 — 5,944 — 7,367 7,367 — 7,367 — 1,545 1,710 — — 1,710 $ 960,916 $ 960,916 $ 960,916 $ — $ — Time deposits 293,540 296,123 — 296,123 — Borrowings 109,150 110,744 — 110,744 — 51 51 — 51 — September 30, 2019 Carrying Amount Estimated Fair Value Fair Value Measurements Using: Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents $ 56,481 $ 56,481 $ 56,481 $ — $ — Investment securities available for sale 251,196 251,196 — 251,196 — Investment securities held to maturity 37,649 39,035 — 39,035 — Loans held for sale 2,055 2,055 — 2,055 — Loans receivable, net 841,146 818,269 — — 818,269 FHLB stock 4,931 4,931 — 4,931 — Accrued interest receivable 3,726 3,726 — 3,726 — Mortgage servicing rights, net 926 1,771 — — 1,771 Financial liabilities Demand deposits $ 691,635 $ 691,635 $ 691,635 $ — $ — Time deposits 279,065 279,762 — 279,762 — Borrowings 85,324 85,623 — 85,623 — Accrued interest payable 262 262 — 262 — December 31, 2018 Carrying Amount Estimated Fair Value Fair Value Measurements Using: Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents $ 26,323 $ 26,323 $ 26,323 $ — $ — Investment securities available for sale 262,967 262,967 — 262,967 — Investment securities held to maturity 43,503 42,990 — 42,990 — Loans receivable, net 863,852 840,861 — — 840,861 FHLB stock 6,927 6,927 — 6,927 — Accrued interest receivable 4,048 4,048 — 4,048 — Mortgage servicing rights, net 1,044 1,479 — — 1,479 Financial liabilities Demand deposits $ 678,908 $ 678,908 $ 678,908 $ — $ — Time deposits 261,352 259,549 — 259,549 — Borrowings 136,552 137,153 — 137,153 — Accrued interest payable 521 521 — 521 — $ 48,739 $ 48,739 $ 48,739 $ 0 $ 0 315,580 315,580 0 315,580 0 503 503 0 503 0 878,437 858,101 0 0 858,101 6,034 6,034 0 6,034 0 3,931 3,931 0 3,931 0 871 1,486 0 0 1,486 $ 693,565 $ 693,565 $ 693,565 $ 0 $ 0 308,080 308,819 0 308,819 0 112,930 113,076 0 113,076 0 373 373 0 373 0 2016-012016-01 requiring public entities to use the exit price notion effective January 1, 2018, are as follows:FIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)third-partythird-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-partythird-party pricing service, fair value is estimated using secondary pricing services or non-binding third-partythird-party broker quotes.2019,2020, 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.Note 10 - Noninterest IncomeOn January 1, 2018, the Company adopted the amendments of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has included the following table regarding the Company’s noninterest income for the periods presented. Three Months Ended Nine Months Ended September 30, September 30, 2019 2018 2019 2018 (In thousands) Noninterest income: Loan fees (1) $ 248 $ 223 $ 969 $ 480 Deposit fees 454 433 1,364 1,194 Debit interchange income 41 33 90 102 Credit card interchange income 466 456 1,325 1,309 Investment securities gain (loss), net (1) — (58 ) 57 77 Gain on loan sales, net (1) 655 139 830 456 Increase in cash surrender value of BOLI (1) 147 150 435 448 Other income: Investment services revenue 47 20 155 177 Gain or loss on subsidiary (1) 18 18 50 50 Remaining other income 5 6 20 14 Total other income 70 44 225 241 Total noninterest income $ 2,081 $ 1,420 $ 5,295 $ 4,307 (1) Not within scope of Topic 606 The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The following is a discussion of key revenues within the scope of the new revenue guidance.Deposit fees - The Company earns fees from its deposit customers for account maintenance, transaction-based activity and overdraft services. Account maintenance fees consist primarily 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 servicesFIRST NORTHWEST BANCORP AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)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.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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONSforward‑lookingforward-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‑lookingForward-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; andestimates of our risks and future costs and benefits.changes in general economic conditions, either nationally or in our market area, that are worse than expected;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;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,pandemic, and the relative differences between shortdirect 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 membersindirect impact 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 orpandemic 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;Bank, its customers andother 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.forward lookingforward-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 ofDue 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. 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-orientedcommunity financial institution serving Western Washington. Our thirteen locations includeClallam, 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 Lending Center which has been focused on the origination of loans secured by one- to four-family residential properties and that we intend to expand to include a commercial lending team.branches. Our business and operating strategy is focused on building sustainable earnings through employing experienced bankers, diversifying our loan portfolio through geographic expansion and loan product mix, expanding our deposit product offerings by upgradingthat deliver value-added solutions, 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.the communities we serve.Western Washington. While we have a large concentration of first lien one- to four-family mortgage loans, we have increasedcontinue to increase our origination and portfolio balances of commercial real estate and multi-family real estate,estate. We have also increased our auto and constructionconsumer loans, as well as engaging inthrough 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 mayregularly sell conforming loans into the secondary market to increase noninterest income and manage our interest rate risk, or we mayrisk. We also retain one- to four-family first and second lien loans in our portfolio to enhancegenerate 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, as a way to provide cost effective liquidity and manage interest rate risk.FederalNorthwest is impactedaffected 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 ofseveral 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, branding and customer acquisition, and the overall level of personal income and savings.savings in the markets where we do business. Lending activities are influenced by the demand for funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.probable losses inherent in our loan portfolio.portfolio through our allowance for loan losses. As credit metrics improve, such as a loan's risk rating, improves,increased property values, increase, or recoveries of amounts previously charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest income.The noninterestbenefits and expenses,benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and customer acquisition expenses, expenses related to real estate and personal property owned, and other miscellaneous expenses.◦ Increased on balance sheet liquidity, specifically Cash and Cash Equivalents increased by $3.3 million, a 6.9% increase over December 31, 2019. The investment portfolio, a secondary source of liquidity, increased by $53.5 million, or 17.0%, as well. 2018.2019.20192020 and December 31, 2018declinedincreased to $1.25$1.56 billion at September 30, 20192020 from $1.26$1.30 billion at December 31, 2018.decreased $23.7increased $182.9 million to $846.1 million$1.06 billion at September 30, 2019,2020, from $869.7$878.4 million at December 31, 2018.2019. During the nine months ended September 30, 2019,2020, one- to four familyfour-family residential loans declined $33.8increased $11.7 million, dueas we sold 65.6% of one- to four-family residential loans originated during the sale of a $28.5 million pool of loan sales combined with repayment and other sale activity exceeding new originations held in portfolio.year. Multi-family loans decreased $20.2increased $31.4 million mainly dueas we continued to prepayment activity outpacing newbuild this part of the loan originations, while the balance of commercialportfolio. Commercial real estate loans stayed relatively stable.increased by $27.6 million as we continue to build our lending presence in King and Whatcom Counties as well as continued lending in our legacy markets. Commercial business loans increased $81.4 million as we funded PPP loans and increased balances generated through the Northpointe Bank Mortgage Participation Program (NBMPP) during 2020. The NBMPP provides interim financing to mortgage originators based on the contractual sale agreement of a mortgage loan. We are also attracting new commercial business clients due to our hiring efforts and investment into customer focused, experienced commercial bankers. Auto and other consumer and construction and land loans increased $24.0 million and $10.9 million, respectively, as we continued to grow our specialty auto loan portfolio and construction lending business. Strong competitiondecreased $337,000. Competition for quality commercial credits remains,remains; however, impacts of the COVID-19 pandemic effect both the supply and an increase in refinancedemand for credit. Refinance activity of one- to-four family residential loans was observedrobust during the nine-month period.20.1%$38.0 million, or 102.2%, to $65.0$75.2 million at September 30, 2019,2020, from $54.1$37.2 million at December 31, 2018.2019. The majority of our construction loans are geographically dispersed throughout the Puget Sound region and, as a result, these loans are susceptible to risks that may be differentvary depending on the nature and location of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects and intend to begin utilizing internal staffing to monitor certain projects, which we expect will enhance fee income related to these loans.We have seen a slowingFor the majority of 2019, we decreased our construction lending, which has resulted in a decline in construction commitments. Whilebalances at the end of the year compared to 2018. In the fourth quarter of 2019 and the first nine months of 2020, we continue to focus onincreased 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. We also intend to evaluate opportunities to grow loans through wholesale channels in order to supplement our organic originations and improve net interest income. $ 16,090 $ 25,865 $ 1,478 $ — $ 43,433 — 67,620 — 8,020 75,640 8,897 33,833 2,807 — 45,537 $ 24,987 $ 127,318 $ 4,285 $ 8,020 $ 164,610 $ 7,762 $ 14,579 $ 565 $ — $ 22,906 — 25,634 — — 25,634 7,877 10,313 55 — 18,245 $ 15,639 $ 50,526 $ 620 $ — $ 66,785 $ 8,328 $ 11,286 $ 913 $ — $ 20,527 — 41,986 — 8,020 50,006 1,020 23,520 2,752 — 27,292 $ 9,348 $ 76,792 $ 3,665 $ 8,020 $ 97,825 $ 4,588 $ 2,133 $ 349 $ — $ 7,070 — 1,350 — — 1,350 $ 4,588 $ 3,483 $ 349 $ — $ 8,420 $ 14,915 $ 23,969 $ 496 $ — $ 39,380 — 27,241 — — 27,241 6,381 563 3,120 — 10,064 $ 21,296 $ 51,773 $ 3,616 $ — $ 76,685 $ 5,242 $ 10,734 $ 151 $ — $ 16,127 — 10,465 — — 10,465 2,704 563 58 — 3,325 $ 7,946 $ 21,762 $ 209 $ — $ 29,917 $ 9,673 $ 13,235 $ 345 $ — $ 23,253 — 16,776 — — 16,776 3,677 — 3,062 — 6,739 $ 13,350 $ 30,011 $ 3,407 $ — $ 46,768 $ 4,904 $ 1,343 $ — $ — $ 6,247 1,023 — — — 1,023 $ 5,927 $ 1,343 $ — $ — $ 7,270 September 30, 2019 Other Washington Total (In thousands) Construction Commitment One- to four-family residential $ 12,411 $ 21,691 $ 406 $ 34,508 Multi-family residential — 42,769 — 42,769 Commercial real estate 6,127 10,536 — 16,663 Total commitment $ 18,538 $ 74,996 $ 406 $ 93,940 Construction Funds Disbursed One- to four-family residential $ 5,282 $ 9,071 $ 101 $ 14,454 Multi-family residential — 29,898 — 29,898 Commercial real estate 1,619 9,302 — 10,921 Total disbursed $ 6,901 $ 48,271 $ 101 $ 55,273 Undisbursed Commitment One- to four-family residential $ 7,129 $ 12,620 $ 305 $ 20,054 Multi-family residential — 12,871 — 12,871 Commercial real estate 4,508 1,234 — 5,742 Total undisbursed $ 11,637 $ 26,725 $ 305 $ 38,667 Land Funds Disbursed One- to four-family residential $ 5,478 $ 2,801 $ — $ 8,279 Commercial real estate 1,122 280 — 1,402 Total disbursed for land $ 6,600 $ 3,081 $ — $ 9,681 (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 (In thousands) Construction Commitment One- to four-family residential $ 16,814 $ 18,550 $ — $ 35,364 Multi-family residential — 45,313 — 45,313 Commercial real estate 1,868 20,147 — 22,015 Total Commitment $ 18,682 $ 84,010 $ — $ 102,692 Construction Funds Disbursed One- to four-family residential $ 8,321 $ 8,998 $ — $ 17,319 Multi-family residential — 17,348 — 17,348 Commercial real estate 1,584 9,424 — 11,008 Total disbursed $ 9,905 $ 35,770 $ — $ 45,675 Undisbursed Commitment One- to four-family residential $ 8,493 $ 9,552 $ — $ 18,045 Multi-family residential — 27,965 — 27,965 Commercial real estate 284 10,723 — 11,007 Total undisbursed $ 8,777 $ 48,240 $ — $ 57,017 Land Funds Disbursed One- to four-family residential $ 6,124 $ 2,023 $ — $ 8,147 Commercial real estate — 280 — 280 Total disbursed for land $ 6,124 $ 2,303 $ — $ 8,427 2019,2020, the Company originated $113.2$498.5 million of loans, of which $50.6$308.3 million, or 44.7%61.8%, were originated in the Puget Sound region, of Washington, $58.8$159.1 million, or 51.9%31.9%, in the North Olympic Peninsula, and $3.9$12.8 million, or 3.4%2.6%, in other areas throughout Washington State, and $18.3 million, or 3.7%, in Washington.Oregon. The Company purchased an additional $48.4$28.7 million in one- to four-family loans, mainly$26.1 million in specialty auto loans, of $37.1$2.1 million in other consumer loans, and $2.0 million in multifamily loans, during the nine months ended September 30, 2019.decreased $90,000,increased $3.3 million, or 0.9%35.1%, to $9.4$13.0 million at September 30, 2019,2020, from $9.5$9.6 million at December 31, 2018, mainly2019. The increase was due to a $4.1 million loan loss provision, offset by net charge-offs of $737,000 for the nine-month period. The provision is largely attributed to qualitative factor adjustments made in response to the economic impact of the COVID-19 pandemic, as a result of a declinewell as to account for growth in the loan balances.portfolio. The allowance for loan losses as a percentage of total loans remained at 1.1% at both September 30, 20192020 and December 31, 2018.decreased $401,000,increased $1.3 million, or 23.3%72.5%, to $1.3$3.0 million at September 30, 2019,2020, from $1.7 million at December 31, 2018,2019, mainly attributable to decreasesan increase in nonperforming home equity loans of $253,000 and commercial business loans and one- to four-family loans of $173,000 each, partially$1.2 million, multi-family loans of $287,000, commercial real estate loans of $57,000, offset by an increasedecreases in construction and land loans of $4,000, home equity loans of $38,000, and auto and other consumer nonperforming loans of $230,000.$241,000. Nonperforming loans to total loans remained the sameincreased to 0.3% at September 30, 2020, from 0.2% at both September 30, 2019 and December 31, 2018.2019. The allowance for loan losses as a percentage of nonperforming loans increaseddecreased to 714.3%419.9% at September 30, 2019,2020, from 553.3%536.1% at December 31, 2018, and classified loans increased $1.3 million to $4.6 million at September 30, 2019, from $3.4 million at December 31, 2018.2019,2020, there were $3.6$2.2 million in restructured loans, of which $3.4$2.1 million were performing in accordance with their modified payment terms and returned to accrual status.Asset quality remains strong with net Classified loans decreased $921,000 to $4.0 million at September 30, 2020, from $5.0 million at December 31, 2019.have adjustedrecently removed one of our indirect auto loan product offerings in an effort to improve credit qualityeffectively eliminate new production 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 wasis adequate to absorb the known and inherent risks of loss in the loan portfolio as of September 30, 2019. $ 317,755 $ 306,014 $ 11,741 3.8 % 127,569 96,098 31,471 32.7 283,390 255,722 27,668 10.8 75,204 37,187 38,017 102.2 803,918 695,021 108,897 15.7 34,120 35,046 (926 ) (2.6 ) 111,782 112,119 (337 ) (0.3 ) 145,902 147,165 (1,263 ) (0.9 ) 123,036 41,571 81,465 196.0 1,072,856 883,757 189,099 21.4 2,628 206 2,422 1,175.7 (4,196 ) (4,514 ) 318 (7.0 ) 13,007 9,628 3,379 35.1 $ 1,061,417 $ 878,437 $ 182,980 20.8 September 30, 2019 December 31, 2018 (In thousands) Real Estate: One-to-four family $ 302,337 $ 336,178 Multi-family 62,173 82,331 Commercial real estate 254,058 253,235 Construction and land 64,954 54,102 Total real estate loans 683,522 725,846 Consumer: Home equity 36,898 37,629 Auto and other consumer 111,312 87,357 Total consumer loans 148,210 124,986 Commercial business loans 14,325 18,898 Total loans 846,057 869,730 Less: Net deferred loan fees 117 292 Premium on purchased loans, net (4,649 ) (3,947 ) Allowance for loan losses 9,443 9,533 Loans receivable, net $ 841,146 $ 863,852 September 30, 2019 December 31, 2018 (In thousands) Nonperforming loans: Real estate loans: One- to four-family $ 586 $ 759 Commercial real estate 116 133 Construction and land 29 44 Total real estate loans 731 936 Consumer loans: Home equity 116 369 Other 475 245 Total consumer loans 591 614 Commercial business — 173 Total nonperforming loans 1,322 1,723 Real estate owned: Land 69 72 Total real estate owned 69 72 Repossessed assets 59 52 Total nonperforming assets $ 1,450 $ 1,847 Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.2 % 0.2 % Total investment $ 1,939 $ 698 $ 1,241 177.8 % 287 — 287 100.0 166 109 57 52.3 25 29 (4 ) (13.8 ) 2,417 836 1,581 189.1 74 112 (38 ) (33.9 ) 607 848 (241 ) (28.4 ) 681 960 (279 ) (29.1 ) — — — 100.0 3,098 1,796 1,302 72.5 — 62 (62 ) (100.0 ) — 62 (62 ) (100.0 ) 170 92 78 84.8 $ 3,268 $ 1,950 $ 1,318 67.6 0.3 % 0.2 % 0.1 % 50.0 decreased $17.6increased $53.5 million, or 5.7%17.0%, to $288.8$369.1 million at September 30, 2019,2020, from $306.5$315.6 million at December 31, 2018,2019, due to sales, calls,the purchase and sale of securities, normal repayment activity.payments and prepayment activity, and an increase in the market value of the portfolio. Mortgage-backed securities represent the largest portion of our investment securities portfolio and totaled $169.4$108.5 million at September 30, 2019,2020, or 58.7%29.4% of the investment securities portfolio, a decrease during the year of $15.9$60.0 million, or 8.6%35.6%, from $185.3$168.5 million at December 31, 2018.2019. Other investment securities, including municipal bonds and other asset-backed securities, were $119.4$260.6 million at September 30, 2019,2020, or 41.3%70.6% of the investment securities portfolio, a decreasean increase of $1.7$113.5 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 4.56.7 years as of September 30, 2019,2020, and 5.0 years as of December 31, 2018,2019, and had an estimated average repricing term of 3.24.4 years as of September 30, 2019,2020, and 3.7 years as of December 31, 2018,2019, based on the interest rate environment at those times.88.6%59.8% in amortizing securities at September 30, 20192020 and 91.5%81.8% at December 31, 2018. As a result, the2019. The projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-backed securities portfolio, is generally affectedimpacted by changingprevailing mortgage interest rates. Management continues tomaintains a focus on improvingenhancing the mix of earning assets by originating loans and decreasing securities as a percentage of earning assets; however, we maycontinue 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 decreased $13.5 millionincreased to $1.07$1.38 billion at September 30, 2019,2020, from $1.09$1.13 billion at December 31, 2018,2019, primarily due to a decrease in borrowings of $51.3 million, partially offset by an increase in deposit accounts.$30.4 million, or 3.2%25.2%, to $970.7 million$1.25 billion at September 30, 2019,2020, from $940.3 million$1.00 billion at December 31, 2018.2019. There was a shift in the mix of deposits with a $30.2$150.0 million decreaseincrease in money market accounts, offset by a $30.4$114.3 million increase in transaction accounts, and a $2.9 million increase in savings accounts which we attributeduring the year. The increase in deposits is in large part due to our promotional savings product which carries a twelve-month rate guarantee that is more favorable than our money market offerings. We anticipate that robust competition for depositsthe Federal government's response to the pandemic including stimulus payments, additional unemployment benefits, and deferrals of Federal tax payment due dates. These actions, coupled with other financial institutionsdecreased spending by consumers and financial intermediaries will continuebusiness, resulted in our markets and that we will continue to offer competitive products and pricing to defend and grow customer deposits.higher deposit balances. In addition to collecting customer deposits, we utilizedutilize 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 selectiveallow flexibility when competing on rate.retail rates. At September 30, 2019,2020, we had $37.2$92.6 million in brokered CDs included in ourthe $293.5 million balance of certificates of deposit.$5.0$3.8 million duringto $180.6 million for the year to $177.3 million atnine months ended September 30, 2019, primarily the result of net2020. The increase was due to an after-tax increase in other comprehensive income of $6.8$4.7 million and an increase indue to the increased value of our available-for-sale securities portfolio resulting in a $4.1offset by realized sales, as well as year-to-date net income of $6.5 million, decrease in our accumulated other comprehensive loss, net of tax. These increases were partially offset by $6.0$7.2 million in repurchases of shares of common stock during the quarter.stock.20192020 and 2018$584,000,$1.2 million, or 30.3%46.4%, to $3.7 million for the three months ended September 30, 2020, compared to net income of $2.5 million for the three months ended September 30, 2019, compared2019. The increase is mainly due to an increase in net interest income, noninterest income driven by mortgage revenue, gain on sale of $1.9investments, and swap fee program fees which was offset by an increase in noninterest expense due primarily to higher compensation expenses.2018.Net Interest Income. Net interest income remained at $9.32020, compared to $9.4 million for both the three months ended September 30, 2019 and 2018. The yield on average interest-earning assets increased nine basis points to 4.14% for the three months ended September 30, 2019 The yield on average interest-earning assets decreased 38 basis points to 3.82% for the three months ended September 30, 2020, compared to 4.05%4.20% for the same period in the prior year. We continuedThe decrease was due to a lower market interest rates offset by a small increase our concentrationin the ratio of total loans receivable, as a percentage of interest-earningto assets which earned higher yields than investment and cash alternatives and contributedin the current period compared to improved overall yields on interest-earning assets.increased 22decreased 67 basis points to 0.60% for the three months ended September 30, 2020, compared to 1.27% for the same period last year. The decrease was due in part to the management of deposit rates reflecting the low rate environment as well as a reduction in the level and cost of borrowings given the prepayment of higher costing FHLB borrowings in the fourth quarter of 2019 and the first quarter of 2020. Our average cost of FHLB borrowings for the three months ended September 30, 2020 decreased to 1.34% in the third quarter of 2020 compared to 3.16% for the same period one year prior. The cost of interest-bearing deposits decreased by 50 basis points to 0.56% compared to 1.06% for the three months ended September 30, 2019, compared to 1.05% for the same period last year, due primarily to increases in the average balance and cost of deposits.cost ofyield on interest-bearing liabilities increasingdecreasing at a faster pace than our interest-earning assets, the net interest margin decreased eightincreased 13 basis points to 3.17%3.36% for the three months ended September 30, 2019,2020, from 3.25%3.23% for the same period in 2018.2019. For additional information, see Rate/Volume Analysis contained in Item 2 of this Form 10-Q$540,000,$1.1 million, or 4.7%9.1%, to $12.1$13.3 million for the three months ended September 30, 2020, from $12.2 million for the comparable period in 2019. Interest and fees on loans receivable increased $1.0 million, to $11.0 million for the three months ended September 30, 2020, from $10.0 million for the three months ended September 30, 2019, from $11.6 million for the comparable period in 2018,due primarily due to an increase in the volume of average balanceloans. Average loan yields decreased 23 basis points to 4.45% for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 due to a decrease in market rates and an increase in the amount of lower yielding loans as a percentage of loans, including Northpointe and yields earnedPPP loans.loans receivable. Interest and fees on loans receivableinvestment securities increased $673,000,$682,000 to $9.9$1.6 million for the three months ended September 30, 2019, from $9.3 million for the three months ended September 30, 2018, due primarily to an increase in the average balance of net loans receivable of $35.7 million. Average loan yields increased 12 basis points to 4.60% for the three months ended September 30, 20192020, compared to the three months ended September 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.Interest income on investment securities decreased $31,000 to $921,000 for the three months ended September 30, 2019, compared to $952,000 for the three months ended September 30, 2018, due to a $156.2 million increase in average balances partially offset by an $8.9 million91 basis point decrease in average balance partially offset byyield related to a 14 basis point increasedecrease in average yield.the yield on variable rate securities and lower reinvestment market rates. The change in average yield on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the three months ended September 30, 20192020 decreased $109,000,$522,000, or 9.1%48.0%, compared to the three months ended September 30, 2018,2019, the result of a decrease of $4.4$61.8 million in the average balance and an 18a 48 basis point decrease in the average yield. $ 998,586 4.45 % $ 862,587 4.68 % $ 1,001 267,911 2.39 111,695 3.30 682 110,863 2.04 172,639 2.52 (522 ) 4,028 9.63 5,019 7.33 5 19,702 0.18 15,413 1.69 (56 ) $ 1,401,090 3.82 % $ 1,167,353 4.20 % $ 1,110 Three Months Ended September 30, 2019 2018 Increase (Decrease) in Interest Income Average Balance Outstanding Yield Average Balance Outstanding Yield (Dollars in thousands) Loans receivable, net $ 862,587 4.60 % $ 826,880 4.48 % $ 673 Investment securities 111,695 3.30 120,575 3.16 (31 ) Mortgage-backed securities 172,639 2.52 176,997 2.70 (109 ) FHLB stock 5,019 7.33 5,776 6.93 (8 ) Interest-bearing deposits in banks 15,413 1.69 9,765 2.05 15 Total interest-earning assets $ 1,167,353 4.14 $ 1,139,993 4.05 $ 540 increased $542,000,decreased $1.2 million, or 23.7%43.1%, to $1.6 million for the three months ended September 30, 2020, compared to $2.8 million for the three months ended September 30, 2019, comparedmainly due to $2.3 millionan $736,000, or 34.0% decrease in interest paid on deposits. Interest on borrowings decreased $486,000 or 70.3%. Interest expense on deposits decreased for the three months ended September 30, 2018, mainly2020, due to a 42.9% increase in deposit costs, partially offset by a 12.8% decrease in borrowing costs. Deposit costslower rates offsetting the impact of increased balances. The average balance of interest-bearing deposits increased $202.3 million, or 25.1%, to $1.01 billion for the three months ended September 30, 2019, due to increased interest rates paid and customers transferring deposits into higher-yielding accounts. The average balance of interest-bearing deposits increased $41.6 million, or 5.4%, to2020, from $806.7 million for the three months ended September 30, 2019, from $765.2 million for the three months ended September 30, 2018, as we continued to target deposit growth in deposits in new and existing market areas.areas as well as the industry-wide impact of stimulus related deposits during the pandemic. During the three months ended September 30, 2019,2020, the average balance and related cost of savings accounts increased $52.5$6.0 million and 58the related weighted-average cost decreased 54 basis points respectively, compared to the same period in 2018, the result of an above market rate savings promotion targeting growth in newer markets. During the same period, compared to 2018, the2019. The average balance of certificates of deposit balances grew $23.8$43.1 million with an increase inand the average rate paid of 37weighed-average cost decreased by 96 basis points, mainly as a result of the utilization of brokered CDs. During the three months ended September 30, 2019,2020, the average balance of money market accounts decreased $39.6increased $125.7 million compared to the same period in the prior year, as customers moved money into accounts at other financial institutions or into higher-yielding certificates of deposit and savings accounts at First Federal.year. The average cost of all deposit products increaseddeposits decreased by 50 basis points to 0.56% for the three months ended September 30, 2020, from 1.06% for the three months ended September 30, 2019, from 0.78% for the three months ended September 30, 2018.2019. Borrowing costs increaseddecreased due primarily to an increasethe prepayment of higher cost term borrowings in the fourth quarter of 2019 and the first quarter of 2020and a reduction in the average rate paid of 22 basis points during the most recent quarter compared to the same period in 2018. We prepaid $15.0 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. Three Months Ended September 30, 2019 2018 Increase (Decrease) in Interest Expense Average Balance Outstanding Rate Average Balance Outstanding Rate (Dollars in thousands) Savings accounts $ 168,495 0.94 % $ 115,973 0.36 % $ 293 Transaction accounts 116,328 0.09 111,506 0.09 1 Money market accounts 245,640 0.51 285,214 0.44 (5 ) Certificates of deposit 276,247 2.04 252,462 1.67 354 Borrowings 87,492 3.16 107,681 2.94 (101 ) Total interest-bearing liabilities $ 894,202 1.27 $ 872,836 1.05 $ 542 $ 174,475 0.40 % $ 168,495 0.94 % $ (221 ) 143,890 0.01 116,328 0.09 (21 ) 371,335 0.39 245,640 0.51 50 319,341 1.08 276,247 2.04 (544 ) 61,244 1.34 87,492 3.16 (486 ) $ 1,070,285 0.60 % $ 894,202 1.27 % $ (1,222 ) There was a recapture of The provision for loan losses of $170,000was $1.3 million during the three months ended September 30, 2019, which was mainly the result of the sale of a pool of one- to four-family residential loans,2020, compared to a $197,000 provision for$170,000 recovery of loan losses for the three months ended September 30, 2018. Three Months Ended September 30, 2019 2018 (Dollars in thousands) Provision for loan losses $ (170 ) $ 197 Net charge-offs (118 ) (144 ) Allowance for loan losses 9,443 9,335 Allowance for losses as a percentage of total gross loans receivable at the end of this period 1.1 % 1.1 % Total nonaccruing loans 1,322 2,473 Allowance for loan losses as a percentage of nonaccrual loans at end of period 714.3 % 377.5 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.2 % 0.3 % Total loans $ 846,057 $ 845,797 Provision for (recovery of) loan losses $ 1,350 $ (170 ) (452 ) (118 ) 13,007 9,443 Allowance for losses as a percentage of total gross loans receivable at the end of this period 1.2 % 1.1 % 3,098 1,322 Allowance for loan losses as a percentage of nonaccrual loans at end of period 419.9 % 714.3 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.3 % 0.2 % $ 1,072,856 $ 846,057 $661,000,$2.8 million or 46.5%149.7%, to $2.1$4.7 million for the three months ended September 30, 2020, from $1.9 million for the three months ended September 30, 2019, from $1.4 million for the three months ended September 30, 2018, primarily due to the gain on sales of mortgage loans of $1.7 million, the gain on sale of investment securities of $969,000, and an increase in the cash surrender value of bank owned life insurance (BOLI) of $475,000. The increase in the cash surrender of BOLI in the third quarter of was due to a surrender of an underperforming policy and the subsequent reinvestment of the proceeds into a different policy. A yield enhancement on the new policy was captured up front which resulted in recognition of $406,000 in cash surrender value. Fees received from participation in a loan swap program generated $396,000. Loan and deposit servicefees decreased by $131,000 due to fewer non-sufficient funds fees as noted above. $ 868 $ 999 $ (131 ) (13.1 )% 148 44 104 236.4 1,725 655 1,070 163.4 Net gain on sale of investment securities 969 — 969 100.0 622 147 475 323.1 449 70 379 541.4 $ 4,781 $ 1,915 $ 2,866 149.7 % Three Months Ended September 30, Increase (Decrease) 2019 2018 Amount Percent (Dollars in thousands) Loan and deposit service fees $ 1,165 $ 1,122 $ 43 3.8 % Mortgage servicing fees, net of amortization 44 23 21 91.3 Net gain on sale of loans 655 139 516 371.2 Net gain (loss) on sale of investment securities — (58 ) 58 100.0 Increase in cash surrender value of bank-owned life insurance 147 150 (3 ) (2.0 ) Other income 70 44 26 59.1 Total noninterest income $ 2,081 $ 1,420 $ 661 46.5 % decreased slightlyincreased $1.6 million, or 19.7%, during the three months ended September 30, 2019,2020, compared to the three months ended September 30, 2018, as we continued2019, mainly due to strive for better efficienciesa 27.2% increase in compensation and cost managementbenefits driven by additional staffing and a 366.3% increase in the absence of new branching initiatives. Three Months Ended September 30, Increase (Decrease) 2019 2018 Amount Percent (Dollars in thousands) Compensation and benefits $ 4,771 $ 4,740 $ 31 0.7 % Data processing 680 676 4 0.6 Occupancy and equipment 1,161 1,119 42 3.8 Supplies, postage, and telephone 208 211 (3 ) (1.4 ) Regulatory assessments and state taxes 209 172 37 21.5 Advertising 197 185 12 6.5 Professional fees 278 319 (41 ) (12.9 ) FDIC insurance premium (72 ) 76 (148 ) (194.7 ) FHLB prepayment penalty 344 — 344 100.0 Other 648 621 27 4.3 Total $ 8,424 $ 8,119 $ 305 3.8 % $ 6,070 $ 4,771 $ 1,299 27.2 % 640 680 (40 ) (5.9 ) 1,367 1,161 206 17.7 254 208 46 22.1 262 209 53 25.4 285 197 88 44.7 361 278 83 29.9 86 (72 ) 158 (219.4 ) FHLB prepayment penalty — 344 (344 ) (100.0 ) 756 648 108 16.7 $ 10,081 $ 8,424 $ 1,657 19.7 % An income Income tax expense of $580,000$1.4 million was recorded for the three months ended September 30, 2019,2020, compared to $443,000$580,000 for the three months ended September 30, 2018,2019, generally due to an increasea decrease in income before taxes of $721,000.$2.0 million and a penalty recorded related to the surrender of the bank owned life insurance policy. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.20192020 and 2018increased $1.8 million,decreased $272,000, or 36.6%4.0%, to $6.8$6.5 million for the nine months ended September 30, 2020, compared to net income of $6.7 million for the nine months ended September 30, 2019, compareddue to netan increase in provision for loan losses and noninterest expense partially offset by an increase in noninterest income.of $5.0increased $2.5 million to $31.2 million for the nine months ended September 30, 2018.Net Interest Income. Net interest income increased $603,000 to $28.02020, from $28.7 million for the nine months ended September 30, 2019, from $27.4 million2019. This increase was mainly the result of an increase in average earning assets of $118.7 million. The yield on average interest-earning assets decreased 37 basis points to 3.85% for the nine months ended September 30, 2018. This increase was mainly2020, compared to 4.22% for the result of a changesame period in the mix of earning assets, with aprior year due to the decrease in the investment portfolio and an increase in loans receivable.market rates. The yield on average interest-earning assets increased 20net interest margin decreased 3 basis points to 4.14%3.20% for the nine months ended September 30, 2019, compared to 3.94%2020, from 3.23% for the same period in the prior year.net interest margin decreased six basis points to 3.15% for the nine months ended September 30, 2019, from 3.21% for the same period in 2018. While we experienced a 20 basis point increase in asset yields, our cost of interest-bearing liabilities increased 33 basis points, reducing our net interest rate spread and net interest margin.Of the $603,000$2.5 million increase in net interest income during the nine months ended September 30, 2019,2020, compared to the nine months ended September 30, 2018, $1.8 million2019, was the result of a $2.4 million decrease in interest expense driven by an increaseimprovement in volume,the cost of interest-bearing liabilities which was partially offset by $1.2a decrease in interest income. The decrease in interest expense of borrowings of $1.8 million due to changes in rates. The increase in loans receivable was the main contributor to the increase in net interest income with $2.1 million due to an increase in average volumes and $1.0 million due to increases in rates for a total of $3.2 million.increaseddecreased to 1.28%0.85% for the nine months ended September 30, 2019,2020, compared to 0.95%1.28% for the same period last year, due primarily to promotionaldecreases in borrowing volume of $1.1 million and decreases attributable to rates on, and increasesof $760,000.balance of, savings accountsyields on interest-earning assets. Interest and certificates of deposit usedfees on loans receivable increased $508,000, to attract and retain deposits.Interest Income. Totalinterest income increased $3.2$31.1 million or 9.4%, to $36.8for the nine months ended September 30, 2020, from $30.6 million for the nine months ended September 30, 2019, from $33.7 million for the comparable period in 2018, primarily duerelated to both an increase in the average balance of and yields earned on, loans receivable. Interest and fees onnet loans receivable increasedof $61.6 million compared to $30.0the prior year. Average loan yields decreased 24 basis points to 4.45% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.2019,2020 from $26.8$6.4 million for the same period in 2019. While the average balance of total securities increased $51.9 million, the average yield decreased 50 basis points. Interest income on investment securities increased $1.1 million, or 37.5%, to $4.0 million for the nine months ended September 30, 2018. The average balance of net loans receivable increased $63.8 million and the average yield on loans receivable increased 16 basis points to 4.58%2020, compared to 4.42% the prior year.Interest income on investment securities increased $113,000, or 4.1% to $2.9 million for the nine months ended September 30, 2019, compared to $2.8 million for the nine months ended September 30, 2018, due to an increase in the average yieldbalance of 38 basis points,$94.4 million partially offset by a decrease in the average balanceyield of $10.0 million80 basis points compared to the same period in 2018.2019. The change in average yields on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the nine months ended September 30, 20192020 decreased $194,000$1.3 million, or 36.0%, to $2.3 million compared to $3.5 million for the nine months ended September 30, 2018, primarily due to2019, reflecting a $9.0$42.5 million decrease in the average balance.balance and a decrease in yield of 42 basis points. Nine Months Ended September 30, 2019 2018 Increase (Decrease) in Interest Income Average Balance Outstanding Yield Average Balance Outstanding Yield (Dollars in thousands) Loans receivable, net $ 872,259 4.58% $ 808,485 4.42% $ 3,163 Investment securities 116,180 3.33 126,167 2.95 113 Mortgage-backed securities 178,411 2.64 187,429 2.65 (194 ) FHLB stock 6,310 5.66 6,871 4.60 31 Interest-bearing deposits in banks 13,468 1.88 10,004 1.81 54 Total interest-earning assets $ 1,186,628 4.14 $ 1,138,956 3.94 $ 3,167 $ 933,843 4.45 % $ 872,259 4.69 % $ 508 210,571 2.53 116,180 3.33 1,088 135,925 2.22 178,411 2.64 (1,272 ) 4,390 6.04 6,310 5.66 (69 ) 20,637 0.55 13,468 1.88 (105 ) $ 1,305,366 3.85 % $ 1,186,628 4.22 % $ 150 increased $2.6decreased $2.4 million, or 40.8%27.4%, to $6.4 million for the nine months ended September 30, 2020, compared to $8.9 million for the nine months ended September 30, 2019, compareddue to $6.3a decrease in borrowing costs of $1.9 million, or 69.1%. Interest expense on deposit costs decreased for the nine months ended September 30, 2020, by $549,000 due to a 22 basis point decrease in the average cost. The average balance of interest-bearing deposits increased $132.9 million, or 16.6%, to $932.0 million for the nine months ended September 30, 2018, due to an increase in deposit costs of $2.5 million, or 70.0%. Deposit costs increased for the nine months ended September 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 accounts. The average balance of interest-bearing deposits increased $55.9 million, or 7.5%, to2020, from $799.1 million for the nine months ended September 30, 2019, from $743.2 million for the nine months ended September 30, 2018, as we continued to target growth in deposits in new and existing market areas.2019, the cost of savings accounts increased as a result of an increase in average balance of $52.0 million and an increase in the average rate paid of 71 basis points, due to a promotional savings account offered at a higher rate compared to the same period in 2018. In addition, the2020, interest expense on cost of certificates of deposit increased due to an increase in average balance of $21.3$63.6 million and an increasepartially offset by a decrease in the average5954 basis points, compared to the nine months ended September 30, 2018, due to an increase in promotional account activity as well as utilization of brokered CDs in 2019. During the same period, the average balancebalances of savings, transaction, and money market accounts declined $20.0increased $9.3 million, while the average balance of transaction accounts remained relatively stable with a modest $2.6$11.7 million increase.and $48.3 million, respectively. The average cost of all deposit products increaseddecreased to 0.80% for the nine months ended September 30, 2020, from 1.02% for the nine months ended September 30, 2019, from 0.65% for the nine months ended September 30, 2018.2019. Borrowing costs increased primarily due to a 40 basis point increase in average rates paid, partially offset by a decrease indecreased as higher rate long term advances were prepaid during the average balance of $16.5 million. Nine Months Ended September 30, 2019 2018 Increase (Decrease) in Interest Expense Average Balance Outstanding Rate Average Balance Outstanding Rate (Dollars in thousands) Savings accounts $ 161,764 0.89% $ 109,731 0.18% $ 937 Transaction accounts 115,681 0.11 113,124 0.04 60 Money market accounts 257,045 0.49 277,065 0.39 131 Certificates of deposit 264,573 2.02 243,279 1.43 1,397 Borrowings 120,194 3.01 136,722 2.61 39 Total interest-bearing liabilities $ 919,257 1.28 $ 879,921 0.95 $ 2,564 $ 171,085 0.61 % $ 161,764 0.89 % $ (300 ) 127,333 0.03 115,681 0.11 (70 ) 305,373 0.49 257,045 0.49 173 328,197 1.48 264,573 2.02 (352 ) 70,763 1.58 120,194 3.01 (1,877 ) $ 1,002,751 0.85 % $ 919,257 1.28 % $ (2,426 ) duringfor the nine months ended September 30, 2019, primarily due to charge-off activity related toin our indirect auto loan portfolio, partially offset by a provision recapture for the sale of a one- to four family loan pool, and was $902,000 for the nine months ended September 30, 2018, also due to charge-off activity and growth in our auto portfolio. Provision for loan losses $ 4,116 $ 420 (737 ) (510 ) 13,007 9,443 Allowance for losses as a percentage of total gross loans receivable at the end of this period 1.2 % 1.1 % 3,098 1,322 Allowance for loan losses as a percentage of nonaccrual loans at end of period 419.9 % 714.3 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.3 % 0.2 % $ 1,072,856 $ 846,057 Nine Months Ended September 30, 2019 2018 (Dollars in thousands) Provision for loan losses $ 420 $ 902 Net charge-offs (510 ) (327 ) Allowance for loan losses 9,443 9,335 Allowance for losses as a percentage of total gross loans receivable at the end of this period 1.1 % 1.1 % Total nonaccruing loans 1,322 2,473 Allowance for loan losses as a percentage of nonaccrual loans at end of period 714.3 % 377.5 % Nonaccrual and 90 days or more past due loans as a percentage of total loans 0.2 % 0.3 % Total loans $ 846,057 $ 845,797 $988,000,$6.6 million, or 22.9%144.2%, to $5.3$11.2 million for the nine months ended September 30, 2020, from $4.6 million for the nine months ended September 30, 2019, from $4.3 millionmainly due to an increase in gain on sale of mortgage loans of $3.3 million. Gain on sale of investments for the nine months ended September 30, 2018.2020, totaled $2.2 million compared to $57,000 recognized in the first nine months of 2019. The increasecash surrender value of bank-owned life insurance increased $1.1 million in noninterest income was mainly the resultfirst nine months of an increase2020 due to a BOLI restructure that resulted in loan and deposit service fees related to the early prepaymentrecognition of commercial and multi-family real estate loans,market gains as well as an increaseadditional investment in deposit fees related to changes in our deposit account offerings. We also saw an increase in net gain on sale of loans, mainly the result of the sale of a pool of one- to four-family residential loans. Nine Months Ended September 30, Increase (Decrease) 2019 2018 Amount Percent (Dollars in thousands) Loan and deposit service fees $ 3,605 $ 2,930 $ 675 23.0 % Mortgage servicing fees, net of amortization 143 155 (12 ) (7.7 ) Net gain on sale of loans 830 456 374 82.0 Net gain on sale of investment securities 57 77 (20 ) (26.0 ) Increase in cash surrender value of bank-owned life insurance 435 448 (13 ) (2.9 ) Other income 225 241 (16 ) (6.6 ) Total noninterest income $ 5,295 $ 4,307 $ 988 22.9 % $ 2,514 $ 2,899 $ (385 ) (13.3 )% (9 ) 143 (152 ) (106.3 ) 4,109 830 3,279 395.1 2,235 57 2,178 3,821.1 1,577 435 1,142 262.5 782 225 557 247.6 $ 11,208 $ 4,589 $ 6,619 144.2 % decreased $196,000,increased $5.2 million, or 0.8%21.4%, to $29.7 million for the nine months ended September 30, 2020, compared to $24.5 million for the nine months ended September 30, 2019, compared to $24.7 million for the nine months ended September 30, 2018, primarily as a result of a decreasean increase in advertising costs, compensation and benefits professional fees, and FDIC insurance premium, partially offset by an increase in FHLB prepayment penalties and regulatory assessments and state taxes. 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 nine months ended September 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 nine months ended September 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 determinationoccupancy and timing of advertisingequipment as we added staff to generate revenue. Compensation and promotional expenses for the current year. The Bank receivedbenefits also increased due to an FDIC insurance Small Bank Assessment Credit of $268,000 during the quarter, which resulted$1.6 million increase in commissions paid on increased mortgage and commercial loan production as well as one-time pandemic related payments made to staff. We also incurred a recapture of FDIC insurance premiums recorded last quarter and no premium expense recorded in the current quarter. We expect the Small Bank Assessment Credit to offset FDIC insurance premiums in Q4 of 2019 and provide a partial credit for Q1 2020 premiums. With the gain on sale of the one- to four-family loan pool during the most recent quarter, we repaid $15.0 million ofone-time FHLB advances, incurring a prepayment penalty in orderof $210,000 as we retired long term debt to lower our future cost of borrowings and better position our netreduced interest margin in future periods. We incurred costs related to our most recent examination of the Department of Financial Institutions of the State of Washington and have paid increased state taxes on higher gross revenues, resulting in an increase in regulatory assessments and state taxes for the nine months ended September 30, 2019, compared to the same period in 2018. We also had additional expenses related to our CEO search and transition which were included in professional fees. Nine Months Ended September 30, Increase (Decrease) 2019 2018 Amount Percent (Dollars in thousands) Compensation and benefits $ 14,097 $ 14,296 $ (199 ) (1.4 )% Data processing 1,978 1,981 (3 ) (0.2 ) Occupancy and equipment 3,409 3,348 61 1.8 Supplies, postage, and telephone 678 685 (7 ) (1.0 ) Regulatory assessments and state taxes 573 453 120 26.5 Advertising 569 799 (230 ) (28.8 ) Professional fees 907 1,099 (192 ) (17.5 ) FDIC insurance premium 82 231 (149 ) (64.5 ) FHLB prepayment penalty 344 — 344 100.0 Other 1,859 1,800 59 3.3 Total $ 24,496 $ 24,692 $ (196 ) (0.8 )% $ 17,397 $ 14,097 $ 3,300 23.4 % 2,099 1,978 121 6.1 4,063 3,409 654 19.2 749 678 71 10.5 659 573 86 15.0 934 569 365 64.1 1,115 907 208 22.9 156 82 74 90.2 210 344 (134 ) (39.0 ) 2,363 1,859 504 27.1 $ 29,745 $ 24,496 $ 5,249 21.4 % $1.6$2.1 million was recorded for the nine months ended September 30, 2019,2020, compared to $1.1$1.6 million for the nine months ended September 30, 2018, generally2019, due to an increase in income before taxes of $2.3 million.$250,000 and recognition of a tax penalty for early surrender of a BOLI investment. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.interest‑earninginterest-earning assets and interest expense on average interest‑bearinginterest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest‑earninginterest-earning assets), and the ratio of average interest‑earninginterest-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 September 30, 20192020 and 2018.2019. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. NonaccruingNonaccrual loans have been included in the table as loans carrying a zero yield. At September 30, 2020 (Dollars in thousands) (Dollars in thousands) Interest-earning assets: 4.28 % $ 998,586 $ 11,097 4.45 % $ 862,587 $ 10,096 4.68 % $ 933,843 $ 31,169 4.45 % $ 872,259 $ 30,661 4.69 % 2.61 267,911 1,603 2.39 111,695 921 3.30 210,571 3,988 2.53 116,180 2,900 3.33 2.07 110,863 565 2.04 172,639 1,087 2.52 135,925 2,264 2.22 178,411 3,536 2.64 4.85 4,028 97 9.63 5,019 92 7.33 4,390 199 6.04 6,310 268 5.66 0.10 19,702 9 0.18 15,413 65 1.69 20,637 85 0.55 13,468 190 1.88 3.72 1,401,090 13,371 3.82 1,167,353 12,261 4.20 1,305,366 37,705 3.85 1,186,628 37,555 4.22 0.17 $ 174,475 $ 176 0.40 $ 168,495 $ 397 0.94 $ 171,085 $ 785 0.61 $ 161,764 $ 1,085 0.89 0.01 143,890 5 0.01 116,328 26 0.09 127,333 28 0.03 115,681 98 0.11 0.31 371,335 362 0.39 245,640 312 0.51 305,373 1,118 0.49 257,045 945 0.49 1.00 319,341 862 1.08 276,247 1,406 2.04 328,197 3,653 1.48 264,573 4,005 2.02 0.36 1,009,041 1,405 0.56 806,710 2,141 1.06 931,988 5,584 0.80 799,063 6,133 1.02 Borrowings 0.75 61,244 205 1.34 87,492 691 3.16 70,763 840 1.58 120,194 2,717 3.01 0.39 1,070,285 1,610 0.60 894,202 2,832 1.27 1,002,751 6,424 0.85 919,257 8,850 1.28 $ 11,761 $ 9,429 $ 31,281 $ 28,705 3.33 3.22 2.93 3.00 2.94 $ 330,805 $ 273,151 $ 302,615 $ 267,371 3.36 3.23 3.20 3.23 130.9 % 130.5 % 130.2 % 129.1 % At September 30, 2019 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 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 Interest-earning assets: (Dollars in thousands) 4.68 % $ 862,587 $ 9,930 4.60 % $ 826,880 $ 9,257 4.48 % $ 872,259 $ 29,955 4.58 % $ 808,485 $ 26,792 4.42 % Investment securities 4.09 111,695 921 3.30 120,575 952 3.16 116,180 2,900 3.33 126,167 2,787 2.95 Mortgage-backed securities 2.61 172,639 1,087 2.52 176,997 1,196 2.70 178,411 3,536 2.64 187,429 3,730 2.65 FHLB dividends 4.99 5,019 92 7.33 5,776 100 6.93 6,310 268 5.66 6,871 237 4.60 Interest-bearing deposits in banks 0.57 15,413 65 1.69 9,765 50 2.05 13,468 190 1.88 10,004 136 1.81 4.16 1,167,353 12,095 4.14 1,139,993 11,555 4.05 1,186,628 36,849 4.14 1,138,956 33,682 3.94 Interest-bearing liabilities: Savings accounts 0.96 $ 168,495 $ 397 0.94 $ 115,973 104 0.36 $ 161,764 $ 1,085 0.89 $ 109,731 148 0.18 Transaction accounts 0.03 116,328 26 0.09 111,506 25 0.09 115,681 98 0.11 113,124 38 0.04 Money market accounts 0.44 245,640 312 0.51 285,214 317 0.44 257,045 945 0.49 277,065 814 0.39 Certificates of deposit 2.02 276,247 1,406 2.04 252,462 1,052 1.67 264,573 4,005 2.02 243,279 2,608 1.43 Total deposits 0.87 806,710 2,141 1.06 765,155 1,498 0.78 799,063 6,133 1.02 743,199 3,608 0.65 Borrowings 2.33 87,492 691 3.16 107,681 792 2.94 120,194 2,717 3.01 136,722 2,678 2.61 Total interest-bearing liabilities 0.99 894,202 2,832 1.27 872,836 2,290 1.05 919,257 8,850 1.28 879,921 6,286 0.95 Net interest income $ 9,263 $ 9,265 $ 27,999 $ 27,396 Net interest rate spread 3.17 2.87 3.00 2.86 2.99 Net earning assets $ 273,151 $ 267,157 $ 267,371 $ 259,035 3.17 3.25 3.15 3.21 Average interest-earning assets to average interest-bearing liabilities 130.5 % 130.6 % 129.1 % 129.4 % Three Months Ended Nine Months Ended September 30, 2019 vs. 2018 September 30, 2019 vs. 2018 Increase (Decrease) Due to Total Increase (Decrease) Increase (Decrease) Due to Total Increase (Decrease) Volume Rate Volume Rate (In thousands) Interest earning assets: Loans receivable, net $ 407 $ 266 $ 673 $ 2,116 $ 1,047 $ 3,163 Investments (99 ) (41 ) (140 ) (402 ) 321 (81 ) FHLB stock (13 ) 5 (8 ) (19 ) 50 31 29 (14 ) 15 47 7 54 Total interest-earning assets $ 324 $ 216 $ 540 $ 1,742 $ 1,425 $ 3,167 Interest-bearing liabilities: Savings accounts $ 47 $ 246 $ 293 $ 70 $ 867 $ 937 Interest-bearing transaction accounts 1 — 1 1 59 60 Money market accounts (46 ) 41 (5 ) (59 ) 190 131 Certificates of deposit 99 255 354 228 1,169 1,397 Borrowings (149 ) 48 (101 ) (324 ) 363 39 Total interest-bearing liabilities $ (48 ) $ 590 $ 542 $ (84 ) $ 2,648 $ 2,564 Net change in interest income $ 372 $ (374 ) $ (2 ) $ 1,826 $ (1,223 ) $ 603 (1) Includes interest-bearing deposits (cash) at other financial institutions. $ 1,583 $ (582 ) $ 1,001 $ 2,177 $ (1,669 ) $ 508 899 (739 ) 160 1,514 (1,698 ) (184 ) (18 ) 23 5 (82 ) 13 (69 ) 18 (74 ) (56 ) 101 (206 ) (105 ) $ 2,482 $ (1,372 ) $ 1,110 $ 3,710 $ (3,560 ) $ 150 $ 14 $ (235 ) $ (221 ) $ 63 $ (363 ) $ (300 ) 6 (27 ) (21 ) 10 (80 ) (70 ) 160 (110 ) 50 178 (5 ) 173 219 (763 ) (544 ) 963 (1,315 ) (352 ) (207 ) (279 ) (486 ) (1,117 ) (760 ) (1,877 ) $ 192 $ (1,414 ) $ (1,222 ) $ 97 $ (2,523 ) $ (2,426 ) $ 2,290 $ 42 $ 2,332 $ 3,613 $ (1,037 ) $ 2,576 20192020 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.2019,2020, 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 (In thousands) Certificates of deposit $ 214,390 $ 51,675 $ 13,000 $ — $ 279,065 FHLB advances 65,324 10,000 10,000 — 85,324 Operating leases 316 521 441 1,758 3,036 Borrower taxes and insurance 1,876 — — — 1,876 Deferred compensation 471 — 53 464 988 Total contractual obligations $ 282,377 $ 62,196 $ 23,494 $ 2,222 $ 370,289 Certificates of deposit $ 190,613 $ 87,940 $ 14,987 $ — $ 293,540 FHLB advances 59,150 25,000 25,000 — 109,150 Operating leases 461 766 782 2,241 4,250 1,986 — — — 1,986 Deferred compensation 389 230 64 356 1,039 Total contractual obligations $ 252,599 $ 113,936 $ 40,833 $ 2,597 $ 409,965 2019:2020: Within After 1 Year Through After 3 Years Through Beyond Total Amounts $ 2,918 $ — $ — $ — $ 2,918 Variable-rate 7,600 — — — 7,600 38,366 37,919 — 72,484 148,769 182 — — — 182 $ 49,066 $ 37,919 $ — $ 72,484 $ 159,469 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 (In thousands) Commitments to originate loans: Fixed-rate $ 658 $ — $ — $ — $ 658 Adjustable-rate 27 — — — 27 Unfunded commitments under lines of credit or existing loans 2,095 24,381 2,963 46,274 75,713 Standby letters of credit — 214 — — 214 Total commitments $ 2,780 $ 24,595 $ 2,963 $ 46,274 $ 76,612 2019,2020, cash and cash equivalents totaled $56.5$52.1 million, and unpledged securities classified as available-for-sale with a market value of $251.2$281.9 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of $85.3$267.4 million and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which no collateral has beenavailable-for-sale securities with a market value of $29.4 million were pledged as of September 30, 2019.2019,2020, we had $685,000$10.5 million in loan commitments outstanding, and an additional $76.2$149.0 million in undisbursed loans and standby letters of credit, including $38.7$97.8 million in undisbursed construction loan commitments.20192020 totaled $214.4$190.6 million, or 76.8%64.9% of certificates of deposit.deposit with a weighted-average rate of 0.73%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as market interest rates have begun to rise. In addition, shorter-term rates are more favorable to longer terms with the current flat to inverted yield curve.recently declined. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered.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 affordprovide us sufficient foreseeablemore than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.2019,2020, the Company (on an unconsolidated basis) had liquid assets of $19.2$9.6 million.2019,2020, shareholders' equity totaled $177.3$180.7 million, or 14.2%11.5% of total assets. Our book value per share of common stock was $16.42$17.65 at September 30, 2019,2020, 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.2019,2020, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.2019. Minimum Capital Requirements Minimum Required to be Well-Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tier I leverage capital (to average assets) $ 147,430 12.0 % $ 49,020 4.0 % $ 61,275 5.0 % Common equity tier I (to risk-weighted assets) 147,430 18.0 36,944 4.5 53,363 6.5 Tier I risk-based capital (to risk-weighted assets) 147,430 18.0 49,258 6.0 65,678 8.0 Total risk-based capital (to risk-weighted assets) 157,054 19.1 65,678 8.0 82,097 10.0 $ 156,405 10.5 % $ 59,428 4.0 % $ 74,285 5.0 % 156,405 14.7 47,826 4.5 69,083 6.5 156,405 14.7 63,769 6.0 85,025 8.0 169,690 16.0 85,025 8.0 106,281 10.0 2018.2019,2020, the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in2019,2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.There have been no material changes toset forth inpreviously disclosed under Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2018.(a)(b)(c) The following table summarizes common stock repurchases during the three months ended September 30, 2019: 74,005 $ 11.90 64,237 77,556 41,717 11.38 41,717 35,839 39,759 11.80 35,839 — 155,481 $ 11.72 141,793 Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans (2) Maximum Number of Shares that May Yet Be Repurchased Under the Plans July 1, 2019 - July 31, 2019 16,249 $ 16.41 — 262,209 August 1, 2019 - August 31, 2019 60,000 16.17 60,000 202,209 September 1, 2019 - September 30, 2019 71,400 16.52 71,400 130,809 Total 147,649 $ 16.37 131,400 (1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection with cancellation(2) 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 September 30, 2019, a total of 1,035,850 shares, or 88.8% percent of the shares authorized in the September 2017 stock repurchase plan, have been purchased at an average cost of $16.10 per share, leaving 130,809 shares available for future purchases.
trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program,” along with direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans. The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, which prompted Congress to negotiate additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. Further, on July 3, 2020 the President extended the deadline for potential borrowers to apply for Paycheck Protection Program funds until August 8, 2020. The legislative and regulatory landscape surrounding COVID-19 is rapidly changing, and neither the Company nor the Bank can predict with certainty the impact it will have on our operations or business.Not applicable.ExhibitNo.Exhibit DescriptionFiledHerewith31.12019,2020, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL): (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 Statements104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) 8, 20196, 2020Laurence J. HuethMatthew P. DeinesLaurence J. Hueth 8, 20196, 2020Regina M. WoodGeraldine L. BullardRegina M. Wood60