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EX-32 - EXHIBIT 32 - First Northwest Bancorpfnwb-033120x10qxexhibit32.htm
EX-31.2 - EXHIBIT 31.2 - First Northwest Bancorpfnwb-033120x10qxexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - First Northwest Bancorpfnwb-033120x10qxexhibit311.htm
EX-10.4 - EXHIBIT 10.4 - First Northwest Bancorpfnwb2020equityincentiveplan.htm
EX-10.3 - EXHIBIT 10.3 - First Northwest Bancorpa2020executivecashincentiv.htm
EX-10.2 - EXHIBIT 10.2 - First Northwest Bancorpa2020cashincentiveplanpart.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2020
 or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _____ to _____

Commission File Number: 001-36741
FIRST NORTHWEST BANCORP
 
(Exact name of registrant as specified in its charter)
Washington
 
46-1259100
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer I.D. Number)
 
 
 
105 West 8th Street, Port Angeles, Washington
 
98362
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code:
 
(360) 457-0461

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Trading Symbol(s):
 
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
 
FNWB
 
The Nasdaq Stock Market LLC

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý

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



FIRST NORTHWEST BANCORP
FORM 10-Q
TABLE OF CONTENTS


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

Item 1. Financial Statements (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share information) (Unaudited)

ASSETS
March 31, 2020
 
December 31, 2019
 
 
 
 
Cash and due from banks
$
15,531

 
$
13,519

Interest-bearing deposits in banks
91,633

 
35,220

Investment securities available for sale, at fair value
317,520

 
315,580

Loans held for sale
4,531

 
503

Loans receivable (net of allowance for loan losses of $10,830 and $9,628)
899,154

 
878,437

Federal Home Loan Bank (FHLB) stock, at cost
7,581

 
6,034

Accrued interest receivable
4,124

 
3,931

Premises and equipment, net
14,231

 
14,342

Mortgage servicing rights, net
843

 
871

Bank-owned life insurance, net
30,355

 
30,027

Prepaid expenses and other assets
11,436

 
8,872

 
 
 
 
Total assets
$
1,396,939

 
$
1,307,336

 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
Deposits
$
1,063,905

 
$
1,001,645

Borrowings
150,021

 
112,930

Accrued interest payable
194

 
373

Accrued expenses and other liabilities
15,225

 
14,392

Advances from borrowers for taxes and insurance
443

 
1,145

 
 
 
 
Total liabilities
1,229,788

 
1,130,485

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

 

Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,432,963 shares at March 31, 2020, and 10,731,639 shares at December 31, 2019
104

 
107

Additional paid-in capital
99,479

 
102,017

Retained earnings
85,549

 
86,156

Accumulated other comprehensive loss, net of tax
(8,256
)
 
(1,539
)
Unearned employee stock ownership plan (ESOP) shares
(9,725
)
 
(9,890
)
 
 
 
 
Total shareholders' equity
167,151

 
176,851

 
 
 
 
Total liabilities and shareholders' equity
$
1,396,939

 
$
1,307,336


See selected notes to the consolidated financial statements.

3


FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) (Unaudited)

 
Three Months Ended
 
March 31,
 
2020
 
2019
INTEREST INCOME
 
 
 
Interest and fees on loans receivable
$
9,836

 
$
10,092

Interest on mortgage-backed securities
959

 
1,257

Interest on investment securities
1,069

 
1,010

Interest on deposits and other
68

 
67

FHLB dividends
47

 
88

 
 
 
 
Total interest income
11,979

 
12,514

INTEREST EXPENSE
 
 
 
Deposits
2,138

 
1,924

Borrowings
434

 
990

 
 
 
 
Total interest expense
2,572

 
2,914

 
 
 
 
Net interest income
9,407

 
9,600

PROVISION FOR LOAN LOSSES
1,266

 
335

 
 
 
 
Net interest income after provision for loan losses
8,141

 
9,265

NONINTEREST INCOME
 
 
 
Loan and deposit service fees
881

 
905

Mortgage servicing fees, net of amortization
15

 
45

Net gain on sale of loans
383

 
87

Net gain on sale of investment securities
605

 

Increase in cash surrender value of bank-owned life insurance
328

 
143

Other income
106

 
71

 
 
 
 
Total noninterest income
2,318

 
1,251

 
 
 
 
NONINTEREST EXPENSE
 
 
 
Compensation and benefits
5,361

 
4,573

Data processing
690

 
631

Occupancy and equipment
1,351

 
1,108

Supplies, postage, and telephone
211

 
228

Regulatory assessments and state taxes
174

 
169

Advertising
272

 
143

Professional fees
400

 
298

FDIC insurance premium

 
77

FHLB prepayment penalty
210

 

Other
713

 
573

 
 
 
 
Total noninterest expense
9,382

 
7,800


 
 
 
INCOME BEFORE PROVISION FOR INCOME TAX
1,077

 
2,716

 
 
 
 
PROVISION FOR INCOME TAX
204

 
509

 
 
 
 
NET INCOME
$
873

 
$
2,207

 
 
 
 
Basic and diluted earnings per share
$
0.09

 
$
0.22

 
 
 
 


 

 
 
 
 

See selected notes to the consolidated financial statements.

4


FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands) (Unaudited)

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
 
 
 
NET INCOME
$
873

 
$
2,207

 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
Unrealized (loss) gain on securities:
 
 
 
Unrealized holding (loss) gain, net of tax (benefit) provision of $(1,658) and $427, respectively
(6,239
)
 
1,603

Reclassification adjustment for net (gain) loss on sales of securities realized in income, net of taxes of $(127) and $0, respectively
(478
)
 

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

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



See selected notes to the consolidated financial statements.

5


FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2020 and 2019
(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, 2018
11,170,018

 
$
112

 
$
105,825

 
$
81,607

 
$
(10,549
)
 
$
(4,731
)
 
$
172,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
2,207

 
 
 
 
 
2,207

Common stock repurchased
(177,837
)
 
(2
)
 
(1,777
)
 
(1,047
)
 
 
 
 
 
(2,826
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
1,603

 
1,603

Share-based compensation
 
 
 
 
283

 
 
 
 
 
 
 
283

ESOP shares committed to be released
 
 
 
 
43

 
 
 
164

 
 
 
207

Cash dividends declared and paid ($0.03 per share)
 
 
 
 
 
 
(331
)
 
 
 
 
 
(331
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, March 31, 2019
10,992,181

 
$
110

 
$
104,374

 
$
82,436

 
$
(10,385
)
 
$
(3,128
)
 
$
173,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2019
10,731,639

 
$
107

 
$
102,017

 
$
86,156

 
$
(9,890
)
 
$
(1,539
)
 
$
176,851

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
873

 
 
 
 
 
873

Common stock repurchased
(288,276
)
 
(3
)
 
(2,880
)
 
(947
)
 
 
 
 
 
(3,830
)
Restricted stock award forfeitures net of grants
(10,400
)
 

 

 
 
 
 
 
 
 

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
 
 
(6,717
)
 
(6,717
)
Share-based compensation
 
 
 
 
304

 
 
 
 
 
 
 
304

ESOP shares committed to be released
 
 
 
 
38

 
 
 
165

 
 
 
203

Cash dividends declared and paid ($0.05 per share)
 
 
 
 
 
 
(533
)
 
 
 
 
 
(533
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, March 31, 2020
10,432,963

 
$
104

 
$
99,479

 
$
85,549

 
$
(9,725
)
 
$
(8,256
)
 
$
167,151




See selected notes to the consolidated financial statements.

6


FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
 
 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
873

 
$
2,207

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization
338

 
333

Amortization and accretion of premiums and discounts on investments, net
477

 
458

(Accretion) amortization of deferred loan fees, net
(436
)
 
167

Amortization of mortgage servicing rights, net
82

 
66

Additions to mortgage servicing rights, net
(54
)
 
(20
)
Net increase (decrease) on the valuation allowance on mortgage servicing rights

 
(3
)
Provision for loan losses
1,266

 
335

Allocation of ESOP shares
203

 
207

Share-based compensation
304

 
283

Gain on sale of loans, net
(383
)
 
(87
)
Gain on sale of securities available for sale, net
(605
)
 

Increase in cash surrender value of life insurance, net
(328
)
 
(143
)
Origination of loans held for sale
(20,027
)
 
(4,420
)
Proceeds from loans held for sale
16,382

 
3,538

Change in assets and liabilities:
 
 
 
Increase in accrued interest receivable
(193
)
 
(66
)
Increase in prepaid expenses and other assets
(382
)
 
(3,916
)
Decrease in accrued interest payable
(179
)
 
(242
)
Increase in accrued expenses and other liabilities
833

 
6,949

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

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of securities available for sale
(66,372
)
 

Proceeds from maturities, calls, and principal repayments of securities available for sale
15,984

 
6,108

Proceeds from sales of securities available for sale
40,073

 

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

 
434

(Purchase) redemption of FHLB stock
(1,547
)
 

Net increase in loans receivable
(21,943
)
 
(19,845
)
Purchase of premises and equipment, net
(227
)
 
(33
)
 
 
 
 
Net cash from investing activities
(34,032
)
 
(13,336
)
 
 
 
 

See selected notes to the consolidated financial statements.

7


FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
 
 
Three Months Ended March 31,
 
2020
 
2019
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net increase in deposits
$
62,260

 
$
12,495

Net increase (decrease) in advances from the FHLB
37,091

 
(1,378
)
Net (decrease) increase in advances from borrowers for taxes and insurance
(702
)
 
1,064

Dividends paid
(533
)
 
(331
)
Repurchase of common stock
(3,830
)
 
(2,826
)
 
 
 
 
Net cash from financing activities
94,286

 
9,024

 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
58,425

 
1,334

 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
48,739

 
26,323

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

 
$
27,657

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

 
$
3,156

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

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

 
$
74




See selected notes to the consolidated financial statements.

8


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 1 - Basis of Presentation and Critical Accounting Policies

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

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

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

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

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

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

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

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

Recently adopted accounting pronouncements

In August 2018, FASB issued ASU No. 2018-13, 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

9


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, 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 did not 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. This ASU, which is effective for fiscal years beginning after December 15, 2019, did not have a material impact on the Company’s financial statements.

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

Recently issued accounting pronouncements not yet adopted

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

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

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

10


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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

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

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

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

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

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

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


11


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at March 31, 2020 are summarized as follows:
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Estimated
Fair Value
 
(In thousands)
Available for Sale
 
 
 
 
 
 
 
Municipal bonds
$
52,238

 
$
708

 
$
(692
)
 
$
52,254

U.S. government agency issued asset-backed securities (ABS agency)
46,495

 
403

 
(4,773
)
 
42,125

Corporate issued asset-backed securities (ABS corporate)
41,716

 

 
(7,643
)
 
34,073

Corporate issued debt securities (Corporate debt)
9,986

 
49

 
(596
)
 
9,439

U.S. Small Business Administration securities (SBA)
25,185

 
190

 
(12
)
 
25,363

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. government agency issued mortgage-backed securities (MBS agency)
142,881

 
2,806

 
(548
)
 
145,139

Corporate issued mortgage-backed securities (MBS corporate)
9,469

 

 
(342
)
 
9,127

 
 
 
 
 
 
 
 
Total securities available for sale
$
327,970

 
$
4,156

 
$
(14,606
)
 
$
317,520




The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale and held-to-maturity at December 31, 2019, are summarized as follows:
 
Amortized Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Estimated
Fair Value
 
(In thousands)
Available for Sale
 
 
 
 
 
 
 
Municipal bonds
$
39,524

 
$
125

 
$
(367
)
 
$
39,282

ABS agency
29,796

 

 
(938
)
 
28,858

ABS corporate
41,728

 

 
(873
)
 
40,855

Corporate debt
9,986

 

 
(343
)
 
9,643

SBA
28,423

 
72

 
(36
)
 
28,459

Mortgage-backed securities:
 
 
 
 
 
 
 
MBS agency
159,697

 
811

 
(341
)
 
160,167

MBS corporate
8,374

 

 
(58
)
 
8,316

 
 
 
 
 
 
 
 
Total securities available for sale
$
317,528

 
$
1,008

 
$
(2,956
)
 
$
315,580



12


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 March 31, 2020:
 
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
$
(692
)
 
$
20,954

 
$

 
$

 
$
(692
)
 
$
20,954

ABS agency
(450
)
 
9,536

 
(4,323
)
 
21,499

 
(4,773
)
 
31,035

ABS corporate
(202
)
 
3,678

 
(7,441
)
 
30,395

 
(7,643
)
 
34,073

Corporate debt

 

 
(596
)
 
4,404

 
(596
)
 
4,404

SBA

 

 
(12
)
 
4,101

 
(12
)
 
4,101

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
MBS agency
(547
)
 
32,889

 
(1
)
 
807

 
(548
)
 
33,696

MBS corporate
(62
)
 
2,216

 
(280
)
 
6,911

 
(342
)
 
9,127

 
 
 
 
 
 
 
 
 
 
 
 
Total available for sale
$
(1,953
)
 
$
69,273

 
$
(12,653
)
 
$
68,117

 
$
(14,606
)
 
$
137,390



The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2019:
 
Less Than Twelve Months
 
Twelve Months or Longer
 
Total
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
(367
)
 
$
29,928

 
$

 
$

 
$
(367
)
 
$
29,928

ABS agency
(59
)
 
3,855

 
(879
)
 
25,002

 
(938
)
 
28,857

ABS corporate
(31
)
 
3,848

 
(842
)
 
37,007

 
(873
)
 
40,855

Corporate debt
(17
)
 
4,983

 
(326
)
 
4,660

 
(343
)
 
9,643

SBA

 

 
(36
)
 
15,034

 
(36
)
 
15,034

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
MBS agency
(166
)
 
18,744

 
(175
)
 
47,463

 
(341
)
 
66,207

MBS corporate

 

 
(58
)
 
8,316

 
(58
)
 
8,316

 
 
 
 
 
 
 
 
 
 
 
 
Total available for sale
$
(640
)
 
$
61,358

 
$
(2,316
)
 
$
137,482

 
$
(2,956
)
 
$
198,840


The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At March 31, 2020 and December 31, 2019, there were 41 and 62 investment securities in an unrealized loss position, respectively.

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

There were no OTTI losses during the three months ended March 31, 2020 and 2019.

13


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.
 
March 31, 2020
 
Available-for-Sale
 
Amortized Cost
 
Estimated Fair Value
 
(In thousands)
Mortgage-backed securities:
 
 
 
Due within one year
$

 
$

Due after one through five years
6,179

 
6,264

Due after five through ten years
7,077

 
7,404

Due after ten years
139,094

 
140,598

 
 
 
 
Total mortgage-backed securities
152,350

 
154,266

 
 
 
 
All other investment securities:
 
 
 
Due within one year

 

Due after one through five years
3,040

 
3,096

Due after five through ten years
49,249

 
44,707

Due after ten years
123,331

 
115,451

 
 
 
 
Total all other investment securities
175,620

 
163,254

 
 
 
 
Total investment securities
$
327,970

 
$
317,520

 
 
 
 

 
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
13,360

 
13,391

Due after five through ten years
6,261

 
6,257

Due after ten years
148,450

 
148,835

 
 
 
 
Total mortgage-backed securities
168,071

 
168,483

 
 
 
 
All other investment securities:
 
 
 
Due within one year

 

Due after one through five years
2,043

 
2,084

Due after five through ten years
58,460

 
57,680

Due after ten years
88,954

 
87,333

 
 
 
 
Total all other investment securities
149,457

 
147,097

 
 
 
 
Total investment securities
$
317,528

 
$
315,580

 
 
 
 



14


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 March 31,
 
2020
 
2019
 
(In thousands)
Proceeds from sales
$
40,073

 
$

Gross realized gains
637

 

Gross realized losses
(32
)
 



Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Real Estate:
 
 
 
One-to-four family
$
302,688

 
$
306,014

Multi-family
88,794

 
96,098

Commercial real estate
260,321

 
255,722

Construction and land
48,565

 
37,187

Total real estate loans
700,368

 
695,021

 
 
 
 
Consumer:
 
 
 
Home equity
35,260

 
35,046

Auto and other consumer
114,194

 
112,119

Total consumer loans
149,454

 
147,165

 
 
 
 
Commercial business loans
55,853

 
41,571

 
 
 
 
Total loans
905,675

 
883,757

 
 
 
 
Less:
 
 
 
Net deferred loan fees
433

 
206

Premium on purchased loans, net
(4,742
)
 
(4,514
)
Allowance for loan losses
10,830

 
9,628

 


 


Total loans receivable, net
$
899,154

 
$
878,437


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


15


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 March 31, 2020
 
One-to-
four family
 
Multi-family
 
Commercial
 real estate
 
Construction
 and land
 
Home
 equity
 
Auto and other
consumer
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
3,024

 
$
888

 
$
2,243

 
$
399

 
$
454

 
$
2,261

 
$
208

 
$
151

 
$
9,628

Provision for loan losses
319

 
35

 
479

 
191

 
(6
)
 
176

 
42

 
30

 
1,266

Charge-offs

 

 

 

 

 
(134
)
 

 

 
(134
)
Recoveries
53

 

 

 
2

 
1

 
14

 

 

 
70

Ending balance
$
3,396

 
$
923

 
$
2,722

 
$
592

 
$
449

 
$
2,317

 
$
250

 
$
181

 
$
10,830

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
At March 31, 2020
 
One-to-
four family
 
Multi-family
 
Commercial
 real estate
 
Construction
 and land
 
Home
 equity
 
Auto and other
consumer
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Total ALLL
$
3,396

 
$
923

 
$
2,722

 
$
592

 
$
449

 
$
2,317

 
$
250

 
$
181

 
$
10,830

General reserve
3,363

 
922

 
2,713

 
591

 
443

 
2,263

 
245

 
181

 
10,721

Specific reserve
33

 
1

 
9

 
1

 
6

 
54

 
5

 

 
109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
302,688

 
$
88,794

 
$
260,321

 
$
48,565

 
$
35,260

 
$
114,194

 
$
55,853

 
$

 
$
905,675

Loans collectively evaluated (1)
299,947

 
88,391

 
258,451

 
48,537

 
34,971

 
113,485

 
55,590

 

 
899,372

Loans individually evaluated (2)
2,741

 
403

 
1,870

 
28

 
289

 
709

 
263

 

 
6,303

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

 
At or For the Three Months Ended March 31, 2019
 
One-to-
four family
 
Multi-family
 
Commercial
 real estate
 
Construction
 and land
 
Home
 equity
 
Auto and other
consumer
 
Commercial
business
 
Unallocated
 
Total
ALLL:
(In thousands)
Beginning balance
$
3,297

 
$
762

 
$
2,289

 
$
585

 
$
480

 
$
1,611

 
$
334

 
$
175

 
$
9,533

Provision for loan losses
142

 
7

 
48

 
115

 
(14
)
 
177

 
(141
)
 
1

 
335

Charge-offs

 

 

 

 

 
(186
)
 
(4
)
 

 
(190
)
Recoveries
2

 

 

 

 
1

 
76

 
2

 

 
81

Ending balance
$
3,441

 
$
769

 
$
2,337

 
$
700

 
$
467

 
$
1,678

 
$
191

 
$
176

 
$
9,759

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


16


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
At December 31, 2019
 
One-to-
four family
 
Multi-family
 
Commercial
 real estate
 
Construction
 and land
 
Home
 equity
 
Auto and other
consumer
 
Commercial
business
 
Unallocated
 
Total
 
(In thousands)
Total ALLL
$
3,024

 
$
888

 
$
2,243

 
$
399

 
$
454

 
$
2,261

 
$
208

 
$
151

 
$
9,628

General reserve
2,993

 
887

 
2,235

 
399

 
439

 
2,119

 
203

 
151

 
9,426

Specific reserve
31

 
1

 
8

 

 
15

 
142

 
5

 

 
202

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
306,014

 
$
96,098

 
$
255,722

 
$
37,187

 
$
35,046

 
$
112,119

 
$
41,571

 
$

 
$
883,757

Loans collectively evaluated (1)
303,026

 
95,991

 
253,839

 
37,158

 
34,775

 
111,271

 
41,308

 

 
877,368

Loans individually evaluated (2)
2,988

 
107

 
1,883

 
29

 
271

 
848

 
263

 

 
6,389

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

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


17


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:
 
March 31, 2020
 
December 31, 2019
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
(In thousands)
With no allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
72

 
$
99

 
$

 
$
297

 
$
332

 
$

Multi-family
296

 
296

 

 

 

 

Commercial real estate
1,227

 
1,310

 

 
1,240

 
1,320

 

Construction and land

 
32

 

 

 
33

 

Home equity
42

 
114

 

 
45

 
110

 

Auto and other consumer

 
271

 

 
251

 
548

 

Commercial business

 

 

 

 

 

Total
1,637

 
2,122

 

 
1,833

 
2,343

 

 
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
2,669

 
2,884

 
33

 
2,691

 
2,911

 
31

Multi-family
107

 
107

 
1

 
107

 
107

 
1

Commercial real estate
643

 
643

 
9

 
643

 
643

 
8

Construction and land
28

 
28

 
1

 
29

 
29

 

Home equity
247

 
307

 
6

 
226

 
286

 
15

Auto and other consumer
709

 
818

 
54

 
597

 
690

 
142

Commercial business
263

 
263

 
5

 
263

 
263

 
5

Total
4,666

 
5,050

 
109

 
4,556

 
4,929

 
202

 
 
 
 
 
 
 
 
 
 
 
 
Total impaired loans:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
2,741

 
2,983

 
33

 
2,988

 
3,243

 
31

Multi-family
403

 
403

 
1

 
107

 
107

 
1

Commercial real estate
1,870

 
1,953

 
9

 
1,883

 
1,963

 
8

Construction and land
28

 
60

 
1

 
29

 
62

 

Home equity
289

 
421

 
6

 
271

 
396

 
15

Auto and other consumer
709

 
1,089

 
54

 
848

 
1,238

 
142

Commercial business
263

 
263

 
5

 
263

 
263

 
5

Total
$
6,303

 
$
7,172

 
$
109

 
$
6,389

 
$
7,272

 
$
202



18


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
 
March 31, 2020
 
Average Recorded Investment
 
Interest Income Recognized
 
(In thousands)
With no allowance recorded:
 
 
 
One-to-four family
$
108

 
$
1

Multi-family
99

 

Commercial real estate
1,231

 
15

Home equity
42

 
3

Auto and other consumer

 
10

Commercial business

 

Total
1,480

 
29

 
 
 
 
With an allowance recorded:
 
 
 
One-to-four family
2,676

 
64

Multi-family
305

 

Commercial real estate
643

 

Construction and land
28

 
2

Home equity
248

 
6

Auto and other consumer
689

 
17

Commercial business
263

 

Total
4,852

 
89

 
 
 
 
Total impaired loans:
 
 
 
One-to-four family
2,784

 
65

Multi-family
404

 

Commercial real estate
1,874

 
15

Construction and land
28

 
2

Home equity
290

 
9

Auto and other consumer
689

 
27

Commercial business
263

 

Total
$
6,332

 
$
118



Interest income recognized on a cash basis on impaired loans for the three months ended March 31, 2020, was $76,000.


19


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
 
March 31, 2019
 
Average Recorded Investment
 
Interest Income Recognized
 
(In thousands)
With no allowance recorded:
 
 
 
One-to-four family
$
304

 
$
5

Commercial real estate
1,296

 
12

Construction and land

 

Home equity
324

 
10

Auto and other consumer

 
7

Total
1,924

 
34

 
 
 
 
With an allowance recorded:
 
 
 
One-to-four family
2,831

 
68

Multi-family
110

 
1

Commercial real estate
663

 
7

Construction and land
53

 
2

Home equity
300

 
7

Auto and other consumer
263

 
7

Commercial business
328

 
5

Total
4,548

 
97

 
 
 
 
Total impaired loans:
 
 
 
One-to-four family
3,135

 
73

Multi-family
110

 
1

Commercial real estate
1,959

 
19

Construction and land
53

 
2

Home equity
624

 
17

Auto and other consumer
263

 
14

Commercial business
328

 
5

Total
$
6,472

 
$
131



Interest income recognized on a cash basis on impaired loans for the three months ended March 31, 2019, was $92,000.


20


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:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
One-to-four family
$
467

 
$
698

Multi-family
297

 

Commercial real estate
106

 
109

Construction and land
28

 
29

Home equity
133

 
112

Auto and other consumer
709

 
848

Commercial business

 

 
 
 
 
Total nonaccrual loans
$
1,740

 
$
1,796

 
 
 
 

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at March 31, 2020 and December 31, 2019.

The following table presents past due loans, net of partial loan charge-offs, by class, as of March 31, 2020:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or More
Past Due
 
Total
Past Due
 
Current
 
Total Loans
 
(In thousands)
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
$
1,791

 
$

 
$

 
$
1,791

 
$
300,897

 
$
302,688

Multi-family

 
107

 
297

 
404

 
88,390

 
88,794

Commercial real estate

 
643

 

 
643

 
259,678

 
260,321

Construction and land
689

 

 

 
689

 
47,876

 
48,565

Total real estate loans
2,480

 
750

 
297

 
3,527

 
696,841

 
700,368

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
13

 
12

 
24

 
49

 
35,211

 
35,260

Auto and other consumer
2,157

 
324

 
380

 
2,861

 
111,333

 
114,194

Total consumer loans
2,170

 
336

 
404

 
2,910

 
146,544

 
149,454

 
 
 
 
 
 
 
 
 
 
 
 
Commercial business loans
417

 
263

 

 
680

 
55,173

 
55,853

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
5,067

 
$
1,349

 
$
701

 
$
7,117

 
$
898,558

 
$
905,675



21


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, 2019:
 
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
$
928

 
$
92

 
$
116

 
$
1,136

 
$
304,878

 
$
306,014

Multi-family

 

 

 

 
96,098

 
96,098

Commercial real estate

 

 

 

 
255,722

 
255,722

Construction and land
38

 

 

 
38

 
37,149

 
37,187

Total real estate loans
966

 
92

 
116

 
1,174

 
693,847

 
695,021

 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
299

 
24

 

 
323

 
34,723

 
35,046

Auto and other consumer
1,423

 
370

 
614

 
2,407

 
109,712

 
112,119

Total consumer loans
1,722

 
394

 
614

 
2,730

 
144,435

 
147,165

 
 
 
 
 
 
 
 
 
 
 
 
Commercial business loans

 
115

 

 
115

 
41,456

 
41,571

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
2,688

 
$
601

 
$
730

 
$
4,019

 
$
879,738

 
$
883,757


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

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

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


22


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table represents the internally assigned grade as of March 31, 2020, by class of loans:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
 
(In thousands)
Real Estate:
 
 
 
 
 
 
 
 
 
One-to-four family
$
297,391

 
$
3,455

 
$
1,206

 
$
636

 
$
302,688

Multi-family
88,390

 

 
107

 
297

 
88,794

Commercial real estate
256,166

 
94

 
2,782

 
1,279

 
260,321

Construction and land
37,987

 
10,353

 
186

 
39

 
48,565

Total real estate loans
679,934

 
13,902

 
4,281

 
2,251

 
700,368

 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
Home equity
34,196

 
712

 
127

 
225

 
35,260

Auto and other consumer
108,858

 
3,806

 
759

 
771

 
114,194

Total consumer loans
143,054

 
4,518

 
886

 
996

 
149,454

 
 
 
 
 
 
 
 
 
 
Commercial business loans
53,894

 
60

 
570

 
1,329

 
55,853

 
 
 
 
 
 
 
 
 
 
Total loans
$
876,882

 
$
18,480

 
$
5,737

 
$
4,576

 
$
905,675



The following table represents the internally assigned grade as of December 31, 2019, by class of loans:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
 
(In thousands)
Real Estate:
 
 
 
 
 
 
 
 
 
One-to-four family
$
301,312

 
$
2,685

 
$
1,148

 
$
869

 
$
306,014

Multi-family
95,694

 

 
107

 
297

 
96,098

Commercial real estate
251,531

 
97

 
2,800

 
1,294

 
255,722

Construction and land
35,897

 
1,184

 
77

 
29

 
37,187

Total real estate loans
684,434

 
3,966

 
4,132

 
2,489

 
695,021

 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
Home equity
34,260

 
470

 
89

 
227

 
35,046

Auto and other consumer
107,327

 
3,243

 
594

 
955

 
112,119

Total consumer loans
141,587

 
3,713

 
683

 
1,182

 
147,165

 
 
 
 
 
 
 
 
 
 
Commercial business loans
39,653

 
376

 
263

 
1,279

 
41,571

 
 
 
 
 
 
 
 
 
 
Total loans
$
865,674

 
$
8,055

 
$
5,078

 
$
4,950

 
$
883,757



23


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 March 31, 2020, by class of loans:
 
Nonperforming
 
Performing
 
Total
 
(In thousands)
Real Estate:
 
 
 
 
 
One-to-four family
$
467

 
$
302,221

 
$
302,688

Multi-family
297

 
88,497

 
88,794

Commercial real estate
106

 
260,215

 
260,321

Construction and land
28

 
48,537

 
48,565

 
 
 
 
 
 
Consumer:
 
 
 
 
 
Home equity
133

 
35,127

 
35,260

Auto and other consumer
709

 
113,485

 
114,194

 
 
 
 
 
 
Commercial business

 
55,853

 
55,853

 
 
 
 
 
 
Total loans
$
1,740

 
$
903,935

 
$
905,675



The following table represents the credit risk profile based on payment activity as of December 31, 2019, by class of loans:
 
Nonperforming
 
Performing
 
Total
 
(In thousands)
Real Estate:
 
 
 
 
 
One-to-four family
$
698

 
$
305,316

 
$
306,014

Multi-family

 
96,098

 
96,098

Commercial real estate
109

 
255,613

 
255,722

Construction and land
29

 
37,158

 
37,187

 
 
 
 
 
 
Consumer:
 
 
 
 
 
Home equity
112

 
34,934

 
35,046

Auto and other consumer
848

 
111,271

 
112,119

 
 
 
 
 
 
Commercial business

 
41,571

 
41,571

 
 
 
 
 
 
Total loans
$
1,796

 
$
881,961

 
$
883,757


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

The following table is a summary of information pertaining to TDR loans included in impaired loans at the dates indicated:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Total TDR loans
$
3,523

 
$
3,544

Allowance for loan losses related to TDR loans
44

 
41

Total nonaccrual TDR loans
81

 
81




24


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


There were no newly restructured and renewals or modifications of existing TDR loans that occurred during the three months ended March 31, 2020 or March 31, 2019.

There were no TDR loans which incurred a payment default within 12 months of the restructure date during the three months ended March 31, 2020.

The following is a summary of TDR loans which incurred a payment default within 12 months of the restructure date during the three months ended March 31, 2019.
 
Number
of Contracts
 
Rate
Modification
 
Term
Modification
 
Combination
Modification
 
Total
Modifications
 
 
 
(Dollars in thousands)
TDR loans that subsequently defaulted
 
 
 
 
 
 
 
 
 
One- to four-family
1

 
$

 
$

 
$
48

 
$
48


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

The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.
 
March 31, 2020
 
December 31, 2019
 
Accrual
 
Nonaccrual
 
Total
 
Accrual
 
Nonaccrual
 
Total
 
(In thousands)
One-to-four family
$
2,273

 
$
81

 
$
2,354

 
$
2,290

 
$
81

 
$
2,371

Multi-family
107

 

 
107

 
107

 

 
107

Commercial real estate
642

 

 
642

 
643

 

 
643

Home equity
157

 

 
157

 
160

 

 
160

Commercial business
263

 

 
263

 
263

 

 
263

 
 
 
 
 
 
 
 
 
 
 
 
Total TDR loans
$
3,442

 
$
81

 
$
3,523

 
$
3,463

 
$
81

 
$
3,544


Note 4 - Deposits

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at March 31, 2020 and December 31, 2019, were $106.1 million and $93.5 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:
 
March 31, 2020
 
December 31, 2019
 
Amount
 
Weighted-Average Interest Rate
 
Amount
 
Weighted-Average Interest Rate
 
(Dollars in thousands)
Savings
$
165,747

 
0.72%
 
$
168,983

 
0.86%
Transaction accounts
286,283

 
0.01%
 
276,496

 
0.03%
Money market accounts
253,198

 
0.48%
 
248,086

 
0.46%
Certificates of deposit
358,677

 
1.67%
 
308,080

 
1.85%
 
 
 
 
 
 
 
 
 
$
1,063,905

 
0.79%
 
$
1,001,645

 
0.84%
 
 
 
 
 
 
 
 


25


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Maturities of certificates at the dates indicated are as follows:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Within one year or less
$
289,742

 
$
241,127

After one year through two years
44,215

 
42,274

After two years through three years
9,772

 
11,167

After three years through four years
7,864

 
6,593

After four years through five years
7,084

 
6,919

After five years

 

 
 
 
 
 
$
358,677

 
$
308,080


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

Deposits at March 31, 2020 and December 31, 2019, included $68.7 million and $57.4 million, respectively, in public fund deposits. Investment securities with a carrying value of $32.1 million and $35.5 million were pledged as collateral for these deposits at March 31, 2020 and December 31, 2019, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

Interest on deposits by type for the periods shown was as follows:
 
Three Months Ended
 
March 31,
 
2020

2019
 
(In thousands)
Savings
$
340

 
$
316

Transaction accounts
19

 
36

Insured money market accounts
356

 
320

Certificates of deposit
1,423

 
1,252

 
 
 
 
 
$
2,138

 
$
1,924


Note 5 - Federal Taxes on Income

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

The effective tax rates were 18.9% and 18.7% for the three months ended March 31, 2020 and 2019, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2019 and 2018 of 21%, largely due to the nontaxable earnings on bank owned life insurance and tax-exempt interest income earned on certain investment securities and loans.


26


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 months ended March 31, 2020 and 2019.
 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In thousands, except share data)
Numerator:
 
 
 
Net income
$
873

 
$
2,207

 
 
 
 
Denominator:
 
 
 
Basic weighted average common shares outstanding
9,624,727

 
9,973,125

Dilutive restricted stock grants
51,650

 
77,143

Diluted weighted average common shares outstanding
9,676,377

 
10,050,268

 
 
 
 
Basic earnings per share
$
0.09

 
$
0.22

 
 
 
 
Diluted earnings per share
$
0.09

 
$
0.22

 
 
 
 

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of March 31, 2020 and 2019, there were 780,785 and 833,782 shares in the ESOP that remain unallocated, respectively.

Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. There were 16,256 and zero restricted stock award anti-dilutive weighted-average shares for the three months ended March 31, 2020 and 2019, respectively.

Note 7 - Employee Benefits

Employee Stock Ownership Plan

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

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. No principal or interest was paid by the ESOP during the three months ended March 31, 2020.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is

27


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP for the three months ended March 31, 2020 and 2019, was $151,000 and $207,000, respectively.

Shares issued to the ESOP as of the dates indicated are as follows:
 
March 31, 2020
 
December 31, 2019
 
(Dollars in thousands)
Allocated shares
253,987

 
253,987

Committed to be released shares
13,257

 

Unallocated shares
780,785

 
794,042

 
 
 
 
Total ESOP shares issued
1,048,029

 
1,048,029

 
 
 
 
Fair value of unallocated shares
$
8,487

 
$
14,396

 
 
 
 

Note 8 - Stock-based Compensation

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

During the three months ended March 31, 2020, 35,100 shares of restricted stock were awarded and no stock options were granted. There were no shares of restricted stock awarded during the three and three months ended March 31, 2019. Awarded shares of restricted stock vest ratably over five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over five years.

For the three months ended March 31, 2020 and 2019, total compensation expense for the 2015 EIP was $304,000 and $283,000, respectively.

Included in the above compensation expense for the three months ended March 31, 2020 and 2019, directors' compensation was $85,000 and $85,000, respectively.

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

 
For the Three Months Ended
 
March 31, 2020
 
Shares
 
Weighted-Average Grant Date Fair Value
Non-vested at January 1, 2020
264,300

 
$
14.60

Granted
35,100

 
16.22

Forfeited
(45,500
)
 
13.31

 
 
 
 
Non-vested at March 31, 2020
253,900

 
15.05

 
 
 
 

28


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



As of March 31, 2020, there was $3.1 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 3.46 years.

Subsequent to quarter-end, on May 5, 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan (the "2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. The 2020 EIP provides for the use of authorized but unissued shares or shares that have been reacquired by First Northwest to fund share-based awards. The 2020 EIP is separate from the 2015 EIP. The adoption of the 2020 EIP neither affects nor is affected by the continued existence of the 2015 EIP, except that after May 5, 2020, no further awards will be granted under the 2015 EIP.


Note 9 - Fair Value Accounting and Measurement

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

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

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

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

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

Level 3 - Unobservable inputs.

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

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

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


29


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:
 
March 31, 2020
 
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
$

 
$
52,254

 
$

 
$
52,254

ABS agency

 
42,125

 

 
42,125

ABS corporate

 
34,073

 

 
34,073

Corporate debt

 
9,439

 

 
9,439

SBA

 
25,363

 

 
25,363

MBS agency

 
145,139

 

 
145,139

MBS corporate

 
9,127

 

 
9,127

 
$

 
$
317,520

 
$

 
$
317,520

 
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
$

 
$
39,282

 
$

 
$
39,282

ABS agency

 
28,858

 

 
28,858

ABS corporate

 
40,855

 

 
40,855

Corporate debt

 
9,643

 

 
9,643

SBA

 
28,459

 

 
28,459

MBS agency

 
160,167

 

 
160,167

MBS corporate

 
8,316

 

 
8,316

 
$

 
$
315,580

 
$

 
$
315,580



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


30


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:
 
March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Impaired loans
$

 
$

 
$
6,303

 
$
6,303

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

 
$

 
$
6,389

 
$
6,389


At March 31, 2020 and December 31, 2019, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.


The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:
 
March 31, 2020
 
Carrying Amount
 
Estimated Fair Value
 
Fair Value Measurements Using:
 
 
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
107,164

 
$
107,164

 
$
107,164

 
$

 
$

Investment securities available for sale
317,520

 
317,520

 

 
317,520

 

Loans held for sale
4,531

 
4,531

 

 
4,531

 

Loans receivable, net
899,154

 
894,671

 

 

 
894,671

FHLB stock
7,581

 
7,581

 

 
7,581

 

Accrued interest receivable
4,124

 
4,124

 

 
4,124

 

Mortgage servicing rights, net
843

 
1,160

 

 

 
1,160

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
705,228

 
$
705,228

 
$
705,228

 
$

 
$

Time deposits
358,677

 
361,726

 

 
361,726

 

Borrowings
150,021

 
151,073

 

 
151,073

 

Accrued interest payable
194

 
194

 

 
194

 



31


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
December 31, 2019
 
Carrying Amount
 
Estimated Fair Value
 
Fair Value Measurements Using:
 
 
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
48,739

 
$
48,739

 
$
48,739

 
$

 
$

Investment securities available for sale
315,580

 
315,580

 

 
315,580

 

Loans held for sale
503

 
503

 

 
503

 

Loans receivable, net
878,437

 
858,101

 

 

 
858,101

FHLB stock
6,034

 
6,034

 

 
6,034

 

Accrued interest receivable
3,931

 
3,931

 

 
3,931

 

Mortgage servicing rights, net
871

 
1,486

 

 

 
1,486

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
693,565

 
$
693,565

 
$
693,565

 
$

 
$

Time deposits
308,080

 
308,819

 

 
308,819

 

Borrowings
112,930

 
113,076

 

 
113,076

 

Accrued interest payable
373

 
373

 

 
373

 


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

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

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

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

Note 10 - Subsequent Event

As one of the first regions to experience COVID-19 infections, Washington State moved quickly to mandate business closures and implement quarantine measures. Consequently, the Company incorporated several COVID-19 pandemic measures to assist the communities we serve. We are actively assisting customers and supporting the businesses in our communities. Our loan officers are contacting borrowers who are affected by declining economic activity, offering their assistance with payment deferrals and interest only payment options. Additionally, we continue to help our small business borrowers navigate the Small Business Administration’s Paycheck Protection Program.     We processed approximately $29.1

32


FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


million of PPP loans for more than 377 customers in SBA PPP loan fundings as of May 7, 2020, with an average loan amount approved of approximately $77,000. Payments by borrowers on these loans begin six months after the note date, and 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).

The success of our banking operation relies entirely on the safety and well-being of our employees and customers. On March 20, 2020, we began restricting lobby activities at all branches to appointment only and encouraged the use of drive-up services, ITM/ATM machines, digital banking applications and our contact center. On March 23, 2020, the State of Washington announced the Stay Home, Stay Healthy order for all residents, resulting in the closing of businesses or a substantial reduction in business activity. Nearly 70% of our staff are able to work remotely, and we will continue operating in this manner until the mandated Stay Home, Stay Healthy order is lifted by the State of Washington.



33


ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward‑looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward‑looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios;
estimates of our risks and future costs and benefits; and
statements concerning the potential effects of the COVID-19 pandemic on the Bank's business and financial results and conditions.
These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
developments and changes in Federal and state laws and regulations, such as the recently enacted Coronavirus Aid Relief and Economic Security Act (“CARES Act”) addressing the economic effects of the COVID-19 pandemic and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions;
changes in general economic conditions, either nationally or in our market area, that are worse than expected;
changes in policy and regulation as it pertains to the Small Business Administration’s Paycheck Protection Program (“PPP”) and the bank’s participation as a lender in the PPP and similar program and its effect on the Bank’s liquidity, financial results, business and customers, including the availability of program funds and the ability of customers to comply with the requirements and otherwise perform with respect to loans obtained under such programs.
the credit risks of our lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market area;
a decrease in the secondary market demand for loans that we originate for sale;
management’s assumptions in determining the adequacy of the allowance for loan losses;
our ability to control operating costs and expenses;
whether our management team can implement our operational strategy, including but not limited to our loan growth;
our ability to successfully execute on merger and/or acquisition strategies and integrate any newly acquired assets, liabilities, customers, systems, and management personnel into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
staffing needs and associated expenses in response to product demand or the implementation of corporate strategies, including our growth strategies related to the home lending center and new branches;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
increased competitive pressures among financial services companies;
our ability to attract and retain deposits;

34


our ability to retain key members of our senior management team;
changes in consumer spending, borrowing and savings habits;
our ability to successfully manage our growth in compliance with regulatory requirements;
results of examinations of us by the Washington State Department of Financial Institutions, Department of Banks, the Federal Deposit Insurance Corporation, the Federal Reserve Bank of San Francisco, or other regulatory authorities, which could result in restrictions that may adversely affect our liquidity and earnings;
changes in accounting policies and practices, as may be adopted by the financial institutions regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
inability of key third-party vendors to perform their obligations to us; and
other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019.

Further, statements about the potential effects of the COVID-19 pandemic on the Bank’s businesses and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Bank’s control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on the Bank, its customers and third parties.
These developments could have an adverse impact on our financial position and our results of operations.
Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

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

We offer a wide range of products and services focused on the lending and depository needs of the communities we serve. While we have a concentration of first lien one- to four-family mortgage loans, over the past five years, we increased our origination and portfolio balances of commercial real estate, multi-family real estate, and have increased our auto and consumer loans, through indirect auto lending and purchased auto loan programs, in order to diversify our asset portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase noninterest income and improve our interest rate risk. We also retain one- to four-family first and second lien loans in our portfolio to enhance interest income. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts, and certificates of deposit for individuals, businesses, and nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities. We also

35


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

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

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

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

The noninterest expenses we incur in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, advertising and promotion expenses, marketing and promotion expenses, expenses related to real estate and personal property owned and other miscellaneous expenses.
COVID-19 Pandemic. In late 2019 and early 2020, the COVID-19 pandemic manifested its impact on individuals, companies, and governmental entities around the world. It significantly impacted the global economy and created a challenging operating environment. As economic conditions deteriorated in mid-March 2020 as a result of the COVID-19 pandemic, we responded in several ways. Some of the key adjustments and developments include the following:
For our employees:
Enhancing the ability of our employees to work remotely, adjusting branch operating hours and restricting lobby access in most cases.
Providing significant support to employees by granting an increase in flexibility with paid leave, temporarily adjusting vacation policies, and increasing the cleaning of facilities to enable a safer environment for those employees that are not able to work from home.
Increasing compensation for hourly employees and providing additional compensation for exempt employees below the level of Senior Vice President.
For our customers and communities:
Offering short-term loan payment and fee forbearance programs. May borrowers requested and received temporary forbearance from obligations to assist them with the expected shortage in their near-term cash flow.
Facilitating government programs like the Small Business Administration's Paycheck Protection Program ("SBA PPP").
Investing in our communities. We plan to use a portion of the proceeds received from the SBA PPP loans and invest in the communities we serve.
For our shareholders and regulators:
Maintaining our capital ratios at strong levels and materially increasing our provision for loan losses to $1.3 million for the first quarter of 2020, compared to $669,000 for all of 2019.
Increasing on balance sheet liquidity, specifically Cash and Cash Equivalents increased by $58.4 million, a 120% increase over December 31, 2019.

On March 23, 2020, the State of Washington announced the Stay Home, Stay Healthy order for all residents, resulting in the closing of businesses or a substantial reduction in business activity. The sectors that have been most heavily impacted include hospitality; restaurant and food services; lessors of commercial real estate to hospitality, restaurant, and retail establishments; and professional services. At March 31, 2020, the Company’s exposure as a percent of the total loan portfolio to these industries was 5.6%, 0.2%, 5.3%, and 1.6%, respectively.


36


Subsequent to March 31, 2020, we provided assistance to many small businesses through the SBA's Paycheck Protection Program. This program provides small businesses with funds to pay up to eight weeks of payroll costs including benefits. A portion of the funds can also be used to pay interest on mortgages, rent, and utilities.

We processed approximately $29.1 million of PPP loans for more than 377 customers in SBA PPP loan fundings as of May 7, 2020. The average loan amount approved was approximately $77,000. Payments by borrowers on these loans begin six months after the note date, and interest, at 1%, will continue to accrue during the six-month deferment. Loans can be forgiven in whole or part (up to full principal and any accrued interest).

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


Critical Accounting Policies

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

Comparison of Financial Condition at March 31, 2020 and December 31, 2019

Assets. Total assets increased to $1.40 billion at March 31, 2020 from $1.31 billion at December 31, 2019.

Total loans, excluding loans held for sale, increased $21.9 million to $905.7 million at March 31, 2020, from $883.8 million at December 31, 2019. During the three months ended March 31, 2020, one- to four-family residential loans declined $3.3 million, due to repayment and secondary market sale activity exceeding new originations held in portfolio. Multi-family loans decreased $7.3 million, due to prepayment activity outpacing new loan originations. Commercial real estate loans increased by $4.6 million as we continue to build our lending presence in King and Whatcom Counties as well as in our legacy markets. Auto and other consumer and construction and land loans increased $2.1 million and $11.4 million, respectively, as we maintain our specialty auto loan portfolio and fund construction loan commitments. Competition for quality commercial credits remains; however, impacts of the COVID-19 pandemic is impacting both the supply and demand for credit. An increase in refinance activity of one- to-four family residential loans also occurred during the period.

Construction and land loans increased 30.6% to $48.6 million at March 31, 2020, from $37.2 million at December 31, 2019. The majority of our construction loans are geographically dispersed throughout the Puget Sound region and, as a result, these loans are susceptible to risks that may vary depending on the nature and location of the project. We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our construction projects and intend to begin utilizing internal staffing to monitor certain projects, which we expect will enhance fee income related to these loans. In March 2020, the vast majority of construction projects in Washington State were put on hold as a result of Governor Jay Inslee’s “Stay Home, Stay Safe” order. By May 5, 2020, certain projects were able to restart under specific criteria. We do not believe any of the projects currently in our portfolio will not be completed due to the order and subsequent impacts of COVID-19.

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


37


The following tables show our construction commitments by type and geographic concentrations at the dates indicated:
March 31, 2020
North Olympic Peninsula (1)
 
Puget Sound Region (2)
 
Other Washington
 
Total
 
(In thousands)
Construction Commitment
 
 
 
 
 
 
 
 
One- to four-family residential
$
14,371

 
$
23,550

 
$
496

 
$
38,417

 
Multi-family residential

 
44,947

 

 
44,947

 
Commercial real estate
7,514

 
17,484

 
2,795

 
27,793

 
Total commitment
$
21,885

 
$
85,981

 
$
3,291

 
$
111,157

 
 
 
 
 
 
 
 
 
Construction Funds Disbursed
 
 
 
 
 
 
 
 
One- to four-family residential
$
5,777

 
$
11,088

 
$
189

 
$
17,054

 
Multi-family residential

 
17,382

 

 
17,382

 
Commercial real estate
5,422

 
1,543

 
52

 
7,017

 
Total disbursed
$
11,199

 
$
30,013

 
$
241

 
$
41,453

 
 
 
 
 
 
 
 
 
Undisbursed Commitment
 
 
 
 
 
 
 
 
One- to four-family residential
$
8,594

 
$
12,462

 
$
307

 
$
21,363

 
Multi-family residential

 
27,565

 

 
27,565

 
Commercial real estate
2,092

 
15,941

 
2,743

 
20,776

 
Total undisbursed
$
10,686

 
$
55,968

 
$
3,050

 
$
69,704

 
 
 
 
 
 
 
 
 
Land Funds Disbursed
 
 
 
 
 
 
 
 
One- to four-family residential
$
4,867

 
$
2,074

 
$
171

 
$
7,112

 
Commercial real estate

 

 

 

 
Total disbursed for land
$
4,867

 
$
2,074

 
$
171

 
$
7,112

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


38


December 31, 2019
North Olympic Peninsula
 
Puget Sound Region
 
Other Washington
 
Total
 
(In thousands)
Construction Commitment
 
 
 
 
 
 
 
 
One- to four-family residential
$
14,915

 
$
23,969

 
$
496

 
$
39,380

 
Multi-family residential

 
27,241

 

 
27,241

 
Commercial real estate
6,381

 
563

 
3,120

 
10,064

 
Total Commitment
$
21,296

 
$
51,773

 
$
3,616

 
$
76,685

 
 
 
 
 
 
 
 
 
Construction Funds Disbursed
 
 
 
 
 
 
 
 
One- to four-family residential
$
5,242

 
$
10,734

 
$
151

 
$
16,127

 
Multi-family residential

 
10,465

 

 
10,465

 
Commercial real estate
2,704

 
563

 
58

 
3,325

 
Total disbursed
$
7,946

 
$
21,762

 
$
209

 
$
29,917

 
 
 
 
 
 
 
 
 
Undisbursed Commitment
 
 
 
 
 
 
 
 
One- to four-family residential
$
9,673

 
$
13,235

 
$
345

 
$
23,253

 
Multi-family residential

 
16,776

 

 
16,776

 
Commercial real estate
3,677

 

 
3,062

 
6,739

 
Total undisbursed
$
13,350

 
$
30,011

 
$
3,407

 
$
46,768

 
 
 
 
 
 
 
 
 
Land Funds Disbursed
 
 
 
 
 
 
 
 
One- to four-family residential
$
4,904

 
$
1,343

 
$

 
$
6,247

 
Commercial real estate
1,023

 

 

 
1,023

 
Total disbursed for land
$
5,927

 
$
1,343

 
$

 
$
7,270



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

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

Nonperforming loans decreased $56,000, or 3.1%, to $1.7 million at March 31, 2020, from $1.8 million at December 31, 2019, mainly attributable to a decrease in nonperforming one- to four-family loans of $231,000 and other consumer loans of $139,000, partially offset by an increase multi-family loans of $297,000. Nonperforming loans to total loans remained the same at 0.2% at both March 31, 2020 and December 31, 2019. The allowance for loan losses as a percentage of nonperforming loans increased to 622.4% at March 31, 2020, from 536.1% at December 31, 2019, and classified loans decreased $374,000 to $4.6 million at March 31, 2020, from $5.0 million at December 31, 2019.

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

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

39


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

Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Real Estate:
 
 
 
One-to-four family
$
302,688

 
$
306,014

Multi-family
88,794

 
96,098

Commercial real estate
260,321

 
255,722

Construction and land
48,565

 
37,187

Total real estate loans
700,368

 
695,021

 
 
 
 
Consumer:
 
 
 
Home equity
35,260

 
35,046

Auto and other consumer
114,194

 
112,119

Total consumer loans
149,454

 
147,165

 
 
 
 
Commercial business loans
55,853

 
41,571

 
 
 
 
Total loans
905,675

 
883,757

Less:
 
 
 
Net deferred loan fees
433

 
206

Premium on purchased loans, net
(4,742
)
 
(4,514
)
Allowance for loan losses
10,830

 
9,628

Loans receivable, net
$
899,154

 
$
878,437




40


The following table represents nonperforming assets at the dates indicated.
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Nonperforming loans:
 
 
 
Real estate loans:
 
 
 
One- to four-family
$
467

 
$
698

Multi-family
297

 

Commercial real estate
106

 
109

Construction and land
28

 
29

 
 
 
 
Total real estate loans
898

 
836

 
 
 
 
Consumer loans:
 
 
 
Home equity
133

 
112

Other
709

 
848

 
 
 
 
Total consumer loans
842

 
960

 
 
 
 
Commercial business

 

 
 
 
 
Total nonperforming loans
1,740

 
1,796

 
 
 
 
Real estate owned:
 
 
 
Land
62

 
62

 
 
 
 
Total real estate owned
62

 
62

 
 
 
 
Repossessed assets
422

 
92

 
 
 
 
Total nonperforming assets
$
2,224

 
$
1,950

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


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

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

Liabilities. Total liabilities increased $99.3 million to $1.23 billion at March 31, 2020, from $1.13 billion at December 31, 2019, primarily due to an increase in borrowings of $37.1 million and an increase in deposit account balances of $62.3 million.


41


Deposit balances increased 6.2%, to $1.1 billion at March 31, 2020, from $1.0 billion at December 31, 2019. There was a $5.1 million increase in money market accounts offset by a $3.2 million decrease in savings accounts during the quarter. In addition to collecting customer deposits, we utilize brokered certificates of deposit ("brokered CDs") as an additional funding source in order to manage our cost of funds more effectively, reduce our reliance on public funds deposits, and become more selective when competing on rate. At March 31, 2020, we had $90.4 million in brokered CDs included in our balance of certificates of deposit.

Equity. Total shareholders' equity decreased $9.7 million during the year to $167.2 million at March 31, 2020. The decrease was due to the decline in the value of our available-for-sale securities portfolio, which resulted in a $6.7 million decrease in our accumulated other comprehensive loss, net of tax, as well as a $3.8 million in repurchases of shares of common stock during the quarter. The decrease was partially offset by net income of $873,000 in net income.


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

General. Net income decreased $1.3 million, or 60.4%, to $873,000 for the three months ended March 31, 2020, compared to net income of $2.2 million for the three months ended March 31, 2019. The decrease is mainly due to a combination of a decrease in net interest income, higher operating expenses, and a larger loan loss provision in the current period compared to the same period one year ago.

Net Interest Income. Net interest income decreased $193,000 to $9.4 million for the three months ended March 31, 2020. The yield on average interest-earning assets decreased twenty-two basis points to 3.97% for the three months ended March 31, 2020, compared to 4.19% for the same period in the prior year. This was due to a decrease in market interest rates and a decrease in the ratio of total loans to assets in the current period compared to one year ago.

The average cost of interest-bearing liabilities decreased 14 basis points to 1.11% for the three months ended March 31, 2020, compared to 1.25% for the same period last year, due primarily to a decrease in market deposit and borrowing rates. This was partially due to the prepayment of higher costing FHLB borrowings in the fourth quarter of 2019 and first quarter of 2020. As a result, our average cost of FHLB borrowings decreased to 2.18% in the first quarter of 2020 compared to 2.95% for the same period one year prior.

Due to the average yield on interest-earning assets decreasing at a faster pace than our interest-bearing liabilities, the net interest margin decreased eleven basis points to 3.11% for the three months ended March 31, 2020, from 3.22% for the same period in 2019. For additional information, see Rate/Volume Analysis contained in Item 2 of this Form 10-Q.

Interest Income. Total interest income decreased $535,000, or 4.3%, to $12.0 million for the three months ended March 31, 2020, from $12.5 million for the comparable period in 2019. Interest and fees on loans receivable decreased $256,000, to $9.8 million for the three months ended March 31, 2020, from $10.1 million for the three months ended March 31, 2019, due primarily to a decrease in the yield on loans and securities. Average loan yields decreased 12 basis points to 4.52% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

Interest income on investment securities increased $59,000 to $1.1 million for the three months ended March 31, 2020, compared to $1.0 million for the three months ended March 31, 2019, due to a $29.6 million increase in average balance partially offset by a 51 basis point decrease in average yield. The change in average yield on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the three months ended March 31, 2020 decreased $298,000, or 23.7%, compared to the three months ended March 31, 2019, the result of a decrease of $22.0 million in the average balance and a 37 basis point decrease in the average yield in the 2020 period.


42


The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
Increase (Decrease) in Interest Income
 
Average Balance Outstanding
 
Yield
 
Average Balance Outstanding
 
Yield
 
 
(Dollars in thousands)
Loans receivable, net
$
870,739

 
4.52
%
 
$
870,901

 
4.64
%
 
$
(256
)
Investment securities
149,954

 
2.85

 
120,350

 
3.36

 
59

Mortgage-backed securities
161,666

 
2.37

 
183,716

 
2.74

 
(298
)
FHLB stock
4,707

 
3.99

 
6,844

 
5.14

 
(41
)
Interest-bearing deposits in banks
21,248

 
1.28

 
11,873

 
2.26

 
1

Total interest-earning assets
$
1,208,314

 
3.97

 
$
1,193,684

 
4.19

 
$
(535
)

Interest Expense. Total interest expense decreased $342,000, or 11.7%, to $2.6 million for the three months ended March 31, 2020, compared to $2.9 million for the three months ended March 31, 2019, mainly due to an 11.1% increase in deposit costs, which was offset by a 56.2% decrease in borrowing costs. Interest expense on deposits increased for the three months ended March 31, 2020, due to increased balances and a reallocation of non-maturity deposits into higher-yielding accounts. The average balance of interest-bearing deposits increased $54.5 million, or 6.9%, to $849.2 million for the three months ended March 31, 2020, from $794.7 million for the three months ended March 31, 2019, as we continued to target deposit growth in new and existing market areas. During the three months ended March 31, 2020, the average balance of savings accounts increased $12.2 million and the related weighted-average cost remained flat, compared to the same period in 2019. The average balance of certificates of deposit balances grew $57.5 million and the weighed-average cost increased by 14 basis points, mainly as a result of the utilization of brokered CDs. During the three months ended March 31, 2020, the average balance of money market accounts decreased $15.4 million compared to the same period in the prior year, as customers moved money into higher-yielding certificates of deposit and savings accounts at First Federal. The average cost of deposits increased by 4 basis points to 1.01% for the three months ended March 31, 2020, from 0.97% for the three months ended March 31, 2019. Borrowing costs decreased due to a decrease in balances and the average rate paid during the most recent quarter compared to the same period in 2019. We prepaid $25.0 million in FHLB advances during the most recent quarter that had an average rate of 3.81%, which better positions us to align our funding costs more closely with earning asset yields going forward. The prepayment penalty for this transaction was $210,000.

The following table details average balances, cost of funds and the change in interest expense for the periods shown:
 
Three Months Ended March 31,
 
 
 
2020
 
2019
 
Increase (Decrease) in Interest Expense
 
Average Balance Outstanding
 
Rate
 
Average Balance Outstanding
 
Rate
 
 
(Dollars in thousands)
Savings accounts
$
165,911

 
0.82
%
 
$
153,689

 
0.82
%
 
$
24

Transaction accounts
114,970

 
0.07

 
114,801

 
0.13

 
(17
)
Money market accounts
252,537

 
0.56

 
267,947

 
0.48

 
36

Certificates of deposit
315,778

 
1.80

 
258,272

 
1.94

 
171

Borrowings
79,659

 
2.18

 
134,447

 
2.95

 
(556
)
Total interest-bearing liabilities
$
928,855

 
1.11

 
$
929,156

 
1.25

 
$
(342
)

Provision for Loan Losses. There was a provision for loan losses of $1.3 million during the three months ended March 31, 2020, compared to a $335,000 provision for loan losses for the three months ended March 31, 2019. This was mainly due to an increase to the economic qualitative factor resulting from the uncertainty surrounding COVID-19 and its economic impact.


43


The following table details activity and information related to the allowance for loan losses for the periods shown:
 
Three Months Ended March 31,
 
2020
 
2019
 
(Dollars in thousands)
Provision for loan losses
$
1,266

 
$
335

Net charge-offs
(64
)
 
(109
)
Allowance for loan losses
10,830

 
9,759

Allowance for losses as a percentage of total gross loans receivable at the end of this period
1.2
%
 
1.1
%
Total nonaccrual loans
1,740

 
1,606

Allowance for loan losses as a percentage of nonaccrual loans at end of period
622.4
%
 
607.7
%
Nonaccrual and 90 days or more past due loans as a percentage of total loans
0.2
%
 
0.2
%
Total loans
$
905,675

 
$
888,926


Noninterest Income. Noninterest income increased $1.1 million, or 85.3%, to $2.3 million for the three months ended March 31, 2020, from $1.3 million for the three months ended March 31, 2019, primarily due to the gain on sale of investment securities of $605,000, the net gain on sale of loans, and an increase in the cash surrender value of bank owned life insurance.

The following table provides a detailed analysis of the changes in the components of noninterest income for the periods shown:
 
Three Months Ended March 31,
 
Increase (Decrease)
 
2020
 
2019
 
Amount
 
Percent
 
(Dollars in thousands)
Loan and deposit service fees
$
881

 
$
905

 
$
(24
)
 
(2.7
)%
Mortgage servicing fees, net of amortization
15

 
45

 
(30
)
 
(66.7
)
Net gain on sale of loans
383

 
87

 
296

 
340.2

Net gain (loss) on sale of investment securities
605

 

 
605

 
100.0

Increase in cash surrender value of bank-owned life insurance
328

 
143

 
185

 
129.4

Other income
106

 
71

 
35

 
49.3

Total noninterest income
$
2,318

 
$
1,251

 
$
1,067

 
85.3
 %

Noninterest Expense. Noninterest expense increased $1.6 million or 20.3% during the three months ended March 31, 2020, compared to the three months ended March 31, 2019, mainly due to a 17.2% increase in compensation and benefits as we hired additional bankers, a 90.2% increase to advertising expense, and a one-time FHLB prepayment penalty of $210,000.


44


The following table provides an analysis of the changes in the components of noninterest expense for the periods shown:
 
Three Months Ended March 31,
 
Increase (Decrease)
 
2020
 
2019
 
Amount
 
Percent
 
(Dollars in thousands)
Compensation and benefits
$
5,361

 
$
4,573

 
$
788

 
17.2
 %
Data processing
690

 
631

 
59

 
9.4

Occupancy and equipment
1,351

 
1,108

 
243

 
21.9

Supplies, postage, and telephone
211

 
228

 
(17
)
 
(7.5
)
Regulatory assessments and state taxes
174

 
169

 
5

 
3.0

Advertising
272

 
143

 
129

 
90.2

Professional fees
400

 
298

 
102

 
34.2

FDIC insurance premium

 
77

 
(77
)
 
(100.0
)
FHLB prepayment penalty
210

 

 
210

 
100.0

Other
713

 
573

 
140

 
24.4

Total
$
9,382

 
$
7,800

 
$
1,582

 
20.3
 %

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



45


Average Balances, Interest and Average Yields/Cost
The following table set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest‑earning assets and interest expense on average interest‑bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest‑earning assets), and the ratio of average interest‑earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread at March 31, 2020 and 2019. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield.
 
At March 31, 2020
 
Three Months Ended March 31,
 
 
2020
 
2019
 
Yield/
Rate
 
Average
Balance
Outstanding
 
Interest
Earned/
Paid
 
Yield/
Rate
 
Average
Balance
Outstanding
 
Interest
Earned/
Paid
 
Yield/
Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
(Dollars in thousands)
Loans receivable, net (1)
4.56
%
 
$
870,739

 
$
9,836

 
4.52
%
 
$
870,901

 
$
10,092

 
4.64
%
Investment securities
3.32

 
149,954

 
1,069

 
2.85

 
120,350

 
1,010

 
3.36

Mortgage-backed securities
2.09

 
161,666

 
959

 
2.37

 
183,716

 
1,257

 
2.74

FHLB dividends
5.25

 
4,707

 
47

 
3.99

 
6,844

 
88

 
5.14

Interest-bearing deposits in banks
0.21

 
21,248

 
68

 
1.28

 
11,873

 
67

 
2.26

Total interest-earning assets (2)
3.80

 
1,208,314

 
11,979

 
3.97

 
1,193,684

 
12,514

 
4.19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
0.72

 
$
165,911

 
$
340

 
0.82

 
$
153,689

 
316

 
0.82

Transaction accounts
0.01

 
114,970

 
19

 
0.07

 
114,801

 
36

 
0.13

Money market accounts
0.48

 
252,537

 
356

 
0.56

 
267,947

 
320

 
0.48

Certificates of deposit
1.67

 
315,778

 
1,423

 
1.80

 
258,272

 
1,252

 
1.94

Total deposits
0.79

 
849,196

 
2,138

 
1.01

 
794,709

 
1,924

 
0.97

Borrowings
1.01

 
79,659

 
434

 
2.18

 
134,447

 
990

 
2.95

Total interest-bearing liabilities
0.82

 
928,855

 
2,572

 
1.11

 
929,156

 
2,914

 
1.25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
 
$
9,407

 
 
 
 
 
$
9,600

 
 
Net interest rate spread
2.98

 
 
 
 
 
2.86

 
 
 
 
 
2.94

Net earning assets
 
 
$
279,459

 
 
 
 
 
$
264,528

 
 
 
 
Net interest margin (3)
 
 
 
 
 
 
3.11

 
 
 
 
 
3.22

Average interest-earning assets to average interest-bearing liabilities
 
 
130.1
%
 
 
 
 
 
128.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.


46


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

 
 
Three Months Ended
 
 
 
 
March 31, 2020 vs. 2019
 
 
 
 
Increase (Decrease) Due to
 
Total Increase (Decrease)
 
 
Volume
 
Rate
 
 
(In thousands)
Interest earning assets:
 
 
 
 
 
 
Loans receivable, net
 
$
(2
)
 
$
(254
)
 
$
(256
)
Investments
 
100

 
(339
)
 
(239
)
FHLB stock
 
(27
)
 
(14
)
 
(41
)
Other(1)
 
53

 
(52
)
 
1

Total interest-earning assets
 
$
124

 
$
(659
)
 
$
(535
)
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
Savings accounts
 
$
24

 
$

 
$
24

Interest-bearing transaction accounts
 

 
(17
)
 
(17
)
Money market accounts
 
(17
)
 
53

 
36

Certificates of deposit
 
281

 
(110
)
 
171

Borrowings
 
(403
)
 
(153
)
 
(556
)
Total interest-bearing liabilities
 
$
(115
)
 
$
(227
)
 
$
(342
)
 
 
 
 
 
 
 
Net change in interest income
 
$
239

 
$
(432
)
 
$
(193
)
 
 
 
 
 
 
 
(1) Includes interest-bearing deposits (cash) at other financial institutions.

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

47


Contractual Obligations

At March 31, 2020, our scheduled maturities of contractual obligations were as follows:
 
Within
1 Year
 
After 1 Year Through
3 Years
 
After 3 Years Through
5 Years
 
Beyond
5 Years
 
Total
Balance
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
$
289,742

 
$
53,987

 
$
14,948

 
$

 
$
358,677

FHLB advances
100,021

 
20,000

 
30,000

 

 
150,021

Operating leases
356

 
584

 
543

 
2,085

 
3,568

Borrower taxes and insurance
443

 

 

 

 
443

Deferred compensation
152

 
362

 
49

 
261

 
824

Total contractual obligations
$
390,714

 
$
74,933

 
$
45,540

 
$
2,346

 
$
513,533


Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2020:
 
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
$
630

 
$

 
$

 
$

 
$
630

Unfunded commitments under lines of credit or existing loans
27,833

 
20,346

 

 
62,448

 
110,627

Standby letters of credit
182

 

 

 

 
182

Total commitments
$
28,645

 
$
20,346

 
$

 
$
62,448

 
$
111,439


Liquidity Management

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

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

Our most liquid assets are cash and cash equivalents followed by available for sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2020, cash and cash equivalents totaled $107.2 million, and unpledged securities classified as available-for-sale with a market value of $212.8 million provided additional sources of liquidity. We pledged collateral to support borrowings from the FHLB of $150.0 million and have an established borrowing arrangement with the Federal Reserve Bank of San Francisco, for which available-for-sale securities with a market value of $50.9 million were pledged as of March 31, 2020.

At March 31, 2020, we had $630,000 in loan commitments outstanding, $110.8 million in undisbursed loans and standby letters of credit, including $69.7 million in undisbursed construction loan commitments.


48


Certificates of deposit due within one year as of March 31, 2020 totaled $289.7 million, or 80.8% of certificates of deposit with a weighted-average rate of 1.60%. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as interest rates have dropped. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit, non-maturity deposits, and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered as well as through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will afford us more than adequate long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. At March 31, 2020, the Company (on an unconsolidated basis) had liquid assets of $14.0 million.

Capital Resources
At March 31, 2020, shareholders' equity totaled $167.2 million, or 12.0% of total assets. Our book value per share of common stock was $16.02 at March 31, 2020, compared to $16.48 at December 31, 2019.

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

The following table provides the capital requirements and actual results for First Federal at March 31, 2020.
 

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)
$
149,708

 
11.8
%
 
$
50,968

 
4.0
%
 
$
63,710

 
5.0
%
Common equity tier I (to risk-weighted assets)
149,708

 
16.8

 
40,064

 
4.5

 
57,871

 
6.5

Tier I risk-based capital (to risk-weighted assets)
149,708

 
16.8

 
53,419

 
6.0

 
71,225

 
8.0

Total risk-based capital (to risk-weighted assets)
160,800

 
18.1

 
71,225

 
8.0

 
89,032

 
10.0


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



49


Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019.


Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

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

(b) Changes in Internal Controls.

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

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



50


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The disclosures below supplement the risk factors previously disclosed under Part I. Item 1A of the Company's Form 10-K for the year ended December 31, 2019.

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

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

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 March 31, 2020:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Repurchased as Part of Publicly Announced Plans (1)
 
Maximum Number of Shares that May Yet Be Repurchased Under the Plans
 
 
 
 
 
 
 
 
 
January 1, 2020 - January 31, 2020
 
30,509

 
$
17.17

 
30,509

 
(5,300
)
February 1, 2020 - February 29, 2020
 
61,200

 
16.61

 
61,200

 
(66,500
)
March 1, 2020 - March 31, 2020
 
196,567

 
11.65

 
196,567

 
(263,067
)
Total
 
288,276

 
$
13.29

 
288,276

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


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On December 5, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to an additional 535,097 shares of its common stock, or approximately 5% of its shares of common stock issued and outstanding as of December 2, 2019. As of March 31, 2020, a total of 263,067 shares, or 49.2% percent of the shares authorized in the December 2019 stock repurchase plan, have been purchased at an average cost of $12.90 per share, leaving 272,030 shares available for future purchases.


Item 3. Defaults Upon Senior Securities

Not applicable.


Item 4. Mine Safety Disclosures

Not applicable.


Item 5. Other Information

First Northwest Bancorp 2020 Equity Incentive Plan

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

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

COVID-19 Legislation and Regulation.

Governments at all levels are rapidly taking steps to address and remediate the COVID-19 emergency.  On March 27, 2020, the President signed into law the historic $2 trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes many provisions that will impact us and our customers.  For example, the CARES Act includes $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program” of the U.S. Small Business Administration and an additional $500 billion for the U.S. Department of Treasury to make loans to distressed American businesses.  The various banking agencies have strongly encouraged banks to work with borrowers impacted by COVID-19, and the CARES Act authorizes banks to elect to suspend GAAP for certain loan modifications that would otherwise be classified as a troubled debt restructure (which, in part, allows banks to provide immediate relief to their impacted borrowers).  To ease the financial impacts of COVID-19, these agencies have further encouraged banks to consider offering responsible small-dollar loans to their consumers and small businesses affected by the pandemic.

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

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

52


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


Item 6. Exhibits
Exhibit
No.
Exhibit Description
Filed
Herewith
Form
Original Exhibit No.
Filing Date
SEC File No.
10.1*
 
10-K
10.4
3/15/2019
 
10.2*
X
 
 
 
 
10.3*
X
 
 
 
 
10.4*
X
 
 
 
 
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 March 31, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Cash Flows; and (5) Selected Notes to Consolidated Financial Statements
* Denotes a management contract or compensatory plan or arrangement.



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SIGNATURES

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


 
FIRST NORTHWEST BANCORP
 
 
Date: May 11, 2020
/s/ Matthew P. Deines
 
 
 
Matthew P. Deines
 
President, Chief Executive Officer and Director
 
(Principal Executive Officer)
 
 
 
 
Date: May 11, 2020
/s/ Geraldine L. Bullard
 
 
 
Geraldine L. Bullard
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)


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