First Northwest Bancorp - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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



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

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP

(Exact name of registrant as specified in its charter)



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

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

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

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



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

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

Yes ý No ¨

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

Yes ý No ¨

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



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

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

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

Yes ¨ No ý

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

FIRST NORTHWEST BANCORP

FORM 10-Q

TABLE OF CONTENTS



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

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3 - Quantitative and Qualitative Disclosures About Market Risk	54

Item 4 - Controls and Procedures	54

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings	55

Item 1A - Risk Factors	55

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3 - Defaults Upon Senior Securities	55

Item 4 - Mine Safety Disclosures	55

Item 5 - Other Information	55

Item 6 - Exhibits	56

SIGNATURES	57

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

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



ASSETS	June 30, 2019			December 31, 2018

Cash and due from banks	$	15,275		$	15,430
Interest-bearing deposits in banks	13,547			10,893
Investment securities available for sale, at fair value	250,051			262,967
Investment securities held to maturity, at amortized cost	37,990			43,503
Loans held for sale	2,516			—
Loans receivable (net of allowance for loan losses of $9,731 and $9,533)	873,958			863,852
Federal Home Loan Bank (FHLB) stock, at cost	6,773			6,927
Accrued interest receivable	4,094			4,048
Premises and equipment, net	14,719			15,255
Mortgage servicing rights, net	955			1,044
Bank-owned life insurance, net	29,607			29,319
Prepaid expenses and other assets	8,225			5,520

Total assets	$	1,257,710		$	1,258,758


LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits	$	933,265		$	940,260
Borrowings	131,337			136,552
Accrued interest payable	389			521
Accrued expenses and other liabilities	15,067			8,071
Advances from borrowers for taxes and insurance	1,251			1,090

Total liabilities	1,081,309			1,086,494

Shareholders' Equity
Preferred stock, $0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding	—			—
Common stock, $0.01 par value, authorized 75,000,000 shares; issued and outstanding 10,925,181 shares at June 30, 2019, and 11,170,018 shares at December 31, 2018	109			112
Additional paid-in capital	104,064			105,825
Retained earnings	83,795			81,607
Accumulated other comprehensive loss, net of tax	(1,347		)	(4,731		)
Unearned employee stock ownership plan (ESOP) shares	(10,220		)	(10,549		)

Total shareholders' equity	176,401			172,264

Total liabilities and shareholders' equity	$	1,257,710		$	1,258,758

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

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



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

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

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

Net interest income	9,296		9,159		18,736		18,131
PROVISION FOR LOAN LOSSES	255		395		590		705

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

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

NONINTEREST EXPENSE
Compensation and benefits	4,753		4,745		9,326		9,556
Data processing	667		677		1,298		1,305
Occupancy and equipment	1,140		1,127		2,248		2,229
Supplies, postage, and telephone	242		243		470		474
Regulatory assessments and state taxes	195		155		364		281
Advertising	229		290		372		614
Professional fees	331		458		629		780
FDIC insurance premium	77		79		154		155
Other	638		524		1,211		1,179

Total noninterest expense	8,272		8,298		16,072		16,573

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

PROVISION FOR INCOME TAXES	493		345		1,002		691

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

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

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)



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

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

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

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

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

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended June 30, 2019 and 2018

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



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

BALANCE, March 31, 2018	11,577,394		$	116		$	109,354		$	78,822		$	(11,043	)	$	(3,747	)	$	173,502

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

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


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

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

BALANCE, June 30, 2019	10,925,181		$	109		$	104,064		$	83,795		$	(10,220	)	$	(1,347	)	$	176,401

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Six Months Ended June 30, 2019 and 2018

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



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

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

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

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


BALANCE, December 31, 2018	11,170,018		$	112		$	105,825		$	81,607		$	(10,549	)	$	(4,731	)	$	172,264

Net income									4,286									4,286
Common stock repurchased	(240,837	)	(3		)	(2,405		)	(1,439		)							(3,847		)
Restricted stock award forfeitures	(4,000	)	—			—												—
Other comprehensive income, net of tax															3,384			3,384
Share-based compensation						553												553
ESOP shares committed to be released						91						329						420
Cash dividends declared and paid ($0.06 per share)									(659		)							(659		)

BALANCE, June 30, 2019	10,925,181		$	109		$	104,064		$	83,795		$	(10,220	)	$	(1,347	)	$	176,401

See selected notes to the consolidated financial statements.



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

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

Net cash from operating activities	8,362			6,213

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

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

See selected notes to the consolidated financial statements.



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

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

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

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

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

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

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

Income taxes	$	990		$	250

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

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

See selected notes to the consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of Presentation and Critical Accounting Policies

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

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

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

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

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

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

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

Subsequent Events - The Company has evaluated subsequent events for potential recognition and disclosure and determined there are no such events or transactions requiring recognition or disclosure.

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 is intended to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The ASU requires a lessee to recognize on the balance sheet assets

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the ASC requires that both types of leases by recognized on the balance sheet. For public companies, this update is effective for interim and annual periods beginning after December 15, 2018. The adoption of ASU No. 2016-02 effective January 1, 2019 resulted in a right-of-use asset and corresponding lease obligation liability of $3,919,000. The Corporation chose the effective date as the date of initial application. Consequently, prior period financial information has not been updated or restated. The right-of-use asset is included in other assets and the lease obligation liability is included in other liabilities on the June 30, 2019, consolidated balance sheet.

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

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

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

In October 2018, the FASB issued ASU No. 2018-16 Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this ASU permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The amendments in this ASU are required to be adopted concurrently with the amendments in ASU 2017-12. For public companies, this would be for fiscal years, and interim periods within those fiscal years beginning after December 15, 2018. Adoption of ASU 2018-16 did not have a material impact on the Company's consolidated financial statements.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently adopted regulatory rule

In August 2018, the Securities and Exchange Commission issued a final rule that amends certain of its disclosure requirements. The rule simplifies various disclosure requirements for public companies including primarily that it (i) eliminates the requirement for public companies to disclose in their filings a schedule of earnings to fixed charges, (ii) requires an analysis of changes in stockholders’ equity for the current and comparative year-to-date interim periods in interim reports, and (iii) reduces the requirements for market price information disclosures in annual reports. These changes are effective for public companies beginning on November 5, 2018. The Company will be complying with these new requirements beginning with the Quarterly Report for the period ended March 31, 2019, on Form 10-Q.

Recently issued accounting pronouncements not yet adopted

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

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

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

The Company is evaluating the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. At this time, we cannot reasonably estimate the impact the implementation of this ASU 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.

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 for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

Note 2 - Securities

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	881	$	51	$	—		$	932
U.S. government agency issued asset-backed securities (ABS agency)	25,995		—		(559		)	25,436
Corporate issued asset-backed securities (ABS corporate)	37,877		—		(667		)	37,210
Corporate issued debt securities (Corporate debt)	9,986		—		(504		)	9,482
U.S. Small Business Administration securities (SBA)	31,865		151		(41		)	31,975
Mortgage-backed securities:
U.S. government agency issued mortgage-backed securities (MBS agency)	135,337		499		(597		)	135,239
Corporate issued mortgage-backed securities (MBS corporate)	9,841		3		(67		)	9,777

Total securities available for sale	$	251,782	$	704	$	(2,435	)	$	250,051

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	882	$	—	$	(13	)	$	869
ABS agency	26,125		—		(373		)	25,752
ABS corporate	37,897		—		(1,174		)	36,723
Corporate debt	9,986		98		(196		)	9,888
SBA	35,936		23		(289		)	35,670
Mortgage-backed securities:
MBS agency	147,205		12		(3,762		)	143,455
MBS corporate	10,953		—		(343		)	10,610

Total securities available for sale	$	268,984	$	133	$	(6,150	)	$	262,967

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

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

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



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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Less Than Twelve Months					Twelve Months or Longer					Total
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
Available for Sale
Municipal bonds	$	(8	)	$	757	$	(5	)	$	110	$	(13	)	$	867
ABS agency	(302		)	23,286		(71		)	2,466		(373		)	25,752
ABS corporate	(571		)	14,527		(603		)	22,196		(1,174		)	36,723
Corporate debt	—			—		(196		)	4,791		(196		)	4,791
SBA	(44		)	13,400		(245		)	13,089		(289		)	26,489
Mortgage-backed securities:
MBS agency	(28		)	17,996		(3,734		)	120,617		(3,762		)	138,613
MBS corporate	—			—		(343		)	10,610		(343		)	10,610

Total available for sale	$	(953	)	$	69,966	$	(5,197	)	$	173,879	$	(6,150	)	$	243,845

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

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

The Company may hold certain investment securities in an unrealized loss position that are not considered other than temporarily impaired ("OTTI"). At June 30, 2019 and December 31, 2018, there were 47 and 69 investment securities in an unrealized loss position, respectively.

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

There were no OTTI losses during the three and six months ended June 30, 2019 and 2018.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



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

Total mortgage-backed securities	145,178		145,016		30,766		31,380

All other investment securities:
Due within one year	—		—		—		—
Due after one through five years	—		—		794		812
Due after five through ten years	28,628		28,143		6,430		6,483
Due after ten years	77,976		76,892		—		—

Total all other investment securities	106,604		105,035		7,224		7,295

Total investment securities	$	251,782	$	250,051	$	37,990	$	38,675



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

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

All other investment securities:
Due within one year	—		—		—		—
Due after one through five years	—		—		734		741
Due after five through ten years	19,564		19,362		6,728		6,743
Due after ten years	91,262		89,540		4,759		4,779

Total all other investment securities	110,826		108,902		12,221		12,263

Total investment securities	$	268,984	$	262,967	$	43,503	$	42,990

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



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

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

Note 3 - Loans Receivable

Loans receivable consisted of the following at the dates indicated:



	June 30, 2019			December 31, 2018
	(In thousands)
Real Estate:
One-to-four family	$	331,748		$	336,178
Multi-family	68,440			82,331
Commercial real estate	250,250			253,235
Construction and land	63,741			54,102
Total real estate loans	714,179			725,846

Consumer:
Home equity	37,194			37,629
Auto and other consumer	112,583			87,357
Total consumer loans	149,777			124,986

Commercial business loans	15,098			18,898

Total loans	879,054			869,730

Less:
Net deferred loan fees	103			292
Premium on purchased loans, net	(4,738		)	(3,947		)
Allowance for loan losses	9,731			9,533

Total loans receivable, net	$	873,958		$	863,852

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	At or For the Three Months Ended June 30, 2019
	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	$	3,441		$	769		$	2,337	$	700	$	467		$	1,678		$	191		$	176		$	9,759
Provision for loan losses	(25		)	(118		)	20		11		(22		)	416			(20		)	(7		)	255
Charge-offs	—			—			—		—		—			(362		)	—			—			(362		)
Recoveries	1			—			—		—		20			58			—			—			79
Ending balance	$	3,417		$	651		$	2,357	$	711	$	465		$	1,790		$	171		$	169		$	9,731



	At or For the Six Months Ended June 30, 2019
	One-to- four family		Multi-family			Commercial real estate		Construction and land		Home equity			Auto and other consumer			Commercial business			Unallocated			Total
	(In thousands)
ALLL:
Beginning balance	$	3,297	$	762		$	2,289	$	585	$	480		$	1,611		$	334		$	175		$	9,533
Provision for loan losses	117		(111		)	68		126		(36		)	593			(161		)	(6		)	590
Charge-offs	—		—			—		—		—			(548		)	(4		)	—			(552		)
Recoveries	3		—			—		—		21			134			2			—			160
Ending balance	$	3,417	$	651		$	2,357	$	711	$	465		$	1,790		$	171		$	169		$	9,731



	At June 30, 2019
	One-to- four family		Multi-family		Commercial real estate		Construction and land		Home equity		Auto and other consumer		Commercial business		Unallocated		Total
	(In thousands)
Total ALLL	$	3,417	$	651	$	2,357	$	711	$	465	$	1,790	$	171	$	169	$	9,731
General reserve	3,381		650		2,347		710		458		1,740		164		169		9,619
Specific reserve	36		1		10		1		7		50		7		—		112

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


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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	At or For the Three Months Ended June 30, 2018
	One-to- four family			Multi-family		Commercial real estate		Construction and land			Home equity			Auto and other consumer			Commercial business		Unallocated			Total
ALLL:	(In thousands)
Beginning balance	$	3,167		$	647	$	2,053	$	679		$	744		$	948		$	709	$	37		$	8,984
Provision for loan losses	(102		)	194		107		(166		)	(110		)	476			6		(10		)	395
Charge-offs	(16		)	—		—		—			—			(134		)	—		—			(150		)
Recoveries	1			—		—		1			8			42			1		—			53
Ending balance	$	3,050		$	841	$	2,160	$	514		$	642		$	1,332		$	716	$	27		$	9,282



	At or For the Six Months Ended June 30, 2018
	One-to- four family			Multi-family		Commercial real estate		Construction and land			Home equity			Auto and other consumer			Commercial business		Unallocated			Total
ALLL:	(In thousands)
Beginning balance	$	3,061		$	648	$	1,847	$	648		$	787		$	712		$	265	$	792		$	8,760
Provision for loan losses	3			193		313		(135		)	(161		)	807			450		(765		)	705
Charge-offs	(16		)	—		—		—			—			(257		)	—		—			(273		)
Recoveries	2			—		—		1			16			70			1		—			90
Ending balance	$	3,050		$	841	$	2,160	$	514		$	642		$	1,332		$	716	$	27		$	9,282



	At December 31, 2018
	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	$	3,297	$	762	$	2,289	$	585	$	480	$	1,611	$	334	$	175	$	9,533
General reserve	3,262		761		2,281		584		474		1,552		168		175		9,257
Specific reserve	35		1		8		1		6		59		166		—		276

Total loans	$	336,178	$	82,331	$	253,235	$	54,102	$	37,629	$	87,357	$	18,898	$	—	$	869,730
Loans collectively evaluated ⁽¹⁾	333,062		82,221		251,263		54,058		37,002		87,113		18,453		—		863,172
Loans individually evaluated ⁽²⁾	3,116		110		1,972		44		627		244		445		—		6,558


⁽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. In the process of identifying loans as impaired, management takes into consideration factors that include payment history and status, collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as impaired. The significance of payment delays and shortfalls is considered by management on a case-by-case basis after taking into consideration the totality of circumstances surrounding the loans and the borrowers, including payment history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable performance. Impairment is measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying troubled debt restructuring ("TDR") loans.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	June 30, 2019							December 31, 2018
	Recorded Investment			Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no allowance recorded:
One-to-four family	$	188		$	222	$	—	$	306	$	339	$	—
Commercial real estate	1,274			1,346		—		1,308		1,374		—
Construction and land	—			—		—		—		1		—
Home equity	57			161		—		330		478		—
Auto and other consumer	(7		)	504		—		—		276		—
Commercial business	—			—		—		—		3		—
Total	1,512			2,233		—		1,944		2,471		—

With an allowance recorded:
One-to-four family	2,821			3,088		36		2,810		3,085		35
Multi-family	109			109		1		110		110		1
Commercial real estate	656			656		10		664		663		8
Construction and land	65			99		1		44		71		1
Home equity	344			410		7		297		364		6
Auto and other consumer	247			247		50		244		244		59
Commercial business	298			298		7		445		445		166
Total	4,540			4,907		112		4,614		4,982		276

Total impaired loans:
One-to-four family	3,009			3,310		36		3,116		3,424		35
Multi-family	109			109		1		110		110		1
Commercial real estate	1,930			2,002		10		1,972		2,037		8
Construction and land	65			99		1		44		72		1
Home equity	401			571		7		627		842		6
Auto and other consumer	240			751		50		244		520		59
Commercial business	298			298		7		445		448		166
Total	$	6,052		$	7,140	$	112	$	6,558	$	7,453	$	276

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended				Six Months Ended
	June 30, 2019				June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	189	$	3	$	246	$	5
Commercial real estate	1,278		13		1,288		25
Home equity	55		9		190		17
Auto and other consumer	—		9		—		11
Total	1,522		34		1,724		58

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

Total impaired loans:
One-to-four family	3,016		72		3,075		117
Multi-family	109		1		110		3
Commercial real estate	1,936		21		1,948		40
Construction and land	66		3		59		3
Home equity	362		17		493		30
Auto and other consumer	311		15		287		20
Commercial business	302		5		315		10
Total	$	6,102	$	134	$	6,287	$	223

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three Months Ended				Six Months Ended
	June 30, 2018				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no allowance recorded:
One-to-four family	$	407	$	6	$	408	$	10
Commercial real estate	2,720		13		2,554		26
Construction and land	2,486		—		2,487		—
Home equity	356		9		358		9
Auto and other consumer	—		5		—		9
Total	5,969		33		5,807		54

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

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	June 30, 2019		December 31, 2018
	(In thousands)
One-to-four family	$	685	$	759
Commercial real estate	123		133
Construction and land	65		44
Home equity	148		369
Auto and other consumer	240		245
Commercial business	30		173

Total nonaccrual loans	$	1,291	$	1,723

Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at June 30, 2019 and December 31, 2018.

The following table presents past due loans, net of partial loan charge-offs, by class, as of June 30, 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	$	685	$	—	$	100	$	785	$	330,963	$	331,748
Multi-family	—		—		—		—		68,440		68,440
Commercial real estate	—		—		—		—		250,250		250,250
Construction and land	—		—		31		31		63,710		63,741
Total real estate loans	685		—		131		816		713,363		714,179

Consumer:
Home equity	145		—		25		170		37,024		37,194
Auto and other consumer	795		158		15		968		111,615		112,583
Total consumer loans	940		158		40		1,138		148,639		149,777

Commercial business loans	—		—		30		30		15,068		15,098

Total loans	$	1,625	$	158	$	201	$	1,984	$	877,070	$	879,054

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans
	(In thousands)
Real Estate:
One-to-four family	$	289	$	176	$	164	$	629	$	335,549	$	336,178
Multi-family	—		—		—		—		82,331		82,331
Commercial real estate	—		—		—		—		253,235		253,235
Construction and land	35		14		31		80		54,022		54,102
Total real estate loans	324		190		195		709		725,137		725,846

Consumer:
Home equity	97		30		9		136		37,493		37,629
Auto and other consumer	471		92		—		563		86,794		87,357
Total consumer loans	568		122		9		699		124,287		124,986

Commercial business loans	923		—		—		923		17,975		18,898

Total loans	$	1,815	$	312	$	204	$	2,331	$	867,399	$	869,730

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

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table represents the internally assigned grade as of June 30, 2019, by class of loans:



	Pass		Watch		Special Mention		Substandard		Total
	(In thousands)
Real Estate:
One-to-four family	$	326,047	$	3,761	$	1,136	$	804	$	331,748
Multi-family	68,028		303		109		—		68,440
Commercial real estate	242,070		3,821		3,026		1,333		250,250
Construction and land	62,102		1,527		47		65		63,741
Total real estate loans	698,247		9,412		4,318		2,202		714,179

Consumer:
Home equity	36,119		648		154		273		37,194
Auto and other consumer	110,265		1,668		356		294		112,583
Total consumer loans	146,384		2,316		510		567		149,777

Commercial business loans	13,015		87		1,635		361		15,098

Total loans	$	857,646	$	11,815	$	6,463	$	3,130	$	879,054

The following table represents the internally assigned grade as of December 31, 2018, by class of loans:



	Pass		Watch		Special Mention		Substandard		Total
	(In thousands)
Real Estate:
One-to-four family	$	330,476	$	3,767	$	957	$	978	$	336,178
Multi-family	82,221		—		110		—		82,331
Commercial real estate	244,919		6,281		663		1,372		253,235
Construction and land	51,480		2,578		—		44		54,102
Total real estate loans	709,096		12,626		1,730		2,394		725,846

Consumer:
Home equity	36,559		465		123		482		37,629
Auto and other consumer	85,579		1,310		151		317		87,357
Total consumer loans	122,138		1,775		274		799		124,986

Commercial business loans	16,520		1,733		472		173		18,898

Total loans	$	847,754	$	16,134	$	2,476	$	3,366	$	869,730

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	685	$	331,063	$	331,748
Multi-family	—		68,440		68,440
Commercial real estate	123		250,127		250,250
Construction and land	65		63,676		63,741

Consumer:
Home equity	148		37,046		37,194
Auto and other consumer	240		112,343		112,583

Commercial business	30		15,068		15,098

Total loans	$	1,291	$	877,763	$	879,054

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



	Nonperforming		Performing		Total
	(In thousands)
Real Estate:
One-to-four family	$	759	$	335,419	$	336,178
Multi-family	—		82,331		82,331
Commercial real estate	133		253,102		253,235
Construction and land	44		54,058		54,102

Consumer:
Home equity	369		37,260		37,629
Auto and other consumer	245		87,112		87,357

Commercial business	173		18,725		18,898

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

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

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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



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

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



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

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

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



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

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

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



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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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



	June 30, 2019						December 31, 2018
	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
	(In thousands)
One-to-four family	$	2,324	$	134	$	2,458	$	2,358	$	84	$	2,442
Multi-family	109		—		109		110		—		110
Commercial real estate	656		—		656		663		—		663
Home equity	253		—		253		258		—		258
Commercial business	268		—		268		272		—		272

Total TDR loans	$	3,610	$	134	$	3,744	$	3,661	$	84	$	3,745

Note 4 - Deposits

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at June 30, 2019 and December 31, 2018, was $87.8 million and $107.0 million, respectively. Deposits and weighted-average interest rates at the dates indicated are as follows:



	June 30, 2019			December 31, 2018
	Amount		Weighted-Average Interest Rate	Amount		Weighted-Average Interest Rate
	(Dollars in thousands)
Savings	$	164,190	0.94%	$	143,412	0.74%
Transaction accounts	260,701		0.06%	262,152		0.05%
Money market accounts	251,002		0.43%	273,344		0.43%
Certificates of deposit	257,372		2.11%	261,352		1.86%

	$	933,265	0.88%	$	940,260	0.77%

Maturities of certificates at the dates indicated are as follows:



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

	$	257,372	$	261,352

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Deposits at June 30, 2019 and December 31, 2018, included $56.2 million and $80.0 million, respectively, in public fund deposits. Investment securities with a carrying value of $43.1 million and $47.6 million were pledged as collateral for these deposits at June 30, 2019 and December 31, 2018, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission.

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
	(In thousands)
Savings	$	372	$	28	$	688	$	44
Transaction accounts	36		9		72		13
Insured money market accounts	313		282		633		497
Certificates of deposit	1,347		806		2,599		1,556

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

Note 5 - Federal Taxes on Income

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

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

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

The effective tax rates were 18.9% and 18.5% for the six months ended June 30, 2019 and 2018, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2019 and 2018 of 21%, largely due to the nontaxable earnings on bank owned life insurance and tax-exempt interest income earned on certain investment securities and loans.

Note 6 - Earnings per Share

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

that contain nonforfeitable rights to dividends or dividend equivalents are considered participating securities and are included in the computation of earnings per share.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2018.



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

Denominator:
Basic weighted average common shares outstanding	9,856,423		10,329,680		9,916,423		10,412,704
Dilutive restricted stock grants	100,664		126,666		90,907		120,526
Diluted weighted average common shares outstanding	9,957,087		10,456,346		10,007,330		10,533,230

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

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

Unallocated ESOP shares are not included as outstanding for either basic or diluted earnings per share calculations. As of June 30, 2019 and 2018, there were 820,556 and 873,445 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 no restricted stock award anti-dilutive shares at June 30, 2019 and 2018, respectively.

Note 7 - Employee Benefits

Employee Stock Ownership Plan

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

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. An annual principal and interest payment of $835,000 was made by the ESOP during the six months ended June 30, 2019.

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Allocated shares	227,473		174,584
Committed to be released shares	—		26,442
Unallocated shares	820,556		847,003

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

Fair value of unallocated shares	$	13,334	$	12,561

Note 8 - Stock-based Compensation

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

During the three and six months ended June 30, 2019 and 2018, no shares of restricted stock were awarded and no stock options were granted. Awarded shares of restricted stock vest ratably over five years from the date of grant as long as the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over five years.

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

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

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



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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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

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

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

As of June 30, 2019, there was $2.9 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 2.84 years.

Note 9 - Fair Value Accounting and Measurement

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

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

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

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

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

Level 3 - Unobservable inputs.

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

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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



	June 30, 2019
	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	$	—	$	932	$	—	$	932
ABS agency	—		25,436		—		25,436
ABS corporate	—		37,210		—		37,210
Corporate debt	—		9,482		—		9,482
SBA	—		31,975		—		31,975
MBS agency	—		135,239		—		135,239
MBS corporate	—		9,777		—		9,777
	$	—	$	250,051	$	—	$	250,051



	December 31, 2018
	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(In thousands)
Securities available-for-sale
Municipal bonds	$	—	$	869	$	—	$	869
ABS agency	—		25,752		—		25,752
ABS corporate	—		36,723		—		36,723
Corporate debt	—		9,888		—		9,888
SBA	—		35,670		—		35,670
MBS agency	—		143,455		—		143,455
MBS corporate	—		10,610		—		10,610
	$	—	$	262,967	$	—	$	262,967

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

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	June 30, 2019
	Level 1		Level 2		Level 3		Total
	(In thousands)
Impaired loans	$	—	$	—	$	6,052	$	6,052


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

At June 30, 2019 and December 31, 2018, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.

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



	June 30, 2019
	Carrying Amount		Estimated Fair Value		Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	28,822	$	28,822	$	28,822	$	—	$	—
Investment securities available for sale	250,051		250,051		—		250,051		—
Investment securities held to maturity	37,990		38,675		—		38,675		—
Loans held for sale	2,516		2,516		—		2,516		—
Loans receivable, net	873,958		856,059		—		—		856,059
FHLB stock	6,773		6,773		—		6,773		—
Accrued interest receivable	4,094		4,094		—		4,094		—
Mortgage servicing rights, net	955		1,934		—		—		1,934

Financial liabilities
Demand deposits	$	675,893	$	675,893	$	675,893	$	—	$	—
Time deposits	257,372		257,629		—		257,629		—
Borrowings	131,337		132,099		—		132,099		—
Accrued interest payable	389		389		—		389		—

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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

Financial liabilities
Demand deposits	$	678,908	$	678,908	$	678,908	$	—	$	—
Time deposits	261,352		259,549		—		259,549		—
Borrowings	136,552		137,153		—		137,153		—
Accrued interest payable	521		521		—		521		—

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

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

Loans receivable, net - At June 30, 2019, the fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

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

Note 10 - Noninterest Income

On January 1, 2018, the Company adopted the amendments of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has included the following table regarding the Company’s noninterest income for the periods presented.

FIRST NORTHWEST BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(In thousands)
Noninterest income:
Loan fees (1)	$	482	$	132	$	721	$	257
Deposit fees	463		369		910		761
Debit interchange income	27		37		49		69
Credit card interchange income	457		447		859		853
Investment securities gain (loss), net (1)	57		13		57		135
Gain on loan sales, net (1)	88		150		175		317
Increase in cash surrender value of BOLI (1)	145		149		288		298
Other income:
Investment services revenue	60		83		108		157
Gain or loss on subsidiary (1)	18		18		32		32
Remaining other income	6		7		15		8
Total other income	84		108		155		197

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

(1) Not within scope of Topic 606

The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The following is a discussion of key revenues within the scope of the new revenue guidance.

Deposit fees - The Company earns fees from its deposit customers for account maintenance, transaction-based activity and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

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

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

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

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

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

Forward-Looking Statements

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


•	statements of our goals, intentions and expectations;


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


•	statements regarding the quality of our loan and investment portfolios; and


•	estimates of our risks and future costs and benefits.

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:


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


•	the credit risks of our lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;


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


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


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


•	our ability to control operating costs and expenses;


•	whether our management team can implement our operational strategy, including but not limited to our loan growth;


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


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


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


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


•	increased competitive pressures among financial services companies;


•	our ability to attract and retain deposits;


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


•	changes in consumer spending, borrowing and savings habits;


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


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


•	changes in accounting policies and practices, as may be adopted by the financial institutions regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;


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


•	inability of key third-party vendors to perform their obligations to us; and


•	other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018.

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

General

First Northwest Bancorp (the "Company") is a bank holding company which primarily engages in the business activity of its subsidiary, First Federal Savings and Loan Association of Port Angeles ("First Federal" or the "Bank"). First Federal is a community-oriented financial institution serving Western Washington. Our thirteen locations include ten full-service banking offices, two locations primarily serving our customers through the use of Interactive Teller Machines ("ITM"), and a Home Lending Center ("HLC"), which is focused on the origination of loans secured by one- to four-family residential properties. Our business and operating strategy is focused on diversifying our loan portfolio through geographic expansion and loan product mix, expanding our deposit product offerings by upgrading existing services and use of technology, and enhancing our infrastructure to support our changing lending and deposit capabilities in order to meet the changing needs and expectations of our customers.

We offer a wide range of products and services focused on the lending and depository needs of the communities we serve. While we have a large concentration of first lien one- to four-family mortgage loans, we have increased our origination of commercial real estate, multi-family real estate, and construction loans, as well as engaging in indirect auto lending and auto loan purchase programs, in order to diversify our portfolio and increase interest income. We continue to originate one- to four-family residential mortgage loans and may sell loans into the secondary market to increase noninterest income and improve our interest rate risk, or we may retain 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.

First Federal is significantly affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, available alternative investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in levels of interest rates 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, and gains and losses from sales of securities.

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

The noninterest expenses we incur in operating our business consist of salaries and employee benefits and expenses, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, expenses related to real estate and personal property owned and other miscellaneous expenses.

Critical Accounting Policies

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

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

Assets. Total assets were $1.26 billion at both June 30, 2019 and December 31, 2018.

Total loans, excluding loans held for sale, increased $9.3 million to $879.1 million at June 30, 2019, from $869.7 million at December 31, 2018, a result of new loan originations and loan purchases partially offset by loan sales and repayment activity. Growth in auto and other consumer and construction and land loans of $25.2 million and $9.6 million, respectfully, was partially offset by decreases in multi-family, one- to four-family residential, commercial business, commercial real estate, and home equity loans of $13.9 million, $4.4 million, $3.8 million, $3.0 million, and $435,000, respectively. Loan growth was muted during the most recent quarter with some unexpected early repayments within our multi-family loan portfolio coupled with strong competition for quality commercial credits and our continuing efforts to originate one- to-four family residential loans for sale.

Construction and land loans increased 17.7% to $63.7 million at June 30, 2019, from $54.1 million at December 31, 2018. The majority of our construction loans are geographically disbursed throughout the Puget Sound region and, as a result, these loans are susceptible to risks that may be different depending on the location of the project. We manage all of our construction lending by utilizing a licensed third party vendor to assist us in monitoring our construction projects.

We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, in order to prudently underwrite construction loans. We have seen a slowing of construction lending, which has resulted in a decline in construction and land loan commitments. While we continue to focus on construction loan origination activity, we may see a decline in outstanding construction loan balances over time if we are unable to source quality construction loans to replace completed projects. We continually assess our lending strategies across all product lines and markets within which we do business in order to improve our earnings potential over time while also prudently managing credit risk.

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



June 30, 2019		North Olympic Peninsula ⁽¹⁾		Puget Sound Region ⁽²⁾		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	12,814	$	18,938	$	406	$	32,158
	Multi-family residential	—		43,958		—		43,958
	Commercial real estate	7,717		10,915		—		18,632
	Total commitment	$	20,531	$	73,811	$	406	$	94,748

Construction Funds Disbursed
	One- to four-family residential	$	6,053	$	7,197	$	55	$	13,305
	Multi-family residential	—		31,877		—		31,877
	Commercial real estate	2,143		8,675		—		10,818
	Total disbursed	$	8,196	$	47,749	$	55	$	56,000

Undisbursed Commitment
	One- to four-family residential	$	6,761	$	11,741	$	351	$	18,853
	Multi-family residential	—		12,081		—		12,081
	Commercial real estate	5,574		2,240		—		7,814
	Total undisbursed	$	12,335	$	26,062	$	351	$	38,748

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

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



December 31, 2018		North Olympic Peninsula		Puget Sound Region		Other Washington		Total
		(In thousands)
Construction Commitment
	One- to four-family residential	$	16,814	$	18,550	$	—	$	35,364
	Multi-family residential	—		45,313		—		45,313
	Commercial real estate	1,868		20,147		—		22,015
	Total Commitment	$	18,682	$	84,010	$	—	$	102,692

Construction Funds Disbursed
	One- to four-family residential	$	8,321	$	8,998	$	—	$	17,319
	Multi-family residential	—		17,348		—		17,348
	Commercial real estate	1,584		9,424		—		11,008
	Total disbursed	$	9,905	$	35,770	$	—	$	45,675

Undisbursed Commitment
	One- to four-family residential	$	8,493	$	9,552	$	—	$	18,045
	Multi-family residential	—		27,965		—		27,965
	Commercial real estate	284		10,723		—		11,007
	Total undisbursed	$	8,777	$	48,240	$	—	$	57,017

Land Funds Disbursed
	One- to four-family residential	$	6,124	$	2,023	$	—	$	8,147
	Commercial real estate	—		280		—		280
	Total disbursed for land	$	6,124	$	2,303	$	—	$	8,427

During the six months ended June 30, 2019, the Company originated $70.6 million of loans, of which $32.5 million, or 46.0%, were originated in the Puget Sound region of Washington, $36.0 million, or 50.9%, in the North Olympic Peninsula, and $2.2 million, or 3.1%, in other areas in Washington. The Company purchased an additional $34.6 million in loans, mainly specialty auto loans of $28.4 million, during the six months ended June 30, 2019.

Our allowance for loan losses increased $198,000, or 2.1%, to $9.7 million at June 30, 2019, from $9.5 million at December 31, 2018, mainly as a result of loan growth. The allowance for loan losses as a percentage of total loans remained at 1.1% at both June 30, 2019 and December 31, 2018.

Nonperforming loans decreased $432,000, or 25.1%, to $1.3 million at June 30, 2019, from $1.7 million at December 31, 2018, mainly attributable to a decreases in nonperforming home equity loans of $221,000 and commercial business loans of $143,000. Nonperforming loans to total loans decreased to 0.1% at June 30, 2019 from 0.2% at December 31, 2018. The allowance for loan losses as a percentage of nonperforming loans increased to 753.8% at June 30, 2019, from 553.3% at December 31, 2018, and classified loans decreased $236,000 to $3.1 million at June 30, 2019, from $3.4 million at December 31, 2018.

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

Asset quality remains strong with net loan charge-offs concentrated mainly in our auto loan portfolio. We have adjusted our indirect auto loan product offerings in an effort to improve credit quality and reduce future charge-off activity. We continue to monitor and make changes to the indirect auto loan program in order to prudently balance risk and return within the auto loan portfolio. We believe that our allowance for loan losses was adequate to absorb the known and inherent risks of loss in the loan portfolio as of June 30, 2019.

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



	June 30, 2019			December 31, 2018
	(In thousands)
Real Estate:
One-to-four family	$	331,748		$	336,178
Multi-family	68,440			82,331
Commercial real estate	250,250			253,235
Construction and land	63,741			54,102
Total real estate loans	714,179			725,846

Consumer:
Home equity	37,194			37,629
Auto and other consumer	112,583			87,357
Total consumer loans	149,777			124,986

Commercial business loans	15,098			18,898

Total loans	879,054			869,730
Less:
Net deferred loan fees	103			292
Premium on purchased loans, net	(4,738		)	(3,947		)
Allowance for loan losses	9,731			9,533
Loans receivable, net	$	873,958		$	863,852

The following table represents nonperforming assets at the dates indicated.



	June 30, 2019			December 31, 2018
	(In thousands)
Nonperforming loans:
Real estate loans:
One- to four-family	$	685		$	759
Commercial real estate	123			133
Construction and land	65			44

Total real estate loans	873			936

Consumer loans:
Home equity	148			369
Other	240			245

Total consumer loans	388			614

Commercial business	30			173

Total nonperforming loans	1,291			1,723

Real estate owned:
Land	72			72

Total real estate owned	72			72

Repossessed assets	19			52

Total nonperforming assets	$	1,382		$	1,847

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

Total investment securities decreased $18.4 million, or 6.0%, to $288.0 million at June 30, 2019, from $306.5 million at December 31, 2018, due to sales, calls, and normal repayment activity. Mortgage-backed securities represent the largest portion of our investment securities portfolio and totaled $175.8 million at June 30, 2019, or 61.0% of the investment securities portfolio, a decrease during the year of $9.5 million, or 5.2%, from $185.3 million at December 31, 2018. Other investment securities, including municipal bonds and other asset-backed securities, were $112.3 million at June 30, 2019, or 39.0% of the investment securities portfolio, a decrease of $8.9 million from $121.1 million at December 31, 2018. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 4.6 years as of June 30, 2019, and 5.0 years as of December 31, 2018, and had an estimated average repricing term of 3.3 years as of June 30, 2019, and 3.7 years as of December 31, 2018, based on the interest rate environment at those times.

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

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

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

Equity. Total shareholders' equity increased $4.1 million during the year to $176.4 million at June 30, 2019, mainly the result of net income of $4.3 million and an increase in the value of our available-for-sale securities portfolio, resulting in a $3.4 million decrease in our accumulated other comprehensive loss, net of tax. These increases were partially offset by a $3.8 million decrease due to the repurchase of shares of common stock during the quarter.

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

General. Net income increased $553,000, or 36.2%, to $2.1 million for the three months ended June 30, 2019, compared to net income of $1.5 million for the three months ended June 30, 2018. The increase in net income was primarily due to an increase in noninterest income from early prepayment fees on loans.

Net Interest Income. Net interest income increased $137,000 to $9.3 million for the three months ended June 30, 2019, from $9.2 million for the three months ended June 30, 2018, mainly as the result of an increase in interest income on loans receivable, partially offset by an increase in deposit costs. The yield on average interest-earning assets increased 18 basis points to 4.14% for the three months ended June 30, 2019, compared to 3.96% for the same period in the prior year, due primarily to an increase in the average balance of loans receivable coupled with a decrease in the average balance of investment securities. We continued to increase our concentration of loans receivable as a percentage of interest-earning assets.

The average cost of interest-bearing liabilities increased 37 basis points to 1.33% for the three months ended June 30, 2019, compared to 0.96% for the same period last year, due primarily to increases in the average balance and cost of deposits.

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

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

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

Interest income on investment securities decreased $4,000 to $969,000 for the three months ended June 30, 2019, compared to $973,000 for the three months ended June 30, 2018, due to an $8.9 million decrease in the average balance, partially offset by a 23 basis point increase in average yield during the quarter, compared to the same period in 2018. The change in average yield on investment securities does not include the benefit of nontaxable income from municipal bonds. Interest income on mortgage-backed and related securities for the three months ended June 30, 2019 decreased $45,000, or 3.6%, compared to the three months ended June 30, 2018, the result of a decrease of $7.5 million in average balance, partially offset by a 2 basis point increase in average yield.

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



	Three Months Ended June 30,
	2019				2018				Increase (Decrease) in Interest Income
	Average Balance Outstanding		Yield		Average Balance Outstanding		Yield		Increase (Decrease) in Interest Income
	(Dollars in thousands)
Loans receivable, net	$	883,290	4.57	%	$	809,839	4.42	%	$	1,141
Investment securities	116,496		3.33		125,442		3.10		(4		)
Mortgage-backed securities	178,878		2.67		186,385		2.65		(45		)
FHLB stock	7,066		4.98		7,605		4.10		10
Interest-bearing deposits in banks	13,118		1.77		9,111		1.80		17
Total interest-earning assets	$	1,198,848	4.14		$	1,138,382	3.96		$	1,119

Interest Expense. Total interest expense increased $982,000, or 46.3%, to $3.1 million for the three months ended June 30, 2019, compared to $2.1 million for the three months ended June 30, 2018, due to an 83.8% increase in deposit costs, and a 3.9% increase in borrowing costs. Deposit costs increased for the three months ended June 30, 2019, due to increased interest rates and customers transferring deposits into higher-yielding accounts. The average balance of interest-bearing deposits increased $62.6 million, or 8.5%, to $795.8 million for the three months ended June 30, 2019, from $733.1 million for the three months ended June 30, 2018, as we continued to target growth in deposits in new and existing market areas. During the three months ended June 30, 2019, the average balance and related cost of savings accounts increased $58.0 million and 80 basis points, respectfully, compared to the same period in 2018, the result of a savings promotion targeting growth in newer markets. During the same

period, as compared to 2018, the average balance of certificates of deposit balances grew $22.0 million with an increase in the average rate paid of 72 basis points, as a result of our customers placing more money into higher-yielding certificates of deposit as rates have increased. During the three months ended June 30, 2019, the average balance of money market accounts decreased $19.6 million compared to the same period in the prior year, as customers moved money into higher-yielding accounts at other financial institutions or into higher-yielding certificates of deposit and savings accounts at First Federal. The average cost of all deposit products increased to 1.04% for the three months ended June 30, 2019, from 0.61% for the three months ended June 30, 2018, as we paid higher rates to attract new and retain existing deposit balances and customer relationships. Borrowing costs increased due primarily to an increase in the average rate paid of 39 basis points during the most recent quarter as compared to the same period in 2018.

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



	Three Months Ended June 30,
	2019				2018				Increase (Decrease) in Interest Expense
	Average Balance Outstanding		Rate		Average Balance Outstanding		Rate		Increase (Decrease) in Interest Expense
	(Dollars in thousands)
Savings accounts	$	163,106	0.91	%	$	105,067	0.11	%	$	344
Transaction accounts	115,914		0.12		113,666		0.03		27
Money market accounts	257,548		0.49		277,186		0.41		31
Certificates of deposit	259,203		2.08		237,216		1.36		541
Borrowings	138,643		2.99		153,362		2.60		39
Total interest-bearing liabilities	$	934,414	1.33		$	886,497	0.96		$	982

Provision for Loan Losses. The provision for loan losses was $255,000 during the three months ended June 30, 2019, primarily due to charge-off activity in our auto and consumer loan portfolio related to our indirect auto loan portfolio, and $395,000 for the three months ended June 30, 2018.

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



	Three Months Ended June 30,
	2019			2018
	(Dollars in thousands)
Provision for loan losses	$	255		$	395
Net charge-offs	(283		)	(97		)
Allowance for loan losses	9,731			9,282
Allowance for losses as a percentage of total gross loans receivable at the end of this period	1.1		%	1.1		%
Total nonaccruing loans	1,291			2,062
Allowance for loan losses as a percentage of nonaccrual loans at end of period	753.8		%	450.1		%
Nonaccrual and 90 days or more past due loans as a percentage of total loans	0.1		%	0.2		%
Total loans	$	879,054		$	828,229

Noninterest Income. Noninterest income increased $398,000, or 28.3%, to $1.8 million for the three months ended June 30, 2019, from $1.4 million for the three months ended June 30, 2018, primarily due to an increase in loan and deposit service fees, as noted above.

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



	Three Months Ended June 30,				Increase (Decrease)
	2019		2018		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	1,375	$	915	$	460		50.3	%
Mortgage servicing fees, net of amortization	54		70		(16		)	(22.9	)
Net gain on sale of loans	88		150		(62		)	(41.3	)
Net gain on sale of investment securities	57		13		44			338.5
Increase in cash surrender value of bank-owned life insurance	145		149		(4		)	(2.7	)
Other income	84		108		(24		)	(22.2	)
Total noninterest income	$	1,803	$	1,405	$	398		28.3	%

Noninterest Expense. Noninterest expense decreased slightly during the three months ended June 30, 2019, compared to the three months ended June 30, 2018, as we continued to strive for better efficiencies and cost management in the absence of new branching initiatives.

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



	Three Months Ended June 30,				Increase (Decrease)
	2019		2018		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	4,753	$	4,745	$	8		0.2	%
Data processing	667		677		(10		)	(1.5	)
Occupancy and equipment	1,140		1,127		13			1.2
Supplies, postage, and telephone	242		243		(1		)	(0.4	)
Regulatory assessments and state taxes	195		155		40			25.8
Advertising	229		290		(61		)	(21.0	)
Professional fees	331		458		(127		)	(27.7	)
FDIC insurance premium	77		79		(2		)	(2.5	)
Other	638		524		114			21.8
Total	$	8,272	$	8,298	$	(26	)	(0.3	)%

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

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

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

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

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

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

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

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

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

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



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

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

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

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



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

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

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



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

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

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



	Six Months Ended June 30,				Increase (Decrease)
	2019		2018		Amount			Percent
	(Dollars in thousands)
Loan and deposit service fees	$	2,440	$	1,808	$	632		35.0	%
Mortgage servicing fees, net of amortization	99		132		(33		)	(25.0	)
Net gain on sale of loans	175		317		(142		)	(44.8	)
Net gain on sale of investment securities	57		135		(78		)	(57.8	)
Increase in cash surrender value of bank-owned life insurance	288		298		(10		)	(3.4	)
Other income	155		197		(42		)	(21.3	)
Total noninterest income	$	3,214	$	2,887	$	327		11.3	%

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

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



	Six Months Ended June 30,				Increase (Decrease)
	2019		2018		Amount			Percent
	(Dollars in thousands)
Compensation and benefits	$	9,326	$	9,556	$	(230	)	(2.4	)%
Data processing	1,298		1,305		(7		)	(0.5	)
Occupancy and equipment	2,248		2,229		19			0.9
Supplies, postage, and telephone	470		474		(4		)	(0.8	)
Regulatory assessments and state taxes	364		281		83			29.5
Advertising	372		614		(242		)	(39.4	)
Professional fees	629		780		(151		)	(19.4	)
FDIC insurance premium	154		155		(1		)	(0.6	)
Other	1,211		1,179		32			2.7
Total	$	16,072	$	16,573	$	(501	)	(3.0	)%

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

Average Balances, Interest and Average Yields/Cost

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



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

Interest-earning assets:	(Dollars in thousands)
Loans receivable, net ⁽¹⁾	4.72	%	$	883,290		$	10,093	4.57	%	$	809,839		$	8,952	4.42	%	$	877,095		$	20,025	4.57	%	$	799,288		$	17,535	4.39	%
Investment securities	4.38		116,496			969		3.33		125,442			973		3.10		118,423			1,979		3.34		128,963			1,835		2.85
Mortgage-backed securities	2.61		178,878			1,192		2.67		186,385			1,237		2.65		181,297			2,449		2.70		192,645			2,534		2.63
FHLB dividends	5.20		7,066			88		4.98		7,605			78		4.10		6,955			176		5.06		7,419			137		3.69
Interest-bearing deposits in banks	1.79		13,118			58		1.77		9,111			41		1.80		12,495			125		2.00		10,123			86		1.70
Total interest-earning assets ⁽²⁾	4.32		1,198,848			12,400		4.14		1,138,382			11,281		3.96		1,196,265			24,754		4.14		1,138,438			22,127		3.89

Interest-bearing liabilities:
Savings accounts	0.94		$	163,106		$	372	0.91		$	105,067		28		0.11		$	158,398		$	688	0.87		$	106,610		44		0.08
Transaction accounts	0.06		115,914			36		0.12		113,666			9		0.03		115,358			72		0.12		113,933			13		0.02
Money market accounts	0.43		257,548			313		0.49		277,186			282		0.41		262,747			633		0.48		272,991			497		0.36
Certificates of deposit	2.11		259,203			1,347		2.08		237,216			806		1.36		258,737			2,599		2.01		238,687			1,556		1.30
Total deposits	0.88		795,771			2,068		1.04		733,135			1,125		0.61		795,240			3,992		1.00		732,221			2,110		0.58
Borrowings	2.84		138,643			1,036		2.99		153,362			997		2.60		136,545			2,026		2.97		151,243			1,886		2.49
Total interest-bearing liabilities	1.12		934,414			3,104		1.33		886,497			2,122		0.96		931,785			6,018		1.29		883,464			3,996		0.90

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

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

Rate/Volume Analysis

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



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

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

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

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

Off-Balance Sheet Activities

In the normal course of operations, First Federal engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the six months ended June 30, 2019 and the year ended December 31, 2018, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

Contractual Obligations

At June 30, 2019, 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	$	179,950	$	64,274	$	13,148	$	—	$	257,372
FHLB advances	101,337		30,000		—		—		131,337
Operating leases	321		541		438		1,814		3,114
Borrower taxes and insurance	1,251		—		—		—		1,251
Deferred compensation	54		—		53		836		943
Total contractual obligations	$	282,913	$	94,815	$	13,639	$	2,650	$	394,017

Commitments and Off-Balance Sheet Arrangements

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



	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	$	27	$	—	$	—	$	—	$	27
Adjustable-rate	658		—		—		—		658
Unfunded commitments under lines of credit or existing loans	2,122		25,833		4,089		47,307		79,351
Standby letters of credit	—		214		—		—		214
Total commitments	$	2,807	$	26,047	$	4,089	$	47,307	$	80,250

Liquidity Management

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

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

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

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

Certificates of deposit due within one year as of June 30, 2019 totaled $180.0 million, or 69.9% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers' hesitancy to invest their funds for longer periods as interest rates have begun to rise. A significant portion of our money market accounts have rolled into certificates of deposit over the past twelve months, which management believes, based on past experience, is commensurate with our customers' behavior during periods of rising interest rates. If these maturing deposits are not renewed, however, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. We have the ability to attract and retain deposits by adjusting the interest rates offered. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on certificates of deposit. In addition, we believe that our branch network, and the general cash flows from our existing lending and investment activities, will afford us sufficient foreseeable long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

The Company is a separate legal entity from the Bank and provides for its own liquidity to pay its operating expenses and other financial obligations. At June 30, 2019, the Company (on an unconsolidated basis) had liquid assets of $20.6 million.

Capital Resources

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

At June 30, 2019, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Federal at June 30, 2019.



	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)	$	145,397	11.6	%		$	50,305	4.0	%	$	62,881	5.0	%
Common equity tier I (to risk-weighted assets)	145,397		17.4			37,692		4.5		54,445		6.5
Tier I risk-based capital (to risk-weighted assets)	145,397		17.4			50,256		6.0		67,009		8.0
Total risk-based capital (to risk-weighted assets)	155,316		18.5			67,009		8.0		83,761		10.0

In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer. This new capital conservation buffer requirement was phased in starting in January 2016 requiring a buffer of 0.625% of risk-weighted assets and will increase each year until fully implemented to an amount of 2.5% of risk-weighted assets in January 2019. As of June 30, 2019, the conservation buffer was 2.500%.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance

than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has not been any material change in the market risk disclosures contained in First Northwest Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2019, 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 Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b) Changes in Internal Controls.

There have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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


(a)	Not applicable.


(b)	Not applicable.



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

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

On September 26, 2017, the Board of Directors authorized the repurchase of up to 1,166,659 shares, or approximately 10% of its shares of common stock issued and outstanding as of September 18, 2017. The repurchase program permits shares to be repurchased in the open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with the SEC's Rule 10b5-1. As of June 30, 2019, a total of 904,450 shares, or 77.5% percent of the shares authorized in the September 2017 stock repurchase plan, have been purchased at an average cost of $16.06 per share, leaving 262,209 shares available for future purchases.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits



Exhibit No.	Exhibit Description	Filed Herewith
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act	X
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act	X
101	The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, 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

SIGNATURES

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



	FIRST NORTHWEST BANCORP

Date: August 7, 2019	/s/ Laurence J. Hueth

	Laurence J. Hueth
	President, Chief Executive Officer and Director
	(Principal Executive Officer)


Date: August 7, 2019	/s/ Regina M. Wood

	Regina M. Wood
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)