See selected notes to the consolidated financial statements.
See selected notes to the consolidated financial statements.
See selected notes to the consolidated financial statements.
See selected notes to the consolidated financial statements.
See selected notes to the consolidated financial statements.
See selected notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation and Critical Accounting Policies
Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") 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 was 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.
In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, POM Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin Ventures"). First Northwest extended $8.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of $500,000. Quin Ventures sold substantially all of its assets in December 2022 to Quil Ventures Inc., at which time POM returned the 29,719 shares previously issued and the Joint Venture Agreement was terminated. As part of the sale transaction, the Company received a 5% ownership stake in Quil Ventures Inc. valued at $225,000 and recorded a $1.5 million commitment receivable. First Northwest continues to hold a controlling interest in Quin Ventures.
On October 31, 2021, the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.
On August 5, 2022, First Northwest's election to be treated as a financial holding company became effective, allowing the Company to engage in activities that are financial in nature or incidental to financial activities.
First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."
First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures.
The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with borrowing and investing activities.
Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all 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, 2022. 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. Operating results for the three months ended March 31, 2023, 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 credit losses ("ACL"), fair value of financial instruments and derivatives, and deferred tax assets and liabilities.
Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures. All material intercompany accounts and transactions have been eliminated in consolidation. While First Northwest and POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest for financial reporting purposes under Accounting Standards Codification 810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.
Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and has included additional information where appropriate.
Recently adopted accounting pronouncements
Credit Losses
On
January 1, 2023, the Company adopted FASB ASU
2016-
13 Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with a current expected credit loss ("CECL") methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, the CECL adoption made changes to the accounting for investment securities available for sale.
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. This method resulted in recording a cumulative-effect adjustment as of the beginning of 2023 with no change to prior periods. The Company elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Company policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.
Results for the reporting period beginning after January 1, 2023, are presented under ASU 2016-13, while prior period amounts were not restated and continue to be reported in accordance with previously applicable GAAP. The accounting policies for prior periods are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
The accounting policies for all financial instruments impacted by the CECL adoption are as follows:
Investment Securities
A debt security is placed on nonaccrual status at the time any principal or payments become more than 90 days delinquent. Interest accrued, but not received for a security placed on nonaccrual, is reversed against interest income during the period that the debt security is placed on nonaccrual status.
Allowance for Credit Losses on Investment Securities
Management evaluates the need for an ACL on investment securities ("ACLI") on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For investment securities available for sale in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and adverse conditions specifically related to the security, among other factors. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACLI is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any decline in fair value that has not been recorded through an ACLI is recognized in other comprehensive income (loss).
Changes in the ACLI are recorded as provision, or reversal of provision, for credit losses expense. Losses are charged against the allowance when management believes the uncollectibility of an investment security available for sale is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on investment securities available for sale is excluded from the estimate of credit losses as interest accrued, but not received, is reversed timely in accordance with the policy for investment securities above.
Loans Receivable
Loans receivable include loans originated and indirect loans purchased by the Bank as well as loans acquired in business combinations.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the outstanding principal balance, net of purchased premiums and discounts, unearned discounts, and net deferred loan origination fees and costs. Accrued interest receivable for loans receivable is reported in prepaid expenses and other assets on the Consolidated Balance Sheets.
Allowance for Credit Losses on Loans
The ACL on loans ("ACLL") is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. Loans are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Bank records the changes in the ACLL through earnings, as a provision for credit losses on the Consolidated Statements of Income.
Accrued interest receivable on loans receivable is excluded from the estimate of credit losses. Instead, interest accrued, but not received, is reversed timely in accordance with the policy for loans receivable above.
The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies. Management has adopted a discounted cash flow ("DCF") methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a Remaining Life methodology. The Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. If the present value of cash flows is less than the total recorded investment, a reserve is calculated.
For each loan segment collectively measured, the baseline loss rates are calculated using the Bank's own data and peer institution data from FFIEC Call Report filings. The Bank evaluates the historical period on a quarterly basis. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost, as adjusted for balances guaranteed by governmental entities, such as the Small Business Administration ("SBA") or the United States Department of Agriculture ("USDA"), or the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: 1) management has a reasonable expectation at the reporting date that a modification agreement will be executed with an individual borrower or 2) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment period assumption on a quarterly basis.
The CECL methodology includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets two forecasted macroeconomic factors, which are national gross domestic product ("GDP") and unemployment figures. Each of the forecasted DCF segments is impacted by these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year.
The Bank uses the Federal Open Market Committee ("FOMC") forecast via an application programming interface with our CECL software. FOMC provides various forecast scenarios used to determine the loan portfolio’s expected credit loss. Based on known/knowable information at the measurement date, management has determined that the FOMC scenarios and the underlying assumptions most closely align with current and expected conditions. The Bank has elected to forecast the first four quarters of the credit loss estimate and revert on a straight-line basis as permitted in ASC 326-20-30-9. The Bank also considers other qualitative risk factors to adjust the estimated ACL calculated by the above-mentioned model. While there are many factors available to incorporate into the quantitative model, the Bank has selected to use the most critical factors. Additional metrics will be included only if internal or external factors outside those considered in its historical losses or macroeconomic forecast indicate otherwise. The Bank has established metrics to estimate the qualitative risk factor by segment based on the identified risk.
In general, management's estimate of the ACLL uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The allowance for loan losses evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available to recognize losses on loans, future additions to the allowance may be necessary based on further declines in local and national economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ACLL. Such agencies may require the Bank to make adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the ACLL is appropriate given the above considerations.
Allowance for Credit Losses on Unfunded Commitments
The Bank estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Bank is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Bank has determined that no allowance is necessary for its home equity line of credit portfolio as it has the ability to unconditionally cancel the available lines of credit.
The allowance methodology is similar to the ACLL, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class.
The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (reversal of provision) for credit losses on the Consolidated Statements of Income.
Provision for Credit Losses
The provision for credit losses as presented in the Company's Consolidated Statements of Income includes the provision for credit losses on loans and the provision for credit losses on unfunded commitments.
Summary of CECL Impact:
Investment Securities - As of December 31, 2022, the Company had no historical charge-off or recovery history and did not have any investment securities available for sale outstanding at the adoption date for which an other-than-temporary impairment was previously recorded. At the adoption date of ASU 2016-13, the unrealized losses present in the portfolio of investment securities available for sale were primarily due to decreases in market interest rates on floating rate investment securities since the purchase of the securities and the fair value of these securities was expected to recover as the securities approach their maturity dates. The basis of management’s conclusion was that at March 31, 2023, 23.5% of the investment securities were issued by or guaranteed by the United States government or its agencies, 31.0% were issued and guaranteed by State and local governments and the remainder of the portfolio was invested in at least investment-grade securities. As a result of the analysis, no allowance for credit losses on investment securities available for sale was recorded upon adoption. See Note 2 Investment Securities for more information.
Loan Receivable - ASU 2016-13 was applied prospectively and replaced the allowance for loan losses with the ACLL on the Consolidated Balance Sheet and replaced the related provision for loan losses with the provision for credit losses on loans as presented on the Consolidated Statements of Income, net of provision for credit losses on unfunded commitments.
The Bank recorded a pretax increase to the ACLL of $2.2 million to increase the reserve to the estimated credit losses at January 1, 2023 based on its CECL methodology as part of the cumulative-effect adjustment to beginning retained earnings. Upon adoption, the adjusted beginning balance of the ACLL as a percentage of loans receivable was 1.18% as compared to 1.04% at December 31, 2022 under the prior incurred loss methodology. At March 31, 2023, the ACLL as a percentage of loans receivable was 1.10%.
See Note 4 - Allowance for Credit Loss on Loans for more information.
Unfunded Commitments - ASU 2016-13 was applied prospectively and replaced the reserve for unfunded commitments with the ACL on unfunded commitments ("ACLU") as included in accrued liabilities and other expenses on the Consolidated Balance Sheet and replaced the provision for unfunded commitments with the provision for credit losses on unfunded commitments as presented on the Consolidated Statements of Income, net of provision for credit losses on loans. Upon adoption, the Bank recorded a pretax increase in the beginning ACLU of $1.5 million.
Overall CECL Impact - The adoption of ASU 2016-13, included an increase to the ACLL of $2.2 million and an increase to the ACLU of $1.5 million, which resulted in a pretax cumulative-effect adjustment of $3.7 million. The impact of this adjustment to beginning retained earnings on January 1, 2023 was $3.0 million, net of tax.
Derivative Instruments and Hedging Activities
On
March 28, 2022, the Financial Accounting Standards Board issued Accounting Standards Update (ASU)
2022-
01, Derivatives and Hedging (Topic
815):
Fair Value Hedging –
Portfolio Layer Method. The purpose of this updated guidance is to further align risk management objectives with hedge accounting results on the application of the last-of-layer method, which was
first introduced in ASU
2017-
12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities. ASU
2022-
01 is effective for public business entities for fiscal years beginning after
December 15, 2022, with early adoption in the interim period, permitted. For entities who have already adopted ASU
2017-
12, immediate adoption is allowed. ASU
2022-
01 requires a modified retrospective transition method for basis adjustments in which the entity will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company adopted this ASU on
January 1, 2023 on a prospective basis; therefore, there was
no impact to the consolidated financial statements.
Accounting Policy for Derivative Instruments and Hedging Activities
- FASB ASC
815,
Derivatives and Hedging ("ASC
815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Recently issued accounting pronouncements not yet adopted
Other Pronouncements
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. On December 31, 2022, FASB issued ASU 2022-06, which deferred the sunset date for Topic 848 to December 31, 2024. The Company is implementing a transition plan to identify and modify its loans and other financial instruments that are either directly or indirectly influenced by LIBOR. The Company is in the process of evaluating ASU No. 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments, with no expected material impact on the Company's financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately. Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022-03 will have on its consolidated financial statements and related disclosures.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. ASU 2023-02 allows an entity the option to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits if certain conditions are met. Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this ASU, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. In addition, the amendments in this ASU require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3, requiring a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this ASU, low-income housing tax credit investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this ASU specifies that impairment of low-income housing tax credit investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323-10: Investments - Equity Method and Joint Ventures - Overall. This ASU also clarifies that for low-income housing tax credit investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321: Investments - Equity Securities. The amendments in this ASU also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. ASU 2023-02 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2023-02 will have on its consolidated financial statements and related disclosures.
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 at March 31, 2023 are summarized as follows:
| | | | | | Gross | | | Gross | | | Estimated | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
| | (In thousands) | |
Available for Sale | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 119,761 | | | $ | 1 | | | $ | (17,852 | ) | | $ | 101,910 | |
U.S. Treasury notes | | | 2,472 | | | | — | | | | (82 | ) | | | 2,390 | |
International agency issued bonds (Agency bonds) | | | 1,957 | | | | — | | | | (212 | ) | | | 1,745 | |
Corporate issued debt securities (Corporate debt) | | | 60,648 | | | | — | | | | (5,531 | ) | | | 55,117 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
U.S. government agency issued mortgage-backed securities (MBS agency) | | | 87,398 | | | | — | | | | (12,452 | ) | | | 74,946 | |
Non-agency issued mortgage-backed securities (MBS non-agency) | | | 100,673 | | | | — | | | | (7,695 | ) | | | 92,978 | |
Total securities available for sale | | $ | 372,909 | | | $ | 1 | | | $ | (43,824 | ) | | $ | 329,086 | |
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at December 31, 2022, are summarized as follows:
| | | | | | Gross | | | Gross | | | Estimated | |
| | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
| | (In thousands) | |
Available for Sale | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 119,990 | | | $ | — | | | $ | (21,940 | ) | | $ | 98,050 | |
U.S. Treasury notes | | | 2,469 | | | | — | | | | (105 | ) | | | 2,364 | |
Agency bonds | | | 1,955 | | | | — | | | | (253 | ) | | | 1,702 | |
Corporate debt | | | 60,700 | | | | — | | | | (5,201 | ) | | | 55,499 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | |
MBS agency | | | 88,930 | | | | 1 | | | | (13,283 | ) | | | 75,648 | |
MBS non-agency | | | 101,139 | | | | — | | | | (7,833 | ) | | | 93,306 | |
Total securities available for sale | | $ | 375,183 | | | $ | 1 | | | $ | (48,615 | ) | | $ | 326,569 | |
There were no securities classified as held-to-maturity at March 31, 2023 and December 31, 2022.
Accrued interest receivable on available-for-sale debt securities totaled $2.2 million and $2.0 million as of March 31, 2023 and December 31, 2022, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Balance Sheets and is excluded from the calculation of the allowance for credit losses on investment securities.
The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of March 31, 2023:
| | 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 | | $ | (581 | ) | | $ | 5,092 | | | $ | (17,271 | ) | | $ | 96,517 | | | $ | (17,852 | ) | | $ | 101,609 | |
U.S. Treasury notes | | | — | | | | — | | | | (82 | ) | | | 2,390 | | | | (82 | ) | | | 2,390 | |
Agency bonds | | | — | | | | — | | | | (212 | ) | | | 1,745 | | | | (212 | ) | | | 1,745 | |
Corporate debt | | | (1,562 | ) | | | 23,015 | | | | (3,969 | ) | | | 32,102 | | | | (5,531 | ) | | | 55,117 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
MBS agency | | | (369 | ) | | | 7,279 | | | | (12,083 | ) | | | 67,667 | | | | (12,452 | ) | | | 74,946 | |
MBS non-agency | | | (963 | ) | | | 12,629 | | | | (6,732 | ) | | | 80,349 | | | | (7,695 | ) | | | 92,978 | |
Total available for sale | | $ | (3,475 | ) | | $ | 48,015 | | | $ | (40,349 | ) | | $ | 280,770 | | | $ | (43,824 | ) | | $ | 328,785 | |
The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 2022:
| | 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 | | $ | (15,749 | ) | | $ | 79,129 | | | $ | (6,191 | ) | | $ | 18,621 | | | $ | (21,940 | ) | | $ | 97,750 | |
U.S. Treasury notes | | | (105 | ) | | | 2,364 | | | | — | | | | — | | | | (105 | ) | | | 2,364 | |
Agency bonds | | | — | | | | — | | | | (253 | ) | | | 1,702 | | | | (253 | ) | | | 1,702 | |
Corporate debt | | | (2,570 | ) | | | 30,555 | | | | (2,631 | ) | | | 24,944 | | | | (5,201 | ) | | | 55,499 | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
MBS agency | | | (5,079 | ) | | | 40,099 | | | | (8,204 | ) | | | 33,064 | | | | (13,283 | ) | | | 73,163 | |
MBS non-agency | | | (3,956 | ) | | | 51,994 | | | | (3,877 | ) | | | 41,311 | | | | (7,833 | ) | | | 93,305 | |
Total available for sale | | $ | (27,459 | ) | | $ | 204,141 | | | $ | (21,156 | ) | | $ | 119,642 | | | $ | (48,615 | ) | | $ | 323,783 | |
There were 32 available-for-sale securities with unrealized losses of less than one year, and 151 available-for-sale securities with an unrealized loss of more than one year at March 31, 2023. There were 113 available-for-sale securities with unrealized losses of less than one year, and 69 available-for-sale securities with an unrealized loss of more than one year at December 31, 2022. Management believes that the unrealized losses on our investment securities relate principally to the general change in interest rates, market liquidity and demand, and market volatility that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. We do not believe the unrealized losses on our securities are related to deterioration in credit quality. 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 that it is unlikely that we will be required to sell these investments prior to a market price recovery or maturity. Based on the Company’s evaluation of these securities, no credit impairment was recorded at March 31, 2023, or December 31, 2022.
The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.
| | March 31, 2023 | |
| | Available-for-Sale | |
| | Amortized Cost | | | Estimated Fair Value | |
| | (In thousands) | |
Mortgage-backed securities: | | | | | | | | |
Due within one year | | $ | 22,543 | | | $ | 22,169 | |
Due after one through five years | | | 20,065 | | | | 19,321 | |
Due after five through ten years | | | 13,349 | | | | 12,238 | |
Due after ten years | | | 132,114 | | | | 114,196 | |
Total mortgage-backed securities | | | 188,071 | | | | 167,924 | |
All other investment securities: | | | | | | | | |
Due within one year | | | — | | | | — | |
Due after one through five years | | | 20,705 | | | | 19,173 | |
Due after five through ten years | | | 64,126 | | | | 57,465 | |
Due after ten years | | | 100,007 | | | | 84,524 | |
Total all other investment securities | | | 184,838 | | | | 161,162 | |
Total investment securities | | $ | 372,909 | | | $ | 329,086 | |
| | December 31, 2022 | |
| | Available-for-Sale | |
| | Amortized Cost | | | Estimated Fair Value | |
| | (In thousands) | |
Mortgage-backed securities: | | | | | | | | |
Due within one year | | $ | 13,762 | | | $ | 13,490 | |
Due after one through five years | | | 28,890 | | | | 27,808 | |
Due after five through ten years | | | 13,436 | | | | 12,165 | |
Due after ten years | | | 133,981 | | | | 115,491 | |
Total mortgage-backed securities | | | 190,069 | | | | 168,954 | |
All other investment securities: | | | | | | | | |
Due within one year | | | — | | | | — | |
Due after one through five years | | | 20,700 | | | | 18,957 | |
Due after five through ten years | | | 64,211 | | | | 57,523 | |
Due after ten years | | | 100,203 | | | | 81,135 | |
Total all other investment securities | | | 185,114 | | | | 157,615 | |
Total investment securities | | $ | 375,183 | | | $ | 326,569 | |
Sales of securities available-for-sale for the periods shown are summarized as follows:
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
| | (In thousands) | |
Proceeds from sales | | $ | — | | | $ | 10,452 | |
Gross realized gains | | | — | | | | 128 | |
Gross realized losses | | | — | | | | (2 | ) |
Note 3 - Loans Receivable
The Company has defined its loan portfolio into three segments that reflect the structure of the lending function, the Company's strategic plan and the manner in which management monitors performance and credit quality. The three loan portfolio segments are: Real Estate Loans, Consumer Loans and Commercial Business Loans. These segments are further disaggregated into classes based on similar attributes and risk characteristics.
Loan amounts are net of unearned loan fees in excess of unamortized costs and premiums of $13.8 million as of March 31, 2023 and $13.2 million as of December 31, 2022. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $4.9 million as of March 31, 2023 and $4.7 million as of December 31, 2022, and was reported in accrued interest receivable on the consolidated balance sheets.
The amortized cost of loans receivable, net of ACLL, consisted of the following at the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
| | (In thousands) | |
Real Estate: | | | | | | | | |
One-to-four family | | $ | 354,522 | | | $ | 343,559 | |
Multi-family | | | 284,863 | | | | 252,745 | |
Commercial real estate | | | 373,013 | | | | 388,884 | |
Construction and land | | | 161,662 | | | | 193,646 | |
Total real estate loans | | | 1,174,060 | | | | 1,178,834 | |
Consumer: | | | | | | | | |
Home equity | | | 54,116 | | | | 52,877 | |
Auto and other consumer | | | 251,302 | | | | 238,913 | |
Total consumer loans | | | 305,418 | | | | 291,790 | |
Commercial business loans | | | 99,986 | | | | 76,927 | |
Total loans receivable | | | 1,579,464 | | | | 1,547,551 | |
Less: | | | | | | | | |
Allowance for credit losses on loans (1) | | | 17,396 | | | | 16,116 | |
Total loans receivable, net | | $ | 1,562,068 | | | $ | 1,531,435 | |
(1) Allowance for credit losses on loans in 2023 reported using the CECL method and in 2022 reported using the incurred loss method.
Nonaccrual Loans. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.
The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated:
| | March 31, 2023 | | | December 31, 2022 | |
| | Collateral Dependent Loans | | | Non-Collateral Dependent Loans | | | Total Nonaccrual Loans | | | Nonaccrual (1) | |
| | (In thousands) | |
One-to-four family | | $ | 1,154 | | | $ | 332 | | | $ | 1,486 | | | $ | 954 | |
Commercial real estate | | | 46 | | | | — | | | | 46 | | | | 53 | |
Construction and land | | | — | | | | 14 | | | | 14 | | | | 15 | |
Home equity | | | 32 | | | | 274 | | | | 306 | | | | 196 | |
Auto and other consumer | | | — | | | | 781 | | | | 781 | | | | 575 | |
Total nonaccrual loans | | $ | 1,232 | | | $ | 1,401 | | | $ | 2,633 | | | $ | 1,793 | |
(1) Presentation of December 31, 2022, balances is in accordance with pre-CECL disclosure requirements. | |
Interest income recognized on a cash basis on nonaccrual loans for the three months ended March 31, 2023, was $9,000.
Prior to the implementation of CECL, the Bank categorized loans as performing or nonperforming based on payment activity. Loans that were more than 90 days past due and nonaccrual loans were considered nonperforming.
The following table represents the credit risk profile based on payment activity by class of loans as of December 31, 2022, in accordance with pre-CECL disclosure requirements:
| | Nonperforming | | | Performing | | | Total | |
| | (In thousands) | |
Real Estate: | | | | | | | | | | | | |
One-to-four family | | $ | 954 | | | $ | 342,605 | | | $ | 343,559 | |
Multi-family | | | — | | | | 252,745 | | | | 252,745 | |
Commercial real estate | | | 53 | | | | 388,831 | | | | 388,884 | |
Construction and land | | | 15 | | | | 193,631 | | | | 193,646 | |
Consumer: | | | | | | | | | | | | |
Home equity | | | 196 | | | | 52,681 | | | | 52,877 | |
Auto and other consumer | | | 575 | | | | 238,338 | | | | 238,913 | |
Commercial business | | | — | | | | 76,927 | | | | 76,927 | |
Total loans | | $ | 1,793 | | | $ | 1,545,758 | | | $ | 1,547,551 | |
Past due loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. There were no loans past due 90 days or more and still accruing interest at March 31, 2023 or December 31, 2022.
The following table presents the amortized cost of past due loans by segment and class as of March 31, 2023:
| | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total | | | | | | | | | |
| | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Total Loans | |
| | (In thousands) | |
Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
One-to-four family | | $ | 403 | | | $ | 492 | | | $ | 620 | | | $ | 1,515 | | | $ | 353,007 | | | $ | 354,522 | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | 284,863 | | | | 284,863 | |
Commercial real estate | | | — | | | | — | | | | — | | | | — | | | | 373,013 | | | | 373,013 | |
Construction and land | | | 18 | | | | — | | | | 18 | | | | 36 | | | | 161,626 | | | | 161,662 | |
Total real estate loans | | | 421 | | | | 492 | | | | 638 | | | | 1,551 | | | | 1,172,509 | | | | 1,174,060 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | 63 | | | | — | | | | 92 | | | | 155 | | | | 53,961 | | | | 54,116 | |
Auto and other consumer | | | 1,127 | | | | 291 | | | | 766 | | | | 2,184 | | | | 249,118 | | | | 251,302 | |
Total consumer loans | | | 1,190 | | | | 291 | | | | 858 | | | | 2,339 | | | | 303,079 | | | | 305,418 | |
Commercial business loans | | | — | | | | — | | | | — | | | | — | | | | 99,986 | | | | 99,986 | |
Total loans | | $ | 1,611 | | | $ | 783 | | | $ | 1,496 | | | $ | 3,890 | | | $ | 1,575,574 | | | $ | 1,579,464 | |
The following table presents the amortized cost of past due loans by segment and class as of December 31, 2022, in accordance with pre-CECL disclosure requirements:
| | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total | | | | | | | | | |
| | Past Due | | | Past Due | | | Past Due | | | Past Due | | | Current | | | Total Loans | |
| | (In thousands) | |
Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
One-to-four family | | $ | 1,449 | | | $ | 155 | | | $ | 652 | | | $ | 2,256 | | | $ | 341,303 | | | $ | 343,559 | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | 252,745 | | | | 252,745 | |
Commercial real estate | | | — | | | | — | | | | — | | | | — | | | | 388,884 | | | | 388,884 | |
Construction and land | | | — | | | | 18 | | | | — | | | | 18 | | | | 193,628 | | | | 193,646 | |
Total real estate loans | | | 1,449 | | | | 173 | | | | 652 | | | | 2,274 | | | | 1,176,560 | | | | 1,178,834 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity | | | 153 | | | | — | | | | 11 | | | | 164 | | | | 52,713 | | | | 52,877 | |
Auto and other consumer | | | 1,390 | | | | 698 | | | | 557 | | | | 2,645 | | | | 236,268 | | | | 238,913 | |
Total consumer loans | | | 1,543 | | | | 698 | | | | 568 | | | | 2,809 | | | | 288,981 | | | | 291,790 | |
Commercial business loans | | | — | | | | — | | | | — | | | | — | | | | 76,927 | | | | 76,927 | |
Total loans | | $ | 2,992 | | | $ | 871 | | | $ | 1,220 | | | $ | 5,083 | | | $ | 1,542,468 | | | $ | 1,547,551 | |
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 paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank 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 the Bank classifies problem assets as either substandard or doubtful, it may establish a specific allowance to address the risk specifically or allow the loss to be addressed in the general allowance. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities but that, unlike specific allowances, have not been specifically allocated to certain problem assets. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose the Bank to enough risk to warrant classification as substandard or doubtful but do possess identified weaknesses are designated as either watch or special mention assets; risk ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are considered pass graded loans and are rated 1-3 in our risk rating system.
The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of March 31, 2023. Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.
| | Term Loans by Year of Origination (1) | | | Revolving | | | Total | |
| | 2023 | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | Prior | | | Loans | | | Loans | |
| | (In thousands) | |
One-to-four family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,093 | | | $ | 71,982 | | | $ | 112,627 | | | $ | 76,012 | | | $ | 14,469 | | | $ | 74,187 | | | $ | — | | | $ | 350,370 | |
Watch | | | — | | | | — | | | | — | | | | 951 | | | | — | | | | 829 | | | | — | | | | 1,780 | |
Special Mention | | | — | | | | — | | | | — | | | | 330 | | | | — | | | | 26 | | | | — | | | | 356 | |
Substandard | | | — | | | | — | | | | — | | | | 304 | | | | 492 | | | | 1,220 | | | | — | | | | 2,016 | |
Total one-to-four family | | | 1,093 | | | | 71,982 | | | | 112,627 | | | | 77,597 | | | | 14,961 | | | | 76,262 | | | | — | | | | 354,522 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Multi-family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 9,145 | | | | 103,424 | | | | 82,664 | | | | 59,124 | | | | 2,313 | | | | 6,468 | | | | — | | | | 263,138 | |
Watch | | | — | | | | — | | | | 15,337 | | | | — | | | | 6,388 | | | | — | | | | — | | | | 21,725 | |
Total multi-family | | | 9,145 | | | | 103,424 | | | | 98,001 | | | | 59,124 | | | | 8,701 | | | | 6,468 | | | | — | | | | 284,863 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 5,428 | | | | 90,446 | | | | 108,425 | | | | 89,639 | | | | 13,797 | | | | 31,640 | | | | — | | | | 339,375 | |
Watch | | | 3,934 | | | | — | | | | 14,007 | | | | 3,288 | | | | 3,627 | | | | 1,034 | | | | — | | | | 25,890 | |
Special Mention | | | — | | | | — | | | | 6,627 | | | | — | | | | — | | | | — | | | | — | | | | 6,627 | |
Substandard | | | — | | | | 46 | | | | — | | | | 1,075 | | | | — | | | | — | | | | — | | | | 1,121 | |
Total commercial real estate | | | 9,362 | | | | 90,492 | | | | 129,059 | | | | 94,002 | | | | 17,424 | | | | 32,674 | | | | — | | | | 373,013 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Construction and Land | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 9,024 | | | | 60,673 | | | | 72,087 | | | | 1,840 | | | | 579 | | | | 2,622 | | | | — | | | | 146,825 | |
Watch | | | 819 | | | | — | | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | 837 | |
Substandard | | | 13,986 | | | | — | | | | — | | | | — | | | | — | | | | 14 | | | | — | | | | 14,000 | |
Total construction and land | | | 23,829 | | | | 60,673 | | | | 72,087 | | | | 1,840 | | | | 579 | | | | 2,654 | | | | — | | | | 161,662 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Home Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 934 | | | | 7,932 | | | | 5,315 | | | | 3,675 | | | | 1,718 | | | | 4,302 | | | | 29,844 | | | | 53,720 | |
Watch | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14 | | | | 3 | | | | 17 | |
Special Mention | | | — | | | | — | | | | — | | | | — | | | | — | | | | 73 | | | | — | | | | 73 | |
Substandard | | | — | | | | — | | | | 90 | | | | 63 | | | | — | | | | — | | | | 153 | | | | 306 | |
Total home equity | | | 934 | | | | 7,932 | | | | 5,405 | | | | 3,738 | | | | 1,718 | | | | 4,389 | | | | 30,000 | | | | 54,116 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | 11 | |
Other Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 14,479 | | | | 86,920 | | | | 73,549 | | | | 34,458 | | | | 18,091 | | | | 21,028 | | | | 418 | | | | 248,943 | |
Watch | | | — | | | | 342 | | | | 357 | | | | 272 | | | | 213 | | | | 73 | | | | — | | | | 1,257 | |
Special Mention | | | — | | | | 281 | | | | — | | | | 9 | | | | — | | | | 30 | | | | — | | | | 320 | |
Substandard | | | — | | | | 438 | | | | 171 | | | | 6 | | | | 1 | | | | 166 | | | | — | | | | 782 | |
Total other consumer | | | 14,479 | | | | 87,981 | | | | 74,077 | | | | 34,745 | | | | 18,305 | | | | 21,297 | | | | 418 | | | | 251,302 | |
Gross charge-offs during the period | | | — | | | | 835 | | | | — | | | | — | | | | 11 | | | | 85 | | | | 23 | | | | 954 | |
Commercial business | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 10,681 | | | | 31,913 | | | | 12,301 | | | | 4,149 | | | | 540 | | | | 4,283 | | | | 27,529 | | | | 91,396 | |
Watch | | | — | | | | 11 | | | | 399 | | | | 1,107 | | | | — | | | | (3 | ) | | | — | | | | 1,514 | |
Special Mention | | | — | | | | — | | | | — | | | | 312 | | | | — | | | | 2,975 | | | | 3,789 | | | | 7,076 | |
Total commercial business | | | 10,681 | | | | 31,924 | | | | 12,700 | | | | 5,568 | | | | 540 | | | | 7,255 | | | | 31,318 | | | | 99,986 | |
Gross charge-offs during the period | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Total loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | | 50,784 | | | | 453,290 | | | | 466,968 | | | | 268,897 | | | | 51,507 | | | | 144,530 | | | | 57,791 | | | | 1,493,767 | |
Watch | | | 4,753 | | | | 353 | | | | 30,100 | | | | 5,618 | | | | 10,228 | | | | 1,965 | | | | 3 | | | | 53,020 | |
Special Mention | | | — | | | | 281 | | | | 6,627 | | | | 651 | | | | — | | | | 3,104 | | | | 3,789 | | | | 14,452 | |
Substandard | | | 13,986 | | | | 484 | | | | 261 | | | | 1,448 | | | | 493 | | | | 1,400 | | | | 153 | | | | 18,225 | |
Total loans | | $ | 69,523 | | | $ | 454,408 | | | $ | 503,956 | | | $ | 276,614 | | | $ | 62,228 | | | $ | 150,999 | | | $ | 61,736 | | | $ | 1,579,464 | |
Total gross charge-offs during the period | | $ | — | | | $ | 835 | | | $ | — | | | $ | — | | | $ | 11 | | | $ | 96 | | | $ | 23 | | | $ | 965 | |
(1) Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension.
The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of December 31, 2022, in accordance with pre-CECL disclosure requirements:
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Total | |
| | (In thousands) | |
Real Estate: | | | | | | | | | | | | | | | | | | | | |
One-to-four family | | $ | 339,812 | | | $ | 2,234 | | | $ | 27 | | | $ | 1,486 | | | $ | 343,559 | |
Multi-family | | | 237,077 | | | | 15,668 | | | | — | | | | — | | | | 252,745 | |
Commercial real estate | | | 350,001 | | | | 25,586 | | | | 12,161 | | | | 1,136 | | | | 388,884 | |
Construction and land | | | 179,116 | | | | 529 | | | | — | | | | 14,001 | | | | 193,646 | |
Total real estate loans | | | 1,106,006 | | | | 44,017 | | | | 12,188 | | | | 16,623 | | | | 1,178,834 | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Home equity | | | 52,295 | | | | 372 | | | | 14 | | | | 196 | | | | 52,877 | |
Auto and other consumer | | | 238,522 | | | | 222 | | | | 75 | | | | 94 | | | | 238,913 | |
Total consumer loans | | | 290,817 | | | | 594 | | | | 89 | | | | 290 | | | | 291,790 | |
Commercial business loans | | | 66,276 | | | | 2,234 | | | | 8,417 | | | | — | | | | 76,927 | |
Total loans | | $ | 1,463,099 | | | $ | 46,845 | | | $ | 20,694 | | | $ | 16,913 | | | $ | 1,547,551 | |
Individually Evaluated Loans. The Company evaluates loans collectively for purposes of determining the ACLL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified loans made to borrowers experiencing financial difficulty, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio are evaluated individually for purposes of determining an appropriate lifetime ACLL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the ACLL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. Changes in the ACLL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.
As of March 31, 2023, $1.2 million of loans were individually evaluated with no ACLL attributed to such loans. At March 31, 2023, all individually evaluated loans were evaluated based on the underlying value of the collateral and none were evaluated using a discounted cash flow approach. All individually evaluated loans were on nonaccrual status at March 31, 2023.
Collateral Dependent Loans. Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACLL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACLL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACLL is recorded.
The following table summarizes collateral dependent loans by segment and collateral type as of March 31, 2023:
| | Collateral Type | | | | |
| | Single Family Residence | | | Warehouse | | | Total | |
| | (In thousands) | |
One-to-four family | | $ | 1,154 | | | $ | — | | | $ | 1,154 | |
Commercial real estate | | | — | | | | 46 | | | | 46 | |
Home equity | | | 32 | | | | — | | | | 32 | |
Total collateral dependent loans | | $ | 1,186 | | | $ | 46 | | | $ | 1,232 | |
Troubled debt restructuring. Prior to the implementation of CECL on January 1, 2023, a loan was identified as a troubled debt restructuring ("TDR") when a loan to a borrower who was experiencing financial difficulty was modified from its original terms and conditions in such a way that the Bank granted the borrower a concession of some kind. First Fed had granted a variety of concessions to borrowers in the form of loan modifications. The modifications were generally related to the loan's interest rate, term and payment amount or a combination thereof.
The following table is a summary of information pertaining to TDR loans included in impaired loans at the date indicated, in accordance with pre-CECL disclosure requirements:
| | December 31, 2022 | |
| | (In thousands) | |
Total TDR loans | | $ | 1,753 | |
Allowance for credit losses on loans related to TDR loans | | | 21 | |
Total nonaccrual TDR loans | | | 29 | |
There were no newly restructured, renewals, or modifications of existing TDR loans that occurred during the three months ended March 31, 2022.
There were no TDR loans that incurred a payment default within 12 months of the restructure date during the three months ended March 31, 2022.
The following table presents TDR loans by class by accrual and nonaccrual status at the date indicated, in accordance with pre-CECL disclosure requirements:
| | December 31, 2022 | |
| | Accrual | | | Nonaccrual | | | Total | |
| | (In thousands) | |
One-to-four family | | $ | 1,697 | | | $ | 29 | | | $ | 1,726 | |
Home equity | | | 27 | | | | — | | | | 27 | |
Total TDR loans | | $ | 1,724 | | | $ | 29 | | | $ | 1,753 | |
Modified Loans to Troubled Borrowers. On January 1, 2023, the Company adopted ASU 2022-02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. The Company refers to these loans as modified loans to troubled borrowers ("MLTB"). A MLTB arises from a modification made to a loan in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. GAAP requires that certain types of modifications be reported, which consist of the following: (i) principal forgiveness, (ii) interest rate reduction, (iii) other-than-insignificant payment delay, (iv) term extension, or any combination of the foregoing. The ACLL for a MLTB is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loans no longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACLL for a MLTB is determined through individual evaluation.
During the three months ended March 31, 2023, there were no MLTB.
Note 4 - Allowance for Credit Losses on Loans
The Company maintains an ACLL and an ACLU in accordance with ASC 326: Financial Instruments - Credit Losses. ASC 326 requires the Company to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents the Company’s best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACLL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The reserve is an estimate based upon factors and trends at the time the financial statements are prepared. The Company adopted ASU 2016-13 effective January 1, 2023, which increased the beginning ACLL as discussed in Note 1. The incurred loss methodology presentation is used for periods prior to the adoption of ASU 2016-13.
The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies. The Company uses a DCF methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a Remaining Life methodology. The Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. If the present value of cash flows is less than the total recorded investment, a reserve is calculated.
For each loan segment collectively measured, the baseline loss rates are calculated using the Bank's own data and peer institution data from FFIEC Call Report filings. The Bank evaluates the historical period on a quarterly basis. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost, as adjusted for balances guaranteed by governmental entities, such as the SBA or the USDA, or the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: 1) management has a reasonable expectation at the reporting date that a modification agreement will be executed with an individual borrower or 2) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segments, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment period assumption on a quarterly basis.
The CECL methodology includes consideration of the forecasted direction of the economic and business environment and its likely impact to the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets two forecasted macroeconomic factors, which are national GDP and unemployment figures. Each of the forecasted DCF segments is impacted by these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. The Company also considers other qualitative risk factors to adjust the estimated ACLL calculated by the above-mentioned model. The Company established metrics to estimate the qualitative risk factor by segment based on the identified risk.
The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Company has determined that no allowance is necessary for its home equity line of credit portfolio as it has the ability to unconditionally cancel the available lines of credit. The allowance methodology is similar to the ACLL, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class. The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (reversal of provision) for credit losses on the Consolidated Statements of Income.
The following table details activity in the allowance for credit losses on loans by class for the period shown:
| | At or For the Three Months Ended March 31, 2023 | |
| | Beginning Balance | | | Impact of Day 1 CECL Adoption | | | Adjusted Beginning Balance | | | Charge-offs | | | Recoveries | | | (Recapture of) Provision for Credit Losses | | | Ending Balance | |
| | (In thousands) | |
One-to-four family | | $ | 3,343 | | | $ | (429 | ) | | $ | 2,914 | | | $ | — | | | $ | — | | | $ | (11 | ) | | $ | 2,903 | |
Multi-family | | | 2,468 | | | | (1,449 | ) | | | 1,019 | | | | — | | | | — | | | | 26 | | | | 1,045 | |
Commercial real estate | | | 4,217 | | | | (604 | ) | | | 3,613 | | | | — | | | | — | | | | (634 | ) | | | 2,979 | |
Construction and land | | | 2,344 | | | | 1,555 | | | | 3,899 | | | | — | | | | — | | | | (1,117 | ) | | | 2,782 | |
Home equity | | | 549 | | | | 346 | | | | 895 | | | | (11 | ) | | | — | | | | 200 | | | | 1,084 | |
Auto and other consumer | | | 2,024 | | | | 2,381 | | | | 4,405 | | | | (954 | ) | | | 21 | | | | 1,217 | | | | 4,689 | |
Commercial business | | | 786 | | | | 794 | | | | 1,580 | | | | — | | | | — | | | | 334 | | | | 1,914 | |
Unallocated | | | 385 | | | | (385 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 16,116 | | | $ | 2,209 | | | $ | 18,325 | | | $ | (965 | ) | | $ | 21 | | | $ | 15 | | | $ | 17,396 | |
The decrease in the ACLL during the three months ended March 31, 2023, of $930,000 is reflective of $944,000 in net charge-offs, partially offset by a $15,000 in provision for credit losses. The provision for credit losses during the three months ended March 31, 2023, can be attributed to an improvement in the GDP assumption since the implementation of CECL at the beginning of 2023. Charge-offs during the three months ended March 31, 2023, were mainly concentrated in Splash purchased unsecured consumer loans, the indirect auto loan portfolio, and quin CoreCard program.
The following table details activity in the ALLL by class for the period shown under the incurred loss methodology:
| | At or For the Three Months Ended March 31, 2022 | |
| | 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 | | $ | 3,184 | | | $ | 1,816 | | | $ | 3,996 | | | $ | 2,672 | | | $ | 407 | | | $ | 2,221 | | | $ | 470 | | | $ | 358 | | | $ | 15,124 | |
(Recapture of) provision for loan losses | | | (177 | ) | | | 276 | | | | 42 | | | | (193 | ) | | | (19 | ) | | | 56 | | | | 56 | | | | (41 | ) | | | — | |
Charge-offs | | | — | | | | — | | | | — | | | | — | | | | — | | | | (137 | ) | | | — | | | | — | | | | (137 | ) |
Recoveries | | | 32 | | | | — | | | | — | | | | 2 | | | | 17 | | | | 89 | | | | — | | | | — | | | | 140 | |
Ending balance | | $ | 3,039 | | | $ | 2,092 | | | $ | 4,038 | | | $ | 2,481 | | | $ | 405 | | | $ | 2,229 | | | $ | 526 | | | $ | 317 | | | $ | 15,127 | |
The following table details the ALLL and loan portfolio by class and impairment method for the period shown under the incurred loss methodology:
| | At December 31, 2022 | |
| | 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 | | $ | 3,343 | | | $ | 2,468 | | | $ | 4,217 | | | $ | 2,344 | | | $ | 549 | | | $ | 2,024 | | | $ | 786 | | | $ | 385 | | | $ | 16,116 | |
General reserve | | | 3,321 | | | | 2,468 | | | | 4,217 | | | | 2,343 | | | | 545 | | | | 2,019 | | | | 786 | | | | 385 | | | | 16,084 | |
Specific reserve | | | 22 | | | | — | | | | — | | | | 1 | | | | 4 | | | | 5 | | | | — | | | | — | | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross loans | | $ | 343,825 | | | $ | 253,551 | | | $ | 390,246 | | | $ | 194,646 | | | $ | 52,322 | | | $ | 222,794 | | | $ | 76,996 | | | $ | — | | | $ | 1,534,380 | |
Loans collectively evaluated (1) | | | 341,171 | | | | 253,551 | | | | 390,196 | | | | 194,630 | | | | 52,100 | | | | 222,702 | | | | 76,996 | | | | — | | | | 1,531,346 | |
Loans individually evaluated (2) | | | 2,654 | | | | — | | | | 50 | | | | 16 | | | | 222 | | | | 92 | | | | — | | | | — | | | | 3,034 | |
(1) Loans collectively evaluated for general reserves. |
(2) Loans individually evaluated for specific reserves. |
Impaired loans incurred loss model. Prior to the implementation of CECL on January 1, 2023, a loan was considered impaired when the Bank has determined that it may be unable to collect payments of principal or interest when due under the contractual terms of the loan. Impairment was measured on a loan-by-loan basis for all loans in the portfolio except smaller balance homogeneous loans and certain qualifying TDR loans.
The following table provides additional information on loans individually evaluated for impairment by portfolio class at the date indicated under the incurred loss methodology. Recorded investment includes the unpaid principal balance or carrying amount of loans less charge-offs.
| | December 31, 2022 | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Allowance | |
| | (In thousands) | |
With no allowance recorded: | | | | | | | | | | | | |
One-to-four family | | $ | 666 | | | $ | 705 | | | $ | — | |
Commercial real estate | | | 50 | | | | 149 | | | | — | |
Construction and land | | | — | | | | 14 | | | | — | |
Auto and other consumer | | | — | | | | 2 | | | | — | |
Total | | | 716 | | | | 870 | | | | — | |
With an allowance recorded: | | | | | | | | | | | | |
One-to-four family | | | 1,988 | | | | 2,129 | | | | 22 | |
Construction and land | | | 16 | | | | 19 | | | | 1 | |
Home equity | | | 222 | | | | 224 | | | | 4 | |
Auto and other consumer | | | 92 | | | | 95 | | | | 5 | |
Total | | | 2,318 | | | | 2,467 | | | | 32 | |
Total impaired loans: | | | | | | | | | | | | |
One-to-four family | | | 2,654 | | | | 2,834 | | | | 22 | |
Commercial real estate | | | 50 | | | | 149 | | | | — | |
Construction and land | | | 16 | | | | 33 | | | | 1 | |
Home equity | | | 222 | | | | 224 | | | | 4 | |
Auto and other consumer | | | 92 | | | | 97 | | | | 5 | |
Total | | $ | 3,034 | | | $ | 3,337 | | | $ | 32 | |
The following table presents the average recorded investment in loans individually evaluated for impairment and the related interest income recognized for the period shown under the incurred loss methodology:
| | Three Months Ended | |
| | March 31, 2022 | |
| | Average Recorded Investment | | | Interest Income Recognized | |
| | (In thousands) | |
With no allowance recorded: | | | | | | | | |
One-to-four family | | $ | 210 | | | $ | 4 | |
Commercial real estate | | | 69 | | | | — | |
Construction and land | | | — | | | | 1 | |
Home equity | | | 9 | | | | 17 | |
Auto and other consumer | | | 252 | | | | 7 | |
Total | | | 540 | | | | 29 | |
With an allowance recorded: | | | | | | | | |
One-to-four family | | | 2,030 | | | | 41 | |
Construction and land | | | 22 | | | | 1 | |
Home equity | | | 303 | | | | 4 | |
Auto and other consumer | | | 217 | | | | 3 | |
Total | | | 2,572 | | | | 49 | |
Total impaired loans: | | | | | | | | |
One-to-four family | | | 2,240 | | | | 45 | |
Commercial real estate | | | 69 | | | | — | |
Construction and land | | | 22 | | | | 2 | |
Home equity | | | 312 | | | | 21 | |
Auto and other consumer | | | 469 | | | | 10 | |
Total | | $ | 3,112 | | | $ | 78 | |
Interest income recognized on a cash basis on impaired loans for the three months ended March 31, 2022, was $66,000 under the incurred loss methodology.
Allowance for Credit Losses on Unfunded Loan Commitments. The Company maintains an ACL for off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities on the consolidated balance sheets. The allowance for off-balance sheet commitments was $1.3 million at March 31, 2023, a decrease compared to $1.9 million at the adoption of CECL on January 1, 2023. The provision recapture for off-balance sheet commitments of $515,000 was attributable to lower unfunded commitments, primarily due to construction loan disbursements.
Note 5 - Deposits
Deposits and weighted-average interest rates at the dates indicated are as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
Amount |
|
|
Weighted-Average Interest Rate |
|
|
Amount |
|
|
Weighted-Average Interest Rate |
|
|
|
(Dollars in thousands) |
|
Noninterest-bearing demand deposits |
|
$ |
292,119 |
|
|
|
— |
% |
|
$ |
315,083 |
|
|
|
— |
% |
Interest-bearing demand deposits |
|
|
189,187 |
|
|
|
0.47 |
% |
|
|
193,558 |
|
|
|
0.01 |
% |
Money market accounts |
|
|
402,760 |
|
|
|
0.86 |
% |
|
|
473,009 |
|
|
|
0.58 |
% |
Savings accounts |
|
|
242,117 |
|
|
|
1.00 |
% |
|
|
200,920 |
|
|
|
0.26 |
% |
Certificates of deposit |
|
|
468,025 |
|
|
|
3.02 |
% |
|
|
381,685 |
|
|
|
2.19 |
% |
Total deposits |
|
$ |
1,594,208 |
|
|
|
1.31 |
% |
|
$ |
1,564,255 |
|
|
|
0.74 |
% |
Brokered certificates of deposit of $134.5 million and $133.9 million are included in the March 31, 2023 and December 31, 2022 certificates of deposit totals above, respectively. The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at March 31, 2023 and December 31, 2022, were $137.7 million and $96.6 million, respectively.
Maturities of certificates at the dates indicated are as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
(In thousands) |
|
Within one year or less |
|
$ |
317,003 |
|
|
$ |
262,189 |
|
After one year through two years |
|
|
120,850 |
|
|
|
69,967 |
|
After two years through three years |
|
|
19,213 |
|
|
|
37,032 |
|
After three years through four years |
|
|
6,814 |
|
|
|
7,409 |
|
After four years through five years |
|
|
4,145 |
|
|
|
5,088 |
|
Total certificates of deposit |
|
$ |
468,025 |
|
|
$ |
381,685 |
|
At March 31, 2023 and December 31, 2022, deposits included $101.4 million and $93.3 million, respectively, in public fund deposits. Investment securities with a carrying value of $59.2 million and $57.1 million were pledged as collateral for these deposits at March 31, 2023 and December 31, 2022, respectively. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at March 31, 2023 and December 31, 2022, were funds held by federally recognized tribes totaling $18.6 million and $10.3 million, respectively. Investment securities with a carrying value of $23.2 million and $23.6 million were pledged as collateral for these deposits at March 31, 2023 and December 31, 2022, respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs.
Interest on deposits by type for the periods shown was as follows:
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(In thousands) |
|
Demand deposits |
|
$ |
194 |
|
|
$ |
17 |
|
Money market accounts |
|
|
776 |
|
|
|
298 |
|
Savings accounts |
|
|
376 |
|
|
|
26 |
|
Certificates of deposit |
|
|
3,007 |
|
|
|
376 |
|
Total interest expense on deposits |
|
$ |
4,353 |
|
|
$ |
717 |
|
Note 6 - Borrowings
First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 45% of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements.
First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until paid. First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of funds. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $765.3 million and $753.7 million at March 31, 2023 and December 31, 2022, respectively.
First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco ("FRB") to utilize the discount window for short-term borrowing. Available borrowing capacity was $8.7 million and $8.6 million at March 31, 2023 and December 31, 2022, respectively. No funds have been borrowed to date. Investment securities with a carrying value of $9.1 million and $9.0 million were pledged to the FRB at March 31, 2023 and December 31, 2022, respectively.
On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. The Company used the net proceeds of the offering for general corporate purposes.
On May 20, 2022, First Northwest entered into a borrowing arrangement with NexBank for a $20.0 million revolving line of credit. Borrowings are secured by a blanket lien on First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments. The line of credit matures on May 19, 2023, with the option for two 364-day extensions.
The following table sets forth information regarding our borrowings at the end of and during the three months ended March 31, 2023. The table includes both long- and short-term borrowings.
| | FHLB Long-Term Advances | | | FHLB Overnight Variable-Rate Advances | | | FHLB Short-Term Fixed-Rate Advances | | | Line of Credit | | | Subordinated Debt, net | |
| | (Dollars in thousands) | |
Balance outstanding | | $ | 85,000 | | | $ | 189,000 | | | $ | 55,000 | | | $ | 11,000 | | | $ | 39,377 | |
Maximum outstanding at any month-end | | | 85,000 | | | | 189,000 | | | | 55,000 | | | | 11,000 | | | | 39,377 | |
Average monthly outstanding during the period | | | 80,000 | | | | 158,667 | | | | 26,667 | | | | 10,933 | | | | 39,365 | |
Weighted-average daily interest rates | | | | | | | | | | | | | | | | | | | | |
Annual | | | 1.72 | % | | | 4.77 | % | | | 4.64 | % | | | 8.74 | % | | | 4.06 | % |
Period End | | | 2.08 | % | | | 4.91 | % | | | 5.05 | % | | | 8.50 | % | | | 4.06 | % |
The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at March 31, 2023 are as follows:
| | Amount | | | Weighted- Average Interest Rate | |
| | (Dollars in thousands) | |
Within one year or less | | $ | 15,000 | | | | 1.47 | % |
After one year through two years | | | 35,000 | | | | 2.81 | |
After two years through three years | | | 15,000 | | | | 1.49 | |
After three years through four years | | | 10,000 | | | | 1.63 | |
After four years through five years | | | 10,000 | | | | 1.76 | |
Total FHLB long-term advances | | $ | 85,000 | | | | 2.08 | % |
The following table sets forth information regarding our borrowings at the end of and during the year ended December 31, 2022. The table includes both long- and short-term borrowings.
| | FHLB Long-Term Advances | | | FHLB Overnight Variable-Rate Advances | | | FHLB Short-Term Fixed-Rate Advances | | | Line of Credit | | | Subordinated Debt, net | |
| | (Dollars in thousands) | |
Balance outstanding | | $ | 80,000 | | | $ | 144,000 | | | $ | 10,000 | | | $ | 12,000 | | | $ | 39,358 | |
Maximum outstanding at any month-end | | | 80,000 | | | | 206,000 | | | | 42,500 | | | | 12,000 | | | | 39,358 | |
Average monthly outstanding during the period | | | 80,000 | | | | 90,983 | | | | 15,208 | | | | 5,770 | | | | 39,312 | |
Weighted-average daily interest rates | | | | | | | | | | | | | | | | | | | | |
Annual | | | 1.52 | % | | | 2.83 | % | | | 1.82 | % | | | 6.76 | % | | | 4.01 | % |
Period End | | | 1.52 | % | | | 4.30 | % | | | 2.12 | % | | | 8.00 | % | | | 4.01 | % |
Note 7 - Income Tax
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.
The effective tax rates were 19.3% and 18.1% for the three months ended March 31, 2023 and 2022, respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2023 and 2022 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. In the second quarter of 2022, the Company began accruing a provision for income tax for certain states in which we have employees and collateral for loans, thereby creating a nexus in those states for income tax purposes. The additional accrual for state income tax results in a higher effective tax rate.
Note 8 - Earnings per Common Share
The two-class method is used for computing basic and diluted earnings per share. Under the two-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.
The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the three months ended March 31, 2023 and 2022.
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(In thousands, except share data) |
|
Net income: |
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,528 |
|
|
$ |
2,806 |
|
Earnings allocated to participating securities |
|
|
(20 |
) |
|
|
(70 |
) |
Earnings allocated to common shareholders |
|
$ |
3,508 |
|
|
$ |
2,736 |
|
Basic: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
9,703,115 |
|
|
|
10,040,090 |
|
Weighted average unvested restricted stock awards |
|
|
(165,333 |
) |
|
|
(234,953 |
) |
Weighted average unallocated ESOP shares |
|
|
(626,488 |
) |
|
|
(674,969 |
) |
Total basic weighted average common shares outstanding |
|
|
8,911,294 |
|
|
|
9,130,168 |
|
Diluted: |
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
8,911,294 |
|
|
|
9,130,168 |
|
Dilutive restricted stock awards |
|
|
28,307 |
|
|
|
95,200 |
|
Total diluted weighted average common shares outstanding |
|
|
8,939,601 |
|
|
|
9,225,368 |
|
Basic earnings per common share |
|
$ |
0.39 |
|
|
$ |
0.30 |
|
Diluted earnings per common share |
|
$ |
0.39 |
|
|
$ |
0.30 |
|
Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At March 31, 2023 and 2022, antidilutive shares as calculated under the treasury stock method totaled 7,934 and 17, respectively.
Note 9 - Employee Benefits
Employee Stock Ownership Plan
In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month period are eligible to participate in the ESOP.
Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. No principal and interest payment was made by the ESOP during the three months ended March 31, 2023.
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 March 31, 2023 and 2022, was $187,000 and $291,000, respectively.
Shares issued to the ESOP as of the dates indicated are as follows:
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
|
|
(Dollars in thousands) |
|
Allocated shares |
|
|
386,285 |
|
|
|
386,285 |
|
Committed to be released shares |
|
|
39,663 |
|
|
|
26,442 |
|
Unallocated shares |
|
|
622,081 |
|
|
|
635,302 |
|
Total ESOP shares issued |
|
|
1,048,029 |
|
|
|
1,048,029 |
|
Fair value of unallocated shares |
|
$ |
7,154 |
|
|
$ |
9,758 |
|
Note 10 - Stock-based Compensation
In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. As of March 31, 2023, there were 282,718 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares.
As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made. As of March 31, 2023, there were no shares available for grant under the 2015 EIP. At this date, there are 46,500 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions.
There were 27,049 and 42,243 shares of restricted stock awarded, respectively, during the three months ended March 31, 2023 and 2022. Awarded shares of restricted stock vest ratably over periods ranging from one to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period.
For the three months ended March 31, 2023 and 2022, total compensation expense for the equity incentive plans was $391,000 and $411,000, respectively. Included in the compensation expense for the three months ended March 31, 2023 and 2022, was directors' equity compensation of $58,000 and $55,000, respectively.
The following tables provide a summary of changes in non-vested restricted stock awards for the period shown:
|
|
For the Three Months Ended |
|
|
|
March 31, 2023 |
|
|
|
Shares |
|
|
Weighted-Average Grant Date Fair Value |
|
Non-vested at January 1, 2023 |
|
|
166,839 |
|
|
$ |
17.78 |
|
Granted |
|
|
27,049 |
|
|
|
14.38 |
|
Vested |
|
|
(32,700 |
) |
|
|
19.85 |
|
Canceled (1) |
|
|
(10,334 |
) |
|
|
19.85 |
|
Forfeited |
|
|
(1,800 |
) |
|
|
18.17 |
|
Non-vested at March 31, 2023 |
|
|
149,054 |
|
|
$ |
16.56 |
|
|
|
|
|
|
|
|
|
|
(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 participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue. |
|
As of March 31, 2023, there was $2.0 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 1.58 years.
Note 11 - 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.
The Company used the following methods to measure fair value on a recurring and nonrecurring basis.
Securities available for sale: Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.
Partnership investments: Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level 2, when available. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3.
Sold loan servicing rights, at fair value: The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation.
Loans receivable, net: 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.
Interest rate swap derivative: The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2). The Company’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third-party pricing services without adjustment.
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 and liabilities measured at fair value on a recurring basis at the dates indicated:
| | March 31, 2023 | |
| | Quoted Prices in Active Markets for Identical Assets or Liabilities | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Financial Assets | | | (In thousands) | |
Securities available-for-sale | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 5,027 | | | $ | 96,883 | | | $ | — | | | $ | 101,910 | |
U.S. Treasury notes | | | 2,390 | | | | — | | | | — | | | | 2,390 | |
Agency bonds | | | — | | | | 1,745 | | | | — | | | | 1,745 | |
Corporate debt | | | 5,452 | | | | 49,665 | | | | — | | | | 55,117 | |
MBS agency | | | — | | | | 74,946 | | | | — | | | | 74,946 | |
MBS non-agency | | | — | | | | 63,356 | | | | 29,622 | | | | 92,978 | |
Sold loan servicing rights | | | — | | | | — | | | | 4,224 | | | | 4,224 | |
Partnership investments | | | — | | | | — | | | | 12,556 | | | | 12,556 | |
Total assets measured at fair value | | $ | 12,869 | | | $ | 286,595 | | | $ | 46,402 | | | $ | 345,866 | |
Financial Liabilities | | | | | | | | | | | | | | | | |
Interest rate swap derivative | | $ | — | | | $ | 1,697 | | | $ | — | | | $ | 1,697 | |
| | December 31, 2022 | |
| | Quoted Prices in Active Markets for Identical Assets or Liabilities | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | | | | | |
| | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Financial Assets | | | (In thousands) | |
Securities available-for-sale | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 4,913 | | | $ | 93,137 | | | $ | — | | | $ | 98,050 | |
U.S. Treasury notes | | | 2,364 | | | | — | | | | — | | | | 2,364 | |
Agency bonds | | | — | | | | 1,702 | | | | — | | | | 1,702 | |
Corporate debt | | | 5,326 | | | | 50,173 | | | | — | | | | 55,499 | |
MBS agency | | | — | | | | 75,648 | | | | — | | | | 75,648 | |
MBS non-agency | | | — | | | | 63,707 | | | | 29,599 | | | | 93,306 | |
Sold loan servicing rights | | | — | | | | — | | | | 3,887 | | | | 3,887 | |
Partnership investments | | | — | | | | — | | | | 12,563 | | | | 12,563 | |
Total assets measured at fair value | | $ | 12,603 | | | $ | 284,367 | | | $ | 46,049 | | | $ | 343,019 | |
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the date indicated:
March 31, 2023 | | Fair Value (In thousands) | | Valuation Technique | | Unobservable Input (1) | | Range (Weighted Average) | |
Sold loan servicing rights | | $4,224 | | Discounted cash flow | | Constant prepayment rate | | 4.61% - 22.63% (6.65%) | |
| | | | | | | Discount rate | | | 11.38% - 14.41% (12.48%) | |
MBS non-agency | | $29,622 | | Consensus pricing | | Offered quotes | | 97 - 99 | |
| | | | | | | Comparability adjustments (%) | | | -1.2% - +1.0% | |
(1) Unobservable inputs were weighted by the relative fair value of the instruments. | |
The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates indicated:
| | As of or For the Three Months Ended March 31, 2023 | |
| | Balance at beginning of period | | | Servicing rights that result from transfers and sale of financial assets | | | Changes in fair value due to changes in model inputs or assumptions (1) | | | Balance at end of period | |
| | (In thousands) | |
Sold loan servicing rights | | $ | 3,887 | | | $ | 68 | | | $ | 269 | | | $ | 4,224 | |
(1) Represents changes due to collection/realization of expected cash flows and curtailments. | |
| | As of or For the Three Months Ended March 31, 2022 | |
| | Election of Fair Value Option for Servicing Rights at January 1, 2022 | | | Servicing rights that result from transfers and sale of financial assets | | | Changes in fair value due to changes in model inputs or assumptions (1) | | | Balance at end of period | |
| | (In thousands) | |
Sold loan servicing rights | | $ | 3,820 | | | $ | 56 | | | $ | 170 | | | $ | 4,046 | |
(1) Represents changes due to collection/realization of expected cash flows and curtailments. | |
| | As of or For the Three Months Ended March 31, 2023 | |
| | Balance at beginning of period | | | Transfers Into Level 3 | | | Purchases | | | Unrealized Gains (Losses) | | | Balance at end of period | |
| | (In thousands) | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | |
MBS non-agency | | $ | 29,599 | | | $ | — | | | $ | — | | | $ | 23 | | | $ | 29,622 | |
Partnership investments | | | 12,563 | | | | — | | | | — | | | | (7 | ) | | | 12,556 | |
| |
| | As of or For the Year Ended December 31, 2022 | |
| | Balance at beginning of period | | | Transfers Into Level 3 (1) | | | Purchases | | | Unrealized Gains | | | Balance at end of period | |
| | (In thousands) | |
Securities available for sale: | | | | | | | | | | | | | | | | | | | | |
MBS non-agency | | $ | — | | | $ | 29,599 | | | $ | — | | | $ | — | | | $ | 29,599 | |
Sold loan servicing rights | | | — | | | | 12,490 | | | | — | | | | 73 | | | | 12,563 | |
(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no market activity for the investments. | |
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.
The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the date indicated:
| | December 31, 2022 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (In thousands) | |
Impaired loans | | $ | — | | | $ | — | | | $ | 3,034 | | | $ | 3,034 | |
At March 31, 2023 and December 31, 2022, there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs.
The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:
| | March 31, 2023 | |
| | | | | | | | | | Fair Value Measurements Using: | |
| | Carrying Amount | | | Estimated Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In thousands) | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 140,617 | | | $ | 140,617 | | | $ | 140,617 | | | $ | — | | | $ | — | |
Investment securities available for sale | | | 329,086 | | | | 329,086 | | | | 12,869 | | | | 286,595 | | | | 29,622 | |
Loans receivable, net | | | 1,562,068 | | | | 1,468,281 | | | | — | | | | — | | | | 1,468,281 | |
FHLB stock | | | 15,602 | | | | 15,602 | | | | — | | | | 15,602 | | | | — | |
Accrued interest receivable | | | 7,205 | | | | 7,205 | | | | — | | | | 7,205 | | | | — | |
Sold loan servicing rights, at fair value | | | 4,224 | | | | 4,224 | | | | — | | | | — | | | | 4,224 | |
Partnership investments | | | 12,556 | | | | 12,556 | | | | — | | | | — | | | | 12,556 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 1,126,183 | | | $ | 1,126,183 | | | $ | 1,126,183 | | | $ | — | | | $ | — | |
Time deposits | | | 468,025 | | | | 460,747 | | | | — | | | | — | | | | 460,747 | |
FHLB Borrowings | | | 329,000 | | | | 324,086 | | | | — | | | | — | | | | 324,086 | |
Line of Credit | | | 11,000 | | | | 11,039 | | | | — | | | | — | | | | 11,039 | |
Subordinated debt, net | | | 39,377 | | | | 40,819 | | | | — | | | | — | | | | 40,819 | |
Accrued interest payable | | | 508 | | | | 508 | | | | — | | | | 508 | | | | — | |
Interest rate swap derivative | | | 1,697 | | | | 1,697 | | | | — | | | | 1,697 | | | | — | |
| | December 31, 2022 | |
| | | | | | | | | | Fair Value Measurements Using: | |
| | Carrying Amount | | | Estimated Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | (In thousands) | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 45,596 | | | $ | 45,596 | | | $ | 45,596 | | | $ | — | | | $ | — | |
Investment securities available for sale | | | 326,569 | | | | 326,569 | | | | 12,603 | | | | 284,367 | | | | 29,599 | |
Loans held for sale | | | 597 | | | | 597 | | | | — | | | | 597 | | | | — | |
Loans receivable, net | | | 1,531,435 | | | | 1,461,470 | | | | — | | | | — | | | | 1,461,470 | |
FHLB stock | | | 11,681 | | | | 11,681 | | | | — | | | | 11,681 | | | | — | |
Accrued interest receivable | | | 6,743 | | | | 6,743 | | | | — | | | | 6,743 | | | | — | |
Sold loan servicing rights, at fair value | | | 3,887 | | | | 3,887 | | | | — | | | | — | | | | 3,887 | |
Partnership investments | | | 12,563 | | | | 12,563 | | | | — | | | | — | | | | 12,563 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 1,182,570 | | | $ | 1,182,570 | | | $ | 1,182,570 | | | $ | — | | | $ | — | |
Time deposits | | | 381,685 | | | | 372,865 | | | | — | | | | — | | | | 372,865 | |
FHLB Borrowings | | | 234,000 | | | | 229,103 | | | | — | | | | — | | | | 229,103 | |
Line of Credit | | | 12,000 | | | | 12,034 | | | | — | | | | — | | | | 12,034 | |
Subordinated debt, net | | | 39,358 | | | | 38,841 | | | | — | | | | — | | | | 38,841 | |
Accrued interest payable | | | 455 | | | | 455 | | | | — | | | | 455 | | | | — | |
Note 12- Change in Accumulated Other Comprehensive Income ("AOCI")
Our AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:
| | Unrealized Gains and Losses on Available-for-Sale Securities | | | Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization | | | Unrealized Gains and Losses on Derivatives | | | Total | |
| | (In thousands) | |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | | $ | 2,140 | | | $ | (1,852 | ) | | $ | — | | | $ | 288 | |
Other comprehensive loss before reclassification | | | (15,370 | ) | | | — | | | | — | | | | (15,370 | ) |
Amounts reclassified from accumulated other comprehensive income | | | (100 | ) | | | 29 | | | | — | | | | (71 | ) |
Net other comprehensive (loss) income | | | (15,470 | ) | | | 29 | | | | — | | | | (15,441 | ) |
Balance at March 31, 2022 | | $ | (13,330 | ) | | $ | (1,823 | ) | | $ | — | | | $ | (15,153 | ) |
| | | | | | | | | | | | | | | | |
Balance at December 31, 2022 | | $ | (38,404 | ) | | $ | (2,139 | ) | | $ | — | | | $ | (40,543 | ) |
Other comprehensive income before reclassification | | | 3,762 | | | | — | | | | (1,357 | ) | | | 2,405 | |
Amounts reclassified from accumulated other comprehensive income | | | — | | | | 30 | | | | — | | | | 30 | |
Net other comprehensive income | | | 3,762 | | | | 30 | | | | (1,357 | ) | | | 2,435 | |
Balance at March 31, 2023 | | $ | (34,642 | ) | | $ | (2,109 | ) | | $ | (1,357 | ) | | $ | (38,108 | ) |
Note 13 - Derivatives and Hedging Activities
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
As of March 31, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
Line Item in the Statement of Financial Position in Which the Hedged Item is Included |
|
Carrying Amount of the Hedged Assets/(Liabilities) |
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
|
|
|
as of March 31, 2023 |
|
|
as of March 31, 2023 |
|
|
|
(In thousands) |
|
AFS Securities (1) |
|
$ |
51,728 |
|
|
$ |
1,728 |
|
Total |
|
$ |
51,728 |
|
|
$ |
1,728 |
|
(1) These amounts include the amortized cost basis of closed portfolios of AFS securities used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At March 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $59.8 million, the cumulative basis adjustments associated with these hedging relationships was $1.7 million, and the amounts of the designated hedged items were $50 million. |
|
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2023.
|
|
Derivative Liabilities |
|
|
|
As of March 31, 2023 |
|
|
|
Notional Amount |
|
Balance Sheet Location |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
Interest Rate Products |
|
$ |
50,000 |
|
Other Liabilities |
|
$ |
1,697 |
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
|
$ |
1,697 |
|
The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 2023. There was no activity during the three months ended March 31, 2022.
|
|
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
|
|
|
2023 |
|
|
|
Interest Income |
|
|
|
(In thousands) |
|
Total amounts of income and expense line items presented in the |
|
|
|
|
statement of financial performance in which the effects of fair value or |
|
|
|
|
cash flow hedges are recorded |
|
$ |
31 |
|
|
|
|
|
|
The effects of fair value and cash flow hedging: |
|
|
|
|
Gain or (loss) on fair value hedging relationships in Subtopic 815-20 |
|
|
|
|
Interest contracts |
|
|
|
|
Hedged items |
|
$ |
1,728 |
|
Derivatives designated as hedging instruments |
|
$ |
(1,697 |
) |
Credit Risk-related Contingent Features
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this does not eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.
The Company’s derivative contracts contain credit risk-related contingent features designed to protect against significant deterioration in counterparties’ creditworthiness and their ultimate ability to settle outstanding derivative contracts in the normal course of business. The Company’s bilateral credit related contingent features generally require the owing entity, either the Company or the derivative counterparty, to post collateral for the portion of the fair value in excess of $50 million should the fair value of outstanding derivatives per counterparty be greater than $50 million. Additionally, a certain level of decline in credit rating of either the Company or the counterparty could also trigger collateral requirements. As of March 31, 2023, the Company was in compliance with all credit risk-related contingent features and had derivative instruments with credit risk-related contingent features in a net liability position of $1.7 million. Accordingly, the Company posted collateral of $1.9 million as a result of these contingent features. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.