First Northwest Bancorp: Form 10-Q/A for the period ended Jun 30, 2024

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Item has been restated to reflect the changes described in the Explanatory Note and in Note 18 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

Forward-Looking Statements

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

• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
• estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

• risks associated with lending and potential adverse changes in the credit quality of loans in our portfolio;
• legislative or regulatory changes, including increased insurance rates and assessments or expanded consumer protection regulations, responses to recent events in the banking industry, interest rates along the yield curve, and inflation, which could adversely affect the Company's business;
• continued depressed market demand for mortgage and Small Business Administration loans that we originate for sale;
• changes in monetary and fiscal policies including interest rate policies of the Federal Reserve and the relative differences between short and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
• our ability to control operating costs and expenses;
• whether our management team can succeed in implementing our operational strategy, including but not limited to our ability to achieve higher net interest income and noninterest revenue growth;
• our ability to successfully execute on growth strategies related to our entry into new markets and delivery channels, including banking as a service;
• our ability to develop user-friendly digital applications to serve existing customers and attract new customers;
• the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
• pressures on liquidity, including as a result of withdrawals of customer deposits or declines in the value of our investment portfolio;
• increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;
• our ability to attract and retain deposits at a reasonable cost relative to the market;
• changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;
• results of examinations by our primary or other regulatory authorities, as well as a consent order we entered into with the Federal Deposit Insurance Corporation, could have an adverse impact on our business and operations;
• disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
• risks related to overall economic conditions, including the impact on the economy of an elevated interest rate environment and geopolitical instability, including the wars in Ukraine and the Middle East;
• any failure of key third-party vendors to perform their obligations to us;
• risks related to natural disasters, including droughts, fires, floods, earthquakes, pandemics, and other unexpected events;
• the effects of any reputational damage to the Company resulting from any of the foregoing; and
• other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q/A and the Company's 2023 Form 10-K.

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

General

First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities. Non-financial investments include several limited partnership investments, including a 33.3% interest in The Meriwether Group, LLC ("MWG"). The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed. The Company also entered into partnerships to strategically invest in fintech-related businesses.

First Fed Bank is a community-oriented financial institution founded in 1923 in Port Angeles, Washington. We have 18 locations including 12 full-service branches, three business centers and three administration centers in Clallam, Jefferson, King, Kitsap, Snohomish and Whatcom counties. First Fed’s business and operating strategy is focused on building sustainable earnings by delivering a full array of financial products and services for individuals, small business, and commercial customers. Lending activities include the origination of first lien one-to-four family mortgage loans, commercial and multi-family real estate loans, residential and commercial construction and land loans, commercial business loans, SBA loans, and consumer loans, consisting primarily of home equity loans and lines of credit. Over the last five years, we have significantly increased the origination of commercial real estate, multi-family real estate, construction, and commercial business loans, and have increased our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit ("CDs") for individuals and businesses. Deposits are our primary source of funding for our lending and investing activities. First Fed also has a limited partnership investment in the Meriwether Group Capital Hero Fund LP ("Hero Fund") which was previously held by First Northwest. The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.

First Northwest's limited partnership investments include Canapi Ventures Fund, LP; BankTech Ventures, LP; and JAM FINTOP Blockchain, LP. These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33.3% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Hero Fund. MWG also holds a 20% general partner interest in MWGC. MWGC holds a 0.01% general partner interest in the Hero Fund.

First Northwest is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by several factors, including interest rates paid on competing deposits, alternative investment options available to our customers, account maturities, the number and quality of our deposit originators, digital delivery systems, branding and customer acquisition, and the overall level of personal income and savings in the markets where we do business. Lending activities are influenced by the demand and pricing for loan funds, our credit policies, the number and quality of our lenders and credit underwriters, digital delivery systems, branding and customer acquisition, and regional economic cycles.

Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income earned on our loans and investments and interest expense paid on our deposits and borrowings. Changes in our asset and liability mix, market and portfolio interest rates and cash flows from existing assets and liabilities affect our net interest income. A secondary source of income for the Company is noninterest income, which includes revenue earned from providing products and services, including service charges on deposit accounts, late and other charges on loans, mortgage banking income, loan sales and servicing income, interest rate swap fee income, earnings from bank-owned life insurance, investment services income, gains and losses from sales of securities, and changes in the market value of our equity and partnership investments.

An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations that is required to adequately provide for losses inherent in our investment, loan and unfunded commitment portfolios through the ACL. A recapture of previously recognized provision for credit losses may be added to net income if the underlying assumptions driving anticipated loss rates within the CECL model improve, such as the United States unemployment and gross domestic product metrics; lowered qualitative factor adjustments to reflect improvements in the nonaccrual and past due status or upgrades in risk ratings of a particular loan segment; lower loan or unfunded commitment balances, or receipt of recoveries for amounts previously charged off.

Noninterest expenses incurred in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, data processing expenses, marketing and other customer acquisition expenses, legal and other professional fees, expenses related to real estate and personal property owned, and other expenses.

Recent Regulatory Developments

Brokered Deposits Rulemaking. On July 30, 2024, the Board of Directors of the FDIC approved a proposed rule that would amend the FDIC’s regulations governing the classification and treatment of brokered deposits. The proposal would, among other changes, broaden the definition of deposit broker to include agents that place or facilitate the placement of third-party deposits at only one insured depository institution and narrow the exception to the definition of deposit broker for agents whose primary purpose is not the placement of funds with depository institutions. While the Company is evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, the Bank would likely be required to classify a greater amount of its deposits obtained with the involvement of third parties as brokered deposits. An increase in the amount of brokered deposits on the Bank’s balance sheet could, among other consequences, increase the Bank’s deposit insurance assessment costs.

Third-Party Deposit Arrangements Guidance. On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks. Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships. The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements.

Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in the Company's 2023 Form 10-K.

Comparison of Financial Condition at June 30, 2024 (Restated) and December 31, 2023

Assets. Total assets increased to $2.22 billion, or 0.6%, at June 30, 2024, from $2.2 billion at December 31, 2023.

Cash and cash equivalents decreased by $40.0 million, or 32.5%, to $83.2 million as of June 30, 2024, compared to $123.2 million as of December 31, 2023. Cash decreased during the current year as the Bank deployed funds into higher-yielding investment securities and loans.

Investment securities increased $11.1 million, or 3.8%, to $306.7 million at June 30, 2024, from $295.6 million at December 31, 2023. Investment security purchases during the six months ended June 30, 2024, totaled $53.0 million with an estimated weighted-average yield of 6.4% and a weighted-average life of 5.4 years. The security purchases and a portfolio market value increase of $100,000 were partially offset by the sale of $23.2 million of securities, with an average yield of 3.0%, during the six months ended June 30, 2024, and payment activity during the period. Our recent investment purchases have primarily been floating rate securities to take advantage of higher short-term rates above those offered on cash and to reduce balance sheet sensitivity. The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 7.8 years as of June 30, 2024, compared to 7.7 years as of December 31, 2023, and had an estimated average repricing term of 6.5 years as of June 30, 2024, compared to 6.3 years as of December 31, 2023, based on the interest rate environment at those times. The effective duration of the investment portfolio was 4.3 years at June 30, 2024, compared to 4.8 years at December 31, 2023. If prevailing market interest rates fall, we expect prepayments will accelerate due to the current coupons of fixed rate bonds.

Included in MBS non-agency are $29.8 million of commercial mortgage-backed securities ("CMBS"), of which 89.8% are in "A" tranches with the remaining 10.2% in "B" tranches. Our largest exposure in the CMBS portfolio is to long-term care facilities, which comprises 65.2%, or $19.4 million, of our private label CMBS securities. All of the CMBS have credit enhancements ranging from 28.8% to 99.8%, with a weighted-average credit enhancement of 55.2%, that further reduces the risk of loss on these investments.

The investment portfolio was comprised of 55.8% in amortizing securities at June 30, 2024, compared to 52.0% at December 31, 2023. The projected average life of the securities portfolio may vary due to prepayment activity, particularly in the mortgage-backed securities portfolio, which is impacted by prevailing market interest rates. Our securities portfolio is utilized to manage liquidity, improve long-term interest income and manage interest rate risk. For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

Net loans, excluding loans held for sale, increased $35.3 million to $1.68 billion at June 30, 2024, from $1.64 billion at December 31, 2023. During the six months ended June 30, 2024, auto and other consumer loans increased $36.5 million with $25.6 million of Woodside auto loan purchases, $22.3 million of Triad manufactured home loan purchases and $14.2 million of First Help auto loan purchases, partially offset by prepayments and scheduled payments. Multi-family loans increased $17.0 million during the six months ended June 30, 2024. The increase was the result of $21.4 million of construction loans converting into permanent amortizing loans, partially offset by payment activity. One-to-four family loans increased $11.5 million during the six months ended June 30, 2024, as a result of $22.3 million in residential construction loans which converted to permanent amortizing loans, partially offset by payments received. Commercial business loans increased $4.8 million, including $13.4 million of organic originations, $9.5 million of purchased Bankers Healthcare group loans and $4.9 million in draws on existing line of credit commitments, offset by repayments and charge off activity. Home equity loan outstanding balances increased $3.2 million over the prior year end due to $2.9 million from home equity loan originations and draws on new and existing line of credit commitments. Commercial real estate loans decreased $12.5 million during the six months ended June 30, 2024, due to payoffs, scheduled payments and a reclassification of $3.9 million to multi-family offsetting originations of $5.2 million.

Construction and land loans decreased $22.4 million, or 17.3%, to $107.3 million at June 30, 2024, from $129.7 million at December 31, 2023, with $44.1 million converting into fully amortizing loans and charge offs totaling $4.0 million, partially offset by draws on new and existing loan commitments. Construction loans in the portfolio are geographically dispersed throughout Western Washington. All construction projects are monitored by either a third-party firm or our internal construction administration team. Projects with larger loan commitments have more robust monitoring by firms with more services and expertise. We continue to monitor the impact inflation and housing demand may have on the completion of the projects currently in the portfolio. As of the date of this report, we have no reason to believe that any of the projects in process will not be completed. At June 30, 2024, 46% of construction commitments were secured by one-to-four family residential properties, which are anticipated to convert into amortizing loans upon completion and may be sold at that time.

We monitor real estate values and general economic conditions in our market areas, in addition to assessing the strength of our borrowers, including their equity contributions to a project, to prudently underwrite construction loans. We continually assess our lending strategies across all product lines and markets where we do business to improve earnings while also prudently managing credit risk.

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

(In thousands)

(1) Includes Clallam and Jefferson counties.

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

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(In thousands)

(1) Includes Clallam and Jefferson counties.

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

During the six months ended June 30, 2024, the Company added $90.5 million of organic loan originations, of which $59.4 million, or 65.7%, were located in the Puget Sound region, $23.5 million, or 26.0%, on the North Olympic Peninsula, $2.8 million, or 3.1%, in other areas throughout Washington State, and $4.8 million, or 5.3%, in other states. The Company purchased an additional $40.7 million in auto loans, $22.3 million in manufactured home loans, and $9.5 million in commercial business loans to borrowers located throughout the United States during the six months ended June 30, 2024. We will continue to strategically evaluate opportunities to acquire assets through wholesale channels in order to supplement organic originations and increase net interest income. The Northpointe Bank Mortgage Purchase Program ("Northpointe MPP") also provides a source of additional interest income but is dependent on demand for funding, with repayment of advances to this program typically occurring within 30 days or less. The total loan portfolio was composed of 78.2% organic originations and 21.8% purchased loans at June 30, 2024.

The ACLL increased to $19.3 million at June 30, 2024, as the Company recorded a $9.9 million provision for credit loss on loans for the six-month period. Net charge-offs were $8.1 million for the six-month period. The ACLL as a percentage of total loans was 1.14% and 1.10% at June 30, 2024 and December 31, 2023, respectively.

Nonaccrual loans increased $5.0 million, or 26.7%, to $23.6 million at June 30, 2024, from $18.6 million at December 31, 2023, primarily attributable to a $8.1 million commercial construction loan placed on nonaccrual during the quarter ended June 30, 2024, a $708,000 multi-family loan, a $535,000 delinquent purchased one-to-four family loan, three delinquent auto loans totaling $406,000 and a $184,000 increase to a commercial construction relationship previously placed on nonaccrual. These increases were partially offset by $4.0 million of charge offs on loans previously placed on nonaccrual and a $591,000 single family residence loan that was paid off during the first quarter of 2024. Nonaccrual loans to total loans was 1.39% at June 30, 2024, compared to 1.12% at December 31, 2023. The ACLL as a percentage of nonaccrual loans decreased to 82% at June 30, 2024, down from 94% at December 31, 2023. Subsequent to quarter-end, the $708,000 multifamily loan was paid off.

Classified loans increased $4.6 million to $39.8 million at June 30, 2024, from $35.1 million at December 31, 2023, due to the downgrade during the first half of 2024 of the loans noted above. An $11.2 million construction loan relationship, which became classified in the fourth quarter of 2022, a $9.2 million commercial loan relationship which became classified in the fourth quarter of 2023 and the $8.1 million commercial construction loan relationship which became classified in the quarter ended June 30, 2024, account for 71% of the classified loan balance at June 30, 2024. The Bank has exercised legal remedies, including the appointment of a third-party receivership and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in two of the three collateral-dependent relationships. Proceeds from the sale of a unit in the $11.2 million construction loan relationship during the first quarter of 2024 were used to the paydown principal of the related loan balance. Subsequent to quarter-end, a property included in the $9.2 million commercial loan relationship was sold, resulting in a $3.0 million loan payoff recorded in the third quarter of 2024.

The Bank recorded commercial construction loan charge-offs totaling $4.0 million and commercial business loan charge-offs of $2.6 million in the second quarter of 2024 as a result of uncertainty in the collectability of the underlying collateral in specific loan relationships. Charge-offs are based on individual loan evaluations and do not represent a universal decline in the collectability of all loans in these categories. Additional charged-off balances were related to loans purchased through the Splash unsecured consumer loan program totaled $1.3 million during the six months ended June 30, 2024, or 76% of gross charge-offs. The Bank's active participation in the program was discontinued in 2023. Total Splash loan balances of $4.7 million and $7.3 million were included in Auto and Other Consumer loans at June 30, 2024 and December 31, 2023, respectively. We believe the ACLL is adequate to absorb the known and inherent risks of loss in the overall loan portfolio as of June 30, 2024.

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

(In thousands)

50

The following table represents nonperforming assets at the dates indicated.

(In thousands)

In the second quarter of 2024, the Bank completed the sale and leaseback of six branch properties to Mountainseed, reducing premises and equipment by $6.8 million. The Bank received the full sales price of $14.7 million. The proceeds of the sale transaction were used to pay down borrowings. First Fed is leasing back the six properties sold to Mountainseed under agreements with initial terms of 15 years with one 15-year renewal option each. The leases, recorded in the second quarter of 2024, resulted in an increase of $12.2 million to both other assets and other liabilities for the related right-of-use assets and lease liabilities created by the contracts, respectively.

In the second quarter of 2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed. First Northwest utilized the cash received to pay down the NexBank line of credit.

Liabilities. Total liabilities increased to $2.06 billion at June 30, 2024, from $2.04 billion at December 31, 2023, due to increases in deposits of $31.4 million and lease liabilities included in other liabilities of $11.6 million, partially offset by a decrease in borrowings of $18.4 million.

Deposit balances increased $31.4 million to $1.71 billion at June 30, 2024 from $1.68 billion at December 31, 2023. During the first half of 2024, total retail deposit balances increased $15.3 million and brokered deposit balances increased $16.1 million. Within retail deposit balances, an increase in money market accounts of $60.8 million and demand deposit accounts of $17.2 million was partially offset by a decrease in retail CDs of $45.3 million and savings accounts of $17.5 million. Increases in demand and money market accounts were driven by customer behavior as they sought out higher rates offered as CD specials matured. We utilize brokered CDs as an additional funding source to provide liquidity, manage cost of funds, reduce reliance on FHLB advances, and manage interest rate risk. Overall, the current rate environment contributes to continued competition for deposits with additional deposit rate specials offered to retain existing balances and attract new funds.

Advances decreased $14.9 million, or 5.4% to $260.1 million at June 30, 2024, from $275.0 million at December 31, 2023. We reduced short-term FHLB advances and the NexBank line of credit to improve the cost of funds while long-term advances increased to provide additional balance sheet liquidity.

Equity. Total shareholders' equity decreased $4.5 million to $158.9 million for the six months ended June 30, 2024. The Company recorded a net loss during that period of $1.8 million, $1.3 million of dividends declared and $3.0 million for the cost of repurchased shares. Decreases were partially offset by a $902,000 increase in the post-tax fair market value of derivatives and $866,000 related to share-based compensation plans. During the six months ended June 30, 2024, we repurchased 214,132 shares of common stock under the October 2020 stock repurchase plan at an average price of $14.03 per share for a total of $3.0 million, which completed the October 2020 share repurchase program. In April 2024, the Board of Directors authorized a new buyback plan of up to 10% of shares outstanding for a maximum of 944,279 shares. No shares have been repurchased to date under the new program.

Comparison of Results of Operations for the Three Months Ended June 30, 2024 (Restated) and 2023

General. A net loss attributable to the Company of $2.2 million was recorded for the three months ended June 30, 2024, compared to net income of $1.8 million for the three months ended June 30, 2023. A $10.2 million decrease in net interest income after provision for credit losses and a $392,000 increase in noninterest expense were partially offset by a $5.6 million increase in noninterest income.

Net Interest Income. Net interest income decreased $1.8 million to $14.2 million for the three months ended June 30, 2024, from $16.0 million for the three months ended June 30, 2023. This decrease was mainly the result of higher rates paid on interest-bearing liabilities, which increased 95 basis points to 3.28% for the three months ended June 30, 2024, compared to 2.33% for the same period in the prior year. This was due to higher rates paid on all deposits and borrowings and an increase in the average balances of CDs and borrowings. The cost of total deposits increased 93 basis points to 2.47% for the three months ended June 30, 2024, compared to 1.54% for the same period in 2023. The average yield on interest-earning assets increased 38 basis points to 5.55% for the three months ended June 30, 2024, compared to 5.17% for the same period last year, due primarily to higher yields on variable- and adjustable-rate assets and an increase in higher yielding loan volume due to originations, purchases and draws on new and existing lines of credit.

Total cost of funds increased 89 basis points to 2.87% for the three months ended June 30, 2024, from 1.98% for the same period in 2023. The net interest margin decreased 49 basis points to 2.76% for the three months ended June 30, 2024, from 3.25% for the same period in 2023. While increases in the cost of funding outpaced the growth of the yield on interest-earning assets, the Company has taken measures to reverse interest rate margin compression. Organic loan production was augmented with higher-yielding purchased loans through established third-party relationships. Lower yielding investment securities totaling $23.2 million were sold at a loss in the second quarter of 2024, replaced with $53.3 million of higher-yielding security investments during the second quarter of 2024. Income on the Bank's fair value hedging agreements on securities increased quarter-over-quarter by $67,000. The fair value hedge on loans established in 2024 increased interest income by $378,000 for the second quarter of 2024.

Interest Income. Total interest income increased $3.1 million, or 12.3%, to $28.6 million for the three months ended June 30, 2024, from $25.5 million for the comparable period in 2023, primarily due to higher yields on interest-earning assets. Interest and fees on loans receivable increased $2.4 million, to $23.7 million for the three months ended June 30, 2024, from $21.3 million for the three months ended June 30, 2023, primarily due to an increase in average loan yields to 5.62% for the three months ended June 30, 2024, from 5.38% for the same period in 2023, coupled with an increase in the average balance of net loans receivable of $110.8 million compared to the second quarter of 2023. The loan portfolio has grown through draws on new and existing business lines of credit, originations of multi-family real estate loans, and purchases of auto, manufactured home, and purchased Bankers Healthcare Group commercial loans. Loan yields increased over the prior year due to higher rates on new originations as well as the repricing of variable- and adjustable-rate loans tied to the Prime Rate or other indices. The yield earned on investment securities also increased 87 basis points to 5.01% compared to the same period in 2023, as increases in floating bond rates, sales of lower-yielding bonds, purchases of new bonds at higher yields and a reduction in amortization of premium costs as prepayment speeds slow down have all positively impacted investment securities income. The yield on interest-earning deposits in banks also increased to 5.54% from 5.18% for the comparable period in 2023, benefitting from increases in rates paid on excess balances held at the FRB.

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

(Dollars in thousands)

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Interest Expense. Total interest expense increased $4.9 million, or 51.5%, to $14.4 million for the three months ended June 30, 2024, compared to $9.5 million for the three months ended June 30, 2023. The increase over the second quarter of 2023 was the result of an increase in the cost of deposits to 2.47% from 1.54% in same period one year ago along with higher volumes of CDs. A shift in the deposit mix from no or low-cost transaction and savings accounts to a higher volume of CDs and money market accounts and higher prevailing market rates resulted in a higher cost of deposits. Interest expense on borrowings increased due to an average balance increase of $52.5 million and an increase in the cost of advances from 4.41% to 4.85%, primarily FHLB advances, compared to the same period in 2023.

Average deposit account balances were composed of 85% in interest-bearing deposits and 15% in noninterest-bearing deposits at June 30, 2024, compared to 82% and 18%, respectively, at June 30, 2023. During the three months ended June 30, 2024, interest expense increased on CDs due to an increase in the average balances of $88.5 million, along with an increase in the average rates paid of 108 basis points, compared to the three months ended June 30, 2023. During the same period, the average balances of money market accounts increased $21.1 million with a 141-basis point average rate increase, resulting in an increase to interest expense. The average cost of interest-bearing deposit accounts increased to 2.91% for the three months ended June 30, 2024, from 1.87% for the three months ended June 30, 2023, due to changes to the deposit mix, driven by customer preferences and the use of higher-rate promotional products designed to retain existing deposits and generate new deposits. The mix of retail customer deposit balances shifted from non-maturity accounts towards higher cost term certificate products. Retail customer CDs represented 26.8% and 25.8% of retail customer deposits at June 30, 2024 and 2023, respectively.

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

(Dollars in thousands)

Provision for Credit Losses. The Company recorded an $8.7 million provision for credit losses in the three months ended June 30, 2024. A provision for credit losses on loans of $8.6 million was the result of the charge-off activity previously discussed; an increase in the estimated CECL loss factors applied to commercial business loans, residential real estate and multi-family loans; and growth in the purchased auto loan portfolio. Increases were partially offset by a decrease in the loss factors applied to commercial real estate loans, home equity lines of credit and other consumer loans, and declining commercial business and construction loan balances. A provision for credit losses on unfunded commitments of $99,000 was also recorded during the quarter ended June 30, 2024, due to higher loss factors and a moderate increase in commitment balances at quarter end. This compares to a $300,000 loan loss provision for the quarter ended June 30, 2023. While the ACLL as a percentage of nonaccrual loans at period end has decreased to 82% compared to 677% for the same period in 2023, 85% of the nonaccrual loan balance is comprised of well-secured real estate loans, based on the current loan-to-value ratio, which the Company believes will be sufficient to repay the loans upon sale of the underlying collateral.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:

(Dollars in thousands)

Noninterest Income. Noninterest income increased $5.6 million, or 329.4%, to $7.4 million for the three months ended June 30, 2024, from $1.7 million for the three months ended June 30, 2023. The increase was primarily due to the sale of six branch properties in the sale-leaseback transaction, partially offset by loss on sale of securities. While saleable mortgage loan production and related gains continued to be impacted by higher market rates on mortgage loans, the Company did see improvement due to the sale of SBA loans over the same quarter of 2023. The conversion of lower-yielding BOLI policies was initiated in the first quarter of 2024 and is expected to be finalized in the third and fourth quarters. The decrease in other income is due to $174,000 loan swap fee income recorded in the second quarter of 2023 and a quarter-over-quarter unrealized loss of $285,000 recorded for partnership investments.

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

(Dollars in thousands)

Noninterest Expense. Noninterest expense increased $392,000, or 2.6%, to $15.6 million for the three months ended June 30, 2024, compared to $15.2 million for the three months ended June 30, 2023. The increase in expenses compared to the second quarter of 2023 is mainly due to higher incentive compensation of $133,000, payroll taxes of $175,000, tax on the property sale of $359,000, additional rent of $239,000, salaries of $175,000 and production commissions of $74,000, partially offset by lower advertising costs of $552,000, legal fees of $149,000 and consulting fees of $124,000. The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending while the net interest margin compression due to higher market rates and an inverted yield curve persists.

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

(Dollars in thousands)

Provision for Income Tax. An income tax benefit of $547,000 was recorded for the three months ended June 30, 2024, compared to income tax expense of $475,000 for the three months ended June 30, 2023, due to a year-over-year decrease in income before taxes of $4.9 million. The provision includes accruals for both federal and state income taxes. For additional information, see Note 9 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

Comparison of Results of Operations for the Six Months Ended June 30, 2024 (Restated) and 2023

General. A net loss attributable to the Company of $1.8 million was recorded for the six months ended June 30, 2024, compared to net income of $5.3 million for the six months ended June 30, 2023. A $14.0 million decrease in net interest income after provision for credit losses was partially offset by a $5.5 million increase in noninterest income and a $176,000 decrease in noninterest expense.

Net Interest Income. Net interest income decreased $4.1 million to $28.2 million for the six months ended June 30, 2024, from $32.3 million for the six months ended June 30, 2023, as higher funding costs outpaced increased loan, investment and interest-earning deposit income.

Average earning assets increased $107.5 million year-over-year. The yield on average interest-earning assets increased 43 basis points to 5.49% for the six months ended June 30, 2024, compared to 5.06% for the same period in the prior year, due to an increase in the average net loans receivable balance, higher loan yields, and an increase in yields earned on investment securities and interest-earning deposit accounts.

The average cost of interest-bearing liabilities increased to 3.21% for the six months ended June 30, 2024, compared to 2.08% for the same period last year, due primarily to higher rates paid on all interest-bearing deposits and advances along with increases in the average balances of money market accounts, CDs and FHLB advances. Total cost of funds increased 105 basis points to 2.81% for the six months ended June 30, 2024, from 1.76% for the same period in 2023. The net interest margin decreased 59 basis points to 2.76% for the six months ended June 30, 2024, from 3.35% for the same period in 2023.

Interest Income. Total interest income increased $7.1 million, or 14.7%, to $55.9 million for the six months ended June 30, 2024, from $48.8 million for the comparable period in 2023, primarily due to an increase in yields on interest-earning assets and an increase in average net loans receivable balances. Interest and fees on loans receivable increased $5.7 million, to $46.5 million for the six months ended June 30, 2024, from $40.8 million for the six months ended June 30, 2023, primarily due to an increase in the average balance of net loans receivable of $118.8 million compared to the prior year, coupled with an increase in average loan yields to 5.57% for the six months ended June 30, 2024, from 5.27% for the same period in 2023. The loan portfolio increased as a result of additional auto, manufactured home, and Bankers Healthcare Group commercial loan purchases. Loan yields increased over the prior year due to higher rates on new originations as well as the repricing of variable- and adjustable-rate loans tied to the Prime Rate or other variable-rate indices. The yield earned on investment securities also increased 87 basis points to 4.88% compared to the same period in 2023, with half of the purchase of higher-yielding investments occurring late in the first quarter of 2023 which resulted in the related increase only impacting income for the second quarter of 2024. An increase in rates on floating bonds and a slowdown in prepayment speeds, which reduces amortization of premium costs, also positively impacted investment securities income.

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

(Dollars in thousands)

Interest Expense. Total interest expense increased $11.3 million, or 68.6%, to $27.8 million for the six months ended June 30, 2024, compared to $16.5 million for the six months ended June 30, 2023. The increase over the first six months of 2023 was the result of a 112-basis point increase in the cost of deposits from 1.33% one year prior to 2.45% along with a higher volume of money market account and CD balances. A shift in the deposit mix from no or low-cost transaction, money market, and savings accounts to a higher volume of CDs resulted in higher costs of deposits. Interest expense on borrowings increased due to a $36.6 million increase in the average balance and a 50-basis point increase in the cost of advances, primarily FHLB advances, compared to the same period in 2023.

During the six months ended June 30, 2024, interest expense on CDs increased due to higher average balances of $141.9 million, along with a 135-basis point increase in the average rates paid, compared to the six months ended June 30, 2023. During the same period, the average balances of money market accounts decreased $17.6 million, with a 139-basis point average rate increase, resulting in an overall increase to interest expense. The average cost of interest-bearing deposit accounts increased to 2.88% for the six months ended June 30, 2024, from 1.62% for the six months ended June 30, 2023, due to the use of promotional products designed to retain existing deposits and generate new deposits. The mix of retail customer deposit balances shifted from non-maturity accounts towards higher cost CD and savings products. Retail customer CDs represented 23.3% and 23.0% of total deposits at June 30, 2024 and 2023, respectively. Brokered CDs represented 13.1% and 10.9% of total deposits at June 30, 2024 and 2023, respectively.

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

(Dollars in thousands)

Provision for Credit Losses. The Company recorded a $9.7 million provision for credit losses in the six months ended June 30, 2024. A provision for credit losses on loans of $9.9 million was the result of the charge-offs previously discussed; an increase in the estimated CECL loss factors applied to the Splash consumer loans, residential real estate, multi-family and commercial business loans; and growth in the purchased auto loan portfolio, partially offset by a decrease in the loss factors applied to Woodside auto and construction loans. A recapture of $170,000 was due to a lower year-over-year loss factor applied to unfunded commitment balances reducing the provision for credit losses recorded during the six months ended June 30, 2024. This compares to a $315,000 loan loss provision and a $515,000 unfunded commitment provision recapture for the six months ended June 30, 2023. While the ACLL as a percentage of nonaccrual loans at period end has decreased to 82% compared to 677% for the same period in 2023, 85% of the nonaccrual loan balance is comprised of well-secured real estate loans, based on the current loan-to-value ratio, which the Company believes will be sufficient to repay the loans upon sale of the underlying collateral.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:

(Dollars in thousands)

Noninterest Income. Noninterest income increased $5.5 million, or 135.7%, to $9.5 million for the six months ended June 30, 2024, from $4.1 million for the six months ended June 30, 2023. The increase was primarily due to the sale of the six branch properties in the sale-leaseback transaction partially offset by the sale of securities and no loan swap fee income or investment services fee income during the six months ended June 30, 2024. The Company ended its investment services program in 2023. Income from the gain on sale of loans during the six months ended June 30, 2024, includes $116,000 from SBA loans compared to $65,000 in the same period of 2023. The conversion of lower-yielding BOLI policies initiated in the first quarter of 2024 contributed towards the $120,000 year-over-year recorded increase.

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

(Dollars in thousands)

Noninterest Expense. Noninterest expense decreased $176,000, or 0.6%, to $29.9 million for the six months ended June 30, 2024, compared to $30.1 million for the six months ended June 30, 2023. The decrease in expenses compared to the same period in 2023 is mainly due to lower advertising costs and a $218,000 reduction in the accrual for a civil money penalty assessed by the FDIC. The civil money penalty was originally accrued in the fourth quarter of 2023. These decreases were partially offset by higher payroll taxes of $628,000 related to employee retention tax credits recorded in 2023, tax on the sale-leaseback transaction of $359,000, additional rent of $239,000 and production commissions of $113,000. The Company continues to focus on controlling compensation expense and reducing advertising and other discretionary spending while the net interest margin compression persists, given higher market rates and an inverted yield curve. A reduction-in-force impacting 9% of our workforce took place in July 2024.

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

(Dollars in thousands)

Provision for Income Tax. An income tax benefit of $100,000 was recorded for the six months ended June 30, 2024, compared to income tax expense of $1.3 million for the six months ended June 30, 2023, due to a year-over-year decrease in income before taxes of $8.4 million. The provision for the six months ended June 30, 2024, includes a tax penalty estimate for the early surrender of a BOLI contract. The provision includes accruals for both federal and state income taxes. For additional information, see Note 9 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

Average Balances, Interest and Average Yields/Cost

The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of June 30, 2024 and 2023. Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(Dollars in thousands)

(1) The average loans receivable, net balances include nonaccrual loans. (2) Interest earned on loans receivable includes net deferred fees (costs) of $50,000 and ($48,000) for the three months ended June 30, 2024 and 2023, respectively. (3) Includes interest-earning deposits (cash) at other financial institutions. (4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.47% and 1.54% for the three months ended June 30, 2024 and 2023, respectively. (5) Net interest income divided by average interest-earning assets.

(Dollars in thousands)

(1) The average loans receivable, net balances include nonaccrual loans. (2) Interest earned on loans receivable includes net deferred costs of ($121,000) and ($136,000) for the six months ended June 30, 2024 and 2023, respectively. (3) Includes interest-earning deposits (cash) at other financial institutions. (4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.47% and 1.54% for the six months ended June 30, 2024 and 2023, respectively. (5) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

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

(In thousands)

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

Off-Balance Sheet Activities

In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For the six months ended June 30, 2024 and the year ended December 31, 2023, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

Contractual Obligations

At June 30, 2024, our scheduled maturities of contractual obligations were as follows:

(In thousands)

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2024:

(In thousands)

Liquidity Management

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

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

Our most liquid assets are cash and cash equivalents followed by available-for-sale securities. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At June 30, 2024, cash and cash equivalents totaled $83.2 million and unpledged securities classified as available-for-sale had a market value of $266.7 million. The Bank pledged collateral of $578.4 million to support borrowings from the FHLB, with a remaining borrowing capacity of $257.6 million at June 30, 2024. The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $17.8 million were pledged as of June 30, 2024, providing a borrowing capacity of $17.0 million. First Northwest has a $20.0 million borrowing arrangement with NexBank which is secured by 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 remaining borrowing capacity of the NexBank line of credit was $17.0 million at June 30, 2024.

At June 30, 2024, we had $2.9 million in commitments to originate new loans, $3.8 million in standby letters of credit and $155.0 million in undisbursed loans, including $51.2 million in undisbursed construction loan commitments and $1.6 million in undisbursed maritime fabrication loan commitments.

CDs due within one year as of June 30, 2024, totaled $482.4 million, or 77.6% of CDs with a weighted-average rate of 4.42%. If these maturing deposits are not renewed, we will seek other sources of funds, including other CDs, non-maturity deposits, and borrowings. We can attract and retain deposits by adjusting the interest rates offered and through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on CDs. We believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide adequate short-term and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q/A.

First Fed has a diversified deposit base with approximately 57% of deposit account balances held by consumers, 30% held by business and public fund depositors, and 13% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at June 30, 2024. We estimate that 20-25% of our retail customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers. Management believes that maintaining a diversified deposit base is an important factor in managing and maintaining adequate levels of liquidity.

The Company is a separate legal entity from the Bank and provides for its own liquidity. At June 30, 2024, the Company, on an unconsolidated basis, had liquid assets of $723,000. In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, and for Company stock repurchases, interest payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments to limited partnership investments. The Company may receive dividends or capital distributions from the Bank, although there may be regulatory limitations on the ability of the Bank to pay dividends.

Capital Resources

At June 30, 2024, shareholders' equity totaled $158.9 million, or 7.2% of total assets. Our book value per share of common stock was $16.81 at June 30, 2024, compared to $16.99 at December 31, 2023.

At June 30, 2024, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at June 30, 2024 (restated).

(Dollars in thousands)

In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain common equity tier 1 capital ("CET1") at an amount greater than the required minimum levels plus a capital conservation buffer of 2.5%.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

This Item has been restated to reflect the changes described in the Explanatory Note and in Note 18 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

(a) Evaluation of Disclosure Controls and Procedures.

An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer), and other members of the Company's management team as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2024, the Company's disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, as a result of the material weakness described below.

(b) Changes in Internal Controls.

The Company has evaluated the effect of the facts leading to the restatement of the financial statements herein for the interim period ended June 30, 2024. Management has concluded that a material weakness existed in the design of controls over the timely recognition of changes in value of collateral-dependent individually evaluated loans and the methodology used to evaluate loans that possess characteristics distinct from existing loan groups evaluated on a pooled basis within the portfolio and, thus, in the determination of the adequacy of its allowance for credit losses on loans. It was further determined that such material weakness does not exist in the remainder of the loan portfolio.

Management, with oversight from the Company's Audit Committee, is committed to remediating the foregoing material weakness and has prepared a remediation plan including:

• Revising the Bank's loan-related policies,
• Strengthening an existing internal control to improve the identification and accounting for individually evaluated assets, and
• Strengthening an existing internal control to improve the evaluation of pooled loan groups utilized in the Current Expected Credit Loss model.

Except as described above, there have been no changes in the Company's internal control over financial reporting (as defined in 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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

This Item has been restated to reflect the changes described in the Explanatory Note and in Note 18 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q/A.

Except as set forth below, there have been no material changes to the risk factors set forth in Part I. Item 1A of the Company's 2023 Form 10-K.

The Company has identified a material weakness in its internal controls and cannot provide assurances that this weakness will be effectively remediated or that additional material weaknesses will not occur in the future.

The Company’s management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Management of the Company concluded that a material weakness in the Company’s internal control over financial reporting existed as of June 30, 2024. Specifically, the Company did not maintain effective controls over the timely recognition of changes in value of collateral-dependent individually evaluated loans and the methodology used to evaluate loans that possess characteristics distinct from existing loan groups evaluated on a pooled basis within the portfolio and, thus, in the determination of the adequacy of its allowance for credit losses on loans. Although the Company is taking steps to remediate the material weakness, it cannot provide assurance that such remedial measures will be effective. If the Company fails to maintain effective internal control over financial reporting, it may not be able to accurately report its financial results, which may, among other adverse consequences, cause investors to lose confidence in the Company’s reported financial information.