Note 13 - Fair Value Measurements

9 Months Ended

Sep. 30, 2024

Notes to Financial Statements

Fair Value Disclosures [Text Block]

Note 13 - Fair Value Measurements

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.

Equity and partnership investments: Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level 2, when available. Where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. The Company believes that the net asset value obtained through financial statements provided by each partnership approximates 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 securities derivatives are traded in an over-the-counter market where quoted market prices are not always available. The Company also entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans. 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:

	September 30, 2024
	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	$	5,054	$	76,309	$	—	$	81,363
ABS agency		—		13,296		—		13,296
ABS corporate		—		16,391		—		16,391
Corporate debt		1,945		52,113		—		54,058
SBA		—		9,317		—		9,317
MBS agency		—		78,549		—		78,549
MBS non-agency		—		40,791		17,095		57,886
Sold loan servicing rights		—		—		3,584		3,584
Equity and partnership investments		—		1,762		12,650		14,412
Total assets measured at fair value	$	6,999	$	288,528	$	33,329	$	328,856
Financial Liabilities
Interest rate swap derivative	$	—	$	2,749	$	—	$	2,749

	December 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	$	5,118	$	82,643	$	—	$	87,761
ABS agency		—		11,782		—		11,782
ABS corporate		—		5,286		—		5,286
Corporate debt		1,883		49,571		—		51,454
MBS agency		—		63,247		—		63,247
MBS non-agency		—		48,624		27,469		76,093
Sold loan servicing rights		—		—		3,793		3,793
Partnership investments		—		—		13,183		13,183
Total assets measured at fair value	$	7,001	$	261,153	$	44,445	$	312,599
Financial Liabilities
Interest rate swap derivative	$	—	$	1,002	$	—	$	1,002

The following tables provide 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 dates indicated:

September 30, 2024	Fair Value (In thousands)		Valuation Technique	Unobservable Input (1)	Range (Weighted Average)
Sold loan servicing rights	$	3,584	Discounted cash flow	Constant prepayment rate		5.21% - 41.27% (7.83%)
				Discount rate		10.25% - 12.53% (10.92%)
MBS non-agency	$	17,095	Consensus pricing	Offered quotes		99 - 100
Partnership investments	$	12,650	Net asset value per share	Net asset value		n/a
(1) Unobservable inputs were weighted by the relative fair value of the instruments.

December 31, 2023	Fair Value (In thousands)		Valuation Technique	Unobservable Input (1)	Range (Weighted Average)
Sold loan servicing rights	$	3,793	Discounted cash flow	Constant prepayment rate		4.10% - 47.53% (7.39%)
				Discount rate		11.00% - 13.42% (11.74%)
MBS non-agency	$	27,469	Consensus pricing	Offered quotes		98 - 100
Partnership investments	$	13,183	Net asset value per share	Net asset value		n/a
(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 September 30,						As of or For the Nine Months Ended September 30,
	2024			2023			2024			2023
Sold loan servicing rights:	(In thousands)
Balance at beginning of period	$	3,740		$	3,825		$	3,793		$	3,887
Servicing rights that result from transfers and sale of financial assets		5			71			38			145
Changes in fair value due to changes in model inputs or assumptions (1)		(161	)		(167	)		(247	)		(303	)
Balance at end of period	$	3,584		$	3,729		$	3,584		$	3,729
(1) Represents changes due to collection/realization of expected cash flows and curtailments.

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
	2024			2023			2024			2023
Securities available for sale:	(In thousands)
MBS non-agency
Balance at beginning of period	$	17,231		$	29,378		$	27,469		$	29,599
Principal payments received		(148	)		—			(10,530	)		—
Unrealized Gains (Losses)		12			(186	)		156			(407	)
Balance at end of period	$	17,095		$	29,192		$	17,095		$	29,192

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
	2024			2023			2024			2023
Partnership investments:	(In thousands)
Balance at beginning of period	$	12,823		$	12,733		$	13,183		$	12,563
Funding contributions (1)		80			126			6,386			335
Distributions received (1)		(283	)		(57	)		(6,782	)		(404	)
Unrealized Gains (Losses)		30			(15	)		(137	)		293
Balance at end of period	$	12,650		$	12,787		$	12,650		$	12,787

(1) 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.

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 dates indicated:

	September 30, 2024
	Level 1		Level 2		Level 3		Total
	(In thousands)
Individually evaluated collateral dependent loans	$	—	$	—	$	27,181	$	27,181

	December 31, 2023
	Level 1		Level 2		Level 3		Total
	(In thousands)
Individually evaluated collateral dependent loans	$	—	$	—	$	17,388	$	17,388

At  September 30, 2024 and December 31, 2023, there were no individually evaluated 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:

	September 30, 2024
					Fair Value Measurements Using:
	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial assets
Cash and cash equivalents	$	82,722	$	82,722	$	82,722	$	—	$	—
Investment securities available for sale		310,860		310,860		6,999		286,766		17,095
Loans held for sale		378		378		—		378		—
Loans receivable, net		1,714,416		1,580,047		—		—		1,580,047
FHLB stock		14,435		14,435		—		14,435		—
Accrued interest receivable		8,939		8,939		—		8,939		—
Sold loan servicing rights, at fair value		3,584		3,584		—		—		3,584
Equity and partnership investments		14,412		14,412		—		1,762		12,650
Financial liabilities
Demand deposits	$	1,066,271	$	1,066,271	$	1,066,271	$	—	$	—
Time deposits		645,370		647,583		—		—		647,583
FHLB Borrowings		290,000		290,119		—		—		290,119
Line of Credit		5,500		5,525		—		—		5,525
Subordinated debt, net		39,494		42,016		—		—		42,016
Accrued interest payable		2,153		2,153		—		2,153		—
Interest rate swap derivative		2,749		2,749		—		2,749		—

	December 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	$	123,169	$	123,169	$	123,169	$	—	$	—
Investment securities available for sale		295,623		295,623		7,001		261,153		27,469
Loans held for sale		753		753		—		753		—
Loans receivable, net		1,642,518		1,506,130		—		—		1,506,130
FHLB stock		13,664		13,664		—		13,664		—
Accrued interest receivable		7,894		7,894		—		7,894		—
Sold loan servicing rights, at fair value		3,793		3,793		—		—		3,793
Partnership investments		13,183		13,183		—		—		13,183
Financial liabilities
Demand deposits		1,025,854	$	1,025,854	$	1,025,854	$	—	$	—
Time deposits		651,038		648,428		—		—		648,428
FHLB Borrowings		275,000		271,284		—		—		271,284
Line of Credit		6,500		6,524		—		—		6,524
Subordinated debt, net		39,436		42,116		—		—		42,116
Accrued interest payable		3,396		3,396		—		3,396		—
Interest rate swap derivative		1,002		1,002		—		1,002		—