First Northwest Bancorp 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB ID: 659 ) 79 Consolidated Balance Sheets, December 31, 2023 and 2022 82 Consolidated Statements of Income For the Years Ended December 31, 2023 and 2022 83 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2023 and 2022 84 Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2023 and 2022 85 Consolidated Statements of Cash Flows For the Years Ended December 31, 2023 and 2022 86 Notes to Consolidated Financial Statements 88 78 Table of Contents Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors First Northwest Bancorp and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Northwest Bancorp and Subsidiary (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses (Topic 326). The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The new credit loss standard is also communicated a a critical audit matter below. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion. 79 Table of Contents Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans As described in Notes 1 and 4 to the consolidated financial statements, the Company's consolidated allowance for credit losses on loans (ACLL) balance was $17.5 million at December 31, 2023. The ACLL is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. 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. We identified management’s application of historical losses including reasonable and supportable forecasts of future economic conditions in the discounted cash flow model, and management’s estimation of qualitative risk factors, which are both components of the ACLL calculation, as a critical audit matter. Baseline loss rates are calculated using peer institution data related to historical losses. Historical losses are adjusted for management’s consideration of the forecasted direction of the economic and business environment. The Company also considers other qualitative risk factors to adjust the estimated ACLL. The primary procedures we performed to address this critical audit matter included: ● Tested the completeness and accuracy of the data used in the calculation, application of historical loss rates and forecasted economic conditions, and application of qualitative risk factors, and assessed the appropriateness for the peer groups used in historical loss rates, all of which are determined by management and used in the calculation. ● Obtained management's analysis and supporting documentation related to the forecasted economic conditions and qualitative risk factors and tested whether the forecasted economic conditions and qualitative risk factors used in the calculation of the ACLL were supported by the analysis provided by management. ● Performed an independent sensitivity analysis to evaluate the reasonableness of the qualitative risk factors used by management. 80 Table of Contents ● Analytically reviewed the ACLL for directional consistency with historical asset quality trends and the overall characteristics of the loan portfolio. /s/ Moss Adams LLP Everett, Washington March 15, 2024 We have served as the Company's auditor since 2002. 81 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2023 December 31, 2022 ASSETS Cash and due from banks $ 19,845 $ 17,104 Interest-bearing deposits in banks 103,324 28,492 Investment securities available for sale, at fair value 295,623 326,569 Loans held for sale 753 597 Loans receivable (net of allowance for credit losses on loans of $ 17,510 and $ 16,116 ) 1,642,518 1,531,435 Federal Home Loan Bank (FHLB) stock, at cost 13,664 11,681 Accrued interest receivable 7,894 6,743 Premises and equipment, net 18,049 18,089 Servicing rights on sold loans, at fair value 3,793 3,887 Bank-owned life insurance, net 40,578 39,665 Equity and partnership investments 14,794 14,289 Goodwill and other intangible assets 1,086 1,089 Deferred tax asset, net 13,001 14,091 Prepaid expenses and other assets 26,875 28,339 Total assets $ 2,201,797 $ 2,042,070 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 1,676,892 $ 1,564,255 Borrowings 320,936 285,358 Accrued interest payable 3,396 455 Accrued expenses and other liabilities 35,973 32,344 Advances from borrowers for taxes and insurance 1,260 1,376 Total liabilities 2,038,457 1,883,788 Commitments and Contingencies (Note 14) Shareholders' Equity Preferred stock, $ 0.01 par value, authorized 5,000,000 shares, no shares issued or outstanding — — Common stock, $ 0.01 par value, authorized 75,000,000 shares; issued and outstanding 9,611,876 at December 31, 2023; issued and outstanding 9,703,581 at December 31, 2022 96 97 Additional paid-in capital 95,784 95,508 Retained earnings 107,349 114,424 Accumulated other comprehensive loss, net of tax ( 32,636 ) ( 40,543 ) Unearned employee stock ownership plan (ESOP) shares ( 7,253 ) ( 7,913 ) Total parent's shareholders' equity 163,340 161,573 Noncontrolling interest in Quin Ventures, Inc. — ( 3,291 ) Total shareholders' equity 163,340 158,282 Total liabilities and shareholders' equity $ 2,201,797 $ 2,042,070 See accompanying notes to the consolidated financial statements. 82 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) For the Year Ended December 31, 2023 2022 INTEREST INCOME Interest and fees on loans receivable $ 84,614 $ 68,635 Interest on investment securities 13,279 10,866 Interest-bearing deposits and other 2,126 375 FHLB dividends 880 502 Total interest income 100,899 80,378 INTEREST EXPENSE Deposits 27,019 5,198 Borrowings 12,448 5,317 Total interest expense 39,467 10,515 Net interest income 61,432 69,863 PROVISION FOR CREDIT LOSSES Provision for credit losses on loans 2,357 1,535 Recapture of provision for credit losses on unfunded commitments ( 1,034 ) — Provision for credit losses 1,323 1,535 Net interest income after provision for credit losses 60,109 68,328 NONINTEREST INCOME Loan and deposit fees 4,341 4,729 Sold loan servicing fees and servicing rights mark-to-market 676 867 Net gain on sale of loans 438 824 Net (loss) gain on sale of investment securities ( 5,397 ) 118 Increase in cash surrender value of bank-owned life insurance, net 928 916 Income from death benefit on bank-owned life insurance, net — 1,489 Other income 3,034 1,384 Total noninterest income 4,020 10,327 NONINTEREST EXPENSE Compensation and benefits 31,209 35,940 Data processing 8,170 7,539 Occupancy and equipment 4,858 5,398 Supplies, postage, and telephone 1,433 1,376 Regulatory assessments and state taxes 1,635 1,539 Advertising 2,706 3,288 Professional fees 3,738 2,645 FDIC insurance premium 1,357 888 Other expense 6,348 3,699 Total noninterest expense 61,454 62,312 Income before provision for income taxes 2,675 16,343 Provision for income taxes 549 2,847 Net income 2,126 13,496 Net loss attributable to noncontrolling interest in Quin Ventures, Inc. 160 2,149 Net income attributable to parent $ 2,286 $ 15,645 Basic and diluted earnings per common share $ 0.26 $ 1.71 See accompanying notes to the consolidated financial statements. 83 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) For the Year Ended December 31, 2023 2022 Net income $ 2,126 $ 13,496 Other comprehensive income (loss): Unrealized holding gains (losses) on investments available for sale arising during the period 4,890 ( 51,204 ) Income tax (provision) benefit related to unrealized holding gains (losses) ( 824 ) 10,753 Net actuarial gains (losses) on defined benefit ("DB") plan assets 397 ( 509 ) Income tax benefit (provision) related to net actuarial gains (losses) on DB plan assets ( 85 ) 106 Amortization of unrecognized DB plan prior service cost 150 147 Income tax benefit (provision) related to amortization of DB plan prior service cost ( 32 ) ( 31 ) Unrealized holding losses on derivatives ( 1,054 ) — Income tax benefit related to unrealized holding losses on derivatives 226 — Reclassification adjustment for net losses (gains) on sales of securities realized in income 5,397 ( 118 ) Income tax benefit (provision) related to reclassification adjustment on sales of securities ( 1,158 ) 25 Other comprehensive income (loss), net of tax 7,907 ( 40,831 ) Comprehensive income (loss) 10,033 ( 27,335 ) Comprehensive (loss) income attributable to noncontrolling interest ( 160 ) ( 2,149 ) Comprehensive income (loss) attributable to parent $ 10,193 $ ( 25,186 ) See accompanying notes to the consolidated financial statements. 84 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data) Common Stock Additional Paid-in Retained Unearned ESOP Accumulated Other Comprehensive Loss Noncontrolling Total Shareholders' Shares Amount Capital Earnings Shares Net of Tax Interest Equity Balance at December 31, 2021 9,972,698 $ 100 $ 96,131 $ 103,014 $ ( 8,572 ) $ 288 $ ( 481 ) $ 190,480 Net income 15,645 ( 2,149 ) 13,496 Common stock issued 115,777 1 1,868 — 1,869 Common stock repurchased ( 386,062 ) ( 4 ) ( 3,993 ) ( 1,873 ) ( 5,870 ) Restricted stock award grants net of forfeitures 22,470 — — — Restricted stock awards canceled ( 21,302 ) — ( 392 ) — ( 392 ) Other comprehensive loss, net of tax ( 40,831 ) ( 40,831 ) Reclassification resulting from change in accounting method, net of tax 425 425 Quin Ventures asset sale in-substance distribution — — — — ( 661 ) ( 661 ) Share-based compensation 1,601 1,601 ESOP shares committed to be released 293 659 952 Cash dividends declared and paid ($ 0.28 per share) ( 2,787 ) ( 2,787 ) Balance at December 31, 2022 9,703,581 $ 97 $ 95,508 $ 114,424 $ ( 7,913 ) $ ( 40,543 ) $ ( 3,291 ) $ 158,282 Net income 2,286 ( 160 ) 2,126 Common stock repurchased ( 87,895 ) ( 1 ) ( 889 ) ( 259 ) ( 1,149 ) Restricted stock award grants net of forfeitures 16,856 — — — Restricted stock awards canceled ( 20,666 ) — ( 280 ) ( 280 ) Other comprehensive income, net of tax 7,907 7,907 Reclassification resulting from adoption of Accounting Standards Codification 326, net of tax ( 2,951 ) ( 2,951 ) Close out investment in Quin Ventures ( 3,451 ) 3,451 — Share-based compensation 1,413 1,413 ESOP shares committed to be released 32 660 692 Cash dividends declared and paid ($ 0.28 per share) ( 2,700 ) ( 2,700 ) Balance at December 31, 2023 9,611,876 $ 96 $ 95,784 $ 107,349 $ ( 7,253 ) $ ( 32,636 ) $ — $ 163,340 See accompanying notes to the consolidated financial statements. 85 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2023 2022 Cash flows from operating activities: Net income before noncontrolling interest $ 2,126 $ 13,496 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,612 1,960 Amortization of core deposit intangible 3 94 Amortization and accretion of premiums and discounts on investments, net 1,387 1,666 (Accretion) amortization of deferred loan fees and purchased premiums, net ( 653 ) 981 Amortization of debt issuance costs 78 78 Change in fair value of sold loan servicing rights 243 ( 13 ) Additions to servicing rights on sold loans, net ( 149 ) ( 54 ) Provision for credit losses on loans 2,357 1,535 Recapture of provision for credit losses on unfunded commitments ( 1,034 ) — Deferred federal income taxes, net 134 ( 1,529 ) Allocation of ESOP shares 692 673 Share-based compensation expense 1,413 1,601 Gain on sale of loans, net ( 438 ) ( 824 ) Loss (gain) on sale of securities available for sale, net 5,397 ( 118 ) Increase in cash surrender value of life insurance, net ( 928 ) ( 916 ) Income from death benefit on bank-owned life insurance, net — ( 1,489 ) Origination of loans held for sale ( 25,612 ) ( 25,926 ) Proceeds from loans held for sale 25,894 26,913 Change in assets and liabilities: Increase in accrued interest receivable ( 1,151 ) ( 1,454 ) Decrease (increase) in prepaid expenses and other assets 1,293 ( 3,938 ) Increase in accrued interest payable 2,941 62 Increase in accrued expenses and other liabilities 2,270 3,104 Net cash provided by operating activities 17,875 15,902 Cash flows from investing activities: Purchase of securities available for sale ( 20,330 ) ( 78,409 ) Proceeds from maturities, calls, and principal repayments of securities available for sale 14,161 30,497 Proceeds from sales of securities available for sale 40,619 12,685 Purchase of FHLB stock ( 1,983 ) ( 6,485 ) Early surrender of bank-owned life insurance policy 15 — Net increase in loans receivable ( 114,997 ) ( 183,691 ) Purchase of premises and equipment, net ( 1,571 ) ( 2,914 ) Capital contributions to equity investments ( 608 ) ( 7,364 ) Capital disbursements from equity and partnership agreements 759 — Capital contributions to low-income housing tax credit partnerships ( 259 ) ( 137 ) Capital contributions to historic tax credit partnerships — ( 1,829 ) Net cash used by investing activities ( 84,194 ) ( 237,647 ) See accompanying notes to the consolidated financial statements. 86 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2023 2022 Cash flows from financing activities: Net increase (decrease) in deposits $ 112,637 $ ( 16,325 ) Proceeds from long-term FHLB advances 15,000 — Repayment of long-term FHLB advances ( 15,000 ) — Net increase in short-term FHLB advances 41,000 154,000 Net (decrease) increase in line of credit ( 5,500 ) 12,000 Net (decrease) increase in advances from borrowers for taxes and insurance ( 116 ) 268 Payment of dividends ( 2,700 ) ( 2,787 ) Restricted stock awards canceled ( 280 ) ( 392 ) Repurchase of common stock ( 1,149 ) ( 5,439 ) Net cash provided by financing activities 143,892 141,325 Net increase (decrease) in cash and cash equivalents 77,573 ( 80,420 ) Cash and cash equivalents at beginning of period 45,596 126,016 Cash and cash equivalents at end of period $ 123,169 $ 45,596 Supplemental disclosures of cash flow information: Cash paid for interest on deposits and borrowings $ 36,526 $ 10,453 Cash paid for income taxes 2,125 4,446 Supplemental disclosures of noncash investing activities: Change in unrealized loss on securities available for sale $ 10,287 $ ( 51,322 ) Change in unrealized loss on fair value hedge ( 1,054 ) — Cumulative adjustment to servicing right asset due to election of fair value option — 538 Cumulative effect of adoption of ASU 2016-13 Financial Instruments - Credit Losses on January 1, 2023 ( 3,735 ) — Lease liabilities arising from obtaining right-of-use assets 152 — Transfer of bank-owned life insurance proceeds to prepaid expenses and other assets due to death benefit accrued but not paid at year end — 2,057 (Loss on) equity investment in Quil received through Quin Ventures asset sale ( 225 ) 225 Investment in Meriwether Group, LLC acquired through issuance of shares — 1,869 See accompanying notes to the consolidated financial statements. 87 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Nature of operations - 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 were contributed to the Bank upon Conversion. At the time of Conversion, the Bank established a liquidation account in an amount equal to its total net worth, approximately $ 79.7 million, as of June 30, 2014, the latest statement of financial condition appearing in First Northwest's prospectus. The liquidation account is maintained for the benefit of eligible depositors who continue to maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the extent that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The liquidation account balance is not available for payment of dividends, and the Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount. Pursuant to the Conversion, the Bank’s Board of Directors adopted an ESOP which purchased in the open market 8 % of the common stock originally issued for a total of 1,048,029 shares. As of December 15, 2015, 1,048,029 shares, or 100.0 % of the total, had been purchased. As of December 31, 2023 , First Northwest had allocated 439,174 shares from the total shares purchased to participants. In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "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. ("Quil"), 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 valued at $ 225,000 and recorded a $ 1.5 million commitment receivable. In June 2023, First Northwest determined that Quin Ventures was no longer a going concern. The Company wrote off the remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods. The noncontrolling interest in Quin Ventures balance was moved to retained earnings, with no change to total shareholders' equity as a result of the transaction. In December 2023, the Company determined that Quil was no longer a going concern, making the collectability of the receivable from and investment in Quil unlikely. As result, the related investment of $ 225,000 and commitment receivable of $ 1.5 million were written off during the fourth quarter of 2023, impacting other noninterest income and other noninterest expense, respectively. 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 non-banking activities that are financial in nature or incidental to financial activities. First Northwest and the Bank are collectively referred to as the "Company." For periods prior to June 30, 2023, Company references also include Quin Ventures. First Northwest's business activities generally are limited to passive investment activities and oversight of its investments in First Fed and former controlling interest in Quin Ventures. Accordingly, the information set forth in this report, including the consolidated 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. 88 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses primarily 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. Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions. These assumptions result in estimates that affect the reported amounts of assets and liabilities, revenues and expenses, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. 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, fair value of financial instruments, deferred tax assets and liabilities, and the valuation of collateral dependent loans. Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest Bancorp and its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures, Inc. All material intercompany accounts and transactions have been eliminated in consolidation. Through June 2023, First Northwest and POM shared equal ownership in Quin Ventures; however, it was previously determined that First Northwest had a controlling interest for financial reporting purposes under Accounting Standards Codification 810. As a result, 100% of Quin Ventures balances, excluding intercompany activity, are reported in the consolidated financial statements presented. The Quin Ventures net loss allocable to POM is shown on the financial statements thorough a noncontrolling interest adjustment where applicable. Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure. Cash and cash equivalents - Cash and cash equivalents consist of currency on hand, due from banks, and interest-bearing deposits with financial institutions with an original maturity of three months or less. The amounts on deposit fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects First Fed to credit risk. First Fed has not experienced any losses due to balances exceeding FDIC insurance limits. Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances on deposit with the Federal Reserve Bank of San Francisco. The deposit requirement was zero at both December 31, 2023 and 2022 . First Fed was in compliance with its reserve requirements at December 31, 2023 and 2022 . Investment securities - Investments in debt securities are classified into one of three categories: ( 1 ) held-to-maturity, ( 2 ) available-for-sale, or ( 3 ) trading. First Fed had no trading securities at December 31, 2023 and 2022 . Investment securities are categorized as held-to-maturity when First Fed has the positive intent and ability to hold those securities to maturity. First Fed had no held-to-maturity securities at December 31, 2023 and 2022 . Securities that are held-to-maturity are stated at cost and adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Investment securities categorized as available for sale are generally held for investment purposes (to maturity), although unanticipated future events may result in the sale of some securities. Available-for-sale securities are recorded at fair value, with the unrealized holding gain or loss reported in other comprehensive income (OCI), net of tax, as a separate component of shareholders' equity. Realized gains or losses are determined using the amortized cost basis of securities sold using the specific identification method and are included in earnings. Dividend and interest income on investments are recognized when earned. Premiums and discounts on securities without call features are recognized in interest income using the level yield method over the period to maturity. Premiums on securities with call features are amortized to the earliest call date. 89 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company reviews the need for an allowance for credit losses 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 recapture 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. Federal Home Loan Bank stock - First Fed’s investment in Federal Home Loan Bank of Des Moines (FHLB) stock is carried at cost, which approximates fair value. As a member of the FHLB system, First Fed is required to maintain a minimum investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2023 and 2022 , First Fed’s minimum investment requirement was approximately $ 13.7 million and $ 11.7 million, respectively. First Fed was in compliance with the FHLB minimum investment requirement at December 31, 2023 and 2022 . First Fed may request redemption at par value of any stock in excess of the amount First Fed is required to hold. Stock redemptions are granted at the discretion of the FHLB. Management evaluates FHLB stock for impairment based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as ( 1 ) the significance of any decline in net assets of the FHLB compared with the capital stock amount for the FHLB and the length of time this situation has persisted, ( 2 ) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, ( 3 ) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and ( 4 ) the liquidity position of the FHLB. Based on its evaluation, First Fed did not recognize a loss on its FHLB stock at December 31, 2023 and 2022 . Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value. Fair value is determined based upon market prices from third -party purchasers and brokers. Net unrealized losses, if any, are recognized through a valuation allowance by charges to earnings. Gains or losses on the sale of loans are recognized at the time of sale and determined by the difference between net sale proceeds and the net book value of the loan less the estimated fair value of any retained mortgage servicing rights. Loans receivable - Loans are stated at the amount of unpaid principal, net of charge-offs, unearned income, allowance for credit losses on loans (ACLL) and any deferred fees or costs. Interest on loans is calculated using the simple interest method based on the month end balance of the principal amount outstanding and is credited to income as earned. The estimated life is adjusted for prepayments. Each loan segment and class inherently contains differing credit risk profiles depending on the unique aspects of that segment or class of loans. For example, borrowers tend to consider their primary residence and access to transportation for employment-related purposes as basic requirements; accordingly, many consumers prioritize making payments on real estate first -mortgage loans and vehicle loans. Conversely, second -mortgage real estate loans or unsecured loans may not be supported by sufficient collateral; thus, in the event of financial hardship, borrowers may tend to place less importance on maintaining these loans as current and the Bank may not have adequate collateral to provide a secondary source of repayment in the event of default. Notwithstanding the various risk profiles unique to each class of loan, management believes that the credit risk for all loans is similarly dependent on essentially the same factors, including the financial strength of the borrower, the cash flow available to service maturing debt obligations, the condition and value of underlying collateral, the financial strength of any guarantors, and other factors. 90 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Problem loans are monitored and a portion or all of the balance is charged off when collectability is sufficiently questionable that the Bank can no longer justify showing the loan as an asset on the balance sheet. To determine if a loan should be charged off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flow, the value of the Bank’s collateral, and the strength of co-makers or guarantors. When these sources do not add up to a reasonable probability that the loan can be collected, charge off is processed. 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. Loan fees and purchased premiums - Loan origination fees and certain direct origination costs are deferred and amortized as an adjustment to the yield of the loan over the contractual life using the effective interest method. In the event a loan is sold, the remaining deferred loan origination fees and/or costs are recognized as a component of gains or losses on the sale of loans. We may pay a purchase premium or receive a purchase discount on fully originated loans that we purchase. Premiums and discounts are capitalized at the time of purchase and amortized as an adjustment to the yield over the contractual life using the effective interest method. Allowance for credit losses (applicable to 2023 ) - On January 1, 2023, the Company adopted Financial Accounting Standards Board ("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 allowance for credit losses 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 collectability of a loan balance is unlikely. 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 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 cashflows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cashflows 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. 91 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ACLL 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 credit losses on loans 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 at December 31, 2023 , is appropriate given the above considerations. Allowance for loan losses (applicable to 2022 and prior years) - Prior to the implementation of CECL, First Fed maintained a general allowance for loan losses based on evaluating known and inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors included changes in the size and composition of the loan portfolio, actual loan loss experience, and current and anticipated economic conditions. When determining the appropriate historical loss and qualitative factors, management took into consideration the impact of the COVID- 19 pandemic on such factors as the national and state unemployment rates and related trends, the amount of and timing of financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID- 19 pandemic, and the Company's COVID- 19 loan modification program. Qualitative factors such as economic, market, industry, and political changes were also considered for calculation of the allowance. The appropriateness of the allowance for loan losses was estimated based upon these factors and trends identified by management at the time the consolidated financial statements were prepared. The ultimate recovery of loans is susceptible to future market factors beyond First Fed’s control, which may result in losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review First Fed’s allowance for loan losses. Such agencies may require First Fed to recognize additional provisions for loan losses based on their judgment using information available to them at the time of their examination. Allowances for losses on specific problem loans are charged to income when it is determined that the value of these loans and properties, in the judgment of management, is impaired. First Fed accounts for impaired loans in accordance with Accounting Standards Codification (ASC) 310 - 10 - 35, Receivables—Overall—Subsequent Measurement . A loan is considered impaired when, based on current information and events, it is probable that First Fed will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, impairment is measured at current fair value generally based on a current appraisal of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less than the recorded investment in the loan (including collected interest that has been applied to principal, net deferred loan fees or costs, and unamortized premiums or discounts), loan impairment is recognized by establishing or adjusting an allocation of the allowance for loan losses. Uncollected accrued interest is reversed against interest income. 92 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance. The impairment amount for small balance homogeneous loans is calculated using the adjusted historical loss rate for the class and risk category related to each loan, unless the loan is subject to a troubled debt restructuring ("TDR"). A TDR is a loan for which First Fed, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that First Fed would not otherwise consider. The loan terms that have been modified or restructured due to the borrower’s financial difficulty include, but are not limited to, a reduction in the stated interest rate; an extension of the maturity; an interest rate below market; a reduction in the face amount of the debt; a reduction in the accrued interest; or extension, deferral, renewal, or rewrite of the original loan terms. The restructured loans may be classified "special mention" or "substandard" depending on the severity of the modification. Loans that were paid current at the time of modification may be upgraded in their classification after a sustained period of repayment performance, usually six months or longer, and there is reasonable assurance that repayment will continue. Loans that are past due at the time of modification are classified "substandard" and placed on nonaccrual status. TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of repayment performance, usually six months or longer, and there is a reasonable assurance that repayment will continue. First Fed allows reclassification of a troubled debt restructuring back into the general loan pool (as a non-troubled debt restructuring) if the borrower is able to refinance the loan at then-current market rates and meet all of the underwriting criteria of First Fed required of other borrowers. The refinance must be based on the borrower’s ability to repay the debt and no special concessions of rate and/or term are granted to the borrower. Allowance for credit losses on unfunded commitments (applicable to 2023 ) - 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. Reserve for unfunded commitments (applicable to 2022 and prior years) - Management maintains a reserve for unfunded commitments to absorb probable losses associated with off-balance sheet commitments to lend funds such as unused lines of credit and the undisbursed portion of construction loans. Management determines the adequacy of the reserve based on reviews of individual exposures, current economic conditions, and other relevant factors. The reserve is based on estimates and ultimate losses may vary from the current estimates. The reserve is evaluated on a regular basis and necessary adjustments are reported in earnings during the period in which they become known. The reserve for unfunded commitments is included in "Accrued expenses and other liabilities" on the consolidated balance sheets. Real estate owned and repossessed assets - Real estate owned and repossessed assets include real estate and personal property acquired through foreclosure or repossession and may include in-substance foreclosed properties. These properties are initially recorded at the fair market value of the property less selling costs. Properties are subsequently evaluated for impairment. In-substance foreclosed properties are those properties for which the Bank has taken physical possession, regardless of whether formal foreclosure proceedings have taken place. Loan servicing rights - Loan servicing rights are recorded at fair value when loans are originated and subsequently sold with the servicing rights retained. Management assesses the fair value of loan servicing rights based on recalculations of the present value of remaining future cash flows using updated market discount rates and prepayment speeds. Subsequent loan prepayments and changes in prepayment assumptions in excess of those forecasted can adversely impact the carrying value of the servicing rights. The servicing rights are stratified based on the predominant risk characteristics of the underlying loans: fixed-rate loans and adjustable-rate loans. The effect of changes in market interest rates on estimated rates of loan prepayments is the predominant risk characteristic for loan servicing rights. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. 93 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sold loan servicing income represents fees earned for servicing loans. Fees for servicing sold loans are generally based upon a percentage of the principal balance of the loans serviced, as well as related ancillary income such as late charges. Servicing income is recognized as earned unless collection is doubtful. The caption in the consolidated statement of income "Sold loan servicing fees and servicing rights mark-to-market" includes sold loan servicing income and changes in fair value. Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation is recognized and computed on the straight-line method over the estimated useful lives as follows: Years Buildings 37.5 - 50 Furniture, fixtures, and equipment 3 - 10 Software 3 Automobiles 5 Bank-owned life insurance - The carrying amount of life insurance approximates fair value. Fair value of life insurance is estimated using the cash surrender value, less applicable surrender charges. The change in cash surrender value is included in noninterest income. Equity and partnership investments - Equity investments include amounts invested in non-publicly traded stock and simple agreements for future equity ("SAFE"). Partnership investments include limited partnerships in investment funds and other business ventures. Investments in non-publicly traded stock and SAFE are measured at cost, less impairment, plus or minus changes resulting from observable price changes in ordinary transactions for the identical or similar investment of the same issuer. The recorded balance of these equity investments was $ 1.6 million and $ 1.7 million at December 31, 2023 and 2022 , respectively. Partnership investments that do not result in consolidation of the investee are accounted for under the equity method of accounting; the recorded balance of these partnership investments was $ 13.2 million and $ 12.6 million at December 31, 2023 and 2022 , respectively. Throughout the year we assess whether impairment indicators exist to trigger the performance of an impairment analysis. Changes in the fair value of partnership investments are recorded in other noninterest income. The SAFE investment converted to non-publicly traded stock in 2023. Goodwill - Goodwill is recorded from a business combination as the difference in the purchase price and fair value of assets acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not amortized. The Company reviews goodwill for impairment annually, or more frequently if an indication of impairment exists between annual tests. Any impairment will be recorded as noninterest expense and corresponding reduction in intangible asset on the consolidated financial statements. Core deposit intangible - A core deposit intangible ("CDI") asset is recognized from the assumption of core deposit liabilities in connection with the acquisition of deposits from another financial institution. The asset is valued by a third party and is amortized into noninterest expense over its estimated useful life. The CDI is evaluated for impairment annually with any additional decline recorded as noninterest expense on the Consolidated Income Statement. Income taxes - First Fed accounts for income taxes in accordance with the provisions of ASC 740 - 10, Income Taxes , which requires the use of the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for their future tax consequences, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Leases - Operating lease right-of-use ("ROU") assets represent the Company's right to use the underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the future lease payments using the Company's incremental borrowing rate. The discount rate used in determining the present value is the Company's incremental borrowing rate using the FHLB fixed advance rate based on the remaining lease term as of January 1, 2019, or the commencement date for subsequent leases. The Company does not capitalize short-term leases, which are leases with terms of twelve months or less. ROU assets and related operating lease liabilities are remeasured when lease terms are amended, extended, or when management intends to exercise available extension options. We have lease agreements with lease and non-lease components, which are generally accounted for separately for real estate leases. 94 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Historic Tax Credit Investment - The Company holds an interest in an Historic Tax Credit investment ("HTC") partnership, also referred to as the Rehabilitation Credit, which met the National Park Service's requirements to qualify for a tax incentive on the rehabilitation of a certified historic structure. As a limited liability investor in this partnership, the Company receives a tax benefit in the form of a tax deduction from partnership operating losses and a federal income tax credit. The federal income tax credit is earned over a 5 -year period upon the qualified rehabilitated building being placed in service and having met all the requirements. The Company uses the deferral method to amortize the initial cost of the investment over the life of the related tax credit and other tax benefits received and recognizes the net investment performance on the Consolidated Statements of Income as a component of income tax expense. The Company reports the carrying value of the equity investment in the unconsolidated HTC in "Prepaid expenses and other assets" on the Company’s Consolidated Balance Sheets. The maximum exposure to loss in the HTC is the amount of equity invested by the Company. The Company has evaluated the variable interests held by the Company in the HTC investment and determined that the Company does not have controlling financial interests in such investment and is not the primary beneficiary. Low-Income Housing Tax Credit Investment - The Company has an equity investment in a Low-Income Housing Tax Credit Investment ("LIHTC") partnership which is an indirect federal subsidy that finances low-income housing projects. As a limited liability investor in this partnership, the Company receives a tax benefit in the form of a tax deduction from partnership operating losses and a federal income tax credit. The federal income tax credit is earned over a 10 -year period as a result of the investment properties meeting certain criteria and is subject to recapture for noncompliance with such criteria over a 15 -year period. The Company accounts for the LIHTC under the proportional amortization method and amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance on the Consolidated Statements of Income as a component of income tax expense. The Company reports the carrying value of the equity investment in the unconsolidated LIHTC in "Prepaid expenses and other assets" on the Company’s Consolidated Balance Sheets. The maximum exposure to loss in the LIHTC is the amount of equity invested and credit extended by the Company. The Company has evaluated the variable interests held by the Company in the LIHTC investment and determined that the Company does not have controlling financial interests in such investment and is not the primary beneficiary. Transfers of financial assets - Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when: ( 1 ) the assets have been isolated from First Fed, ( 2 ) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and ( 3 ) First Fed does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The mortgage loans that are sold with recourse provisions are accounted for as sales until such time as the loan defaults. Periodically, First Fed sells mortgage loans with "life of the loan" recourse provisions, requiring First Fed to repurchase the loan at any time if it defaults. The remaining balance of such loans at December 31, 2023 and 2022 , was approximately $ 1.8 million and $ 1.9 million, respectively. Of these loans, no loans were repurchased during the years ended December 31, 2023 or 2022 . There is an associated allowance of $ 9,000 at December 31, 2022 , included in "accrued expenses and other liabilities" on the consolidated balance sheets related to these loans. No allowance is recorded for these loans under CECL at December 31, 2023 . Off-balance-sheet credit-related financial instruments - In the ordinary course of business, First Fed has entered into commitments to extend credit, including commitments under lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Advertising costs - First Fed expenses advertising costs as they are incurred. Comprehensive income (loss) - Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income (loss), are components of comprehensive income (loss). Dividend restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders. 95 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of noninterest income evaluated under Revenue Recognition (Topic 606 ) - The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014 - 09. The following is a discussion of key revenues within the scope of the new revenue guidance. Deposit fees - The Company earns fees from its deposit customers for account maintenance, transaction-based activity and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. Deposit fees are included in Service Fees on the Consolidated Statements of Income. Debit card interchange income - Debit and Automated Teller Machine ("ATM") interchange income represent fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit cardholder transactions through card networks. In addition, the Company earns interchange fees for use of its ATMs by customers of other banking institutions. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder's debit card. Certain expenses directly associated with the credit and debit card are netted against interchange income. Debit card interchange income is included in Service Fees on the Consolidated Statements of Income. Third-party credit card interchange income - Third-party credit card interchange income represents fees earned when a credit card issued by the Bank through a third -party vendor is used. Similar to the debit card interchange, the Bank earns an interchange fee for each transaction made with a Bank-branded credit card. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder's credit card. Certain expenses directly related to the third -party credit card interchange contract are netted against interchange income. Third-party credit card interchange income is included in Service Fees on the Consolidated Statements of Income. Investment services revenue - Commissions received on the sale of investment related products is determined by a percentage of underlying instruments sold and is recognized when the sale is finalized. Investment services revenue is included in Other Income on the Consolidated Statements of Income. Gains/losses on the sale of other real estate owned are included in non-interest expense and are generally recognized when the performance obligation is complete. This is typically at delivery of control over the property to the buyer at time of each real estate closing. Fair value measurements - Fair values of financial instruments are estimated using relevant market information and other assumptions (Note 15 ). Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. 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. 96 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Segment information - First Fed is engaged in the business of attracting deposits and providing lending services. Substantially all income is derived from a diverse base of commercial, mortgage, and consumer lending activities and investments. The Company’s activities are considered to be a single industry segment for financial reporting purposes. Employee Stock Ownership Plan - The cost of shares issued to the ESOP but not yet allocated to participants is shown as a reduction of shareholders' equity. Compensation expense is based on the market price of shares as they are committed to be released to participants' accounts. Dividends on allocated and unallocated ESOP shares reduce debt and accrued interest. Earnings per Common Share - Earn ings per share ("EPS") is computed using the two -class method. The two -class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared or accumulated and participation rights in undistributed earnings. Under the two -class method, basic EPS is computed by dividing earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. Earnings allocated to common shareholders represents net income reduced by earnings allocated to participating securities. ESOP shares that are committed to be released are outstanding for EPS calculation purposes, while unallocated ESOP shares are not considered outstanding for basic or diluted EPS calculations. Diluted EPS is computed by dividing net income by the weighted average common shares outstanding plus the number of additional common shares that would have been outstanding if unvested restricted stock awards were included unless those additional shares would have been anti-dilutive. For the diluted EPS computation, the treasury stock method is applied and compared to the two -class method and whichever method results in a more dilutive impact is utilized to calculate diluted EPS. Recently adopted accounting pronouncements Summary of Credit Losses Adoption On January 1, 2023, the Company adopted Financial Accounting Standards Board ("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 and held-to-maturity securities. 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. 97 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 recapture 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 collectability of a loan balance is unlikely. 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. This accounting policy is discussed in detail previously in Note 1 with additional detail provided in Note 4 of the Notes to Consolidated Financial Statements. 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. 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 (recapture 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. 98 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 higher market interest rates at that time making our lower coupon investments less attractive. 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 January 1, 2023, 23.9 % of the investment securities were issued by or guaranteed by the United States government or its agencies, 30.0 % 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 December 31, 2023, the ACLL as a percentage of loans receivable was 1.05 %. 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 ("ACLUC") 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 ACLUC of $ 1.5 million. Overall CECL Impact Upon Adoption - The adoption of ASU 2016 - 13, included an increase to the ACLL of $ 2.2 million and an increase to the ACLUC 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. Other Recently Adopted Accounting Pronouncements In March 2022, the FASB issued ASU 2022 - 02, Financial Instruments - Credit Losses (Topic 326 ): Troubled Debt Restructurings and Vintage Disclosures . This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancing and restructuring activity by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write offs by year of origination for financing receivables and net investments in leases. This ASU is effective upon adoption of ASU 2016 - 13. On January 1, 2023, the Company adopted this ASU at the same time ASU 2016 - 13 was adopted. The Company recorded gross charge-offs of $ 3.3 million during the year ended December 31, 2023, and recoveries for the same period were $ 150,000 . See table in Note 3 for additional information. On March 28, 2022, the FASB 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. 99 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In March 2020, the FASB issued ASU 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. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, which 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, the FASB issued ASU 2022 - 06, which deferred the sunset date for Topic 848 to December 31, 2024. The Company implemented a transition plan to identify and modify its loans and other financial instruments that were either directly or indirectly influenced by LIBOR. There was no material impact as a result of implementing these ASUs, transitioning away from LIBOR for its loan and other financial instruments effective July 1, 2023. Table of Contents Recently issued accounting pronouncements not yet adopted In June 2022, the FASB issued ASU 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 does not believe this ASU will have a material impact 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. 100 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2023, the FASB issued ASU No. 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures . This ASU enhances disclosures about significant segment expenses. The key amendments: ( 1 ) require that a public entity disclose on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss, ( 2 ) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition, ( 3 ) require that a public entity provide all annual disclosures about a reportable segment's profit or loss currently required by GAAP in interim periods as well, ( 4 ) clarify that if CODM uses more than one measure of a segment's profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit, ( 5 ) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources and ( 6 ) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures. This ASU is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. As the Company has one reportable segment, the requirements of this standard for such entities will apply beginning with the Company's annual report for the year ending December 31, 2024. The Company does not expect adoption of this ASU to have a material effect on the Company's consolidated financial statements. In December 2023, the FASB issued ASU No. 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures . This ASU requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The ASU requires all entities to disclose on an annual basis ( 1 ) the amount of income taxes paid, disaggregated by federal, state and foreign taxes and ( 2 ) the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal or greater than 5 percent of total income taxes paid. The ASU also requires that all entities disclose income (loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic or foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state and foreign. This ASU is effective for public business entities for annual periods beginning after December 15, 2024. The Company does not expect adoption of the ASU to have a material effect on the Company's consolidated financial statements. Reclassifications - Certain amounts in prior periods have been reclassified to conform to the current audited 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 December 31, 2023 , are summarized as follows: December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In thousands) Available for Sale Municipal bonds $ 102,998 $ — $ ( 15,237 ) $ 87,761 U.S. government agency issued asset-backed securities (ABS agency) 11,847 — ( 65 ) 11,782 Corporate issued asset-backed securities (ABS corporate) 5,370 — ( 84 ) 5,286 Corporate issued debt securities (Corporate debt) 56,515 — ( 5,061 ) 51,454 Mortgage-Backed Securities: U.S. government agency issued mortgage-backed securities (MBS agency) 75,665 — ( 12,418 ) 63,247 Non-agency issued mortgage-backed securities (MBS non-agency) 81,555 — ( 5,462 ) 76,093 Total securities available for sale $ 333,950 $ — $ ( 38,327 ) $ 295,623 101 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (In thousands) Available for Sale Municipal bonds $ 119,990 $ — $ ( 21,940 ) $ 98,050 U.S. Treasury notes 2,469 — ( 105 ) 2,364 International agency issued bonds (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 December 31, 2023 and 2022 . Accrued interest receivable on available-for-sale debt securities totaled $ 1.9 million and $ 2.0 million as of December 31, 2023 and 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 table 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, 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 $ — $ — $ ( 15,237 ) $ 87,461 $ ( 15,237 ) $ 87,461 ABS agency ( 65 ) 11,782 — — ( 65 ) 11,782 ABS corporate ( 84 ) 3,771 — — ( 84 ) 3,771 Corporate debt — — ( 5,061 ) 51,454 ( 5,061 ) 51,454 Mortgage-Backed Securities MBS agency ( 27 ) 3,941 ( 12,391 ) 59,305 ( 12,418 ) 63,246 MBS non-agency — — ( 5,462 ) 76,086 ( 5,462 ) 76,086 Total $ ( 176 ) $ 19,494 $ ( 38,151 ) $ 274,306 $ ( 38,327 ) $ 293,800 102 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table 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 $ ( 27,459 ) $ 204,141 $ ( 21,156 ) $ 119,642 $ ( 48,615 ) $ 323,783 There were 6 available-for-sale securities with unrealized losses of less than one year, and 156 available-for-sale securities with an unrealized loss of more than one year at December 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 a 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 loss was recorded at December 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. December 31, 2023 December 31, 2022 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year $ 25,279 $ 25,017 $ 13,762 $ 13,490 Due after one through five years 16,622 16,029 28,890 27,808 Due after five through ten years 8,874 8,197 13,436 12,165 Due after ten years 106,445 90,097 133,981 115,491 Total mortgage-backed securities 157,220 139,340 190,069 168,954 All other investment securities: Due within one year 300 300 — — Due after one through five years 18,187 17,384 20,700 18,957 Due after five through ten years 57,328 50,768 64,211 57,523 Due after ten years 100,915 87,831 100,203 81,135 Total all other investment securities 176,730 156,283 185,114 157,615 Total investment securities $ 333,950 $ 295,623 $ 375,183 $ 326,569 103 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales of available-for-sale securities were as follows: For the Year Ended December 31, 2023 2022 (In thousands) Proceeds $ 40,619 $ 12,685 Gross gains — 128 Gross losses ( 5,397 ) ( 10 ) 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 $ 14.8 million and $ 13.2 million as of December 31, 2023 and 2022 , respectively. Net loans do not include accrued interest receivable. Accrued interest receivable on loans was $ 6.0 million and $ 4.7 million as of December 31, 2023 and 2022 , respectively, 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: December 31, 2023 December 31, 2022 (In thousands) Real Estate: One-to-four family $ 378,432 $ 343,559 Multi-family 333,094 252,745 Commercial real estate 387,983 388,884 Construction and land 129,691 193,646 Total real estate loans 1,229,200 1,178,834 Consumer: Home equity 69,403 52,877 Auto and other consumer 249,130 238,913 Total consumer loans 318,533 291,790 Commercial business loans 112,295 76,927 Total loans receivable 1,660,028 1,547,551 Less: Allowance for credit losses on loans (1) 17,510 16,116 Total loans receivable, net $ 1,642,518 $ 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. 104 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans, by the earlier of next repricing date or maturity, at the dates indicated: December 31, 2023 December 31, 2022 (In thousands) Adjustable-rate loans Due within one year $ 353,493 $ 329,190 After one but within five years 314,634 276,676 After five but within ten years 51,528 51,317 After ten years — 888 Total adjustable-rate loans 719,655 658,071 Fixed-rate loans Due within one year $ 49,582 $ 3,479 After one but within five years 167,137 189,768 After five but within ten years 205,188 220,224 After ten years 518,466 476,009 Total fixed-rate loans 940,373 889,480 Total loans receivable $ 1,660,028 $ 1,547,551 The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to multiple indices. Future market factors may affect the correlation of adjustable loan interest rates with the rates First Fed pays on the short-term deposits that have been primarily used to fund such loans. The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated: December 31, 2023 December 31, 2022 Collateral Dependent Loans Non-collateral Dependent Loans Total Nonaccrual Loans Total Nonaccrual Loans (1) (In thousands) One-to-four family $ 1,426 $ 418 $ 1,844 $ 954 Commercial real estate — 28 28 53 Construction and land 14,981 5 14,986 15 Home equity 30 93 123 196 Auto and other consumer 180 606 786 575 Commercial business loans 877 — 877 — Total nonaccrual loans $ 17,494 $ 1,150 $ 18,644 $ 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 year ended was $ 58,000 . 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. 105 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 loans — 76,927 76,927 Total loans receivable $ 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 December 31, 2023 and 2022 . The following table presents the amortized cost of past due loans by segment and class as of December 31, 2023 : 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total loans receivable (In thousands) Real Estate: One-to-four family $ 802 $ — $ 1,010 $ 1,812 $ 376,620 $ 378,432 Multi-family — — — — 333,094 333,094 Commercial real estate — 8,526 — 8,526 379,457 387,983 Construction and land 14 — — 14 129,677 129,691 Total real estate loans 816 8,526 1,010 10,352 1,218,848 1,229,200 Consumer: Home equity 59 — — 59 69,344 69,403 Auto and other consumer 1,854 601 791 3,246 245,884 249,130 Total consumer loans 1,913 601 791 3,305 315,228 318,533 Commercial business loans 1,117 757 — 1,874 110,421 112,295 Total loans receivable $ 3,846 $ 9,884 $ 1,801 $ 15,531 $ 1,644,497 $ 1,660,028 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 Past Due 60-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total loans receivable (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 receivable $ 2,992 $ 871 $ 1,220 $ 5,083 $ 1,542,468 $ 1,547,551 106 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8 -point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that First Fed 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 credit loss reserve is not warranted. When First Fed classifies problem assets as either substandard or doubtful, it may choose to individually evaluate the expected credit loss or may determine that the characteristics are not significantly different from those in pooled loan analysis. 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. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that do not currently expose First Fed to sufficient risk to warrant classification as substandard or doubtful but 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. 107 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of December 31, 2023 , as well as gross charge-off activity for the year ended December 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 (Grades 1-3) $ 2,282 $ 102,389 $ 118,028 $ 69,229 $ 13,882 $ 65,701 $ — $ 371,511 Watch (Grade 4) — 275 1,338 1,569 — 1,295 — 4,477 Special Mention (Grade 5) — — — 300 — 80 — 380 Substandard (Grade 6) — — — 327 482 1,255 — 2,064 Total one-to-four family 2,282 102,664 119,366 71,425 14,364 68,331 — 378,432 Gross charge-offs — — — — — — — — Multi-family Pass (Grades 1-3) 52,208 105,902 88,293 57,588 6,922 5,356 — 316,269 Watch (Grade 4) — — 15,126 708 — 991 — 16,825 Total multi-family 52,208 105,902 103,419 58,296 6,922 6,347 — 333,094 Gross charge-offs — — — — — — — — Commercial Real Estate Pass (Grades 1-3) 52,823 87,712 99,058 76,664 13,096 22,425 — 351,778 Watch (Grade 4) 4,433 1,168 1,340 8,829 3,561 496 — 19,827 Special Mention (Grade 5) — — 6,528 — — 2 — 6,530 Substandard (Grade 6) — 28 8,526 1,294 — — — 9,848 Total commercial real estate 57,256 88,908 115,452 86,787 16,657 22,923 — 387,983 Gross charge-offs — — — — — — — — Construction and Land Pass (Grades 1-3) 20,772 49,508 23,988 727 344 464 — 95,803 Watch (Grade 4) 6,512 4,935 229 — — 15 — 11,691 Special Mention (Grade 5) 7,196 — — — — 14 — 7,210 Substandard (Grade 6) 14,981 — — — — 6 — 14,987 Total construction and land 49,461 54,443 24,217 727 344 499 — 129,691 Gross charge-offs — — — — — — — — Home Equity Pass (Grades 1-3) 7,179 7,169 4,638 3,063 1,331 4,283 41,105 68,768 Watch (Grade 4) — — — — — 155 345 500 Substandard (Grade 6) — — 30 59 — 13 33 135 Total home equity 7,179 7,169 4,668 3,122 1,331 4,451 41,483 69,403 Gross charge-offs — — — — — 10 — 10 Auto and Other Consumer Pass (Grades 1-3) 49,649 69,052 64,101 29,113 14,660 18,593 385 245,553 Watch (Grade 4) 270 919 579 204 138 59 4 2,173 Special Mention (Grade 5) 90 334 33 162 — — — 619 Substandard (Grade 6) 84 393 — — 30 278 — 785 Total auto and other consumer 50,093 70,698 64,713 29,479 14,828 18,930 389 249,130 Gross charge-offs — 3,018 15 52 11 112 104 3,312 Commercial business Pass (Grades 1-3) 23,499 19,191 11,032 2,440 455 13,635 29,976 100,228 Watch (Grade 4) 340 62 275 270 — ( 1 ) 3,806 4,752 Substandard (Grade 6) 291 3,653 104 779 — ( 1 ) 2,489 7,315 Total commercial business 24,130 22,906 11,411 3,489 455 13,633 36,271 112,295 Gross charge-offs — — — — — — — — Total loans Pass (Grades 1-3) 208,412 440,923 409,138 238,824 50,690 130,457 71,466 1,549,910 Watch (Grade 4) 11,555 7,359 18,887 11,580 3,699 3,010 4,155 60,245 Special Mention (Grade 5) 7,286 334 6,561 462 — 96 — 14,739 Substandard (Grade 6) 15,356 4,074 8,660 2,459 512 1,551 2,522 35,134 Total loans $ 242,609 $ 452,690 $ 443,246 $ 253,325 $ 54,901 $ 135,114 $ 78,143 $ 1,660,028 Total gross charge-offs $ — $ 3,018 $ 15 $ 52 $ 11 $ 122 $ 104 $ 3,322 ( 1 ) Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of the most recent renewal or extension. 108 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 receivable $ 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 by aggregating loans deemed to possess similar risk characteristics and individually evaluates 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 possess unique risk characteristics 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. Collateral dependent loans are evaluated 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. 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. 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 December 31, 2023 , $ 20.0 million of loans were individually evaluated with $ 165,000 of ACLL attributed to such loans. At December 31, 2023 , one individually evaluated loan with a recorded investment of $ 2.5 million was evaluated using a discounted cash flow approach and the remaining loans totaling $ 17.5 million were evaluated based on the underlying value of the collateral. The loan evaluated using the discounted cash flow method was accruing at year end, while the collateral dependent loans were all on nonaccrual status at December 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. The following table summarizes individually evaluated collateral dependent loans by segment and collateral type as of December 31, 2023 : Collateral Type Single Family Residence Condominium Automobile Business Assets Total (In thousands) One-to-four family $ 1,426 $ — $ — $ — $ 1,426 Construction and land — 14,981 — — 14,981 Home equity 30 — — — 30 Auto and other consumer — — 180 — 180 Commercial business — 119 — 652 771 Total collateral dependent loans $ 1,456 $ 15,100 $ 180 $ 652 $ 17,388 109 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Troubled debt restructuring. Prior to the implementation of CECL on January 1, 2023, a loan was identified as a 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 loan losses related to TDR loans 18 Total nonaccrual TDR loans 29 There were no newly restructured and renewals or modifications of existing TDR loans that occurred during the year ended December 31, 2022 . There were no TDR loans that incurred a payment default within 12 months of the restructure date during the year ended December 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 year ended December 31, 2023 , there was one new MLTB, a commercial business loan with a recorded investment of $ 119,000 for which the Bank agreed to deferred principal payments. The borrower continues to make interest-only payments and the loan was current at year end based on the modified terms. Note 4 - Allowance for Credit Losses on Loans The Company maintains an ACLL and an ACLUC 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. The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision (recapture of provision) for credit losses on the Consolidated Statements of Income. The Company adopted ASU 2016 - 13 effective January 1, 2023, as discussed in Note 1. The incurred loss methodology presentation is used for periods prior to the adoption of ASU 2016 - 13. 110 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table details activity in the allowance for credit losses on loans by class for the periods shown: At or For the Year Ended December 31, 2023 Beginning Balance Impact of Day 1 CECL Adoption Adjusted Beginning Balance Charge-offs Recoveries Provision for (Recapture of) Credit Losses Ending Balance (In thousands) One-to-four family $ 3,343 $ ( 429 ) $ 2,914 $ — $ 9 $ 52 $ 2,975 Multi-family 2,468 ( 1,449 ) 1,019 — — 135 1,154 Commercial real estate 4,217 ( 604 ) 3,613 — — 58 3,671 Construction and land 2,344 1,555 3,899 — — ( 2,010 ) 1,889 Home equity 549 346 895 ( 10 ) 15 177 1,077 Auto and other consumer 2,024 2,381 4,405 ( 3,312 ) 126 3,190 4,409 Commercial business 786 794 1,580 — — 755 2,335 Unallocated 385 ( 385 ) — — — — — Total $ 16,116 $ 2,209 $ 18,325 $ ( 3,322 ) $ 150 $ 2,357 $ 17,510 The following table details activity in the ALLL by class for the period shown under the incurred loss methodology: At or For the Year Ended 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) ALLL: Beginning balance $ 3,184 $ 1,816 $ 3,996 $ 2,672 $ 407 $ 2,221 $ 470 $ 358 $ 15,124 Provision for (recapture of) loan losses 45 652 221 ( 330 ) 112 634 174 27 1,535 Charge-offs — — — — — ( 1,025 ) — — ( 1,025 ) Recoveries 114 — — 2 30 194 142 — 482 Ending balance $ 3,343 $ 2,468 $ 4,217 $ 2,344 $ 549 $ 2,024 $ 786 $ 385 $ 16,116 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 Total loans receivable $ 343,825 $ 253,551 $ 390,246 $ 194,646 $ 52,322 $ 222,794 $ 76,996 $ — $ 1,534,380 General reserves (1) 341,171 253,551 390,196 194,630 52,100 222,702 76,996 — 1,531,346 Specific reserves (2) 2,654 — 50 16 222 92 — — 3,034 ( 1 ) Loans collectively evaluated for general reserves. ( 2 ) Loans individually evaluated for specific reserves. 111 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Year Ended December 31, 2022 December 31, 2022 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized (In thousands) With no allowance recorded: One-to-four family $ 666 $ 705 $ — $ 371 $ 99 Commercial real estate 50 149 — 60 — Construction and land — 14 — 437 1 Home equity — — — 2 — Auto and other consumer — 2 — 184 2 Total 716 870 — 1,054 102 With an allowance recorded: One-to-four family 1,988 2,129 22 2,150 136 Commercial real estate — — — 5 — Construction and land 16 19 1 20 2 Home equity 222 224 4 259 11 Auto and other consumer 92 95 5 91 3 Total 2,318 2,467 32 2,525 152 Total impaired loans: One-to-four family 2,654 2,834 22 2,521 235 Commercial real estate 50 149 — 65 — Construction and land 16 33 1 457 3 Home equity 222 224 4 261 11 Auto and other consumer 92 97 5 275 5 Total $ 3,034 $ 3,337 $ 32 $ 3,579 $ 254 Interest income recognized on a cash basis on impaired loans for the year ended December 31, 2022 , was $ 141,000 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 unfunded commitments was $ 817,000 at December 31, 2023 , a decrease compared to $ 1.9 million at the adoption of CECL on January 1, 2023. Included in the year-to-date provision for credit loss expense was a provision recapture for unfunded commitments of $ 1.0 million for the year ended December 31, 2023 , primarily attributable to construction loan disbursements resulting in lower unfunded commitments. 112 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Premises and Equipment Premises and equipment consist of the following as of: December 31, 2023 December 31, 2022 (In thousands) Land $ 2,907 $ 2,907 Buildings 6,697 6,697 Building improvements 17,945 16,747 Furniture, fixtures, and equipment 7,300 7,082 Software 599 598 Automobiles 66 66 Construction in progress 104 663 Total premises and equipment 35,618 34,760 Less accumulated depreciation and amortization ( 17,569 ) ( 16,671 ) Premises and equipment, net of accumulated depreciation and amortization $ 18,049 $ 18,089 Depreciation expense was $ 1.6 million and $ 2.0 million for the years ended December 31, 2023 and 2022 , respectively. Note 6 - Leases The Bank has lease agreements with unaffiliated parties for nine locations, including five full-service branches, three business centers, and a parking easement. Lease expirations range from one to twenty years, with additional renewal options on certain leases ranging from two to ten years. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. At December 31, 2023 , the Company's ROU assets included in other assets and lease liabilities included in other liabilities were $ 6.05 million and $ 6.43 million, respectively. Total costs incurred by the Company, as a lessee, were $ 1.17 million and $ 1.19 million for the years ended December 31, 2023 and 2022 , respectively, and principally related to contractual lease payments on operating leases. The Company's leases do not impose significant covenants or other restrictions on the Company. The following table presents amounts relevant to the Company's assets leased for use in its operations for the years ended: December 31, 2023 December 31, 2022 (In Thousands) Operating cash flows from operating leases $ 1,165 $ 1,194 Right of use assets obtained in exchange for new operating lease liabilities 152 — The following table presents the weighted-average remaining lease terms and discount rates of the Company's assets leased for use in its operations at: December 31, 2023 December 31, 2022 Weighted-average remaining lease term of operating leases (in years) 9.0 10.0 Weighted-average discount rate of operating leases 2.4 % 2.4 % 113 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All lease agreements require the Bank to pay its pro-rata share of building operating expenses. The minimum annual lease payments under non-cancelable operating leases with initial or remaining terms of one year or more through the initial lease term are as follows: December 31, 2023 Twelve-month period ending: (In Thousands) 2024 $ 904 2025 944 2026 927 2027 891 2028 705 Thereafter 3,229 Total minimum payments required $ 7,600 Less imputed interest 1,260 Present value of lease liabilities $ 6,340 Note 7 - Servicing Rights on Sold Loans Mortgage loans serviced for FHLB, Fannie Mae, and Freddie Mac are not included in the accompanying consolidated balance sheets. Selected commercial loan balances have also been sold in whole or in part to various participants, including the Main Street Lending Program, with servicing retained by First Fed and are not included in the accompanying consolidated balance sheets. The unpaid principal balances of serviced loans, primarily mortgage loans, were $ 366.1 million and $ 418.7 million at December 31, 2023 and 2022 , respectively. Loan servicing rights for the periods shown are as follows: For the Year Ended December 31, 2023 2022 (In thousands) Balance at beginning of period $ 3,887 $ 3,282 One-time adjustment for fair value reporting election — 538 Additions 149 54 Change in fair value ( 243 ) 13 Balance at end of period $ 3,793 $ 3,887 The key economic assumptions used in determining the fair value of loan servicing rights for the periods shown are as follows: For the Year Ended December 31, 2023 2022 Constant prepayment rate 7.4 % 8.3 % Weighted-average life (years) 6.6 6.0 Yield to maturity discount 11.7 % 13.3 % The fair values of loan servicing rights were approximately $ 3.8 million and $ 3.9 million at December 31, 2023 and 2022 , respectively. See Note 15 Fair Value Measurement for additional information. The following represents servicing and late fees earned in connection with loan servicing rights and is included in the accompanying consolidated financial statements as a component of noninterest income for the periods shown: For the Year Ended December 31, 2023 2022 (In thousands) Servicing fees $ 916 $ 972 Late fees 9 12 114 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents the hypothetical effect on the fair value of the Company's loan servicing rights using unfavorable shock analyses of certain key valuation assumptions as of December 31, 2023 and 2022 . This analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. For the Year Ended December 31, 2023 2022 (Dollars in thousands) Servicing right fair value $ 3,793 $ 3,887 Constant prepayment rate assumption (weighted-average) 7.4 % 8.3 % Impact on fair value with a 10% adverse change in prepayment speed $ ( 90 ) $ ( 264 ) Impact on fair value with a 20% adverse change in prepayment speed $ ( 175 ) $ ( 416 ) Yield to maturity discount assumption (weighted-average) 11.7 % 13.3 % Impact on fair value with a 10% adverse change in discount rate $ ( 168 ) $ ( 194 ) Impact on fair value with a 20% adverse change in discount rate $ ( 321 ) $ ( 287 ) Note 8 - Deposits Deposits and weighted-average interest rates at the dates indicated are as follows: December 31, 2023 December 31, 2022 Amount Weighted- Average Interest Rate Amount Weighted- Average Interest Rate (Dollars in thousands) Noninterest-bearing demand deposits $ 252,083 — % $ 315,083 — % Interest-bearing demand deposits 169,418 0.56 % 193,558 0.01 % Money market accounts 362,205 1.78 % 473,009 0.58 % Savings accounts 242,148 1.62 % 200,920 0.26 % Certificates of deposit, retail 443,412 4.04 % 247,824 2.03 % Certificates of deposit, brokered 207,626 4.85 % 133,861 2.46 % $ 1,676,892 2.34 % $ 1,564,255 0.74 % The aggregate amount of time deposits in excess of the FDIC insured limit, currently $250,000, at December 31, 2023 and 2022 , were $ 173.8 million and $ 96.6 million, respectively. Maturities of certificates at the dates indicated are as follows: December 31, 2023 (In thousands) Within one year or less $ 495,605 After one year through two years 79,537 After two years through three years 28,881 After three years through four years 24,198 After four years through five years 22,817 $ 651,038 115 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2023 and 2022 , deposits included $ 114.2 million and $ 93.3 million, respectively, in public fund deposits. The Bank had an outstanding letter of credit from the Federal Home Loan Bank of Des Moines ("FHLB") with a notional amount of $ 60.0 million at December 31, 2023 , to secure public deposits. The Bank had investment securities with a carrying value of $ 57.1 million that were pledged as collateral for these deposits at December 31, 2022 . These amounts exceed the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at December 31, 2023 and 2022 , were funds held by federally recognized tribes totaling $ 18.4 million and $ 10.3 million, respectively. Investment securities with a carrying value of $ 23.8 million and $ 23.6 million were pledged as collateral for these deposits at December 31, 2023 and 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: For the Year Ended December 31, 2023 2022 (In thousands) Demand deposits $ 796 $ 137 Money market accounts 4,217 1,698 Savings accounts 3,019 165 Certificates of deposit, retail 12,520 2,090 Certificates of deposit, brokered 6,467 1,108 $ 27,019 $ 5,198 Note 9 - 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 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 $ 896.1 million and $ 753.6 million at December 31, 2023 and 2022 , respectively. The Bank had outstanding letters of credit from the FHLB with notional amounts of $ 60.0 million to secure public deposits and $ 772,000 to secure the Bellevue, Washington branch lease at December 31, 2023 . 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 $ 6.6 million and $ 8.6 million at December 31, 2023 and 2022 , respectively. No funds have been borrowed to date. Investment securities with a carrying value of $ 6.9 million and $ 8.9 million were pledged to the FRB at December 31, 2023 and 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 consummated 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 Company was in compliance with all covenants at December 31, 2023 , including fixed coverage, Tier 1 leverage, and risk-based capital ratio minimum requirements and classified assets to Tier 1 capital and Texas ratio maximum requirements. The line of credit matures on May 18, 2024 , with the option for one 364 -day extension. In June 2023, First Fed established a Bank Term Funding Program ("BTFP") borrowing arrangement with the FRB as an additional source of liquidity. Available borrowing capacity was $15.2 million at December 31, 2023 . No funds have been borrowed to date. Investment securities with a carrying value of $ 12.9 million were pledged to secure the BTFP at December 31, 2023 . 116 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FHLB advances, line of credit, and subordinated debt outstanding by type of advance were as follows: December 31, 2023 December 31, 2022 (In thousands) Long-term advances $ 80,000 $ 80,000 Short-term fixed-rate advances — 10,000 Overnight variable-rate advances 195,000 144,000 Line of credit 6,500 12,000 Subordinated debt, net 39,436 39,358 The maximum and average outstanding balances and average interest rates on FHLB overnight variable-rate advances were as follows: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Maximum outstanding at any month-end $ 195,000 $ 206,000 Monthly average outstanding 149,500 90,983 Weighted-average daily interest rates Annual 5.26 % 2.83 % Period End 5.52 % 4.30 % Interest expense during the period 6,674 1,845 The maximum and average outstanding balances and average interest rates on FHLB short-term, fixed-rate advances were as follows: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Maximum outstanding at any month-end $ 95,000 $ 42,500 Monthly average outstanding 25,000 15,208 Weighted-average daily interest rates Annual 5.08 % 1.82 % Period End 5.27 % 2.12 % Interest expense during the period 1,692 246 The maximum and average outstanding balances and average interest rates on FHLB long-term, fixed-rate advances were as follows: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Maximum outstanding at any month-end $ 85,000 $ 80,000 Monthly average outstanding 81,667 80,000 Weighted-average interest rates Annual 2.00 % 1.52 % Period End 2.09 % 1.52 % Interest expense during the period 1,650 1,260 117 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances are as follows: December 31, 2023 December 31, 2022 Amount Weighted- Average Interest Rate Amount Weighted- Average Interest Rate (Dollars in thousands) Within one year or less $ 25,000 2.76 % $ 15,000 1.54 % After one year through two years 30,000 1.93 15,000 1.47 After two years through three years 15,000 1.55 25,000 1.42 After three years through four years 10,000 1.76 15,000 1.55 After four years through five years — — 10,000 1.76 $ 80,000 2.09 % $ 80,000 1.52 % The maximum and average outstanding balances and average interest rates on the line of credit were as follows: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Maximum outstanding at any month-end $ 11,000 $ 12,000 Monthly average outstanding 9,327 5,770 Weighted-average interest rates Annual 9.15 % 6.76 % Period End 9.00 % 8.00 % Interest expense during the period 854 389 The maximum and average outstanding balances and average interest rates on subordinated debt were as follows: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Maximum outstanding at any month-end $ 39,436 $ 39,358 Monthly average outstanding 39,395 39,312 Weighted-average interest rates Annual 4.01 % 4.01 % Period End 4.00 % 4.01 % Interest expense during the period 1,578 1,577 Note 10 - Federal Taxes on Income The provision for income taxes for the periods shown is summarized as follows: For the Year Ended December 31, 2023 2022 (In thousands) Current $ 415 $ 4,376 Deferred 134 ( 1,529 ) $ 549 $ 2,847 118 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the tax provision (benefit) based on statutory corporate tax rates, estimated to be 21 % for the year ended December 31, 2023 , on pre-tax income and the provision (benefit) shown in the accompanying consolidated statements of income for the periods shown is summarized as follows: For the Year Ended December 31, 2023 2022 (In thousands) Federal income tax computed at statutory rates $ 562 $ 3,432 State taxes 5 — Low-income housing tax credits ( 25 ) — Tax-exempt income ( 63 ) ( 183 ) Bank-owned life insurance income ( 195 ) ( 505 ) FDIC penalty 151 — Other, net 114 103 $ 549 $ 2,847 As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings of approximately $ 6.4 million, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Company does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore, no provision has been made. 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. As of December 31, 2023 , the Company has written off its investment in Quin Ventures. The tax loss as a result of the investment being written off was of $ 8.4 million; this contributed to an overall net operating loss of $ 6.3 million for the Company. This net operating loss is not subject to expiration and is able to offset 80% of taxable income in each future year. We believe there will be sufficient income in future years to utilize the loss and, therefore, a valuation allowance is not necessary. As of December 31, 2022 , Quin Ventures had a net operating loss carryforward of $ 5.2 million which was included in the Company's consolidated tax provision. As a result of the Quin Ventures write-off during 2023, the Company wrote off the 2022 Quin Ventures net operating loss carryforward. The Company applies the provisions of FASB ASC 740 that require the application of a more-likely-than- not recognition criterion for the reporting of uncertain tax positions on its financial statements. The Company had no unrecognized tax assets at December 31, 2023 and 2022 . Interest and penalties are recognized in income tax expense. The Company recognized no interest or penalties during the year ended December 31, 2023 , and a small amount of interest and no penalties during the year ended December 31, 2022 . The Company files consolidated income tax returns in the U.S. federal jurisdiction and is no longer subject to tax examinations for years ending before December 31, 2020 . 119 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of net deferred tax assets and liabilities at the periods shown are summarized as follows: December 31, 2023 December 31, 2022 (In thousands) Deferred tax assets Allowance for credit losses on loans $ 3,932 $ 3,528 Unrealized loss on securities available for sale 8,674 10,432 Accrued compensation 432 368 Nonaccrual loans 2 — ESOP timing differences 168 160 Restricted stock awards 297 319 Deferred lease liabilities 1,379 1,507 Net operating loss carryforward 1,317 1,111 Employee retention credit benefit 1,009 1,168 Total deferred tax assets 17,210 18,593 Deferred tax liabilities Deferred loan fees 1,027 1,126 FHLB stock dividends — 374 Accumulated depreciation 706 864 Outside basis differences in pass-through entity investments 510 424 Defined benefit plan 576 42 Right of use assets 1,298 1,435 Other, net 92 237 Total deferred tax liabilities 4,209 4,502 Deferred tax asset, net $ 13,001 $ 14,091 Note 11 - Benefit Plans Single-employer Pension Plan Effective March 23, 2021, the Company established the First Federal Defined Benefit Plan ("Bank DB Plan"), a single-employer plan. On March 23, 2021, all assets and liabilities were transferred from the prior Pentegra Defined Benefit Plan for Financial Institutions to the newly established Bank DB Plan. The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available under the plan are frozen, not allowing any new participants. The plan provides defined benefits based on years of service and final average salary prior to the freeze. The Company uses December 31 as the measurement date for this plan. A related prior service cost of $ 1.4 million and $ 1.6 million, net of tax, was included in accumulated other comprehensive loss on the Company's balance sheet at December 31, 2023 and 2022 , respectively. The prior service cost is expected to be amortized over 15 years. 120 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the changes in benefit obligations and plan assets for the periods shown: December 31, 2023 December 31, 2022 (Dollars in thousands) Change in fair value of plan assets Fair value at beginning of period $ 10,813 $ 15,821 Actual return on plan assets 777 ( 3,680 ) Benefits paid ( 667 ) ( 462 ) Settlements and curtailments — ( 866 ) Fair value at end of period $ 10,923 $ 10,813 Change in projected benefit obligation Projected benefit obligation at beginning of period $ 10,618 $ 15,328 Interest cost 492 374 Actuarial loss ( 45 ) ( 3,756 ) Benefits paid ( 667 ) ( 462 ) Settlements and curtailments — ( 866 ) Projected benefit obligation at end of period $ 10,398 $ 10,618 Funded status at period end $ 525 $ 195 Amounts recognized on Consolidated Balance Sheet Other assets $ 525 $ 195 Accumulated other comprehensive income ( 1,708 ) ( 2,138 ) Net amount recognized $ 2,233 $ 2,333 Other changes recognized in other comprehensive income Net (gain) loss $ ( 398 ) $ 535 Amortization of prior service (cost) credit ( 150 ) ( 147 ) Amount recognized due to settlement — ( 26 ) Net periodic benefit cost (income) $ ( 548 ) $ 362 Weighted-average assumptions used to determine projected obligation Discount rate 4.90 % 5.10 % Rate of compensation increase N/A N/A The Company does not expect to make a contribution to the Bank DB Plan in 2024 . It is the policy of the Company to fund no less than the minimum funding amount required by ERISA. The following table sets forth the components of net periodic benefit cost and other amounts recognized in accumulated other comprehensive income (loss) for the periods shown: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Components of net periodic benefit cost (income) Interest cost $ 492 $ 374 Expected return on plan assets ( 424 ) ( 611 ) Amortization of prior service cost 150 147 Settlements and curtailments — 26 Net periodic benefit cost (income) $ 218 $ ( 64 ) Weighted-average assumptions used to determine net cost Discount rate 5.10 % 2.65 % Expected return on plan assets 5.40 % 5.30 % Rate of compensation increase N/A N/A 121 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions for the corresponding fiscal year end. Gains and losses are recognized in accordance with the standard amortization provisions of the applicable accounting guidance. The Company's net periodic benefit income recognized for the Bank DB Plan is sensitive to the discount rate and expected return on plan assets. From initial funding in the first quarter of 2021 through December 31, 2023 , the Bank DB Plan assets have been invested primarily in fixed income and large U.S. equity funds, with additional investments in international equity, real estate, and small/mid-range U.S. equity funds. The target allocations for 2024 by asset category are presented in the table below. Asset Category Fixed Income 80 % - 100 % U.S. Equities 0 % - 30 % Non-U.S. Equities 0 % - 20 % Real Assets 0 % - 10 % Benefit payments projected to be made from the Bank DB Plan are as follows: December 31, 2023 (Dollars in thousands) Estimated future benefit payments 2024 $ 1,980 2025 750 2026 630 2027 670 2028 640 Years 2029 - 2033 3,480 Thereafter 2,248 Projected benefit obligation $ 10,398 Fair value measurements, including descriptions of Level 1, 2, and 3 of the fair value hierarchy and the valuation methods employed by the Company are provided in Note 15 - Fair Value Measurements. Plan investment assets measured at fair value by level and in total are as follows: 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 (In thousands) Large U.S. Equity $ 857 $ — $ — $ 857 International Equity 216 — — 216 Fixed Income 9,850 — — 9,850 $ 10,923 $ — $ — $ 10,923 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 (In thousands) Large U.S. Equity $ 903 $ — $ — $ 903 International Equity 236 — — 236 Fixed Income 9,674 — — 9,674 $ 10,813 $ — $ — $ 10,813 122 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nonqualified Deferred Compensation Plan First Fed also sponsors a nonqualified Deferred Compensation Plan ("DCP") for members of the Board of Directors and eligible officer-level employees. This plan, approved by the Board on February 1, 2012, allows eligible participants to defer and invest a portion of their earnings in a selection of investment options identified in the plan at no expense to First Fed. All deferrals are remitted to Principal, the Plan Administrator, and held in a trust. The aggregate balance held in trust at December 31, 2023 , was $ 1.4 million. The Company's obligation to make payments under the DCP is a general obligation of the Company and is to be paid from the Company's general assets. As such, participants are general unsecured creditors of the Company with respect to their participation of the plan. The market value of the DCP assets is recorded in "other assets" and the related liability to participants is recorded in "other liabilities" on the Balance Sheet. The Company also has agreements with certain key officers that provide for potential payments upon retirement, disability, termination, change in control and death. 401 (k) Plan First Fed maintains a single-employer 401 (k) plan. Employees may contribute up to 100 % of their pre-tax compensation to the 401 (k) plan, subject to regulatory limits. First Fed provides matching funds of 50 % limited to the first 6 % of salary contributed. First Fed's contributions were $ 566,000 and $ 634,000 during the years ended December 31, 2023 and December 31, 2022 , respectively. Employee Stock Ownership Plan In connection with the mutual to stock conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company 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 in the open market 8 % of the common stock originally issued in the mutual to stock conversion. As of December 31, 2023 , 1,048,029 shares, or 100 % of the total, have been purchased in the open market at an average price of $ 12.45 per share 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 %. Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. 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. Annual principal and interest payments of $ 835,000 were made by the ESOP during the years ended December 31, 2023 and 2022 . 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 and unallocated ESOP shares will be recorded as a reduction of debt and accrued interest. Compensation expense related to the ESOP for the years ended December 31, 2023 and 2022 , was $ 418,000 and $ 673,000 , respectively. Shares issued to the ESOP as of the dates indicated are as follows: December 31, 2023 December 31, 2022 (Dollars in thousands) Allocated shares 439,174 386,285 Committed-to-be-released shares 26,514 26,442 Unallocated shares 582,341 635,302 Total ESOP shares issued 1,048,029 1,048,029 Fair value of unallocated shares $ 9,283 $ 9,758 123 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based Compensation On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP"), which provided for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units to eligible participants. The cost of awards under the 2015 EIP generally is based on the fair value of the awards on their grant date. Shares of common stock issued under the EIP may be authorized but unissued shares or repurchased shares. During the year ended June 30, 2017, the Company purchased and retired 523,014 shares of common stock to be used for future stock awards. 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 . At December 31, 2023 , there were 289,511 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares. Following adoption of the 2020 EIP, no additional awards may be made under the 2015 EIP. At December 31, 2023 , 21,620 restricted shares are outstanding under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions. During the years ended December 31, 2023 and 2022 , restricted awards of 32,449 and 59,443 shares were awarded, respectively, and no stock options were granted. Restricted shares vest ratably over periods of up 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 awards based on the fair value of the shares at the grant date amortized over the stated period. For the years ended December 31, 2023 and 2022 , total compensation expense for the 2015 and 2020 EIPs was $ 1.4 million and $ 1.6 million, respectively. Included in the above compensation expense for the years ended December 31, 2023 and 2022 , was directors' compensation of $ 246,000 and $ 239,000 , respectively. The following tables provide a summary of changes in non-vested restricted awards for the periods shown: For the Year Ended December 31, 2023 Shares Weighted-Average Grant Date Fair Value Non-vested at January 1, 2023 166,839 $ 17.78 Granted 32,449 13.90 Vested ( 67,007 ) 17.25 Canceled (1) ( 20,666 ) 17.25 Forfeited ( 15,593 ) 17.40 Non-vested at December 31, 2023 96,022 $ 17.02 ( 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 of the vested shares. The surrendered shares are canceled and are unavailable for reissue. As of December 31, 2023 , there was $ 823,000 of total unrecognized compensation cost related to non-vested restricted shares. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 1.25 years. 124 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12 - Regulatory Capital Requirements Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion depositors. The Company is a financial holding company under the supervision of the Federal Reserve Bank of San Francisco. Financial holding companies are subject to capital adequacy requirements of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve Board capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to financial holding companies. The minimum requirements are a ratio of common equity Tier 1 capital ( "CET1 capital") to total risk-weighted assets the ( "CET1 risk-based ratio") of 4.5 %, a Tier 1 capital ratio of 6.0 %, a total capital ratio of 8.0 %, and a leverage ratio of 4.0 %. In addition to the minimum regulatory capital ratios, First Northwest Bancorp and First Fed must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5 % of risk-weighted assets in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. At December 31, 2023 , the Bank's CETI capital exceeded the required capital conservation buffer. At periodic intervals, banking regulators routinely examine First Northwest and First Fed as part of their legally prescribed oversight of the banking industry. A future examination could include a review of certain transactions or other amounts reported in the Company's consolidated financial statements. Based on these examinations, the regulators can direct that the Company's consolidated financial statements be adjusted in accordance with their findings. In view of the uncertain regulatory environment in which First Northwest and First Fed operate, the extent, if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying consolidated financial statements cannot presently be determined. At December 31, 2023 , First Fed exceeded all regulatory capital requirements. As of December 31, 2023 , the most recent regulatory notifications categorized First Fed as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, CET1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed First Fed’s category. Actual and required capital amounts and ratios are presented for First Fed in the following table: Actual For Capital Adequacy Purposes To Be Categorized As Well Capitalized Under Prompt Corrective Action Provision Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) As of December 31, 2023 Common equity tier 1 capital $ 214,049 13.12 % $ 73,407 4.50 % $ 106,032 6.50 % Tier 1 risk-based capital 214,049 13.12 97,876 6.00 130,501 8.00 Total risk-based capital 230,163 14.11 130,501 8.00 163,127 10.00 Tier 1 leverage capital 214,049 9.90 86,508 4.00 108,135 5.00 As of December 31, 2022 Common equity tier 1 capital $ 215,037 13.40 % $ 72,230 4.50 % $ 104,332 6.50 % Tier 1 risk-based capital 215,037 13.40 96,306 6.00 128,408 8.00 Total risk-based capital 231,405 14.42 128,408 8.00 160,510 10.00 Tier 1 leverage capital 215,037 10.41 82,607 4.00 103,259 5.00 125 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 - Related Party Transactions Certain directors and executive officers are also customers who transact business with First Fed. All loans and commitments included in such transactions were made in compliance with applicable laws on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability or present any other unfavorable features. The following table presents the activity in loans to directors and executive officers for the periods shown: For the Year Ended December 31, 2023 2022 (In thousands) Beginning balance $ 64 $ — Loan advances 34 64 Reclassifications (1) 138 — Ending balance $ 236 $ 64 (1) Represents loans that were once considered related party but are no longer considered related party or loans that were not related party that subsequently became related party loans. Deposits and certificates from related parties totaled $ 4.5 million and $ 2.2 million at December 31, 2023 and 2022 , respectively. Note 14 - Commitments and Contingencies First Fed is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally represent a commitment to extend credit in the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. First Fed’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, is represented by the contractual notional amount of those instruments. First Fed uses the same credit policies in making commitments as it does for on-balance-sheet instruments. Management does not anticipate any material loss as a result of these transactions. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Fed evaluates each customer’s creditworthiness on a case-by-case basis. First Fed did not incur any significant losses on its commitments for the years ended December 31, 2023 , and 2022 . The following financial instruments were outstanding whose contract amounts represent credit risk at: December 31, 2023 December 31, 2022 (In thousands) Commitments to grant loans $ 220 $ 25 Standby letters of credit 200 758 Unfunded commitments under lines of credit or existing loans 147,981 225,836 Low-Income Housing Tax Credit Investments - The carrying value of the unconsolidated LIHTC investment was $ 4.7 million and $ 4.9 million at December 31, 2023 and 2022 , respectively. During the years ended December 31, 2023 and 2022 , the Company re cognized tax benefits of $ 194,000 and $ 77,000 and proportional amortization of $ 165,000 and $ 66,000 , respectively. 126 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total unfunded contingent commitments related to the Company’s LIHTC investment totaled $ 4.4 million and $ 4.7 million, at December 31, 2023 and 2022 , respectively. The Company expects to fund LIHTC commitments of $ 3.4 million during the year ending December 31, 2024 and $ 748,000 during the year ending December 31, 2025 , with the remaining commitments of $ 291,000 funded by December 31, 2037 . There were no impairment losses on the Company’s LIHTC investment during the years ended December 31, 2023 and 2022 . Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which, in the opinion of management, have no current material effect on First Fed’s consolidated financial statements. Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial loan concentrations in a specific type of loan within First Fed’s loan portfolio, thereby exposing First Fed to greater risks resulting from adverse economic, political, regulatory, geographic, industrial, or credit developments. Loans to one borrower are subject to the state banking regulations general limitation of 20 percent of First Fed’s equity, excluding accumulated other comprehensive income. At December 31, 2023 and 2022 , First Fed’s most significant concentration of credit risk was in loans secured by real estate. These loans totaled approximately $ 1.33 billion and $ 1.24 billion, or 80.0 % and 79.8 %, of First Fed’s total loan portfolio at December 31, 2023 and 2022 , respectively. Real estate construction, including land acquisition and land development, commercial real estate, multi-family, home equity, and one -to- four family residential loans, are included in the total loans secured by real estate for purposes of this calculation. At December 31, 2023 and 2022 , First Fed’s most significant investment portfolio exposure was from municipal bonds totaling $ 87.8 million and $ 98.1 million, or 28.4 % and 29.0 %, of the total investment portfolio. At December 31, 2023 and 2022 , First Fed's second most significant investment concentration of credit risk was with the U.S. Government, its agencies, and Government-Sponsored Enterprises ("GSEs"). First Fed’s exposure, which results from positions in securities issued by the U.S. Government, its agencies, and securities guaranteed by GSEs, was $ 88.7 million and $ 87.3 million, or 28.7 % and 25.8 %, of First Fed’s total investment portfolio (including FHLB stock) at December 31, 2023 and 2022 , respectively. Note 15 - 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. 127 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 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 fair 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: 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 $ — $ 1,002 128 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: December 31, 2023 Fair Value (In thousands) Valuation Technique Unobservable Input Range (Weighted Average) (a) 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 (a) 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 Year Ended December 31, 2023 2022 (In thousands) Sold loan servicing rights: Balance at beginning of period $ 3,887 $ 3,820 Servicing rights that result from transfers and sale of financial assets 149 54 Changes in fair value due to changes in model inputs or assumptions (1) ( 243 ) 13 Balance at end of period $ 3,793 $ 3,887 (1) Represents changes due to collection/realization of expected cash flows and curtailments. 129 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of or For the Year Ended December 31, 2023 2022 (In thousands) Securities available for sale: MBS non-agency Balance at beginning of period $ 29,599 $ — Transfers Into Level 3 (1) — 29,599 Sales ( 1,912 ) Unrealized Losses ( 218 ) — Balance at end of period $ 27,469 $ 29,599 (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. As of or For the Year Ended December 31, 2023 2022 (In thousands) Partnership investments: Balance at beginning of period $ 12,563 $ — Transfers Into Level 3 (1) — 12,490 Purchases, net of Distributions 620 — Unrealized Gains — 73 Balance at end of period $ 13,183 $ 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 measured at fair value on a nonrecurring basis - Assets are considered to be fair 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: December 31, 2023 Level 1 Level 2 Level 3 Total (In thousands) Collateral dependent loan $ — $ — $ 17,388 $ 17,388 At December 31, 2023 , there were no collateral dependent loans with discounts to appraisal disposition value or other unobservable inputs. December 31, 2022 Level 1 Level 2 Level 3 Total (In thousands) Impaired loans $ — $ — $ 3,034 $ 3,034 At December 31, 2022 , there were no impaired loans with discounts to appraisal disposition value or other unobservable inputs. 130 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated: December 31, 2023 Carrying Estimated Fair Fair Value Measurements Using: Amount 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 — Servicing rights on sold loans, at fair value 3,793 3,793 — — 3,793 Partnership investments 13,183 13,183 — — 13,183 Financial liabilities Demand deposits $ 1,469,266 $ 1,469,266 $ 1,469,266 $ — $ — Time deposits 207,626 648,428 — — 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 — December 31, 2022 Carrying Estimated Fair Fair Value Measurements Using: Amount 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 — Servicing rights on sold loans, net 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 39,358 — — 39,358 Accrued interest payable 455 455 — 455 — 131 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 - 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 periods shown. For the Year Ended December 31, 2023 2022 (In thousands, except share data) Net income attributable to parent: Net income available to common shareholders $ 2,286 $ 15,645 Earnings allocated to participating securities ( 11 ) ( 141 ) Earnings allocated to common shareholders $ 2,275 $ 15,504 Basic: Weighted average common shares outstanding 9,655,499 9,956,823 Weighted average unvested restricted stock awards ( 135,108 ) ( 219,776 ) Weighted average unallocated ESOP shares ( 602,107 ) ( 655,015 ) Total basic weighted average common shares outstanding 8,918,284 9,082,032 Diluted: Basic weighted average common shares outstanding 8,918,284 9,082,032 Dilutive restricted stock awards 22,896 61,583 Total diluted weighted average common shares outstanding 8,941,180 9,143,615 Basic earnings per common share $ 0.26 $ 1.71 Diluted earnings per common share $ 0.26 $ 1.71 Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. For the years ended December 31, 2023 and 2022 , anti-dilutive shares as calculated under the treasury stock method totaled 10,965 and 3,460 , respectively. Note 17 - 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 agreement 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. 132 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2023 , the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges. The Company had no fair value hedges at December 31, 2022. Carrying Amount of the Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (In thousands) Line item in the Statement of Income where the hedged item is included: December 31, 2023 Interest on investment securities (1) $ 51,054 $ 1,054 Total $ 51,054 $ 1,054 ( 1 ) These amounts include the amortized cost basis of a closed portfolio 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 December 31, 2023 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 57.4 million, the cumulative basis adjustments associated with this hedging relationship was $ 1.1 million, and the amount of the designated hedged items was $ 50.0 million. The following table summarizes the Company’s derivative instruments at the date indicated. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows: Fair Value Notional Amount Other Assets Other Liabilities (In thousands) December 31, 2023 Fair value hedges: Interest rate swaps - securities $ 50,000 $ — $ 1,002 The following table summarizes the effect of fair value accounting on the Consolidated Statements of Income for the periods shown: Year Ended December 31, 2023 2022 (In thousands) Total amount recognized in interest on investment securities $ 13,279 $ 10,866 Net gains (losses) on fair value hedging relationships included in the preceding total Interest rate swaps - securities Recognized on hedged items $ 1,054 $ — Recognized on derivatives designated as hedging instruments ( 605 ) — Net income recognized on fair value $ 449 $ — 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 has an interest rate swap agreement with its derivative counterparty that contains a provision where if the Company either defaults or fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to terminate the contract or post additional collateral. At December 31, 2023 , the Company had $ 1.0 million derivatives in a net liability position related to this agreement. The Company has minimum collateral posting thresholds with its derivative counterparty and has posted cash of $ 1.1 million to secure the interest rate swap agreement at December 31, 2023 . In certain cases, the Company will have posted excess collateral compared to total exposure due to initial margin requirements or day-to-day rate volatility. 133 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2023 , the Company was in compliance with all credit risk-related contingent features. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial. Note 18 - Change in Accumulated Other Comprehensive Income ("AOCI") 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 (Losses) on Available-for-Sale Securities Net Actuarial Gains (Losses) on Defined Benefit Plan Assets Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization Unrealized Gains (Losses) on Derivatives Total (In thousands) Balance at December 31, 2021 $ 2,140 $ ( 197 ) $ ( 1,655 ) $ — $ 288 Other comprehensive loss before reclassification ( 40,451 ) ( 403 ) — — ( 40,854 ) Amounts reclassified from accumulated other comprehensive income ( 93 ) — 116 — 23 Net other comprehensive (loss) income ( 40,544 ) ( 403 ) 116 — ( 40,831 ) Balance at December 31, 2022 $ ( 38,404 ) $ ( 600 ) $ ( 1,539 ) $ — $ ( 40,543 ) Balance at December 31, 2022 $ ( 38,404 ) $ ( 600 ) $ ( 1,539 ) $ — $ ( 40,543 ) Other comprehensive income before reclassification 4,066 312 — ( 828 ) 3,550 Amounts reclassified from accumulated other comprehensive income 4,239 — 118 — 4,357 Net other comprehensive income 8,305 312 118 ( 828 ) 7,907 Balance at December 31, 2023 $ ( 30,099 ) $ ( 288 ) $ ( 1,421 ) $ ( 828 ) $ ( 32,636 ) 134 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 - Parent Company Only Financial Statements Presented below are the condensed balance sheets, statements of income, and statements of cash flows for First Northwest Bancorp. FIRST NORTHWEST BANCORP Condensed Balance Sheets (In thousands) December 31, 2023 December 31, 2022 ASSETS Cash and due from banks $ 500 $ 1,028 Investment in bank 180,766 176,297 Equity and partnership investments 14,122 10,371 ESOP loan receivable 8,354 8,972 Commercial business loans receivable, net 4,000 14,912 Accrued interest receivable 430 678 Prepaid expenses and other assets 1,714 1,214 Total assets $ 209,886 $ 213,472 LIABILITIES AND SHAREHOLDERS' EQUITY Subordinated debt, net $ 39,436 $ 39,358 Line of credit 6,500 12,000 Interest payable 378 375 Payable to subsidiary 174 96 Other liabilities 58 70 Total liabilities 46,546 51,899 Shareholders' equity 163,340 161,573 Total liabilities and shareholders' equity $ 209,886 $ 213,472 FIRST NORTHWEST BANCORP Condensed Statements of Income (In thousands) For the Year Ended December 31, 2023 2022 Operating income: Interest and fees on loans receivable $ 737 $ 954 Unrealized gain (loss) on equity and partnership investments 444 ( 513 ) Dividends from Bank 8,000 3,000 Total operating income 9,181 3,441 Operating expenses: Interest paid on subordinated debt, net 1,578 1,578 Interest paid on line of credit 855 388 (Recapture of) provision for credit losses on loans ( 73 ) 73 Other expenses 2,817 1,221 Total operating expenses 5,177 3,260 Income before (benefit) provision for income taxes and equity in undistributed earnings of subsidiary 4,004 181 (Benefit) provision for income taxes ( 873 ) 26 Income before equity in undistributed earnings of subsidiary 4,877 155 Equity in undistributed earnings of subsidiary ( 2,591 ) 15,490 Net income $ 2,286 $ 15,645 135 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FIRST NORTHWEST BANCORP Condensed Statements of Cash Flows (In thousands) For the Year Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 2,286 $ 15,645 Adjustments to reconcile net income to net cash from operating activities: Equity in undistributed earnings of subsidiary 2,591 ( 15,490 ) Amortization of deferred loan fees 65 15 Amortization of debt issuance costs 78 78 (Recapture of) provision for credit losses on loans ( 73 ) 73 Change in payable to subsidiary 78 — Change in accrued interest receivable and other assets 260 ( 51 ) Change in accrued interest payable and other liabilities ( 9 ) 46 Net cash from operating activities 5,276 316 Cash flows from investing activities: Net decrease (increase) loans receivable 2,912 ( 10,000 ) ESOP loan repayment 618 604 Capital contributions to equity investments ( 438 ) ( 7,364 ) Capital disbursements from equity and partnership agreements 733 — Net cash from investing activities 3,825 ( 16,760 ) Cash flows from financing activities: Net (decrease) increase in line of credit ( 5,500 ) 12,000 Repurchase of common stock ( 1,149 ) ( 5,828 ) Restricted stock awards canceled ( 280 ) — Payment of dividends ( 2,700 ) ( 2,787 ) Net cash from financing activities ( 9,629 ) 3,385 Net decrease in cash ( 528 ) ( 13,059 ) Cash and cash equivalents at beginning of period 1,028 14,087 Cash and cash equivalents at end of period $ 500 $ 1,028 Supplemental disclosures of cash flow information: Cash paid during the year for income taxes $ ( 192 ) $ ( 824 ) Cash paid during the year for interest on borrowings 1,500 1,500 Supplemental disclosures of noncash investing activities: (Loss on) equity investment in Quil received through Quin Ventures asset sale $ ( 225 ) $ 225 Investment in Meriwether Group, LLC acquired through issuance of shares — 1,869 Note 20 - Subsequent Event On January 30, 2024, the Bank entered into an agreement for the purchase and sale of real property (the "Sale Agreement") with Mountainseed Real Estate Services, LLC, a Georgia limited liability company ("Mountainseed"), providing for the Bank’s sale to Mountainseed of up to six properties (the "Properties") for an aggregate cash purchase price of $ 14.67 million, assuming all of the Properties are sold. All of the properties are currently operated as branches and located in Clallam County or Jefferson County, Washington. Under the Sale Agreement, Mountainseed has the right to terminate the Sale Agreement prior to closing, in its entirety or with respect to any of the Properties. The Bank may terminate the Sale Agreement if Mountainseed determines to purchase fewer than four of the Properties. 136 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The parties have agreed, concurrently with the closing of the sale of the Properties, to enter into triple net lease agreements (the "Lease Agreements") pursuant to which the Bank will lease each of the Properties sold. Each Lease Agreement will have an initial term of fifteen years with one 15 -year renewal option. The Lease Agreements will provide for annual rent of approximately $ 1.35 million in the aggregate for all Properties. Assuming all of the Properties are sold, the increase in rent will be partially offset by the elimination of the depreciation expense on the buildings and investment of the proceeds. The Company anticipates the transaction will close, if at all, no later than the second quarter of 2024. The closing is subject to Mountainseed performing satisfactory due diligence on the Properties and other customary closing conditions. The sale-leaseback transaction is expected to result in a pre-tax gain, assuming all of the Properties are sold. 137 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.