First Northwest Bancorp 10-Q

Item 1. Financial Statements (Unaudited) FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share information) (Unaudited) September 30, 2024 December 31, 2023 ASSETS Cash and due from banks $ 17,953 $ 19,845 Interest-earning deposits in banks 64,769 103,324 Investment securities available for sale, at fair value (amortized cost of $ 341,011 and $ 333,950 , respectively) 310,860 295,623 Loans held for sale 378 753 Loans receivable (net of allowance for credit losses on loans of $ 21,970 and $ 17,510 , respectively) 1,714,416 1,642,518 Federal Home Loan Bank (FHLB) stock, at cost 14,435 13,664 Accrued interest receivable 8,939 7,894 Premises and equipment, net 10,436 18,049 Servicing rights on sold loans, at fair value 3,584 3,793 Bank-owned life insurance, net 41,429 40,578 Equity and partnership investments 14,912 14,794 Goodwill and other intangible assets, net 1,083 1,086 Deferred tax asset, net 10,802 13,001 Right-of-use ("ROU") asset, net 17,315 6,047 Prepaid expenses and other assets 24,175 20,828 Total assets $ 2,255,486 $ 2,201,797 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 1,711,641 $ 1,676,892 Borrowings 334,994 320,936 Accrued interest payable 2,153 3,396 Lease liability, net 17,799 6,428 Accrued expenses and other liabilities 25,625 29,545 Advances from borrowers for taxes and insurance 2,485 1,260 Total liabilities 2,094,697 2,038,457 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 9,365,979 shares at September 30, 2024, and 9,611,876 shares at December 31, 2023 94 96 Additional paid-in capital 93,218 95,784 Retained earnings 100,660 107,349 Accumulated other comprehensive loss, net of tax ( 26,424 ) ( 32,636 ) Unearned employee stock ownership plan (ESOP) shares ( 6,759 ) ( 7,253 ) Total shareholders' equity 160,789 163,340 Total liabilities and shareholders' equity $ 2,255,486 $ 2,201,797 See selected notes to the consolidated financial statements. 3 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 INTEREST INCOME Interest and fees on loans receivable $ 23,536 $ 21,728 $ 70,036 $ 62,531 Interest on investment securities 3,786 3,368 11,367 9,886 Interest on deposits and other 582 524 1,798 1,545 FHLB dividends 302 214 942 628 Total interest income 28,206 25,834 84,143 74,590 INTEREST EXPENSE Deposits 10,960 7,699 31,252 18,261 Borrowings 3,226 3,185 10,708 9,092 Total interest expense 14,186 10,884 41,960 27,353 Net interest income 14,020 14,950 42,183 47,237 PROVISION FOR CREDIT LOSSES Provision for credit losses on loans 3,077 880 12,956 1,195 Provision for (recapture of) credit losses on unfunded commitments 57 ( 509 ) ( 113 ) ( 1,024 ) Provision for credit losses 3,134 371 12,843 171 Net interest income after provision for credit losses 10,886 14,579 29,340 47,066 NONINTEREST INCOME Loan and deposit service fees 1,059 1,068 3,237 3,273 Sold loan servicing fees and servicing rights mark-to-market 10 98 303 400 Net gain on sale of loans 58 171 260 405 Net (loss) gain on sale of investment securities — — ( 2,117 ) — Net gain on sale of premises and equipment — — 7,919 — Increase in cash surrender value of bank-owned life insurance 315 252 851 668 Other income 337 1,315 861 2,203 Total noninterest income 1,779 2,904 11,314 6,949 NONINTEREST EXPENSE Compensation and benefits 8,582 7,795 25,298 23,812 Data processing 2,085 1,945 6,037 6,063 Occupancy and equipment 1,553 1,173 4,592 3,596 Supplies, postage, and telephone 360 292 970 1,082 Regulatory assessments and state taxes 548 446 1,518 1,259 Advertising 409 501 1,095 2,471 Professional fees 698 929 2,292 2,619 FDIC insurance premium 533 369 1,392 939 Other expense 1,080 926 2,566 2,623 Total noninterest expense 15,848 14,376 45,760 44,464 (Loss) income before (benefit) provision for income taxes ( 3,183 ) 3,107 ( 5,106 ) 9,551 (Benefit) provision for income taxes ( 1,203 ) 603 ( 1,303 ) 1,903 Net (loss) income ( 1,980 ) 2,504 ( 3,803 ) 7,648 Net loss attributable to noncontrolling interest in Quin Ventures, Inc. — — — 160 Net (loss) income attributable to parent $ ( 1,980 ) $ 2,504 $ ( 3,803 ) $ 7,808 Basic and diluted (loss) earnings per common share $ ( 0.23 ) $ 0.28 $ ( 0.43 ) $ 0.87 See selected notes to the consolidated financial statements. 4 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2024 2023 2024 2023 Net (loss) income $ ( 1,980 ) $ 2,504 $ ( 3,803 ) $ 7,648 Other comprehensive income (loss): Unrealized holding gains (losses) on investments available for sale arising during the period 8,076 ( 8,327 ) 6,059 ( 7,688 ) Tax effect ( 1,732 ) 1,787 ( 1,300 ) 1,873 Amortization of unrecognized DB plan prior service cost 37 37 112 113 Tax effect ( 8 ) ( 8 ) ( 24 ) ( 24 ) Unrealized holding (losses) gains on derivatives ( 1,527 ) 925 ( 379 ) 533 Tax effect 327 ( 198 ) 81 ( 114 ) Reclassification adjustment for net losses on sales of securities realized in income — — 2,117 — Tax effect — — ( 454 ) — Other comprehensive income (loss), net of tax 5,173 ( 5,784 ) 6,212 ( 5,307 ) Comprehensive income (loss) 3,193 ( 3,280 ) 2,409 2,341 Comprehensive loss attributable to noncontrolling interest — — — ( 160 ) Comprehensive income (loss) attributable to parent $ 3,193 $ ( 3,280 ) $ 2,409 $ 2,501 See selected notes to the consolidated financial statements. 5 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Three Months Ended September 30, 2024 and 2023 (Dollars in thousands, except share information) (Unaudited) 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 June 30, 2023 9,633,496 $ 96 $ 95,360 $ 111,750 $ ( 7,583 ) $ ( 40,066 ) $ — $ 159,557 Net income 2,504 — 2,504 Common stock repurchased ( 1,073 ) — ( 10 ) ( 2 ) ( 12 ) Restricted stock award grants net of forfeitures 1,918 — — — Restricted stock awards canceled ( 3,606 ) — ( 43 ) ( 43 ) Other comprehensive loss, net of tax ( 5,784 ) ( 5,784 ) Share-based compensation expense 349 349 ESOP shares committed to be released 2 165 167 Cash dividends declared ($ 0.07 per share) ( 673 ) ( 673 ) Balance at September 30, 2023 9,630,735 $ 96 $ 95,658 $ 113,579 $ ( 7,418 ) $ ( 45,850 ) $ — $ 156,065 Balance at June 30, 2024 9,453,247 $ 94 $ 93,985 $ 103,322 $ ( 6,923 ) $ ( 31,597 ) $ — $ 158,881 Net loss ( 1,980 ) — ( 1,980 ) Common stock repurchased ( 98,156 ) — ( 991 ) ( 23 ) ( 1,014 ) Restricted stock award grants net of forfeitures 11,755 — — — Restricted stock awards canceled ( 867 ) — ( 8 ) ( 8 ) Other comprehensive income, net of tax 5,173 5,173 Share-based compensation expense 260 260 ESOP shares committed to be released ( 28 ) 164 136 Cash dividends declared ($ 0.07 per share) ( 659 ) ( 659 ) Balance at September 30, 2024 9,365,979 $ 94 $ 93,218 $ 100,660 $ ( 6,759 ) $ ( 26,424 ) $ — $ 160,789 See selected notes to the consolidated financial statements. 6 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands, except share information) (Unaudited) 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, 2022 9,703,581 $ 97 $ 95,508 $ 114,424 $ ( 7,913 ) $ ( 40,543 ) $ ( 3,291 ) $ 158,282 Net income 7,808 ( 160 ) 7,648 Common stock repurchased ( 75,690 ) ( 1 ) ( 755 ) ( 224 ) ( 980 ) Restricted stock award grants net of forfeitures 18,256 — — — Restricted stock awards canceled ( 15,412 ) — ( 205 ) ( 205 ) Other comprehensive loss, net of tax ( 5,307 ) ( 5,307 ) 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 expense 1,098 1,098 ESOP shares committed to be released 12 495 507 Cash dividends declared ($ 0.21 per share) ( 2,027 ) ( 2,027 ) Balance at September 30, 2023 9,630,735 $ 96 $ 95,658 $ 113,579 $ ( 7,418 ) $ ( 45,850 ) $ — $ 156,065 Balance at December 31, 2023 9,611,876 $ 96 $ 95,784 $ 107,349 $ ( 7,253 ) $ ( 32,636 ) $ — $ 163,340 Net loss ( 3,803 ) — ( 3,803 ) Common stock repurchased ( 312,288 ) ( 2 ) ( 3,160 ) ( 895 ) ( 4,057 ) Restricted stock award grants net of forfeitures 78,418 — — — Restricted stock awards canceled ( 12,027 ) — ( 174 ) ( 174 ) Other comprehensive income, net of tax 6,212 6,212 Share-based compensation expense 781 781 ESOP shares committed to be released ( 13 ) 494 481 Cash dividends declared ($ 0.21 per share) ( 1,991 ) ( 1,991 ) Balance at September 30, 2024 9,365,979 $ 94 $ 93,218 $ 100,660 $ ( 6,759 ) $ ( 26,424 ) $ — $ 160,789 See selected notes to the consolidated financial statements. 7 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net (loss) income before noncontrolling interest $ ( 3,803 ) $ 7,648 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,091 1,201 Amortization of core deposit intangible 3 2 Amortization and accretion of premiums and discounts on investments, net 459 1,078 Accretion of deferred loan fees and purchased premiums, net ( 1,133 ) ( 451 ) Amortization of debt issuance costs 58 58 Change in fair value of sold loan servicing rights 247 303 Additions to servicing rights on sold loans, net ( 38 ) ( 145 ) Provision for credit losses on loans 12,956 1,195 Recapture of provision for credit losses on unfunded commitments ( 113 ) ( 1,024 ) Allocation of ESOP shares 481 507 Share-based compensation expense 781 1,098 Gain on sale of loans, net ( 260 ) ( 405 ) Loss on sale of securities available for sale, net 2,117 — Increase in cash surrender value of life insurance, net ( 851 ) ( 668 ) Origination of loans held for sale ( 13,553 ) ( 21,351 ) Proceeds from sale of loans held for sale 14,188 21,664 Change in assets and liabilities: Increase in accrued interest receivable ( 1,045 ) ( 1,350 ) (Increase) decrease in ROU asset ( 11,268 ) 433 (Increase) decrease in prepaid expenses and other assets ( 396 ) 1,718 (Decrease) increase in accrued interest payable ( 1,243 ) 1,821 Increase (decrease) in lease liabilities 11,371 ( 399 ) (Decrease) increase in accrued expenses and other liabilities ( 5,654 ) 2,359 Net cash provided by operating activities 4,395 15,292 Cash flows from investing activities: Purchase of securities available for sale ( 53,027 ) — Proceeds from maturities, calls, and principal repayments of securities available for sale 22,345 8,480 Proceeds from sales of securities available for sale 21,048 — Purchase of FHLB stock ( 771 ) ( 940 ) Purchase of bank-owned life insurance, net of surrenders ( 6,140 ) — Early surrender of bank-owned life insurance policy 6,140 15 Net increase in loans receivable ( 83,721 ) ( 89,551 ) Net sale (purchase) of premises and equipment, net of amortization 6,521 ( 1,066 ) Capital contributions to equity and partnership investments ( 6,386 ) ( 335 ) Capital disbursements received from equity and partnership investments 6,782 99 Capital contributions to low-income housing tax credit partnerships ( 1,387 ) — Net cash used by investing activities ( 88,596 ) ( 83,298 ) See selected notes to the consolidated financial statements. 8 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2024 2023 Cash flows from financing activities: Net increase in deposits $ 34,749 $ 93,507 Proceeds from long-term FHLB advances 105,000 15,000 Repayment of long-term FHLB advances ( 25,000 ) ( 15,000 ) Net (decrease) increase in short-term FHLB advances ( 65,000 ) 19,000 Net decrease in line of credit ( 1,000 ) ( 4,000 ) Net increase in advances from borrowers for taxes and insurance 1,225 999 Payment of dividends ( 1,989 ) ( 2,025 ) Restricted stock awards canceled ( 174 ) ( 205 ) Repurchase of common stock ( 4,057 ) ( 980 ) Net cash provided by financing activities 43,754 106,296 Net (decrease) increase in cash and cash equivalents ( 40,447 ) 38,290 Cash and cash equivalents at beginning of period 123,169 45,596 Cash and cash equivalents at end of period $ 82,722 $ 83,886 Supplemental disclosures of cash flow information: Cash paid for interest on deposits and borrowings $ 43,203 $ 25,532 Cash paid for income taxes $ 3 $ 1,859 Supplemental disclosures of noncash investing activities: Change in unrealized gain (loss) on securities available for sale $ 8,176 $ ( 7,688 ) Change in unrealized (loss) gain on fair value hedge $ ( 379 ) $ 533 Amortization of unrecognized DB plan prior service cost $ 112 $ 113 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 $ 12,158 $ 152 See selected notes to the consolidated financial statements. 9 Table of Contents FIRST NORTHWEST BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation and Critical Accounting Policies Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on January 29, 2015, upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion"). In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $ 10.00 per share for gross proceeds of $ 121.7 million. An additional 933,360 shares of Company common stock and $ 400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $ 117.6 million in net proceeds from the stock offering of which $ 58.4 million was contributed to the Bank upon Conversion. Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On December 18, 2015, the ESOP completed its open market purchases, with funds borrowed from the Company, of 8 % of the common stock issued in the Conversion for a total of 1,048,029 shares. In April 2021, First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, 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 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 investment in First Fed and former controlling interest in Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures. The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with bor rowing and investing activities. Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10 -K for the year ended December 31, 2023 . In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for the three and nine months ended September 30, 2024 , are not necessarily indicative of the results that may be expected for future periods. 10 Table of Contents In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for credit losses ("ACL"), fair value of financial instruments and derivatives, and deferred tax assets and liabilities. Restatement - On October 21, 2024, the Audit Committee of the Board of Directors (the "Audit Committee") of the Company, based on the recommendation of, and after consultation with, the Company’s management and independent registered public accounting firm, concluded that certain charge-offs of commercial construction loans, commercial business loans and the Splash unsecured consumer loan program as well as increased provision on Splash consumer loans should have been reported in the interim period ending June 30, 2024. On October 25, 2024, the Company filed amendments to its quarterly report for the period ended June 30, 2024 to restate the consolidated financial statements included therein. The consolidated financial statements as of and for the nine months ended September 30, 2024 , reflect the effects of the restatement as of and for the period ended June 30, 2024. Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures. 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 Topic 810. The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment. Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure. Recently adopted accounting pronouncements In June 2022, the FASB issued ASU No. 2022 - 03, Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately. Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU did not have a material impact on the 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 adoption of this ASU did not have a material impact on the consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures . ASU 2023 - 07 requires public companies to provide more transparency in both quarterly and annual reports about the expenses they incur from revenue generating business units to better understand the Company's overall performance and potential future cash flows. The Company has identified one reporting segment. ASU 2023 - 07 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 adoption of this ASU did not have a material impact on the consolidated financial statements and related disclosures. 11 Table of Contents Recently issued accounting pronouncements not yet adopted In March 2024, the FASB issued ASU 2024 - 01, Compensation—Stock Compensation (Topic 718 ): Scope Application of Profits Interest and Similar Awards . ASU 2024 - 01 added an illustrative example to demonstrate how an entity should apply the scope guidance in paragraph 718 - 10 - 15 - 3 to determine whether a profits interest award should be accounted for in accordance with Topic 718. Awards not meeting the criteria should be accounted for in accordance with Topic 710. The illustrative example provides four fact patterns which are intended to reduce complexity in determining whether a profits interest award is subject to the guidance in Topic 718 and reduce existing diversity in practice. ASU 2024 - 01 is effective for the Company for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements and related disclosures. In November 2024, the FASB issued ASU 2024 - 03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220 - 40 ): Disaggregation of Income Statement Expenses . ASU 2024 - 03 requires additional disclosure of the nature of expenses included in the income statement in response to requests from investors for more information to better understand an entity's performance and potential future cash flows. The new standard requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. ASU 2024 - 03 is effective for the Company for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements and related disclosures. Note 2 - Securities The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at September 30, 2024 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses (In thousands) Available for Sale Municipal bonds $ 93,573 $ — $ ( 12,210 ) $ 81,363 $ — U.S. government agency issued asset-backed securities (ABS agency) 13,312 16 ( 32 ) 13,296 — Corporate issued asset-backed securities (ABS corporate) 16,364 48 ( 21 ) 16,391 — Corporate issued debt securities (Corporate debt) 58,131 — ( 4,073 ) 54,058 — U.S. Small Business Administration securities (SBA) 9,268 56 ( 7 ) 9,317 — Mortgage-backed securities: U.S. government agency issued mortgage-backed securities (MBS agency) 88,822 167 ( 10,440 ) 78,549 — Non-agency issued mortgage-backed securities (MBS non-agency) 61,541 — ( 3,655 ) 57,886 — Total securities available for sale $ 341,011 $ 287 $ ( 30,438 ) $ 310,860 $ — 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: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Allowance for Credit Losses (In thousands) Available for Sale Municipal bonds $ 102,998 $ — $ ( 15,237 ) $ 87,761 $ — ABS agency 11,847 — ( 65 ) 11,782 — ABS corporate 5,370 — ( 84 ) 5,286 — Corporate debt 56,515 — ( 5,061 ) 51,454 — Mortgage-backed securities: MBS agency 75,665 — ( 12,418 ) 63,247 — MBS non-agency 81,555 — ( 5,462 ) 76,093 — Total securities available for sale $ 333,950 $ — $ ( 38,327 ) $ 295,623 $ — 12 Table of Contents There were no securities classified as held-to-maturity at September 30, 2024 and December 31, 2023 . There was no allowance for credit losses on investment securities recorded at September 30, 2024 and December 31, 2023 , based on analysis performed by the Company. Accrued interest receivable on available-for-sale debt securities totaled $ 2.4 million and $ 1.9 million as of September 30, 2024 and December 31, 2023 , respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Balance Sheets and is excluded from the calculation of the allowance for credit losses on investment securities. The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of September 30, 2024 : 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 $ — $ — $ ( 12,210 ) $ 81,363 $ ( 12,210 ) $ 81,363 ABS agency ( 32 ) 9,520 — — ( 32 ) 9,520 ABS corporate ( 21 ) 4,815 — — ( 21 ) 4,815 Corporate debt ( 50 ) 1,640 ( 4,023 ) 52,418 ( 4,073 ) 54,058 SBA ( 7 ) 983 — — ( 7 ) 983 Mortgage-backed securities: MBS agency ( 119 ) 7,242 ( 10,321 ) 51,487 ( 10,440 ) 58,729 MBS non-agency — — ( 3,655 ) 56,845 ( 3,655 ) 56,845 Total available-for-sale in a loss position $ ( 229 ) $ 24,200 $ ( 30,209 ) $ 242,113 $ ( 30,438 ) $ 266,313 The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of December 31, 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 available-for-sale in a loss position $ ( 176 ) $ 19,494 $ ( 38,151 ) $ 274,306 $ ( 38,327 ) $ 293,800 There were 10 available-for-sale securities with unrealized losses of less than one year, and 145 available-for-sale securities with an unrealized loss of more than one year at September 30, 2024 . 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 . 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 believes that it is unlikely that we would be required to sell these investments prior to a market price recovery or maturity. Based on the Company’s evaluation of these securities, no credit impairment was recorded at September 30, 2024 , or December 31, 2023 . 13 Table of Contents 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. September 30, 2024 Available-for-Sale Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year $ 19,249 $ 19,091 Due after one through five years 4,264 4,226 Due after five through ten years 8,141 7,782 Due after ten years 118,709 105,336 Total mortgage-backed securities 150,363 136,435 All other investment securities: Due within one year 1,000 815 Due after one through five years 20,574 19,857 Due after five through ten years 53,073 48,893 Due after ten years 116,001 104,860 Total all other investment securities 190,648 174,425 Total investment securities $ 341,011 $ 310,860 December 31, 2023 Available-for-Sale Amortized Cost Estimated Fair Value (In thousands) Mortgage-backed securities: Due within one year $ 25,279 $ 25,017 Due after one through five years 16,622 16,029 Due after five through ten years 8,874 8,197 Due after ten years 106,445 90,097 Total mortgage-backed securities 157,220 139,340 All other investment securities: Due within one year 300 300 Due after one through five years 18,187 17,384 Due after five through ten years 57,328 50,768 Due after ten years 100,915 87,831 Total all other investment securities 176,730 156,283 Total investment securities $ 333,950 $ 295,623 Sales of available-for-sale securities were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In thousands) Proceeds from sales $ — $ — $ 21,048 $ — Gross realized gains — — — — Gross realized losses — — ( 2,117 ) — 14 Table of Contents Note 3 - Loans Receivable The Company has identified three segments of its loan portfolio 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 presented at amortized cost which is comprised of the loan balance net of unearned loan fees in excess of unamortized costs and unamortized purchase premiums of $ 19.5 million as of September 30, 2024 and $ 14.8 million as of December 31, 2023 . The amortized cost reflected in total loans receivable does not include accrued interest receivable. Accrued interest receivable on loans was $ 6.5 million as of September 30, 2024 and $ 6.0 million as of December 31, 2023 , and was reported in accrued interest receivable on the consolidated balance sheets and is excluded from the calculation of the allowance for credit losses on loans. The amortized cost of loans receivable, net of the allowance for credit losses on loans ("ACLL"), consisted of the following at the dates indicated: September 30, 2024 December 31, 2023 (In thousands) Real Estate: One-to-four family $ 395,792 $ 378,432 Multi-family 353,813 333,094 Commercial real estate 376,008 387,983 Construction and land 95,709 129,691 Total real estate loans 1,221,322 1,229,200 Consumer: Home equity 76,960 69,403 Auto and other consumer 281,198 249,130 Total consumer loans 358,158 318,533 Commercial business loans 155,327 112,295 Total loans receivable 1,734,807 1,660,028 Less: Derivative basis adjustment ( 1,579 ) — Allowance for credit losses on loans 21,970 17,510 Total loans receivable, net $ 1,714,416 $ 1,642,518 15 Table of Contents Nonaccrual Loans. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For those loans placed on nonaccrual status due to payment delinquency, return to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months. The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated: September 30, 2024 December 31, 2023 Nonaccrual Loans with ACLL Nonaccrual Loans with No ACLL Total Nonaccrual Loans Nonaccrual Loans with ACLL Nonaccrual Loans with No ACLL Total Nonaccrual Loans (In thousands) One-to-four family $ 312 $ 1,319 $ 1,631 $ 418 $ 1,426 $ 1,844 Multi-family — — — — — — Commercial real estate 10 5,624 5,634 28 — 28 Construction and land 16 19,366 19,382 6 14,980 14,986 Home equity 87 29 116 92 31 123 Auto and other consumer 31 863 894 38 748 786 Commercial business 2,100 619 2,719 165 712 877 Total nonaccrual loans $ 2,556 $ 27,820 $ 30,376 $ 747 $ 17,897 $ 18,644 Interest income recognized on a cash basis on nonaccrual loans for the three months ended September 30, 2024 and 2023 , was $ 1,000 and $ 19,000 , respectively. Interest income recognized on a cash basis on nonaccrual loans for the nine months ended September 30, 2024 and 2023 , was $ 35,000 and $ 52,000 , respectively. 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 September 30, 2024 and December 31, 2023 . 16 Table of Contents The following tables present the amortized cost of past due loans (including both accruing and nonaccruing loans) by segment and class as of the periods shown: 30-59 Days 60-89 Days 90 Days or More Total September 30, 2024 Past Due Past Due Past Due Past Due Current Total Loans (In thousands) Real Estate: One-to-four family $ — $ 360 $ 1,003 $ 1,363 $ 394,429 $ 395,792 Multi-family — — — — 353,813 353,813 Commercial real estate — — 5,624 5,624 370,384 376,008 Construction and land — 8,172 11,198 19,370 76,339 95,709 Total real estate loans — 8,532 17,825 26,357 1,194,965 1,221,322 Consumer: Home equity 53 29 — 82 76,878 76,960 Auto and other consumer 2,378 430 894 3,702 277,496 281,198 Total consumer loans 2,431 459 894 3,784 354,374 358,158 Commercial business loans 1,350 646 605 2,601 152,726 155,327 Total loans $ 3,781 $ 9,637 $ 19,324 $ 32,742 $ 1,702,065 $ 1,734,807 30-59 Days 60-89 Days 90 Days or More Total December 31, 2023 Past Due Past Due Past Due Past Due Current Total Loans (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 $ 3,846 $ 9,884 $ 1,801 $ 15,531 $ 1,644,497 $ 1,660,028 Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings 6, 7, and 8 in our 8 -point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When 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 evaluates 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. 17 Table of Contents The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of September 30, 2024 , as well as gross charge-off activity for the nine months ended September 30, 2024 . 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 or Most Recent Renewal or Extension (1) Revolving Total 2024 2023 2022 2021 2020 Prior Loans Loans (In thousands) One-to-four family Pass (Grades 1-3) $ 725 $ 10,300 $ 125,483 $ 117,096 $ 65,822 $ 69,553 $ — $ 388,979 Watch (Grade 4) — — 570 1,314 1,011 2,170 — 5,065 Special Mention (Grade 5) — — — — — 79 — 79 Substandard (Grade 6) — — — — 845 824 — 1,669 Total one-to-four family 725 10,300 126,053 118,410 67,678 72,626 — 395,792 Gross charge-offs year-to-date — — — — — — — — Multi-family Pass (Grades 1-3) 7,185 37,138 107,903 94,588 50,179 11,417 — 308,410 Watch (Grade 4) 8,787 14,869 1,772 16,208 2,787 980 — 45,403 Total multi-family 15,972 52,007 109,675 110,796 52,966 12,397 — 353,813 Gross charge-offs year-to-date — — — — — — — — Commercial Real Estate Pass (Grades 1-3) 13,843 52,041 72,061 98,202 68,103 31,619 — 335,869 Watch (Grade 4) 556 3,801 10,430 — 8,522 772 — 24,081 Special Mention (Grade 5) — — — — 1,265 2,720 — 3,985 Substandard (Grade 6) — — 10 12,063 — — — 12,073 Total commercial real estate 14,399 55,842 82,501 110,265 77,890 35,111 — 376,008 Gross charge-offs year-to-date — — — — — — — — Construction and Land Pass (Grades 1-3) 21,753 15,971 20,158 11,394 512 559 — 70,347 Watch (Grade 4) 192 5,541 — 224 — 25 — 5,982 Substandard (Grade 6) 8,177 11,187 — — — 16 — 19,380 Total construction and land 30,122 32,699 20,158 11,618 512 600 — 95,709 Gross charge-offs year-to-date — 3,978 — — — — — 3,978 Home Equity Pass (Grades 1-3) 4,554 6,169 6,564 4,282 2,695 4,834 47,262 76,360 Watch (Grade 4) — — — — 36 27 411 474 Substandard (Grade 6) — — — 29 55 11 31 126 Total home equity 4,554 6,169 6,564 4,311 2,786 4,872 47,704 76,960 Gross charge-offs year-to-date — — — — — — — — Auto and Other Consumer Pass (Grades 1-3) 57,620 49,772 69,604 38,192 13,372 48,000 515 277,075 Watch (Grade 4) 1,032 524 572 59 386 225 1 2,799 Special Mention (Grade 5) 206 70 — 148 6 — — 430 Substandard (Grade 6) 31 111 224 241 134 153 — 894 Total auto and other consumer 58,889 50,477 70,400 38,640 13,898 48,378 516 281,198 Gross charge-offs year-to-date — 406 1,319 92 17 234 62 2,130 Commercial business Pass (Grades 1-3) 22,827 21,000 9,059 4,047 1,714 42,683 35,786 137,116 Watch (Grade 4) — 144 1,086 90 — — 974 2,294 Special Mention (Grade 5) — — 1,534 1,595 — — — 3,129 Substandard (Grade 6) 1,619 263 5,649 2,145 614 — 2,495 12,785 Loss (Grade 8) — — — — — — 3 3 Total commercial business 24,446 21,407 17,328 7,877 2,328 42,683 39,258 155,327 Gross charge-offs year-to-date — — 813 1,748 139 — — 2,700 Total loans Pass (Grades 1-3) 128,507 192,391 410,832 367,801 202,397 208,665 83,563 1,594,156 Watch (Grade 4) 10,567 24,879 14,430 17,895 12,742 4,199 1,386 86,098 Special Mention (Grade 5) 206 70 1,534 1,743 1,271 2,799 — 7,623 Substandard (Grade 6) 9,827 11,561 5,883 14,478 1,648 1,004 2,526 46,927 Loss (Grade 8) — — — — — — 3 3 Total loans $ 149,107 $ 228,901 $ 432,679 $ 401,917 $ 218,058 $ 216,667 $ 87,478 $ 1,734,807 Total gross charge-offs year-to-date $ — $ 4,384 $ 2,132 $ 1,840 $ 156 $ 234 $ 62 $ 8,808 ( 1 ) Term loans that are renewed or extended for periods longer than 90 days are presented as a new origination in the year of most recent renewal or extension. 18 Table of Contents 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 then ended. 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 or Most Recent Renewal or Extension (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 for the year — — — — — — — — 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 for the year — — — — — — — — 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 for the year — — — — — — — — 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 for the year — — — — — — — — 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 for the year — — — — — 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 for the year — 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 for the year — — — — — — — — 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 for the year $ — $ 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 most recent renewal or extension. 19 Table of Contents 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 September 30, 2024 , $ 31.8 million of loans were individually evaluated with $ 2.6 million of ACLL attributed to such loans. At September 30, 2024 , eight individually evaluated loans totaling $ 4.6 million were evaluated using a discounted cash flow approach and the remaining loans totaling $ 27.2 million were evaluated based on the underlying value of the collateral. One loan evaluated using the discounted cash flow method remained on accrual at quarter end, while the other loans evaluated using the discounted cash flow method and all loans evaluated based on collateral value were on nonaccrual at September 30, 2024 . At 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 the periods shown: Collateral Type September 30, 2024 Single Family Residence Warehouse Condominium Automobile Business Assets Total (In thousands) One-to-four family $ 1,319 $ — $ — $ — $ — $ 1,319 Commercial real estate — 5,624 — — — 5,624 Construction and land 8,178 — 11,187 — — 19,365 Home equity 29 — — — — 29 Auto and other consumer — — — 241 — 241 Commercial business — — — — 603 603 Total collateral dependent loans $ 9,526 $ 5,624 $ 11,187 $ 241 $ 603 $ 27,181 Collateral Type December 31, 2023 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 20 Table of Contents Modified Loans to Troubled Borrowers. On January 1, 2023, the Company adopted ASU 2022 - 02, which introduced 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: principal forgiveness, interest rate reduction, other-than-insignificant payment delay, 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 nine months ended September 30, 2024 , there was one new MLTB, a commercial business loan with a recorded investment of $ 17,000 for which the Bank agreed to defer payments. The borrower has agreed to resume principal and interest payments at the end of the deferral period. The loan was current at September 30, 2024 , based on the modified terms. 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 defer 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. Determining the ACLL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the Bank's Current Expected Credit Loss ("CECL") model. The reserve is an estimate based upon factors and trends at the time the financial statements are prepared. The Company adopted ASU 2016 - 13 effective January 1, 2023, which increased the beginning ACLL. The Company has identified segments of loans with similar risk characteristics for which it then applies one of two loss methodologies. The Company uses a DCF methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a Remaining Life methodology. The Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. If the present value of cash flows is less than the total recorded investment, a reserve is calculated. 21 Table of Contents The following tables detail activity in the allowance for credit losses on loans by class for the periods shown: At or For the Three Months Ended September 30, 2024 Beginning Balance Charge-offs Recoveries (Recapture of) Provision for Credit Losses Ending Balance (In thousands) One-to-four family $ 4,536 $ — $ 42 $ ( 270 ) $ 4,308 Multi-family 1,624 — — 965 2,589 Commercial real estate 3,132 — — ( 495 ) 2,637 Construction and land 801 — — ( 85 ) 716 Home equity 1,692 — — ( 446 ) 1,246 Auto and other consumer 2,596 ( 492 ) 24 805 2,933 Commercial business 4,962 ( 24 ) — 2,603 7,541 Total $ 19,343 $ ( 516 ) $ 66 $ 3,077 $ 21,970 At or For the Nine Months Ended September 30, 2024 Beginning Balance Charge-offs Recoveries Provision for (Recapture of) Credit Losses Ending Balance (In thousands) One-to-four family $ 2,975 $ — $ 44 $ 1,289 $ 4,308 Multi-family 1,154 — — 1,435 2,589 Commercial real estate 3,671 — — ( 1,034 ) 2,637 Construction and land 1,889 ( 3,978 ) — 2,805 716 Home equity 1,077 — — 169 1,246 Auto and other consumer 4,409 ( 2,130 ) 268 386 2,933 Commercial business 2,335 ( 2,700 ) — 7,906 7,541 Total $ 17,510 $ ( 8,808 ) $ 312 $ 12,956 $ 21,970 At or For the Three Months Ended September 30, 2023 Beginning Balance Charge-offs Recoveries Provision for (Recapture of) Credit Losses Ending Balance (In thousands) One-to-four family $ 3,012 $ — $ — $ 526 $ 3,538 Multi-family 1,041 — — 230 1,271 Commercial real estate 2,924 — — ( 390 ) 2,534 Construction and land 2,535 — — ( 352 ) 2,183 Home equity 1,125 — — 178 1,303 Auto and other consumer 4,795 ( 731 ) ( 501 ) 601 4,164 Commercial business 1,865 — — 87 1,952 Total $ 17,297 $ ( 731 ) $ ( 501 ) $ 880 $ 16,945 22 Table of Contents At or For the Nine Months Ended September 30, 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 $ — $ 4 $ 620 $ 3,538 Multi-family 2,468 ( 1,449 ) 1,019 — — 252 1,271 Commercial real estate 4,217 ( 604 ) 3,613 — — ( 1,079 ) 2,534 Construction and land 2,344 1,555 3,899 — — ( 1,716 ) 2,183 Home equity 549 346 895 ( 11 ) 5 414 1,303 Auto and other consumer 2,024 2,381 4,405 ( 2,657 ) 84 2,332 4,164 Commercial business 786 794 1,580 — — 372 1,952 Unallocated 385 ( 385 ) — — — — — Total $ 16,116 $ 2,209 $ 18,325 $ ( 2,668 ) $ 93 $ 1,195 $ 16,945 Allowance for Credit Losses on Unfunded Loan Commitments. The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Company has determined that no allowance is necessary for its home equity line of credit portfolio as it has the contractual 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, or recapture of provision, for credit losses on unfunded commitments on the Consolidated Statements of Income. The allowance for unfunded commitments was $ 704,000 and $ 817,000 at September 30, 2024 , and December 31, 2023 , respectively. Note 5 - Premises and Equipment Premises and equipment consist of the following as of: September 30, 2024 December 31, 2023 (In thousands) Land $ 676 $ 2,907 Buildings 3,652 6,697 Building improvements 11,235 17,945 Furniture, fixtures, and equipment 7,598 7,300 Software 534 599 Automobiles 66 66 Construction in progress 35 104 Total premises and equipment 23,796 35,618 Less accumulated depreciation and amortization ( 13,360 ) ( 17,569 ) Premises and equipment, net of accumulated depreciation and amortization $ 10,436 $ 18,049 Depreciation expense for the three months ended September 30, 2024 and 2023 , was $ 346,000 and $ 402,000 , respectively. Depreciation expense for the nine months ended September 30, 2024 and 2023 , was $ 1.1 million and $ 1.2 million, respectively. 23 Table of Contents Note 6 - Leases The Bank has lease agreements with unaffiliated parties for fifteen locations, comprised of eleven 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 September 30, 2024 , the Company's ROU assets and lease liabilities were $ 17.3 million and $ 17.8 million, respectively. Total costs incurred by the Company, as a lessee, were $ 1.6 million and $ 857,000 for the nine months ended September 30, 2024 and 2023 , 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 at the dates indicated: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In Thousands) Operating cash flows from operating leases $ 700 $ 284 $ 1,564 $ 857 Right of use assets obtained in exchange for new operating lease liabilities — 152 12,158 152 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 the dates indicated: September 30, 2024 December 31, 2023 Weighted-average remaining lease term of operating leases (in years) 12.6 9.0 Weighted-average discount rate of operating leases 7.2 % 2.4 % 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: Twelve-month period ending: (In Thousands) September 30, 2025 $ 2,310 September 30, 2026 2,333 September 30, 2027 2,321 September 30, 2028 2,206 September 30, 2029 2,106 Thereafter 18,547 Total minimum payments required $ 29,823 Less imputed interest 12,095 Present value of lease liabilities $ 17,728 24 Table of Contents Note 7 - Deposits Deposits and weighted-average interest rates at the dates indicated are as follows: September 30, 2024 December 31, 2023 Amount Weighted-Average Interest Rate Amount Weighted-Average Interest Rate (Dollars in thousands) Noninterest-bearing demand deposits $ 252,999 — % $ 252,083 — % Interest-bearing demand deposits 167,202 0.60 169,418 0.56 Money market accounts 433,307 3.18 362,205 1.78 Savings accounts 212,763 1.45 242,148 1.62 Certificates of deposit, retail 441,665 4.21 443,412 4.04 Certificates of deposit, brokered 203,705 4.65 207,626 4.85 Total deposits $ 1,711,641 2.68 $ 1,676,892 2.34 The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently $250,000, at September 30, 2024 and December 31, 2023 , were $ 170.7 million and $ 173.8 million, respectively. Maturities of certificates at the dates indicated are as follows: September 30, 2024 December 31, 2023 (In thousands) Within one year or less $ 523,584 $ 495,605 After one year through two years 45,754 79,537 After two years through three years 31,221 24,777 After three years through four years 24,305 28,302 After four years through five years 20,506 22,817 Total certificates of deposit $ 645,370 $ 651,038 At September 30, 2024 and December 31, 2023 , deposits included $ 119.0 million and $ 114.2 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 September 30, 2024 and December 31, 2023 , to secure public deposits. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at September 30, 2024 and December 31, 2023 , were funds held by federally recognized tribes totaling $ 20.7 million and $ 18.4 million, respectively. Investment securities with a carrying value of $ 24.2 million and $ 23.8 million were pledged as collateral for these deposits at September 30, 2024 and December 31, 2023 , respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs. Interest on deposits by type for the periods shown was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In thousands) Demand deposits $ 187 $ 204 $ 567 $ 599 Money market accounts 2,875 1,146 7,244 2,866 Savings accounts 923 918 2,791 2,056 Certificates of deposit, retail 4,340 3,505 12,913 8,323 Certificates of deposit, brokered 2,635 1,926 7,737 4,417 Total interest expense on deposits $ 10,960 $ 7,699 $ 31,252 $ 18,261 25 Table of Contents Note 8 - Borrowings First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 35 % of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements. First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until paid. First Fed periodically uses fixed-rate advances maturing in less than one year as an alternative source of funds. Available borrowing capacity was $ 226.1 million and $ 253.8 million at September 30, 2024 and December 31, 2023 , respectively. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $ 907.3 million and $ 896.2 million at September 30, 2024 and December 31, 2023 , 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 September 30, 2024 . First Fed also has an established borrowing arrangement with the Federal Reserve Bank of San Francisco ("FRB") to utilize the discount window for short-term borrowing. Available borrowing capacity was $ 18.7 million and $ 6.6 million at September 30, 2024 and December 31, 2023 , respectively. An overnight test of the line of credit was performed at the end of June 2024. Investment securities with a carrying value of $ 19.3 million and $ 6.9 million were pledged to the FRB at September 30, 2024 and December 31, 2023 , 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 line of credit matures on May 17, 2025 . 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 were borrowed between June 2023 and March 2024, when the BTFP stopped funding new loans, effectively ending the Bank's participation in the program. Investment securities with a carrying value of $ 12.9 million were pledged to secure the BTFP at December 31, 2023. The following table sets forth information regarding our borrowings at the end of and during the nine months ended September 30, 2024 . The table includes both long- and short-term borrowings. FHLB Long-Term Advances FHLB Overnight Variable-Rate Advances FRB Discount Window Line of Credit Subordinated Debt, net (Dollars in thousands) Balance outstanding $ 160,000 $ 130,000 $ — $ 5,500 $ 39,494 Maximum outstanding at any month-end 170,000 270,000 100 10,000 39,494 Average monthly outstanding during the period 128,333 154,778 11 6,856 39,465 Weighted-average daily interest rates Annual 3.24 % 5.51 % 5.27 % 9.60 % 4.01 % Period End 3.63 % 5.35 % — % 8.50 % 4.00 % 26 Table of Contents The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at September 30, 2024 are as follows: Amount Weighted- Average Interest Rate (Dollars in thousands) Within one year or less $ 20,000 2.12 % After one year through two years 55,000 3.85 After two years through three years 50,000 3.93 After three years through four years 35,000 3.72 Total FHLB long-term advances $ 160,000 3.63 The following table sets forth information regarding our borrowings at the end of and during the year ended December 31, 2023 . The table includes both long- and short-term borrowings. FHLB Long-Term Advances FHLB Overnight Variable-Rate Advances FHLB Short-Term Fixed-Rate Advances Line of Credit Subordinated Debt, net (Dollars in thousands) Balance outstanding $ 80,000 $ 195,000 $ — $ 6,500 $ 39,436 Maximum outstanding at any month-end 85,000 195,000 95,000 11,000 39,436 Average monthly outstanding during the period 81,667 149,500 25,000 9,327 39,395 Weighted-average daily interest rates Annual 2.00 % 5.26 % 5.08 % 9.15 % 4.01 % Period End 2.09 % 5.52 % 5.27 % 9.00 % 4.00 % Note 9 - Income Tax Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities. The effective tax rates were 25.5 % and 19.9 % for the nine months ended September 30, 2024 and 2023 , respectively. The effective tax rates differ from the statutory maximum federal tax rate for 2024 and 2023 of 21 %, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. The current period rate includes an estimate for taxes and penalties on the early surrender of a BOLI contract which was recorded in the first quarter of 2024. 27 Table of Contents Note 10 - Earnings (Loss) 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: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In thousands, except share data) Net income: Net (loss) income available to common shareholders $ ( 1,980 ) $ 2,504 $ ( 3,803 ) $ 7,808 Dividends and undistributed earnings allocated to participating securities ( 1 ) ( 11 ) ( 3 ) ( 39 ) (Loss) earnings allocated to common shareholders $ ( 1,981 ) $ 2,493 $ ( 3,806 ) $ 7,769 Basic: Weighted average common shares outstanding 9,419,143 9,631,929 9,469,960 9,666,900 Weighted average unvested restricted stock awards ( 115,322 ) ( 125,338 ) ( 104,622 ) ( 143,326 ) Weighted average unallocated ESOP shares ( 547,056 ) ( 600,065 ) ( 560,214 ) ( 613,183 ) Total basic weighted average common shares outstanding 8,756,765 8,906,526 8,805,124 8,910,391 Diluted: Basic weighted average common shares outstanding 8,756,765 8,906,526 8,805,124 8,910,391 Dilutive restricted stock awards — 28,356 — 20,013 Total diluted weighted average common shares outstanding 8,756,765 8,934,882 8,805,124 8,930,404 Basic (loss) earnings per common share $ ( 0.23 ) $ 0.28 $ ( 0.43 ) $ 0.87 Diluted (loss) earnings per common share $ ( 0.23 ) $ 0.28 $ ( 0.43 ) $ 0.87 Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At September 30, 2024 and 2023 , antidilutive shares as calculated under the treasury stock method totaled 20,663 and 13,582 , respectively. Note 11 - Employee Benefits Employee Stock Ownership Plan In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12 -month period are eligible to participate in the ESOP. Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46 %. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. Principal and interest payments of $ 837,000 and $ 835,000 , respectively, were made by the ESOP during the nine months ended September 30, 2024 and 2023 . As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. 28 Table of Contents Compensation expense related to the ESOP for the three months ended September 30, 2024 and 2023 , was $ 136,000 and $ 167,000 , respectively. Compensation expense related to the ESOP for the nine months ended September 30, 2024 and 2023 , was $ 481,000 and $ 507,000 , respectively. Shares issued to the ESOP as of the dates indicated are as follows: September 30, 2024 December 31, 2023 (Dollars in thousands) Allocated shares 492,208 439,174 Committed to be released shares 13,221 26,514 Unallocated shares 542,600 582,341 Total ESOP shares issued 1,048,029 1,048,029 Fair value of unallocated shares $ 5,806 $ 9,283 Note 12 - Stock-based Compensation In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan ( "2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through May 2030. The cost of awards under the 2020 EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000 . As of September 30, 2024 , there were 210,093 total shares available for grant under the 2020 EIP, all of which are available to be granted as restricted shares. As a result of the approval of the 2020 EIP, the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 EIP") was frozen and no additional awards will be made. As of September 30, 2024 , there were no shares available for grant under the 2015 EIP. At this date, there are 10,220 shares granted under the 2015 EIP that are expected to vest subject to the 2015 EIP plan provisions. There were 81,181 and 32,449 shares of restricted stock awarded, respectively, during the nine months ended September 30, 2024 and 2023 . Awarded shares of restricted stock vest ratably over periods ranging from one to five years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period. For the three months ended September 30, 2024 and 2023 , total compensation expense for the equity incentive plans was $ 260,000 and $ 349,000 , respectively. Included in the compensation expense for the three months ended September 30, 2024 and 2023 , was directors' equity compensation of $ 75,000 and $ 59,000 , respectively. For the nine months ended September 30, 2024 and 2023 , total compensation expense for the equity incentive plans was $ 781,000 and $ 1.1 million, respectively. Included in the compensation expense for the nine months ended September 30, 2024 and 2023 , was directors' equity compensation of $ 185,000 and $ 190,000 , respectively. The following tables provide a summary of changes in non-vested restricted stock awards for the periods shown: Three Months Ended September 30, 2024 Shares Weighted-Average Grant Date Fair Value Non-vested at July 1, 2024 108,143 $ 15.60 Granted 13,043 9.48 Vested ( 4,956 ) 15.70 Canceled (1) ( 867 ) 15.70 Forfeited ( 1,288 ) 20.19 Non-vested at September 30, 2024 114,075 14.84 (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue. 29 Table of Contents Nine Months Ended September 30, 2024 Shares Weighted-Average Grant Date Fair Value Non-vested at January 1, 2024 96,022 $ 17.02 Granted 81,181 13.93 Vested ( 48,338 ) 17.00 Canceled (1) ( 12,027 ) 17.00 Forfeited ( 2,763 ) 16.62 Non-vested at September 30, 2024 114,075 14.84 (1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock price at the vesting date to cover the participant's tax obligation on the vested shares. The surrendered shares are canceled and are unavailable for reissue. As of September 30, 2024 , there was $ 1.1 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 1.94 years. 30 Table of Contents Note 13 - Fair Value Measurements Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models or third -party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs. Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available. A three -level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of the three levels of the hierarchy are as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data. Level 3 - Unobservable inputs. The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement. The Company used the following methods to measure fair value on a recurring and nonrecurring basis. Securities available for sale : Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices are not available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level 2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level 3. Equity and partnership investments : Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level 2, when available. Where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. The Company believes that the net asset value obtained through financial statements provided by each partnership approximates fair value. Such instruments are classified as Level 3. Sold loan servicing rights, at fair value : The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level 3 due to reliance on assumptions used in the valuation. Loans receivable, net : The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred. Interest rate swap derivative : The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level 2 ). The Company’s securities derivatives are traded in an over-the-counter market where quoted market prices are not always available. The Company also entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans. The fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions and third -party pricing services. The fair values of all interest rate swaps are determined from third -party pricing services without adjustment. 31 Table of Contents Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets and liabilities measured at fair value on a recurring basis at the dates indicated: September 30, 2024 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial Assets (In thousands) Securities available-for-sale Municipal bonds $ 5,054 $ 76,309 $ — $ 81,363 ABS agency — 13,296 — 13,296 ABS corporate — 16,391 — 16,391 Corporate debt 1,945 52,113 — 54,058 SBA — 9,317 — 9,317 MBS agency — 78,549 — 78,549 MBS non-agency — 40,791 17,095 57,886 Sold loan servicing rights — — 3,584 3,584 Equity and partnership investments — 1,762 12,650 14,412 Total assets measured at fair value $ 6,999 $ 288,528 $ 33,329 $ 328,856 Financial Liabilities Interest rate swap derivative $ — $ 2,749 $ — $ 2,749 December 31, 2023 Quoted Prices in Active Markets for Identical Assets or Liabilities Significant Other Observable Inputs Significant Unobservable Inputs (Level 1) (Level 2) (Level 3) Total Financial Assets (In thousands) Securities available-for-sale Municipal bonds $ 5,118 $ 82,643 $ — $ 87,761 ABS agency — 11,782 — 11,782 ABS corporate — 5,286 — 5,286 Corporate debt 1,883 49,571 — 51,454 MBS agency — 63,247 — 63,247 MBS non-agency — 48,624 27,469 76,093 Sold loan servicing rights — — 3,793 3,793 Partnership investments — — 13,183 13,183 Total assets measured at fair value $ 7,001 $ 261,153 $ 44,445 $ 312,599 Financial Liabilities Interest rate swap derivative $ — $ 1,002 $ — $ 1,002 32 Table of Contents The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at the dates indicated: September 30, 2024 Fair Value (In thousands) Valuation Technique Unobservable Input (1) Range (Weighted Average) Sold loan servicing rights $ 3,584 Discounted cash flow Constant prepayment rate 5.21% - 41.27% (7.83%) Discount rate 10.25% - 12.53% (10.92%) MBS non-agency $ 17,095 Consensus pricing Offered quotes 99 - 100 Partnership investments $ 12,650 Net asset value per share Net asset value n/a (1) Unobservable inputs were weighted by the relative fair value of the instruments. December 31, 2023 Fair Value (In thousands) Valuation Technique Unobservable Input (1) Range (Weighted Average) Sold loan servicing rights $ 3,793 Discounted cash flow Constant prepayment rate 4.10% - 47.53% (7.39%) Discount rate 11.00% - 13.42% (11.74%) MBS non-agency $ 27,469 Consensus pricing Offered quotes 98 - 100 Partnership investments $ 13,183 Net asset value per share Net asset value n/a (1) Unobservable inputs were weighted by the relative fair value of the instruments. The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis, at the dates indicated: As of or For the Three Months Ended September 30, As of or For the Nine Months Ended September 30, 2024 2023 2024 2023 Sold loan servicing rights: (In thousands) Balance at beginning of period $ 3,740 $ 3,825 $ 3,793 $ 3,887 Servicing rights that result from transfers and sale of financial assets 5 71 38 145 Changes in fair value due to changes in model inputs or assumptions (1) ( 161 ) ( 167 ) ( 247 ) ( 303 ) Balance at end of period $ 3,584 $ 3,729 $ 3,584 $ 3,729 (1) Represents changes due to collection/realization of expected cash flows and curtailments. As of or For the Three Months Ended September 30, As of or For the Nine Months Ended September 30, 2024 2023 2024 2023 Securities available for sale: (In thousands) MBS non-agency Balance at beginning of period $ 17,231 $ 29,378 $ 27,469 $ 29,599 Principal payments received ( 148 ) — ( 10,530 ) — Unrealized Gains (Losses) 12 ( 186 ) 156 ( 407 ) Balance at end of period $ 17,095 $ 29,192 $ 17,095 $ 29,192 33 Table of Contents As of or For the Three Months Ended September 30, As of or For the Nine Months Ended September 30, 2024 2023 2024 2023 Partnership investments: (In thousands) Balance at beginning of period $ 12,823 $ 12,733 $ 13,183 $ 12,563 Funding contributions (1) 80 126 6,386 335 Distributions received (1) ( 283 ) ( 57 ) ( 6,782 ) ( 404 ) Unrealized Gains (Losses) 30 ( 15 ) ( 137 ) 293 Balance at end of period $ 12,650 $ 12,787 $ 12,650 $ 12,787 ( 1 ) In the second quarter of 2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed. Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value. The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated: September 30, 2024 Level 1 Level 2 Level 3 Total (In thousands) Individually evaluated collateral dependent loans $ — $ — $ 27,181 $ 27,181 December 31, 2023 Level 1 Level 2 Level 3 Total (In thousands) Individually evaluated collateral dependent loans $ — $ — $ 17,388 $ 17,388 At September 30, 2024 and December 31, 2023 , there were no individually evaluated loans with discounts to appraisal disposition value or other unobservable inputs. 34 Table of Contents The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated: September 30, 2024 Fair Value Measurements Using: Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents $ 82,722 $ 82,722 $ 82,722 $ — $ — Investment securities available for sale 310,860 310,860 6,999 286,766 17,095 Loans held for sale 378 378 — 378 — Loans receivable, net 1,714,416 1,580,047 — — 1,580,047 FHLB stock 14,435 14,435 — 14,435 — Accrued interest receivable 8,939 8,939 — 8,939 — Sold loan servicing rights, at fair value 3,584 3,584 — — 3,584 Equity and partnership investments 14,412 14,412 — 1,762 12,650 Financial liabilities Demand deposits $ 1,066,271 $ 1,066,271 $ 1,066,271 $ — $ — Time deposits 645,370 647,583 — — 647,583 FHLB Borrowings 290,000 290,119 — — 290,119 Line of Credit 5,500 5,525 — — 5,525 Subordinated debt, net 39,494 42,016 — — 42,016 Accrued interest payable 2,153 2,153 — 2,153 — Interest rate swap derivative 2,749 2,749 — 2,749 — December 31, 2023 Fair Value Measurements Using: Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 (In thousands) Financial assets Cash and cash equivalents $ 123,169 $ 123,169 $ 123,169 $ — $ — Investment securities available for sale 295,623 295,623 7,001 261,153 27,469 Loans held for sale 753 753 — 753 — Loans receivable, net 1,642,518 1,506,130 — — 1,506,130 FHLB stock 13,664 13,664 — 13,664 — Accrued interest receivable 7,894 7,894 — 7,894 — Sold loan servicing rights, at fair value 3,793 3,793 — — 3,793 Partnership investments 13,183 13,183 — — 13,183 Financial liabilities Demand deposits 1,025,854 $ 1,025,854 $ 1,025,854 $ — $ — Time deposits 651,038 648,428 — — 648,428 FHLB Borrowings 275,000 271,284 — — 271,284 Line of Credit 6,500 6,524 — — 6,524 Subordinated debt, net 39,436 42,116 — — 42,116 Accrued interest payable 3,396 3,396 — 3,396 — Interest rate swap derivative 1,002 1,002 — 1,002 — 35 Table of Contents Note 14 - Change in Accumulated Other Comprehensive Income ("AOCI") Our AOCI includes unrealized gains (losses) on available-for-sale securities, defined benefit plan assets and derivatives as well as an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown: Unrealized Gains and Losses on Available-for-Sale Securities Net Actuarial Gains (Losses) on Defined Benefit Plan Assets Unrecognized Defined Benefit Plan Prior Service Cost, Net of Amortization Unrealized Gains and Losses on Derivatives Total (In thousands) Balance at June 30, 2023 $ ( 37,679 ) $ ( 600 ) $ ( 1,479 ) $ ( 308 ) $ ( 40,066 ) Other comprehensive (loss) income before reclassification ( 6,540 ) — — 727 ( 5,813 ) Amounts reclassified from accumulated other comprehensive income — — 29 — 29 Net other comprehensive (loss) income ( 6,540 ) — 29 727 ( 5,784 ) Balance at September 30, 2023 $ ( 44,219 ) $ ( 600 ) $ ( 1,450 ) $ 419 $ ( 45,850 ) Balance at June 30, 2024 $ ( 30,021 ) $ ( 288 ) $ ( 1,362 ) $ 74 $ ( 31,597 ) Other comprehensive income (loss) before reclassification 6,344 — — ( 1,200 ) 5,144 Amounts reclassified from accumulated other comprehensive income — — 29 — 29 Net other comprehensive income 6,344 — 29 ( 1,200 ) 5,173 Balance at September 30, 2024 $ ( 23,677 ) $ ( 288 ) $ ( 1,333 ) $ ( 1,126 ) $ ( 26,424 ) Balance at December 31, 2022 $ ( 38,404 ) $ ( 600 ) $ ( 1,539 ) $ — $ ( 40,543 ) Other comprehensive (loss) income before reclassification ( 5,815 ) — — 419 ( 5,396 ) Amounts reclassified from accumulated other comprehensive income — — 89 — 89 Net other comprehensive (loss) income ( 5,815 ) — 89 419 ( 5,307 ) Balance at September 30, 2023 $ ( 44,219 ) $ ( 600 ) $ ( 1,450 ) $ 419 $ ( 45,850 ) Balance at December 31, 2023 $ ( 30,099 ) $ ( 288 ) $ ( 1,421 ) $ ( 828 ) $ ( 32,636 ) Other comprehensive income (loss) before reclassification 4,759 — — ( 298 ) 4,461 Amounts reclassified from accumulated other comprehensive income 1,663 — 88 — 1,751 Net other comprehensive income 6,422 — 88 ( 298 ) 6,212 Balance at September 30, 2024 $ ( 23,677 ) $ ( 288 ) $ ( 1,333 ) $ ( 1,126 ) $ ( 26,424 ) 36 Table of Contents Note 15 - 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, the Secured Overnight Financing 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. The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheets. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s consolidated statements of income. The following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges for the periods shown. 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 Consolidated Balance Sheets where the hedged item is included: September 30, 2024 Investment securities (1) $ 51,433 $ 1,433 Loans receivable (2) 101,579 1,579 Total $ 153,012 $ 3,012 December 31, 2023 Investment securities $ 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 September 30, 2024 and December 31, 2023 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 56.8 million and $ 57.4 million, respectively; the cumulative basis adjustments associated with this hedging relationship was $ 1.4 million and $ 1.1 million, respectively; and the amount of the designated hedged items was $ 50.0 million for both periods. ( 2 ) These amounts include the amortized cost basis of a closed portfolio of loans receivable 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 September 30, 2024 , the amortized cost basis of the closed portfolio used in this hedging relationship was $ 283.2 million, the cumulative basis adjustments associated with this hedging relationship was $ 1.6 million, and the amount of the designated hedged items was $ 100.0 million. No prior year end information is provided as this hedging relationship was initiated in 2024. 37 Table of Contents 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) September 30, 2024 Fair value hedges: Interest rate swaps - securities $ 50,000 $ — $ 1,310 Interest rate swaps - loans 100,000 — 1,439 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: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (In thousands) Total amounts recognized in interest on investment securities $ 3,786 $ 3,368 $ 11,367 $ 9,886 Total amounts recognized in interest and fees on loans receivable (1) 23,536 — 70,036 — Net gains (losses) on fair value hedging relationships Interest rate swaps - securities Recognized on hedged items $ 1,338 $ — $ 1,433 $ 392 Recognized on derivatives designated as hedging instruments ( 1,102 ) — ( 1,350 ) ( 254 ) Interest rate swaps - loans Recognized on hedged items (1) 562 — 1,579 — Recognized on derivatives designated as hedging instruments (1) ( 300 ) — ( 1,544 ) — Net income recognized on fair value $ 498 $ — $ 118 $ 138 (1) Fair value hedge on loans initiated in 2024. Amounts presented for 2023 are limited to the fair value hedge on securities. 38 Table of Contents 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 interest rate swap agreements with its derivative counterparties that contain provisions 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 September 30, 2024 , the Company had derivatives in a net liability position related to these agreements. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted cash of $ 3.5 million at September 30, 2024 , to secure the related interest rate swap agreements as needed. 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. As of September 30, 2024 , 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 16 - Segment Reporting 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. The chief operating decision maker ("CODM") is comprised of the chief financial officer, chief operating officer and the chief executive officer. The accounting policies of the Bank are the same as those described in the summary of significant accounting policies in Note 1 of the Company's Annual Report on Form 10 -K for the year ended December 31, 2023 (" 2023 Form 10 -K"). The CODM assesses performance for the Bank and decides how to allocate resources based on net income that is reported on the income statement as consolidated net income. The measurement of segment assets is reported on the balance sheet as total consolidated assets. The CODM uses net income to evaluate income generated from the segment assets (return on assets) in deciding whether to reinvest profits into the Bank or into other parts of the entity, such as to pay dividends or a share repurchase plan. Net income is used to monitor budget versus actual results and assess the performance of the Bank. Note 17 - Sale and Leaseback of Premises 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"). All of the Properties are currently operated as branches and located in Clallam County, Washington or Jefferson County, Washington. Upon signing the agreement, the Company classified the related properties as held for sale and presented them separately on the Consolidated Balance Sheets at cost, net of accumulated amortization. The sale of all six properties was completed on May 7, 2024, for an aggregate cash sales price of $ 14.7 million. A pre-tax gain on sale of $ 7.9 million was recorded in noninterest income for the second quarter of 2024. Premises and equipment, net of depreciation, decreased by $ 6.8 million in the second quarter of 2024. Concurrent with the closing of the sale of the Properties, the Bank entered into triple net lease agreements (the "Lease Agreements") to lease back each of the Properties sold. Each Lease Agreement has an initial term of 15 years with one 15 -year renewal option. Going forward, a monthly rent expense of $ 130,000 in the aggregate for all Properties will be recorded in Occupancy and Equipment. The total estimated rent expense for the leaseback of these properties for 2024 is $ 1.0 million. The annual increase in rent is expected to be partially offset by the elimination of annualized depreciation expense on the buildings of $ 204,000 . The executed Lease Agreements also generated ROU assets totaling $ 12.2 million and lease liabilities of $ 12.2 million resulting in increases to other assets and other liabilities, respectively, on the Consolidated Balance Sheets that was recorded during the second quarter of 2024. 39 Table of Contents