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Item 1A. Risk Factors

2026-03-12 compared with 2025-03-13 · 191 added, 73 removed, 232 unchanged (53% of the section changed)

Risk Factors.

The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition, and future results.

You should carefully consider the following risks, together with all of the other information contained in this Form 10-K, including the sections entitled "Forward-Looking Statements" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes thereto.

Any of the following risks could have an adverse effect on our business, financial condition, and results of operations and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment.

Our business, financial condition, and results of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

Economy and Our Markets

Adverse economic conditions in market areas we serve could adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

Our business and operations are concentrated in Washington, and adverse economic conditions in that area could adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

A significant portion of our loans are to businesses and individuals in the state of Washington.

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If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.

Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans, and generally have a negative effect on our financial condition and results of operations.

Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans, and generally have a negative effect on our business, financial condition and results of operations.

Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs, which could adversely affect our earnings and capital levels.

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Deposit flows are influenced by various factors, including customer relationships, sales and marketing efforts, interest rates paid by competitors, alternative investments such as money market mutual funds, equities and bonds, government stimulus programs, and the overall levels of business and personal income and savings.

The current elevated interest rate environment has increased competition for deposits across the banking industry, and deposit balances may decrease if customers perceive alternative investments as providing a better risk/return tradeoff.

The interest rate environment impacts competition for deposits across the banking industry, and deposit balances may decrease if customers perceive alternative investments as providing a better risk/return tradeoff or if customers turn to other alternatives to deposits, such as stablecoins.

Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of the Company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits.

Furthermore, as banking organizations experienced in the Spring of 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely.

We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason.

Our failure to grow or retain deposits may result in a loss of market share and slower or negative loan growth, which likely would have an adverse effect on our financial condition and results of operations.

Public health crises , geopolitical developments, acts of terrorism, natural disasters, climate change and other external factors could harm our business.

Public health crises, domestic or geopolitical crises, such as the current wars in Ukraine and the Middle East, political instability or civil unrest, terrorism, human error or other events outside of our control, could cause disruptions to our business or the United States' economy, resulting in potentially adverse operating results.

Natural disasters may disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate.

Public health crises , geopolitical developments, acts of terrorism, natural disasters, climate change and other events out of our control could harm our business.

Public health crises, domestic or geopolitical crises, such as the current wars in Ukraine and the Middle East, political instability or civil unrest, terrorism or other events outside of our control, could cause disruptions to our business and those of our customers, counterparties and service providers or the U.S.' economy, resulting in potentially adverse operating results.

Natural disasters may disrupt our operations and those of our customers, counterparties and service providers, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate.

Climate change may worsen the severity and impact of future natural disasters and other extreme weather-related events that could cause disruption to our business and operations.

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A significant natural disaster, such as a tsunami, earthquake, drought, fire or flood, where we or our customers live and do business, could have a material adverse impact on our local market areas and our ability to conduct business, especially if our insurance coverage is insufficient to compensate for losses that may occur.

The effects of any of the foregoing factors could have a material adverse effect on our business, operations, and financial condition.

We also could be adversely affected if our key personnel or a significant number of our employees were to become unavailable due to a public health crisis (such as an outbreak of a contagious disease), natural disaster, war, act of terrorism, accident or other reason.

The effects of any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations.

We may be impacted by the actions, soundness or creditworthiness of other financial institutions, which can cause disruption within the industry and increase expenses.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.

We execute transactions with various counterparties in the financial industry, including broker-dealers, commercial banks, and investment banks.

Defaults or failures of financial services institutions and instability in the financial services industry in general can lead to market-wide liquidity problems, increased credit risk and withdrawals of uninsured deposits.

Such events could adversely affect our business, results of operations, and financial condition, as well as the market price and volatility of our common stock.

Bank failures may increase the risk of a recession or lead to regulatory changes and initiatives, such as enhanced capital, liquidity, or risk management requirements, which could adversely impact us.

Changes to laws or regulations, or the imposition of additional restrictions through supervisory or enforcement activities, could have a material impact on our business.

Regulatory changes could also adversely impact our ability to access funding, increase the cost of funding, limit our access to capital markets, and negatively impact our overall financial condition.

For example, certain bank failures in 2023 resulted in a special assessment by the FDIC to replenish the DIF.

We operate in a highly competitive industry.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources.

These competitors primarily include national, regional, community and digital banks within the various markets in which we operate.

We also face competition from many other types of financial institutions, including savings and loans, credit unions, mutual funds, mortgage banking finance companies, brokerage firms, insurance companies and other financial intermediaries or alternative investment vehicles.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies, non-fungible tokens, and other digital assets.

For example, financial technology companies and other firms have begun to offer services such as stablecoins that may serve as alternatives to traditional banking products such as deposits.

Additionally, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.

Competitors in these nonbank sectors may have fewer regulatory constraints, as well as lower cost structures.

Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability and result in a material adverse effect on our financial condition and results of operations.

Failure to keep up with the rapid technological changes in the financial services industry could have an adverse effect on our competitive position and profitability.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services.

The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs.

Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations.

Many of our competitors have substantially greater resources to invest in technological improvements than we do.

We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers.

Failure to keep pace successfully with technological change affecting the financial services industry could harm our ability to compete effectively and could have an adverse effect on our business, financial condition, and results of operations.

As these technologies improve in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have an adverse effect on our business, financial condition, and results of operations.

Credit and Asset Quality

Our increased emphasis on commercial real estate lending subjects us to various risks that could adversely impact our results of operations and financial condition.

We have increased the amount of our commercial real estate and multi-family loans to $723.0 million, or 42.6%, of our total loan portfolio, at December 31, 2024, from $721.1 million, or 43.4%, of our total loan portfolio at December 31, 2023.

We intend to continue to increase, subject to market demand, our origination and purchase of commercial real estate loans.

Our emphasis on commercial real estate lending subjects us to various risks that could adversely impact our results of operations and financial condition.

Our commercial real estate and multi-family loans represent a significant portion of our portfolio, with balances of $691.2 million, or 42.5%, of our total loan portfolio, at December 31, 2025, and $723.0 million, or 42.6%, of our total loan portfolio at December 31, 2024.

We intend to continue, subject to market demand, our origination and purchase of commercial real estate loans.

As an institution’s concentration in commercial real estate lending increases, it becomes subject to more scrutiny under the FDIC's policies for management of its commercial real estate loan portfolio.

Our increased focus on this type of lending has increased our risk profile.

Our focus on this type of lending has increased our risk profile.

Commercial real estate loans are intended to enhance the average yield of our earning assets;

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Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral is typically longer than for a one-to-four family residence because the market for most types of commercial real estate is not readily liquid, resulting in less opportunity to mitigate credit risk by selling part or all of our interest in these assets.

At December 31, 2024, we had $5,598,000 of nonperforming commercial real estate loans and $0 of nonperforming multi-family loans in our portfolio.

An increase in unsecured lending exposes us to an increase in loan losses.

We have increased our commercial business loan portfolio by purchasing unsecured loans to small businesses and professionals and our consumer loan portfolio through purchases from Splash Financial.

Our exposure on these purchased loan portfolios was $21.1 million and $7.3 million, respectively, at December 31, 2024.

Unsecured loans present additional risks to us because if a borrower defaults on an unsecured loan, there is no collateral to repossess and liquidate in order to satisfy the outstanding loan balance.

Also, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on an unsecured loan in default.

Our efforts to mitigate this risk include carefully assessing a borrower’s creditworthiness, including their income, employment history, and debt-to-income ratio.

In 2022, we began purchasing unsecured consumer loans through a partnership with Splash Financial, a private lender that underwrites and funds personal loans.

First Fed has experienced losses of $3.4 million on the Splash Financial loans to date.

We made changes to the program participation criteria for these loans in 2023 with the goal of reducing additional losses.

Purchases of Splash loans were suspended in August 2023.

Additional losses in our unsecured lending portfolio would negatively affect our profitability and capital.

The significant growth in our loan portfolio and expansion into new markets may increase our credit risk.

Since the completion of our initial public offering in January 2015, we have grown substantially in terms of total assets, total loans, total deposits, employees, and locations, expanding our business activities throughout the Puget Sound region.

Our commercial loan portfolio, which includes loans for commercial and multi-family real estate as well as other business loans, has increased to $874.5 million, or 51.6% of total loans, at December 31, 2024, from $833.4 million, or 50.2% of total loans, at December 31, 2023.

One-to-four family loans have increased to $395.3 million, or 23.3% of total loans, at December 31, 2024, from $378.4 million, or 22.8% of total loans, at December 31, 2023.

Total consumer loans have increased to $347.9 million, or 20.6% of total loans, at December 31, 2024, from $318.5 million, or 19.2% of total loans, at December 31, 2023.

Rapidly growing loan portfolios are, by their nature, less seasoned and our experience with these loans may not provide us with a useful payment history pattern.

Rapid growth combined with the geographic expansion of our lending area may make estimating loan loss allowances more difficult and more susceptible to changes in estimates, and to losses exceeding estimates, than our more seasoned portfolio of loans in our traditional lending area.

As a result, it is difficult to predict the future performance of these parts of our loan portfolio.

These loans may develop delinquency or charge-off levels above our historical experience, which could adversely affect our future performance.

We plan to continue both strategic and opportunistic growth, understanding that we may see a slowing of growth as we mature and manage capital down to more efficient levels.

Continued growth can present substantial demands on management personnel, line employees, and other aspects of our operations, especially if our growth occurs rapidly.

We may face difficulties in managing that growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.

Also see "Our expansion strategy will cause our expenses to increase and may negatively affect our earnings."

At December 31, 2025, we had $9.8 million of nonperforming commercial real estate loans in our portfolio.

We have a concentration of large loans outstanding to a limited number of borrowers that increases our risk of loss.

First Fed has extended significant amounts of credit to certain borrowers, largely in connection with high-end residential real estate and commercial and multi-family real estate loans.

First Fed has extended significant amounts of credit to borrowers connected with high-end residential real estate and commercial and multi-family real estate loans.

These types of loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments.

In fact, the FDIC has issued pronouncements alerting banks of its concern about significant loan concentrations.

At December 31, 2025, the aggregate amount of loans, including unused commitments, to First Fed's five largest borrowers (including related entities) amounted to approximately $88.8 million.

Outstanding loan balances for the ten largest borrowing relationships at December 31, 2025, totaled $146.5 million, or 9.0% of total loans.

Although only one of the loans to First Fed's 20 largest borrowers was nonperforming as of December 31, 2024, concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio.

If one or more of these borrowers is not able to service the contractual repayment, the potential loss to First Fed is more likely to have a material adverse impact on our business, financial condition and results of operations.

Although none of the loans to First Fed's 20 largest borrowers were nonperforming as of December 31, 2025, concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio.

The deterioration of one or a few of these loans may cause a significant increase in our non-performing loans.

An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which would have an adverse impact, which could be material, on our business, financial condition and results of operations.

Our construction and land loans are based upon estimates of costs and the value of the completed project.

During the year ended December 31, 2024, our construction and land loans decreased $51.6 million, or 39.8%, to $78.1 million, or 4.6%, of the total loan portfolio at December 31, 2024 and consisted of properties secured by multi-family of $15.4 million, one-to-four family residential of $38.9 million, commercial real estate of $17.3 million, and land of $6.5 million.

During the year ended December 31, 2025, our construction and land loans decreased $16.8 million, or 21.6%, to $61.3 million, or 3.8%, of the total loan portfolio at December 31, 2025 and consisted of properties secured by commercial real estate of $23.0 million, one-to-four family residential of $22.0 million, multi-family of $10.1 million, and land of $6.2 million.

Land loans include raw land and land acquisition and development loans.

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Under these circumstances we may be required to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs.

Any of these results could have a material and adverse effect on our business, financial condition and results of operations.

Our business may be adversely affected by credit risk associated with residential real estate.

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For these reasons we may experience higher rates of delinquencies, default and losses on loans secured by junior liens.

Any of these results could have a material and adverse effect on our business, financial condition and results of operations.

In addition, if we foreclose on and take title to real property securing loans, there is a risk that hazardous or toxic substances could be found on these properties and that we could be liable for remediation costs, as well as personal injury and property damage.

Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to sell the affected property.

The remediation costs and any other financial liabilities associated with an environmental hazard could have an adverse effect on our business, financial condition, and results of operations.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

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Factors affecting the value of this type of collateral include uncollectable accounts receivable and obsolete or limited use inventory, among others.

We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial information.

We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information.

In deciding whether to extend credit, we may rely upon customers’ representations that their financial statements conform to GAAP and present fairly the financial condition, results of operations, and cash flows of the customer.

We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our customers.

Our business, financial condition, and results of operations could be adversely affected if we rely on misleading, false, inaccurate, or fraudulent information.

Our allowance for credit losses on loans may prove to be insufficient to absorb losses in our loan portfolio.

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Any additional provisions will result in a decrease in net income, and possibly capital, and may have a material adverse effect on our financial condition and results of operations.

If our nonperforming assets increase, our earnings will be adversely affected.

We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.

At December 31, 2025, our nonperforming assets, which consist of nonaccrual loans, real estate owned and repossessed assets, were $24.0 million, or 1.1% of total assets.

Our nonperforming assets adversely affect our net income in various ways.

Our level of nonperforming assets is closely tied to the overall credit quality of our loan portfolio and the creditworthiness of our borrowers.

Adverse changes in economic conditions, borrower financial performance, collateral values or other factors affecting credit risk could result in an increase in delinquencies, defaults and nonaccrual loans.

Nonperforming assets adversely affect our net income in various ways.

If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.

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We have and may continue to make minority investments in fintech and specialty finance companies or make investments in funds that do the same.

For example, we currently have investments in Canapi Venture Fund, LP, BankTech Ventures, LP and JAM FINTOP Blockchain, LP to strategically invest in fintech-related businesses.

We currently have investments in Canapi Venture, BankTech Ventures, LP and JAM FINTOP Frontier Fund, LP to strategically invest in fintech-related businesses.

In addition, we have invested in Meriwether Group Capital Hero Fund LP, Meriwether Group Capital, LLC and The Meriwether Group, LLC, which provide funding and services to lower-middle market businesses and entrepreneurs.

We generally are not able to influence the activities of companies or funds in which we invest and may suffer losses due to these activities.

For example, in 2021 we entered into a joint venture with Quin Ventures, Inc.

and Peace of Mind, Inc., which ultimately resulted in the Company writing off the related investment.

In addition, the companies or funds we invest in may have economic or business interests, values, or goals that are inconsistent or conflict with ours, which could damage our reputation or business.

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If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.

We obtain updated valuations in the form of appraisals and tax assessed values when a loan has been foreclosed and the property taken in as real estate owned and at certain other times during the asset’s holding period.

We update our valuation assessments in the form of appraisals and tax assessed values when a loan has been foreclosed and the property taken in as real estate owned and at certain other times during the asset’s holding period.

Our net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value).

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Significant charge-offs to our real estate owned could have a material adverse effect on our financial condition and results of operations.

We operate in a highly competitive industry.

We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources.

These competitors primarily include national, regional and digital banks within the various markets in which we operate.

We also face competition from many other types of financial institutions, including savings and loans, credit unions, mortgage banking finance companies, brokerage firms, insurance companies and other financial intermediaries.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation.

Competitors in these nonbank sectors may have fewer regulatory constraints, as well as lower cost structures.

We are subject to certain risks in connection with our use of networks and technology systems.

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We could also suffer significant reputational damage.

Notwithstanding the strength of defensive measures, cybersecurity threats and the tactics, techniques and procedures used in cyberattacks change, develop and evolve rapidly and continuously, including from emerging technologies, such as artificial intelligence, which may be used to enhance the tactics, techniques and procedures described above and facilitate new cyber threats.

We support the ability of our customers to transact business through multiple automated methods.

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We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data.

These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability, heightened regulatory scrutiny or fines, violations of consumer protection and privacy laws, and significant damage to our reputation and our business.

Our security measures may not protect us from systems failures or interruptions.

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In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers.

If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely impacted.

If our third-party providers encounter difficulties, we have difficulty in communicating with them, or they terminate their services our ability to adequately process and account for transactions, among other things, could be affected, and our business operations could be adversely impacted.

Threats to information security also exist in the processing of customer and consumer information through various third-party vendors and their personnel.

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Interest Rates, Operations and Risk Management

We are subject to interest rate risk.

We are subject to interest rate risk, which could adversely affect our earnings .

Our earnings and cash flows are largely dependent on our net interest income.

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The Federal Reserve decreased the federal funds target rate beginning in September 2024, with the most recent decrease occurring in December 2025.

When the Federal Reserve Board decreases the Fed Funds rate, overall interest rates will likely fall, which may positively impact housing markets by increasing refinancing activity and new home purchases.

When the Federal Reserve Board decreases the Fed Funds rate, overall interest rates are likely to fall, which may positively impact housing markets by increasing refinancing activity and new home purchases.

A falling interest rate environment may also positively affect the U.S.

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Further, there can be no assurance regarding any forecasts or predictions about the effect that any future rate adjustment may have on our results of operations.

Further changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate and/or sell mortgage and SBA loans;

Further changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect, among other things, (i) our ability to originate and/or sell mortgage and SBA loans;

(ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from sales of such assets;

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Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on our shareholders’ equity.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

Also, our interest rate risk modeling techniques and assumptions likely will not fully predict or capture the impact of actual interest rate changes on our balance sheet.

Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations.

Further, our interest rate risk modeling techniques and assumptions likely will not fully predict or capture the impact of actual interest rate changes on our balance sheet.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk," in this Form 10-K for additional information.

Our enterprise risk management program may not be effective at mitigating the risks to which we are subject, based upon our size, scope, and complexity.

We have established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which we are subject, including capital, market, liquidity, credit, operational, compliance, legal, strategic, technology and reputational risks.

Although we seek to manage our exposure to such risks, and employ a broad and diverse set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown or unanticipated.

Any system of control and any system to reduce risk exposure, however well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met.

Further, in some cases we use analytical or forecasting models in our management of risks.

If the models are inadequate, or are subject to ineffective governance, our risk management program may also prove ineffective.

Actions taken to mitigate identified risks may prove less effective than anticipated.

If our risk management program proves ineffective, we could suffer unexpected losses and reputational damage.

If we fail to maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud.

We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control over financial reporting in the future, and our failure to maintain effective internal control over financial reporting could have an adverse effect on our business, financial condition, and results of operations.

We have in the past identified and may in the future identify material weaknesses or significant deficiencies in our internal control over financial reporting, which require remediation.

A material weakness is defined by the standards issued by the PCAOB as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The existence of a material weakness precludes management from concluding that internal control over financial reporting is effective and precludes our independent registered public accounting firm from rendering their report addressing an assessment of the effectiveness of our internal control over financial reporting.

In addition, disclosures of deficiencies of this type in our SEC reports could cause investors to lose confidence in our financial reporting, may negatively affect the market price of our common stock, and could result in the delisting of our securities from the securities exchanges on which they trade.

Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud.

If we have deficiencies in our internal control over financial reporting, such deficiencies may adversely affect us.

Our business may be adversely impacted by litigation and regulatory enforcement actions, which could expose us to significant liabilities and/or damage our reputation.

From time to time, we have and may become party to various litigation claims and legal proceedings.

Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them.

For example, we are currently engaged in litigation with 3|5|2 Capital and Socotra, as described in more detail in Note 14 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.

The risk of litigation may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses.

In addition, as a publicly-traded company, we are subject to the risk of claims under the federal securities laws, and volatility in our stock price and those of other financial institutions increases this risk.

Actions brought against us may result in injunctions, settlements, damages, fines or penalties, which could have an adverse effect on our business, financial condition or results of operations or require changes to our business.

Even if we defend ourselves successfully, the cost of litigation may be substantial, and public reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or negatively impact the confidence of counterparties, rating agencies and stockholders, consequently negatively affecting our earnings.

In the ordinary course of our business, we also are subject to various regulatory, governmental and enforcement inquiries, investigations and subpoenas.

These may be directed generally to participants in the businesses in which we are involved or may be specifically directed at us.

In enforcement matters, claims for disgorgement, the imposition of civil and criminal penalties and the imposition of other remedial sanctions are possible.

Actual outcomes, losses and related expenses of pending legal proceedings may differ materially from assessments and estimates, and may exceed the amount of any reserves we have established, which could adversely affect our reputation, business, financial condition and results of operations.

Decreased volumes and lower gains on sales of loans could adversely impact our noninterest income.

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These delays may adversely affect our ability to limit our credit losses.

As a regulated entity, we are subject to capital requirements, and a failure to meet these standards could adversely affect our financial condition.

We are subject to certain capital and liquidity rules, which establish the minimum capital adequacy requirements and may require us to increase our regulatory capital or liquidity targets, increase regulatory capital ratios, or change how we calculate regulatory capital.

We may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, and enhance capital planning based on hypothetical future adverse economic scenarios.

As of December 31, 2025, First Northwest and First Fed each met the minimum capital ratio requirements applicable to them and exceeded the capital conservation buffer requirement.

Compliance with capital requirements may limit capital-intensive operations and increase operational costs, and we may be limited or prohibited from distributing dividends or repurchasing our stock.

This could adversely affect our ability to expand or maintain present business levels, which may adversely affect our business, results of operations and financial condition.

Additional information on the regulatory capital requirements applicable to First Northwest and First Fed is set forth in Item 1, "Business – How We Are Regulated," of this Form 10-K.

As a holding company, First Northwest depends on dividends and distributions from First Fed for liquidity and to pay dividends, if any.

First Northwest derives most of its cash flow from dividends paid by First Fed.

These dividends are the primary source from which we may pay dividends on our common stock, if any, and principal and interest on our debt obligations.

Various federal and Washington laws and regulations, as well as regulatory expectations, limit the amount of dividends that First Fed may pay to First Northwest.

See Item 1, "Business – How We Are Regulated," of this Form 10-K for a discussion of regulatory requirements applicable to dividends by First Northwest and First Fed.

Through May 2025, we historically declared cash dividends on our common stock.

However, we have not done so since then, as part of a prudent approach to capital management.

We are not required to pay dividends and there can be no assurance we will resume doing so in the future.

Failure to pay dividends could adversely affect the market price of our common stock.

Our reputation is critical to our business, and damage to it could have an adverse effect on us.

A key differentiating factor for our business is the strong reputation we have built in our market.

Maintaining a positive reputation is critical to attracting and retaining customers and employees.

Adverse perceptions of us could make it more difficult for us to execute on our strategy.

Harm to our reputation can arise from many sources, including actual or perceived employee misconduct, errors or misconduct by our third-party vendors or other counterparties, litigation (such as the litigation with 3|5|2 Capital and Socotra described in more detail in Note 14 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K) or regulatory actions, our failure to meet our high customer service and quality standards, and compliance failures.

In particular, is not always possible to prevent employee error or misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified.

Our necessary dependence upon processing systems to record and process transactions and our large transaction volume may further increase the risk that employee errors, tampering, or manipulation of those systems will result in losses that are difficult to detect.

Employee error or misconduct could also subject us to financial claims.

If our internal control systems fail to prevent or detect an occurrence, or if any resulting loss is not insured, exceeds applicable insurance limits, or if insurance coverage is denied or not available, it could have an adverse effect on our business, financial condition, and results of operations.

Additionally, as a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers, and other third parties targeting us and our customers or data.

Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts.

Although we devote substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, we may experience financial losses or reputational harm as a result of fraud.

Negative publicity about us, whether accurate or not, may also damage our reputation, which could have an adverse effect on our business, financial condition, and results of operations.

Regulatory Matters

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We are subject to extensive examination, supervision and comprehensive regulation by the Federal Reserve, the FDIC as insurer of our deposits, and by the DFI.

First Northwest Bancorp is subject to regulation and supervision by the Federal Reserve (as a financial holding company) and regulation by the State of Washington (as a Washington corporation).

First Northwest is subject to regulation and supervision by the Federal Reserve (as a financial holding company) and regulation by the State of Washington (as a Washington corporation).

The Bank is subject to regulation and supervision by the FDIC and the DFI.

Such regulation and supervision govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund.

Such regulation and supervision govern the activities in which we may engage, primarily for the protection of depositors and the DIF.

These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, require additional capital, reclassify assets, determine the adequacy of an institution’s allowance for credit losses on loans and determine the level of deposit insurance premiums assessed.

For example, in November 2023, the Bank entered into a consent order with the FDIC in connection with certain deficiencies in the Bank's compliance program.

The consent order was terminated on October 23, 2024.

Any future changes to the laws, rules and regulations applicable to us could make compliance more difficult and expensive, or otherwise adversely affect our business, financial condition or prospects.

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however, no assurance can be given as to whether such changes will occur or what may result from such changes.

We are subject to laws regarding the privacy, information security, and protection of personal information, and any violation of these laws or other incidents involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information ("PII"), in various information systems that we maintain and in those maintained by third-party service providers.

We also maintain important internal company data such as PII about our employees and information relating to our operations.

We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees, and other third parties).

For example, our business is subject to the GLBA, which, among other things:

(i) imposes certain limitations on our ability to share nonpublic PII about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing, and security practices and afford customers the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement, and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches.

Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory, or law enforcement notification in the event of a security breach.

For example, the California Consumer Privacy Act grants California residents the rights to know about personal information collected about them, to delete certain of this personal information, to opt out of the sale of personal information, and to non-discrimination for exercising these rights.

Ensuring that our collection, use, transfer, and storage of PII complies with all applicable laws and regulations can increase our costs.

Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.

If personal, confidential, or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations.

Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues.

Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations, and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines, or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations.

We are subject to numerous fair lending laws and other laws and regulations designed to protect consumers, and failure to comply with these laws could lead to a wide variety of sanctions.

We are subject to extensive and evolving federal and state fair lending laws and regulations.

For example, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions.

The FDIC, the U.S.

Department of Justice, and other federal and state agencies are responsible for enforcing these laws and regulations.

A successful regulatory challenge to an institution’s compliance with fair lending or consumer protection laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation.

In addition, an institution’s receipt of a less-than-Satisfactory CRA rating, which could result from a violation of fair lending or consumer protection laws or from an unsatisfactory record of meeting the credit needs of low- and moderate-income communities, could similarly result in an inability of the institution to engage in mergers or other expansionary activity.

Such actions and limitations could have a material adverse effect on our business, financial condition, and results of operations.

General Risk Factors

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We rely heavily on the efforts and abilities of our executive officers, and certain other key management personnel, which make up our management team.

The loss of the services of any of our current management team could have a material adverse impact on our operations.

As previously disclosed, the former President, Chief Executive Officer and member of the Board of Directors departed effective July 12, 2025.

In addition, the former Chief Banking Officer of First Fed retired on July 2, 2025, and the former Chief Strategy Officer of First Fed departed on August 9, 2025.

Subsequent to year-end, the former Chief Operating Officer departed on February 4, 2026.

The loss of the services of these individuals, and the potential loss of any of our current management team, could have a material adverse impact on our business, financial condition, and results of operations.

While we believe that our relationship with our remaining management team is good, we cannot guarantee that all members of our management team will remain with our organization.

The ability to attract, retain, and season replacements to our management team presents risks to executing our business plan.

Changes in our current management team and their responsibilities may be disruptive to our business and operations and could have a material adverse effect on our business, financial condition, and results of operations.

While we believe that our relationship with our management team is good, we cannot guarantee that all members of our management team will remain with our organization.

Our consideration of whole bank, branch acquisitions, or fintech partnerships in the future may expose us to financial, execution and operational risks that could adversely affect us.

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Our expansion strategy will cause our expenses to increase and may negatively affect our earnings.

Over the past seven years, we have opened four new full-service branches and two business centers.

Over the past eight years, we have opened four new full-service branches and three business centers.

We also acquired a branch from another financial institution in 2021.

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Accordingly, any new branch or lending center may negatively impact our earnings for some period of time until the office reaches certain economies of scale, and there is a risk that our new offices will not be successful even after they have been established.

We may also expand our digital footprint through partnerships with and investments in fintech companies.

The new technology and start-up companies we invest in may not be as successful as anticipated or may fail, resulting in a total loss of our related investment.

For example, the branch acquired in 2021 will be closed effective April 30, 2026.

We may also expand our digital footprint through technology or partnerships.

The new technology and companies we invest in may not be as successful as anticipated or may fail, resulting in a total loss of our related investment.

The price of our common stock may be volatile or may decline.

During the year ended December 31, 2025, our stock price fluctuated from a low of $6.96 to a high of $11.88.

The price of our common stock may fluctuate in response to various factors, some of which are outside our control.

These factors include the risk factors discussed herein, as well as:

actual or anticipated quarterly fluctuations in our results of operations and financial condition;

changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts and rating agencies;

speculation or changes in perception in the press or investment community;

strategic actions and announcements by us or our competitors, such as acquisitions or restructurings;

actions by institutional stockholders;

addition or departure of key personnel;

fluctuations in the stock price and operating results of our competitors;

general market conditions and, in particular, market conditions in the financial services industry;

anticipated, proposed or adopted regulatory changes or developments;

cyclical fluctuations;

trading volume of our common stock; and

anticipated or pending investigations, proceedings or litigation that involve or affect us.

Industry factors, general economic and political conditions and events, such as cybersecurity incidents or terrorist attacks, economic downturn or recessions, interest rate changes, credit default trends, currency fluctuations, changes to fiscal, monetary or trade policies, or public health issues could also cause our stock price to decline regardless of our operating results.

A significant decline in our stock price could result in substantial losses for stockholders.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors