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Item 7. Management’s Discussion and Analysis

2026-03-12 compared with 2025-03-13 · 197 added, 242 removed, 315 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

First Northwest is a bank holding company and a financial holding company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities.

Non-banking investments include several limited partnership investments, including a 33% interest in The Meriwether Group, LLC ("MWG").

The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed.

The Company has also entered into partnerships to strategically invest in fintech-related businesses.

First Fed is a community-oriented commercial bank serving Clallam, Jefferson, King, Kitsap, Snohomish, and Whatcom counties in Washington State, through its twelve full-service branches and six business centers, including our headquarters.

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations.

The information in this section has been derived from the Consolidated Financial Statements and notes thereto that appear in "Part II.

Financial Statements and Supplementary Data" of this Form 10-K.

The information contained in this section should be read in conjunction with these Consolidated Financial Statements and notes and the business and financial information provided in this Form 10-K.

First Northwest is a bank holding company and a financial holding company.

First Northwest is engaged in banking activities through its wholly owned subsidiary, First Fed, as well as certain non-banking financial activities.

Non-banking investments include several limited partnership investments.

We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve.

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First Fed has a limited partnership investment in the Canapi Ventures SBIC Fund II, LP.

First Fed also has a limited partnership investment in the Meriwether Group Capital Hero Fund LP ("Hero Fund") which was previously held by First Northwest.

First Fed also has a limited partnership investment in the Hero Fund which was previously held by First Northwest.

The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest.

Subsequent to year end, the Bank signed a redemption agreement which sets forth the path to unwind its investment in the Hero Fund through capital distributions beginning in April 2026.

First Northwest's limited partnership investments include Canapi Ventures;

BankTech Ventures, LP;

and JAM FINTOP Frontier Fund, LP.

These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry.

In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed.

Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Hero Fund.

MWG also holds a 20% general partner interest in MWGC.

MWGC holds a 0.01% general partner interest in the Hero Fund.

Subsequent to year end, the Company redeemed its interest in MWGC in full at par.

First Fed is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal policy, including fiscal stimulus, interest rate policy and open market operations, housing, and consumer protection.

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Net interest income is the difference between interest income earned on our loans and investments less interest expense paid on our deposits and borrowings.

Changes in levels of interest rates impact our net interest income.

Changes in levels of interest rates may impact our net interest income.

A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, earnings from equity and partnership investments, and gains and losses from the sale of loans and securities.

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Our Business and Operating Strategy

Our operating strategy is focused on growing and diversifying our loan portfolio, expanding our deposit product offerings, and enhancing our digital infrastructure.

Certain highlights of our operations in the last three years include:

Repositioning the loan portfolio .

The Bank has significantly increased the origination of commercial real estate, multi-family real estate, and construction and land loans, as well as our portfolio of commercial business loans.

The Bank has also utilized wholesale lending programs to add auto, manufactured home, and commercial business loans to our portfolio.

This has helped to increase overall interest income and improved interest rate risk.

Adding new products and servicing capabilities .

In addition to traditional consumer and business deposit products, the Bank offers remote deposit capture, consumer and small business digital banking, treasury cash management capabilities, and commercial digital banking capabilities.

We implemented interactive teller machines, allowing our customers to conduct business with a teller through an interactive screen, at several locations.

In 2023, we further enhanced our offerings for earnest money payment solutions, real-time person-to-person and account-to-account transfers and online business account opening.

Enhancing our infrastructure .

The Bank focused on upgrading its infrastructure, in terms of technology, equipment and personnel, to support its changing lending and deposit capabilities and position the Bank for growth.

Expanding small-to-medium size business relationships .

Our Treasury Management and Commercial Relationship teams have deepened relationships with new and existing customers through acquiring operating accounts and increasing SBA and other commercial business lending.

Investing in financial technology ("fintech") companies.

The Company has four years remaining in a commitment to invest in Canapi Ventures, which provides funding to fintech start-ups.

The Canapi Ventures relationship allows us early access to companies producing technology and apps that may be of interest as we grow in the fintech sector.

We also have seven years remaining in commitments to invest in BankTech Ventures and JAM FINTOP, two fintech-focused venture capital funds designed for community banks.

The Bank has an additional Canapi Small Business Investment Company commitment with eight years remaining.

Our objective is to be an independent, high performing bank focused on meeting the needs of individuals, small businesses and community organizations throughout our market areas with exceptional service and competitive products.

Below are strategies we have implemented, or intend to implement, to achieve our objectives:

Remixing our loan portfolio.

Through loan originations, we intend to increase the percentage of our loan portfolio consisting of higher-yielding commercial real estate and commercial business loans.

These loan categories offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations than traditional fixed-rate, one-to-four family residential loans.

Our commercial and multi-family real estate and commercial business loans have 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.

The increase resulted in part from adding talented leaders to the commercial team, developing relationships with loan referral sources, pursuing loan purchase and participation opportunities, and competing successfully in new and existing markets.

Increasing noninterest income.

The Bank offers SBA loan products, which provide the opportunity to sell the guaranteed portion of loans originated, adding to our gain on sale of loans while also generating servicing fee income.

We will continue our participation in an assumable rate conversion ("ARC") program, whereby a commercial loan customer enters into a contract to pay a fixed rate on their First Fed loan to the third-party program while the Bank receives the variable rate interest stated in the note, which generates referral fee income for the Bank at the time of placement.

We remain committed to our mortgage line of business to serve our customers and add to noninterest income from both sale and servicing fees.

We may also sell commercial loans to manage concentrations and risk, which would generate gain and possibly additional servicing income.

We anticipate that future revenue will be generated through treasury management products and merchant services, which would add income and increased interchange fee income.

Our new consumer rewards products are also expected to generate additional interchange fee income.

Noninterest income will also be affected through changes in the value of our partnership investments and our share of MWG profitability.

Maintaining our focus on asset quality.

Maintaining strong asset quality is a key to our long-term financial success.

We are focused on monitoring existing performing loans and resolving nonperforming loans.

Nonperforming assets were $30.5 million at December 31, 2024 and $18.6 million at December 31, 2023.

The current year increase was primarily due to an $8.2 million commercial construction project, which the Bank believes does not represent significant exposure to loss based on a recent property appraisal.

Two additional loans totaling $5.6 million in a commercial relationship we have been monitoring were also placed on nonaccrual.

We take proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate.

We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures.

We have adopted three strategic pillars that will be our focus in the upcoming years:

process and data improvement to drive efficiencies, build a resilient core deposit base and grow the organic loan portfolio.

Establish a disciplined enterprise-wide approach to data, analytics and process design for scalable growth and an efficient operating platform:

Enhancing customer experience.

We believe that continued investment in the digital and physical interfaces that connect customers to our products and services positions us to compete and grow in an increasingly technology-driven environment.

We intend to strengthen our online presence and engage in digital strategies that will help us successfully compete in an ever-changing digital marketplace.

To enable these initiatives, we are enhancing our data infrastructure with modern architecture to support the delivery of more personalized and valued products and services through both digital and in-person interactions.

Creating operating leverage.

We will continue to pursue opportunities to improve operational efficiency.

We believe recent technology investments may also contribute to additional efficiencies.

We have undertaken a broad process improvement initiative and a key component of future technology investments will focus on refining processes and improving synergy between systems to support our team members and enhance execution of their responsibilities.

Strengthen and diversify the Bank’s core funding base with a focus on relationship-based deposits:

Attracting core deposits and other deposit products.

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In addition to our retail branches, we offer digital delivery solutions, such as personal financial management, business online banking, business remote deposit products, mobile remote deposit services through personal devices, consumer credit score access, real-time account-to-account transfer services between First Fed and other banks, and real-time person-to-person funds transfer, enabling us to compete effectively with banks of all sizes.

We enhanced our mobile banking platform, online account opening solutions, foreign exchange capabilities and upgraded our business on-line banking platform.

Expanding our market presence and capturing business opportunities resulting from changes in the competitive environment.

By delivering high quality, customer-focused products and services, we believe we can attract additional borrowers and depositors and thus increase our market share and revenue generation in our market areas.

We intend to continue our franchise growth.

We expect that community bank consolidation will continue to take place and may consider acquiring additional individual branches or other banks.

Our primary focus for expansion will be in Western Washington;

however, we offer digital delivery in other markets.

Hiring experienced employees with a customer sales and service focus.

Our goal is to compete by relying on the strength of our customer service and relationship building.

We believe that our ability to continue to attract and retain banking professionals who have significant knowledge of existing and new market areas, possess strong commercial banking sales and service skills, and maintain a focus on community relationships will enhance our success.

We intend to hire community bankers, lenders and treasury management officers who are established in their communities to enhance our market position and add profitable growth opportunities as needed.

Improving our digital presence and streamlining the customer experience.

By investing in and improving on the interfaces that connect customers to our products and services, we believe we will be in a better position to compete and grow in an environment that is becoming increasingly technology driven.

We intend to invest in our online presence and engage in digital strategies that will help us to successfully compete in an ever-changing digital marketplace.

The Company has five years remaining in its commitment to Canapi Ventures to identify and infuse capital into early stage fintech companies.

This commitment includes management participation in meetings and events that inform us when making decisions regarding banking-as-a-service, digital services offerings and customer engagement.

In 2022, the Company implemented a customer relationship management software to improve business and consumer relationships.

Exploring alternative lending opportunities to improve interest income .

We strive to grow the balance sheet and leverage capital in a safe and sound manner and believe that lending opportunities outside of organic originations may be a valuable source of interest income.

We increased our auto loan portfolio through our partnerships with Woodside and First Help.

We continue to purchase manufactured home loans in pools and on a flow basis from Triad Financial Services.

We also purchase loans to small businesses and professionals from Banker's Healthcare Group.

We will continue to explore other opportunities such as these as a means to improve net income and supplement organic loan originations.

Creating operating leverage .

We will continue to look for ways to improve operational efficiency.

We realigned staff positions in 2022 to better meet organizational objectives, resulting in some workforce reductions.

Additional workforce reductions were made in 2024.

We believe that recent investments in technology may also provide opportunities to build efficiencies.

Net interest income decreased substantially in 2023 as a result of accelerated funding costs.

We also experienced a decrease in noninterest income, specifically in areas which are impacted by interest rates.

We remain focused on building core noninterest income product lines, such as SBA and swap fees, and are pursuing new revenue channels related to payments while continuing to control noninterest expense.

We enhanced our mobile banking platform, online account opening solutions, foreign exchange capabilities and upgraded our business on-line banking platform to attract and better serve customers who prefer digital banking channels, which is a growing demographic in our area.

Expanding offerings to small-to-medium sized business.

Another priority for the Company is expanding offerings for small-to-medium sized business with a focus on entrepreneurs.

We intend to accomplish this through the commercial team, with a focus on systems and support, the further development of treasury management and our partnership with MWG.

We intend to accomplish this through the commercial team, with a focus on systems and support.

For small-to-medium sized businesses, we believe there are multiple opportunities in payment processing for ACH, check, wire transfers, international payments and debit card interchange.

In addition, we intend to build out our capabilities for accounts payable and receivable, payroll, merchant card acquisition and corporate card spend management solutions.

Hiring experienced employees with a customer sales and service focus.

Our goal is to compete by relying on the strength of our customer service and relationship building.

We intend to hire community bankers and lenders who are established in their communities to enhance our market position and add profitable growth opportunities as needed.

Continued focus on high-quality loan growth through relationship-based lending in core markets:

Remixing our loan portfolio.

Through organic loan originations, we intend to increase the proportion of our loan portfolio consisting of higher-yielding commercial business loans.

These loan types generally offer higher risk-adjusted returns and shorter maturities, which increase the portfolio's ability to reprice in changing interest rate environments.

The shorter duration until maturity or renewal allow for more frequent repricing opportunities, allowing yields to better align with prevailing market conditions compared to traditional fixed-rate, one-to-four family residential loans.

Maintaining our focus on asset quality.

Maintaining strong asset quality is a key to our long-term financial success.

We are focused on monitoring existing performing loans and resolving nonperforming loans.

Nonperforming assets were $24.0 million at December 31, 2025 and $30.5 million at December 31, 2024.

The current year decrease was primarily due to the legal settlement relating to certain of the Water Station loans, which resulted in the Bank receiving partial payments and charging-off the remaining balances.

We are taking proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate.

We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures.

Remaining open to alternative lending opportunities.

We strive to grow the balance sheet and leverage capital in a safe and sound manner and believe that lending opportunities outside of organic originations may be a valuable source of interest income.

We successfully increased our auto loan portfolio through our partnership with Woodside and our manufactured home loan portfolio through our partnership with Triad Financial Services.

We may continue to explore other opportunities such as these as a means to improve net income and supplement organic loan originations.

Critical Accounting Policies

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Allowance for Credit Losses on Loans .

The allowance for credit losses on loans ("ACLL") is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected.

The ACLL is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected.

The allowance is established through the provision for credit losses on loans, which is charged to income.

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Our accounting policies are discussed in detail in Notes 1 and 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Mortgage Servicing Rights.

We record servicing rights on loans originated and subsequently sold into the secondary market.

We stratify our capitalized servicing rights based on the type, term and interest rates of the underlying loans.

Servicing rights are measured at fair value at each reporting date with the change reported in earnings.

The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs.

All of these assumptions require a significant degree of management judgment.

If our assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected.

See Notes 1, 7 and 15 to the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Income Taxes .

Management makes estimates and judgments to calculate certain tax liabilities and to determine the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses.

We also estimate a valuation allowance for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.

These estimates and judgments are inherently subjective.

In evaluating the recoverability of deferred tax assets, management considers all available positive and negative evidence, including past operating results, recent cumulative losses - both capital and operating - and the forecast of future taxable income, both capital gains and operating.

In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.

These assumptions require judgments about future taxable income and are consistent with the plans and estimates to manage our business.

Any reduction in estimated future taxable income may require us to record a valuation allowance against deferred tax assets.

An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

First Fed accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes , which requires the use of the asset and liability method of accounting for income taxes.

Deferred tax assets and liabilities are recognized for their future tax consequences, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Fair values of financial instruments are estimated using relevant market information and other assumptions.

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Comparison of Financial Condition at December 31, 2025 and December 31, 2024

Total assets increased $30.2 million, or 1.4%, to $2.23 billion at December 31, 2024, from $2.2 billion at December 31, 2023.

Cash and cash equivalents decreased by $50.7 million, or 41.2%, to $72.5 million as of December 31, 2024, compared to $123.2 million at December 31, 2023, as proceeds from the sale of investment securities in the fourth quarter of 2023 were deployed into interest-earning assets.

Total investment securities increased $44.7 million, or 15.1%, to $340.3 million at December 31, 2024, from $295.6 million at December 31, 2023.

The year-over-year increase was the result of purchases and an improvement in the portfolio market value, partially offset by sales and normal amortization during the year.

During 2024, we repositioned the investment portfolio by selling $22.8 million of available-for-sale securities yielding 3.1% for a total loss of $2.1 million during the period, and purchased $100.4 million of available-for-sale securities yielding 6.5%.

The increase in the portfolio market value of $2.4 million relates mainly to the recognition of $1.9 million in realized losses related to the securities sale and a $458,000 improvement in the remaining portfolio driven by changes in long-term interest rates.

Total assets decreased $124.1 million, or 5.6%, to $2.11 billion at December 31, 2025, from $2.23 billion at December 31, 2024.

Cash and cash equivalents increased by $12.7 million, or 17.5%, to $85.1 million as of December 31, 2025, compared to $72.5 million at December 31, 2024.

Interest-bearing deposits in banks increased $14.0 million, improving on-hand liquidity at year end.

Total investment securities decreased $70.0 million, or 20.6%, to $270.3 million at December 31, 2025, from $340.3 million at December 31, 2024.

The year-over-year decrease was primarily due to maturities and early redemptions totaling $65.8 million and $20.1 million of principal payments received .

These items were partially offset by an increase in the portfolio market value of $10.4 million, which was mainly driven by changes in long-term interest rates.

The estimated average life of the total investment securities portfolio was 6.5 years as of December 31, 2025, compared to 6.9 years as of December 31, 2024 , and the average repricing term was approximate ly 6.7 years as of December 31, 2025, compared to 5.3 years as of December 31, 2024 , based on the interest rate environments at those times.

Expected duration of the portfolio has decreased to 3.9 years as of December 31, 2024, compared to 4.8 years as of December 31, 2023.

Expected duration of the portfolio has increased to 4.6 years as of December 31, 2025, compared to 3.9 years as of December 31, 2024.

If prevailing market interest rates fall, we expect prepayments will accelerate due to the current coupons of fixed rate bonds.

We anticipate the investment portfolio will continue to provide additional interest income and act as a source of liquidity.

MBS represent the largest portion of our investment portfolio and totaled $170.3 million at December 31, 2024, an increase of $31.0 million, or 22.2%, from $139.3 million at December 31, 2023.

Municipal bonds are the second largest segment, totaling $77.9 million at December 31, 2024, a decrease of $9.9 million, or 11.3%, from $87.8 million at December 31, 2023.

The purchase of investment securities during 2024 resulted in a shift in the investment mix from municipal bonds toward more mortgage-backed, corporate asset-backed and SBA securities.

Other investment securities totaled $92.2 million at December 31, 2024, an increase of $23.6 million, or 34.5%, from $68.5 million at December 31, 2023.

We anticipate the investment portfolio will continue to provide supplemental interest income and act as a source of liquidity.

MBS represent the largest portion of our investment portfolio and totaled $125.1 million at December 31, 2025, a decrease of $45.3 million, or 26.6%, from $170.3 million at December 31, 2024.

Municipal bonds are the second largest segment, totaling $80.3 million at December 31, 2025, an increase of $2.4 million, or 3.1%, from $77.9 million at December 31, 2024.

Other investment securities totaled $65.0 million at December 31, 2025, a decrease of $27.2 million, or 29.5%, from $92.2 million at December 31, 2024.

Included in MBS non-agency were $13.9 million of commercial mortgage-backed securities ("CMBS"), of which 87.3% were in "A" tranches with the remaining 12.7% in "B" tranches.

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For additional information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.

Total loans, excluding loans held for sale, increased $35.8 million, or 2.2%, during the year ended December 31, 2024.

Commercial business loans increased $39.2 million primarily due to an increase in the Northpointe MPP of $26.7 million, $15.2 million of equipment loan originations and purchases of $8.5 million of unsecured Bankers Healthcare Group loans in addition to advances on new and existing lines of credit and originations of amortizing commercial loans.

Auto and other consumer loans increased $19.8 million, or 7.9%, with the purchase of a pool of manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans.

Multi-family and commercial real estate loans increased $1.9 million, or 0.3%, consisting mainly of an increase in commercial real estate loans of $2.4 million as new loan originations of $34.6 million and $1.1 million from construction loans converting into permanent amortizing loans exceeded payment activity.

Multi-family real estate loans decreased $498,000 as a result of payoffs and regular payments exceeding $36.5 million of construction loans converting into permanent amortizing loans and $13.6 million of new originations.

One-to-four family residential loans increased $16.9 million, or 4.5%, with $42.5 million in construction loans converting to permanent amortizing loans during the year, partially offset by payoffs and regular payments.

We continue to focus on the origination of one-to-four family mortgage loans with the intention of selling the majority of our saleable production to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and other investors, while retaining certain adjustable-rate loans that may not be readily sold in the secondary market.

Total loans, excluding loans held for sale, decreased $67.7 million, or 4.0%, during the year ended December 31, 2025.

Auto and other consumer loans increased $14.6 million, or 5.4%, with the purchases of specialty auto loans and individual manufactured home loans.

Commercial real estate loans increased $12.3 million as new loan originations of $53.4 million exceeded payment activity.

Multi-family real estate loans decreased $44.1 million as a result of payoffs and regular payments exceeding $11.1 million of construction loans converting into permanent amortizing loans and $2.7 million of new originations.

Commercial business loans decreased $21.2 million as payments, maturities, charge-offs and a decrease in Northpointe MPP exceeded $26.0 million of advances on new and existing lines of credit, $5.2 million of equipment loan originations and $1.6 million of Bankers Healthcare Group loan purchases.

One-to-four family residential loans decreased $18.6 million, or 4.7%, with payoffs and regular payments exceeding $10.9 million in construction loans converting to permanent amortizing loans during the year and $7.5 million of new originations.

We continue to focus on the origination of one-to-four family mortgage loans with the intention of selling the majority of our saleable production to Freddie Mac and other investors, while retaining certain adjustable-rate loans that may not be readily sold in the secondary market.

Construction and land loans decreased $16.8 million, or 21.6%, with $22.9 million converting into fully amortizing loans partially offset by draws on new and existing commitments.

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Undisbursed construction commitments at December 31, 2025 included $14.6 million of commercial real estate construction, $23.1 million of mainly custom one-to-four family residential construction, and $11.8 million of multi-family construction.

Our construction loans are geographically disbursed throughout the state of Washington.

Our construction loans are geographically disbursed throughout the state of Washington with one project in California.

All construction projects are monitored by either a third-party firm or our internal construction administration team.

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

(dollars in thousands)

December 31, 2025

December 31, 2024

(In thousands)

One-to-four family

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Total loans receivable, net

Our allowance for credit losses on loans ("ACLL") increased $2.9 million, or 16.8%, during the year ended December 31, 2024, primarily due to increased loss factors applied to commercial business, one-to-four family and multi-family loan pools and additional reserves on individually evaluated commercial business loans.

Asset quality declined with increases in past due, nonaccrual and classified assets compared to the total loan portfolio.

Our ACLL decreased $3.5 million, or 16.9%, during the year ended December 31, 2025, primarily due to a reduction in the reserves on individually evaluated loans, lower pooled loan reserve balances and a decrease in the loss factors applied to one-to-four family and other consumer loan balances.

Asset quality improved with decreases in past due, nonaccrual and classified assets compared to the total loan portfolio.

Management continues to closely monitor economic conditions for potential weaknesses that could expose the loan portfolio to losses.

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We believe our ACLL is adequate to cover current expected credit losses in the loan portfolio.

Nonperforming loans increased $11.9 million, or 63.7%, during the year ended December 31, 2024 to $30.5 million.

This increase was mainly the result of increases in nonperforming commercial real estate of $5.6 million, commercial construction of $4.6 million and commercial business of $2.3 million, partially offset by decreases in one-to-four family of $367,000, auto and other consumer of $86,000 and home equity loans of $68,000.

Nonperforming loans decreased $7.9 million, or 26.0%, during the year ended December 31, 2025 to $22.6 million.

This decrease was mainly the result of decreases in commercial construction of $14.4 million, partially offset by increases in nonperforming commercial real estate of $4.2 million, commercial business of $1.2 million, one-to-four family of $795,000, auto and other consumer of $386,000 and home equity loans of $2,000.

Nonperforming loans to total loans was 1.39% at December 31, 2025, an increase from 1.80% at December 31, 2024.

At December 31, 2024, substantially all restructured loans were performing in accordance with their modified payment terms and returned to accrual status.

Classified loans, consisting solely of substandard loans, increased by $7.4 million, or 21.1%, to $42.5 million at December 31, 2024, from $35.1 million at December 31, 2023.

The change in classified loans was mainly the result of downgrades of an $8.2 million commercial construction loan and a $6.4 million commercial real estate loan along with downgrades of six commercial business loans totaling $2.2 million during 2024.

These downgrades were partially offset by a $3.6 million net charge off on one commercial construction relationship and payments received on previously identified classified loans.

An $11.4 million construction loan relationship, which became a classified loan in the fourth quarter of 2022;

an $8.1 million commercial construction loan relationship, which became classified in the second quarter of 2024;

and a $6.2 million commercial loan relationship, which became classified in the fourth quarter of 2023, account for 61% of the classified loan balance at December 31, 2024.

The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in two of these three collateral-dependent relationships.

The Bank is also closely monitoring a group of commercial business loans that have similar collateral, with 15 loans totaling $2.2 million included in classified loans at December 31, 2024, and an additional eight loans totaling $2.8 million included in the special mention risk grading category.

The Bank continues to work with its borrowers to facilitate satisfactory repayment.

In the second quarter of 2024, the Bank completed the sale and leaseback of six branch properties to Mountainseed Real Estate Services, LLC ("Mountainseed"), reducing premises and equipment by $6.8 million.

The Bank received the full sales price of $14.7 million.

The proceeds of the sale transaction were used to pay down borrowings.

First Fed is leasing back the six properties sold to Mountainseed under agreements with initial terms of 15 years with one 15-year renewal option each.

The leases, recorded in the second quarter of 2024, resulted in an increase of $12.2 million to both other assets and other liabilities for the related right-of-use assets and lease liabilities created by the contracts, respectively.

Also in the second quarter of 2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed.

First Northwest utilized the cash received to pay down the NexBank line of credit.

Equity and partnership investments decreased to $13.2 million at December 31, 2024, compared to $14.8 million at December 31, 2023, due to a $1.8 million write down in the fourth quarter of 2024 on an equity investment in an organization that is involved in a lawsuit.

Total liabilities increased $39.7 million, or 1.9%, to $2.08 billion at December 31, 2024, from $2.04 billion at December 31, 2023, with increases in deposits and borrowings used mainly to purchase investment securities and fund loan growth.

Deposit account balances increased $11.1 million, or 0.7%, to $1.69 billion at December 31, 2024 from $1.68 billion at December 31, 2023.

Money market accounts increased $51.6 million, while savings accounts decreased $37.1 million and transaction accounts decreased $194,000.

Customer CDs increased $21.5 million, or 4.9%, to $464.9 million and Brokered CDs decreased $24.7 million, or 11.9%, to $182.9 million at December 31, 2024.

The current rate environment continued to contribute to greater competition for deposits across the industry during 2024.

As a result, the Bank continues offering deposit rate specials to attract new funds.

At December 31, 2025, classified loans, consisting solely of substandard loans, decreased by $7.2 million, or 17.0%, to $35.3 million at December 31, 2025, from $42.5 million at December 31, 2024.

Changes in previously identified classified loans include $7.3 million of payments and sale proceeds received on a commercial construction loan, $5.6 million in charge-offs on a commercial real estate relationship, $4.0 million of payments received and an additional charge-off of $1.9 million on another commercial construction loan, $2.6 million of payments received on a group commercial business loans and an additional $700,000 charge-off followed by $1.4 million of sale proceeds on a commercial business loan.

The decreases from previously identified classified loans were partially offset by downgrades of two commercial real estate loans totaling $16.0 million.

Over 77% of the classified loan balance at December 31, 2025, is comprised of the following relationships:

a $12.5 million commercial real estate loan relationship, which became classified in the fourth quarter of 2025;

a $6.3 million commercial real estate loan relationship, which became classified in the third quarter of 2024;

a $5.1 million construction loan relationship, which became a classified loan in the fourth quarter of 2022;

and a $3.4 million commercial real estate loan relationship, which became classified in the second quarter of 2025.

The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in the third largest of these three collateral-dependent relationships.

At December 31, 2025, the Bank held $1.4 million of real estate owned ("REO") included in "prepaid expenses and other assets" on the Consolidated Balance Sheets.

REO was comprised of five residential real estate properties, all located in Washington State.

One property is expected to be listed for sale in early 2026.

The four remaining properties will be held until July 2026, at which time they will be listed for sale.

Total liabilities decreased $127.5 million, or 6.1%, to $1.95 billion at December 31, 2025, from $2.08 billion at December 31, 2024, with decreases in both deposits and borrowings.

Deposit account balances decreased $88.9 million, or 5.3%, to $1.6 billion at December 31, 2025 from $1.69 billion at December 31, 2024.

Money market accounts increased $37.3 million, savings accounts increased $34.2 million, while transaction accounts decreased $32.4 million.

Customer CDs decreased $31.7 million, or 6.8%, to $433.3 million and Brokered CDs decreased $96.4 million, or 52.7%, to $86.5 million at December 31, 2025.

Competition for deposits across the industry continues to pose deposit retention challenges.

Our focus continues to be on increasing core customer deposits, with an emphasis on small-to-medium sized business deposits, digital accounts and maintaining a stable source of funding to reduce interest expense as a percentage of liabilities.

Borrowings increased $15.1 million, or 4.7%, to $336.0 million at December 31, 2024, from $320.9 million at December 31, 2023.

The Bank increased long-term FHLB advances by $80.0 million during 2024 to take advantage of lower rates compared to those offered on FHLB overnight advances.

FHLB overnight advances decreased $65.0 million compared to the prior year end.

Total shareholders' equity decreased $9.5 million, or 5.8%, to $153.9 million at December 31, 2024, from $163.3 million at December 31, 2023.

The decrease during the year resulted from a net loss of $6.6 million, share repurchases of $4.1 million and $2.6 million in dividends paid in 2024.

These decreases were partially offset by a $2.5 million reduction in accumulated other comprehensive loss related to an improved unrealized market value of available for sale securities, net of tax, and an increase of $1.6 million related to share-based compensation plans.

During the year ended December 31, 2024, we repurchased 214,132 shares of common stock at an average cost of $14.03 per share, pursuant to the Company's 2020 stock repurchase plan, closing out the 2020 plan.

An additional 98,156 shares of common stock were repurchased during 2024 at an average cost of $10.19 per share, pursuant to the Company's new 2024 stock repurchase plan, for a total of 312,288 shares repurchased during 2024.

Borrowings decreased $27.9 million, or 8.3%, to $308.1 million at December 31, 2025, from $336.0 million at December 31, 2024.

Higher levels of cash and cash equivalents reduced reliance on FHLB overnight advances resulting in a $30.0 million decrease compared to the prior year end.

Total shareholders' equity increased $3.4 million, or 2.2%, to $157.3 million at December 31, 2025, from $153.9 million at December 31, 2024.

The increase during the year resulted from a $7.8 million reduction in accumulated other comprehensive loss related to an improved unrealized market value of available for sale securities, net of tax, and an increase of $1.2 million related to share-based compensation plans.

These increases were partially offset by a net loss of $4.2 million and $1.3 million in dividends paid in 2025.

During the year ended December 31, 2025, no shares of common stock were repurchased under the Company's April 2024 Stock Repurchase Plan (the "Repurchase Plan").

There are 846,123 shares that remain available for repurchase under the Repurchase Plan.

Comparison of Results of Operations for the Years Ended December 31, 2025 and 2024

The Company generated a loss on average assets of -0.30%, and a loss on average equity of -4.09%, for the year ended December 31, 2024, compared to a return on average assets of 0.11% and a return on average equity of 1.43% for the year ended December 31, 2023.

Net income decreased $8.9 million compared to 2023.

Net interest income declined as increases to interest expense outpaced increases to interest income.

The provision for credit losses increased as the Bank charged-off several large commercial loan balances during 2024.

Noninterest income increased over the prior year primarily due to the gain on sale of premises, lower loss on sale of investment securities and a BOLI death benefit received.

Noninterest expense was lower due to decreased advertising and professional fees and did not include the one-time write-off expenses recorded in December 2023 for the investment in QUIL.

We recorded a loss of $0.75 per common and diluted share for the year ended December 31, 2024, compared to earnings of $0.26 per common and diluted share for the year ended December 31, 2023.

The Company generated a loss on average assets of -0.20%, and a loss on average equity of -2.74%, for the year ended December 31, 2025, compared to a loss on average assets of -0.30% and a loss on average equity of -4.09% for the year ended December 31, 2024.

Net income increased $2.4 million compared to 2024.

We recorded a loss of $0.48 per common and diluted share for the year ended December 31, 2025, compared to a loss of $0.75 per common and diluted share for the year ended December 31, 2024.

Net Interest Income.

Net interest income decreased $5.1 million, or 8.3%, to $56.3 million for the year ended December 31, 2024, from $61.4 million for the year ended December 31, 2023, mainly as the result of additional interest expense related to higher costs on both deposit and advance balances as well as an increase in the average balances of CDs and advances.

The increase in interest income was largely attributable to changes in loans receivable with an average balance increase of $92.7 million, at an average yield of 5.56%, for the year ended December 31, 2024 compared to an average yield of 5.31%, for the year ended December 31, 2023.

The interest income earned from higher yields was offset by higher interest-bearing liability costs which increased to 3.22% for the year ended December 31, 2024 compared to 2.42% for the year ended December 31, 2023.

This resulted in a 39-basis point decrease in our net interest margin to 2.74% for the year ended December 31, 2024, from 3.13% for the year ended December 31, 2023.

The $11.4 million increase in interest income was offset by the net increase in interest costs of $16.6 million as changes in rates outpaced increases in yields.

As noted above, loans receivable was the main contributor to the increase in interest income with $4.9 million due to an increase in average volume and $4.2 million due to higher rates.

The increase to the cost of average interest-bearing liabilities for the year ended December 31, 2024 was due primarily to costs from higher rates paid of $12.3 million on all interest-bearing deposits and advances and increased average balances of $3.6 million on certificates of deposit.

Net interest income increased $979,000, or 1.7%, to $57.3 million for the year ended December 31, 2025, from $56.3 million for the year ended December 31, 2024, as decreases in rates paid outpaced decreases in yields earned.

The $5.3 million decrease in interest income was largely attributable to changes in loans receivable with an average balance decrease of $57.1 million, at an average yield of 5.54%, for the year ended December 31, 2025 compared to an average yield of 5.56%, for the year ended December 31, 2024.

Loans receivable was the main contributor to the decrease in interest income with $3.2 million due to a decrease in average loan balances and $307,000 due to lower yields.

Interest expense decreased $6.3 million.

The decrease to the cost of average interest-bearing liabilities for the year ended December 31, 2025 was due primarily to lower costs of $4.6 million from reduced brokered CD average balances and lower costs of $3.3 million on reduced rates paid for all interest-bearing deposits and advances.

Interest-bearing liability costs decreased to 2.94% for the year ended December 31, 2025 compared to 3.22% for the year ended December 31, 2024.

The reduced liability costs contributed to a 14 basis point increase in our net interest margin to 2.88% for the year ended December 31, 2025, from 2.74% for the year ended December 31, 2024.

Interest Income.

Interest income increased $11.4 million, or 11.3%, to $112.3 million for the year ended December 31, 2024 from $100.9 million for the comparable period in 2023, primarily due to an increase in the average balance of and higher yields on loans receivable.

Interest and fees on loans receivable increased $9.1 million during the year, in part, as the Bank grew the loan portfolio through participation in the Northpointe MPP and purchased auto and manufactured home loans.

Loan yields also increased due to higher rates on new originations.

The fair value hedge on loans added $1.1 million to interest income for the year ended December 31, 2024.

Interest income on investment securities increased $1.8 million to $15.0 million for the year ended December 31, 2024, compared to $13.3 million for the year ended December 31, 2023.

The increase in interest income on investment securities was driven by an increase in the average yield during the year of 64-basis points due to the investment securities portfolio restructure in the first half of 2024.

The higher rate environment in the first part of the year also contributed to increased interest income as slower prepayment activity reduced the amount of premium amortization during the period.

Interest income decreased $5.3 million, or 4.8%, to $107.0 million for the year ended December 31, 2025 from $112.3 million for the comparable period in 2024, primarily due to a decrease in the average balance of and lower yields on loans receivable.

Interest and fees on loans receivable decreased $3.5 million during the year, driven largely by reductions in the construction loan, multi‑family loan, and Northpointe MPP participation portfolios, partially offset by increased balances in the commercial real estate and purchased manufactured home loan portfolios.

Loan yields decreased by 2 basis points year-over-year.

The fair value hedge on loans added $392,000 to interest income for the year ended December 31, 2025, compared to $1.1 million for the year ended December 31, 2024.

Interest income on investment securities decreased $1.5 million to $13.5 million for the year ended December 31, 2025, compared to $15.0 million for the year ended December 31, 2024.

The decrease in interest income on investment securities was driven by a decrease in the average yield during the year of 38 basis points as higher-yielding investments matured.

The fair value hedge on investments added $142,000 and $621,000 to interest income for the years ended December 31, 2025 and 2024, respectively.

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Year Ended December 31,

(dollars in thousands)

Average Balance Outstanding

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Increase/ (Decrease) in Interest Income

(Dollars in thousands)

Loans receivable, net

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Interest Expense.

Total interest expense increased $16.6 million, or 41.9%, for the year ended December 31, 2024, compared to the prior year, with increases in deposit costs and borrowing costs of $15.4 million and $1.2 million, respectively.

Deposit costs increased due to higher funding costs and an increase of $92.0 million in the average balance of interest-bearing deposits.

The average cost of all interest-bearing deposit products increased 94-basis points to 2.95% for the year ended December 31, 2024 from 2.01% for the year ended December 31, 2023.

The average balances of money market and CD accounts increased year-over-year, while lower cost transaction and savings average account balances declined.

Borrowing costs increased 16-basis points, due to higher rates paid combined with an increase of $15.8 million in the average balance outstanding.

Total interest expense decreased $6.3 million, or 11.3%, for the year ended December 31, 2025, compared to the prior year, with decreases in deposit costs and borrowing costs of $5.4 million and $911,000, respectively.

Deposit costs decreased primarily due to the lower average balance and rate paid on brokered CDs.

The average cost of all interest-bearing deposit products decreased 30 basis points to 2.65% for the year ended December 31, 2025 from 2.95% for the year ended December 31, 2024.

The average balances of money market, customer CD and savings accounts increased year-over-year, while lower cost transaction average account balances declined.

Borrowing costs decreased 21 basis points, due to lower rates paid combined with a decrease of $6.4 million in the average balance outstanding.

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

Year Ended December 31,

(dollars in thousands)

Average Balance Outstanding

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Increase/ (Decrease) in Interest Expense

(Dollars in thousands)

Interest-bearing transaction

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Provision for Credit Losses.

The total provision for credit losses increased $15.2 million to $16.5 million during the year ended December 31, 2024, compared to $1.3 million for 2023.

The higher provision for credit losses on loans compared to 2023 is mainly the result of loan balances charged-off during the year, an increase in reserve for individually evaluated loans and an increase in loss factors applied to one-to-four family, multi-family and commercial business pooled loans.

The total provision for credit losses decreased $9.2 million to $7.3 million during the year ended December 31, 2025, compared to $16.5 million for 2024.

The lower provision for credit losses on loans compared to 2024 is mainly the result of higher recoveries on charged-off loan balances, lower pooled loan reserve balances and a decrease in the loss factors applied to one-to-four family and other consumer loan balances.

These decreases were partially offset by higher loss factors applied to commercial business, commercial real estate and multi-family pooled loans.

The unfunded commitments recapture is due to a decrease in the loss factor applied to this pool.

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Allowance for credit losses on loans as a percentage of nonaccrual loans at end of period

Nonaccrual and 90 days or more past due loans as a percentage of total loans

Nonaccrual loans as a percentage of total loans

Total loans receivable

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Noninterest Income.

Noninterest income increased to $12.6 million for the year ended December 31, 2024, from $4.0 million for the year ended December 31, 2023.

The increase compared to the prior year was primarily due to one-time transactions in 2024, including the gain on sale of six branch properties in the sale-leaseback transaction and a BOLI death benefit payment, partially offset by the loss on sale of securities.

First Northwest also recorded a $1.8 million write down on an equity investment in an organization that is involved in a lawsuit, included in Other (loss) income below.

Saleable mortgage loan production and related gains continued to be impacted by higher market rates on mortgage loans.

The BOLI exchange and reinvestment transactions during 2024 resulted in an increase in the cash surrender value recorded for the year.

Noninterest income decreased to $11.6 million for the year ended December 31, 2025, from $12.6 million for the year ended December 31, 2024.

Nonrecurring transactions in 2025 included a $1.7 million insurance reimbursement received to offset the costs associated with ongoing legal matters, a BOLI death benefit payment and an $846,000 gain on extinguishment of subordinated debt.

One-time transactions in 2024 included the gain on sale of six branch properties in the sale-leaseback transaction and a $1.1 million BOLI death benefit payment, partially offset by the loss on sale of securities and a $1.8 million equity investment write-down included in other income (loss) in the table below.

Saleable mortgage loan production and related gains benefitted from lower mortgage rates.

The BOLI exchange and reinvestment transactions during 2024 resulted in an increase in the cash surrender value for both years.

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

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Net gain on sale of premises and equipment

Increase in cash surrender value of bank-owned life insurance, net

Income from death benefit on bank-owned life insurance, net

Other (loss) income

Increase in BOLI cash surrender value, net

Income from BOLI death benefit, net

Other income (loss)

Total noninterest income

Noninterest Expense.

Noninterest expense decreased to $60.0 million for the year ended December 31, 2024, from $61.5 million for the year ended December 31, 2023.

The decrease from the prior year is primarily related to one-time noninterest expenses recorded during 2023, including the QUIL commitment receivable write-off of $1.5 million, a write-off of Fannie Mae and Freddie Mac investor accounting related items totaling $725,000, and an accrual for a civil money penalty proposed by the FDIC of $718,000.

The FDIC proposed assessing a civil money penalty in connection with the concerns detailed in the consent order entered into by the Bank during 2023 which was lifted in 2024 and the penalty reduced by $218,000.

Compensation expense increased compared to the prior year as a result of nonrecurring payments related to the July 2024 reduction-in-force and increases in incentives and commissions.

Other year-over-year changes include increased lease expense included in occupancy as a result additional lease expense after the sale-leaseback transaction, partially offset by lower advertising and professional fees.

Noninterest expense increased to $67.1 million for the year ended December 31, 2025, from $60.0 million for the year ended December 31, 2024.

The increase over the prior year is primarily due to nonrecurring other expenses including the $5.7 million legal settlement paid, $599,000 for costs associated with the early termination of the Bellevue Business Center lease, and $621,000 for branch closure costs.

Costs related to ongoing legal matters resulted in an increase in professional fees.

Compensation and benefits decreased primarily due to a $2.6 million employee retention credit ("ERC") recognized in 2025, commissions and incentives reduced $757,000 and regular compensation reduced $447,000.

Other year-over-year changes include decreased advertising, data processing and FDIC insurance costs, partially offset by higher regulatory assessments and supply costs.

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

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FDIC insurance premium

Legal settlement paid

Other expense

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Provision for Income Tax.

The Company recorded an income tax benefit for the year ended December 31, 2024, of $944,000 compared to expense of $549,000 for the year ended December 31, 2023, reflecting differences in pre-tax income.

The effective tax rate decreased over the prior year as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit, in 2024, partially offset by an estimate for the penalty on the early surrender of the BOLI contracts.

The Company recorded an income tax benefit for the year ended December 31, 2025, of $1.2 million compared to a benefit of $944,000 for the year ended December 31, 2024, reflecting differences in pre-tax income.

The effective tax rate decreased over the prior year as 2024 included an estimate for the penalty on the early surrender of the BOLI contracts.

The provision includes accruals for both federal and state income taxes.

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Income and all average balances are daily average balances.

Nonaccrual loans have been included in the table as loans carrying a zero yield.

Year Ended December 31,

(dollars in thousands)

Average Balance Outstanding

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Interest-earning assets:

(Dollars in thousands)

Loans receivable, net (1), (2)

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(1) The average loans receivable, net balances include nonaccrual loans.

(2) Interest earned on loans receivable includes net deferred costs of $12,000 and $561,000 for the years ended December 31, 2024 and 2023, respectively.

(2) Interest earned on loans receivable includes net deferred costs of $1.7 million and $1.1 million for the years ended December 31, 2025 and 2024, respectively and loan derivative interest of $392,000 and $1.1 million for the years ended December 31, 2025 and 2024, respectively.

(3) Includes interest-bearing deposits at other financial institutions.

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Total Increase

(In thousands)

(dollars in thousands)

Interest-earning assets:

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Net change in interest income

(1) Includes net deferred fee income.

(1) Includes net deferred fee income and loan derivative interest.

(2) Includes interest-bearing deposits at other financial institutions.

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The most prominent risk exposures management monitors are strategic, credit, interest rate, liquidity, operational, compliance, reputational, cybersecurity, and legal risk.

Interest Rate Risk Management.

We manage the interest rate sensitivity of interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment.

Deposit accounts may reprice more quickly in response to changes in market interest rates because of their shorter maturities.

Certain adjustable-rate investment securities, home equity lines of credit, and commercial real estate loans that are tied to the prime rate, the twelve-month constant maturity treasury, or the Term Secured Overnight Financing Rate ("TSOFR") will also reprice higher when market interest rates increase.

Increases in interest rates should beneficially affect our earnings when variable or adjustable interest-earning assets reprice at higher interest rates faster than it takes for deposit and borrowing costs to reprice higher.

Decreases in interest rates may adversely affect earnings as variable and adjustable assets will reprice lower which will reduce interest income.

Additionally, lower rates may result in increased prepayments and refinancing associated with loans and investment securities, particularly consumer and one-to-four family residential loans and MBS securities with no prepayment restrictions, which are then reinvested into lower yielding assets, further reducing interest income.

The Asset Liability Committee ("ALCO") establishes and guides the Bank's strategic direction and risk tolerances related to Asset Liability Management ("ALM"), including interest rate risk.

ALCO meets quarterly to monitor the Bank's performance against established standards as well a monitor the overall price, credit, interest rate and liquidity risk profile.

The ALM policy is approved by the Board.

Interest Rate Risk.

Interest rate risk represents the risk that changes in market interest rates will adversely affect our financial condition and results of operations.

Our primary exposure to market risk is interest rate risk arising from differences in the repricing characteristics of our interest‑earning assets and interest‑bearing liabilities.

Management of Interest Rate Risk Management.

Managing interest rate risk is an integral part of our overall risk management framework.

Management’s objective is to control exposure to interest rate fluctuations while maintaining acceptable levels of profitability and capital adequacy.

The Bank employs the services of outside firms to assist us in our asset and liability management and our analysis of market and interest rate risk.

We manage interest rate risk by monitoring repricing gaps, earnings sensitivity, and changes in the economic value of equity under various interest rate scenarios.

The economic value of equity represents the difference between the estimated market value of assets and liabilities, including adjustments for off‑balance‑sheet items.

Our balance sheet composition includes adjustable‑rate investment securities, home equity lines of credit, and certain commercial real estate loans tied to market indices such as the prime rate, the twelve‑month constant maturity treasury, TSOFR, or similar term FHLB borrowing rates.

These instruments generally reprice more rapidly than fixed‑rate assets in rising interest rate environments.

Deposit accounts may also reprice more quickly due to their shorter effective maturities.

Interest Rate Sensitivity Analysis.

Management uses an interest rate sensitivity analysis to review our level of interest rate risk.

This analysis measures interest rate risk by computing changes in the present value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates.

The present value of equity is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items.

This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 400 basis point decrease in market interest rates with no effect given to any future steps that management might take to counter the impact of that interest rate movement.

The Bank's balance sheet remains more liability sensitive due to slower loan prepayment speeds, driven by higher interest rates during the first nine months of 2024, and deposit migration from non-maturity deposits to certificates of deposits with shorter average lives.

The following table presents the change in the present value of First Fed’s equity at December 31, 2024, that would occur in the event of an immediate change in interest rates based on management's assumptions.

We use interest rate sensitivity analysis to evaluate our exposure to changes in market interest rates.

This analysis measures the estimated change in the present value of expected cash flows from assets, liabilities, and off‑balance‑sheet instruments under a range of assumed interest rate movements.

The analysis models the impact of an instantaneous and sustained parallel shift in interest rates ranging from a 100 to 400 basis point increase or decrease, assuming no changes to management’s balance sheet strategies in response to those rate movements.

At December 31, 2025, our balance sheet was more asset‑sensitive in the short‑term horizon, reflecting slower loan prepayment speeds driven by higher interest rates and deposit migration from non‑maturity deposits to certificates of deposit with shorter average lives.

Net Interest Income Sensitivity.

The following table presents the estimated sensitivity of projected net interest income over a one-year horizon as of December 31, 2025, based on management’s assumptions regarding interest rates, loan prepayment behavior, deposit decay rates, and pricing characteristics of assets and liabilities.

December 31, 2025

Economic Value of Equity

Basis Point Change in Interest Rates

(dollars in thousands)

Using the same assumptions as above, the sensitivity of our projected net interest income over a one-year period for the year ended December 31, 2024, is as follows:

December 31, 2024

Basis Point Change

Projected Net Interest Income

in Interest Rates

(Dollars in thousands)

Management makes assumptions about interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings are inherent in our analysis.

For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.

Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may take longer to adjust to changes in market rates.

Additionally, certain assets have features, such as rate caps or floors, which restrict changes in interest rates on a short-term basis and over the life of the asset.

Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating forgoing the table.

Change in Interest Rates (basis points)

Key Assumptions and Limitations.

The interest rate sensitivity analysis is based on a number of assumptions, including projected interest rate paths, loan prepayment rates, deposit decay rates, and the estimated market values of certain assets and liabilities under differing interest rate scenarios.

Actual results may differ materially from those modeled due to changes in market conditions, customer behavior, or management actions.

This analysis has inherent limitations.

Assets and liabilities with similar maturities or repricing characteristics may respond differently to changes in interest rates.

Certain instruments include embedded features such as interest rate caps or floors that may limit repricing.

In addition, changes in interest rates may significantly alter prepayment speeds on loans and early withdrawal behavior on certificates of deposit, which could differ from assumptions used in the models.

As a result, the modeled outcomes should not be considered precise forecasts but rather indicators of the potential direction and magnitude of interest rate risk exposure.

Liquidity Management

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however, no such funds were borrowed as of December 31, 2025 .

Another source of short-term funding for the Bank is through PCBB's Fed Funds Borrowing Facility, which provides up to $50.0 million of unsecured borrowing for up to ten consecutive days.

First Northwest maintains a $15.0 million line of credit with NexBank, with an available borrowing capacity of $1.5 million at year end, which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments.

At December 31, 2024, we had $165.8 million in undisbursed loans, including undisbursed construction commitments, and standby letters of credit.

The line of credit matures in November 2026.

At December 31, 2025, we had $168.6 million in commitments to grant loans, undisbursed lines of credit, undisbursed construction commitments, and standby letters of credit.

The Company also had unfunded partnership commitments totaling $2.3 million.

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Management believes that maintaining a diversified deposit base is an important factor in managing liquidity.

The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First Fed Bank, the NexBank line of credit and future investment redemptions for liquidity to pay its operating expenses and other financial obligations.

The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First Fed, the NexBank line of credit and future investment redemptions for liquidity to pay its operating expenses and other financial obligations.

At December 31, 2025, the Company (on an unconsolidated basis) had liquid assets of $7,587,000.

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Amount of Commitment Expiration

(dollars in thousands)

Within 1 Year

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Total Amounts Committed

(In thousands)

Commitments to originate loans:

Fixed-rate loans

Variable-rate loans

Unfunded commitments under lines of credit

Unfunded commitments under existing construction loans

Unfunded commitments under existing maritime loans

Standby letters of credit

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Capital Resources

First Northwest Bancorp is a financial holding company (a type of bank holding company) subject to regulation by the Federal Reserve.

First Northwest is a financial holding company (a type of bank holding company) subject to regulation by the Federal Reserve.

As a bank holding company, we are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve.

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Capital adequacy requirements are quantitative measures established by regulation that require us to maintain minimum amounts and ratios of capital.

First Fed is subject to meeting minimum capital adequacy requirements for common equity Tier 1 ("CET1") capital, Tier 1 risk-based capital, total risk-based capital, and tier 1 capital ("leverage").

First Fed is subject to meeting minimum capital adequacy requirements for CET1 capital, Tier 1 risk-based capital, total risk-based capital, and tier 1 capital ("leverage").

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

First Fed is subject to capital requirements adopted by the Federal Reserve and the FDIC.

See Item 1, "Business-How We Are Regulated," and Note 12 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K for additional information regarding First Northwest Bancorp and First Fed’s regulatory capital requirements.

In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions, First Northwest Bancorp and First Fed must maintain CET1 capital at an amount greater than the required minimum levels plus a capital conservation buffer.

This new capital conservation buffer requirement was phased in starting in January 2016 until fully implemented in the amount of 2.5% of risk-weighted assets in January 2019.

As of December 31, 2024, the conservation buffer was 2.5%.

In order to avoid limitations, based on percentages of eligible retained income, on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain risk-based capital in an amount greater than the required minimum levels plus a capital conservation buffer, comprised of CET1, of 2.5% of risk-weighted assets.

The Bank's capital conservation buffer was 5.55% at December 31, 2025, exceeding this requirement by over 3.00%.

Consistent with our goals to operate a sound and profitable organization, our policy for First Fed is to maintain its "well-capitalized" status in accordance with regulatory standards.

9 unchanged sentences

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the U.S., which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates.

8 unchanged sentences

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 7. Management’s Discussion and Analysis