What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-06 compared with 2026-05-07 · 239 added, 97 removed, 395 unchanged (46% of the section changed)

45 unchanged sentences

First Fed is a community-oriented commercial bank founded in 1923 in Port Angeles, Washington.

The Bank serves Clallam, Jefferson, King, Kitsap, Snohomish and Whatcom counties in Washington State through its eleven full-service branches and five business centers, including our headquarters.

The Bank serves Clallam, Jefferson, King, Kitsap, Snohomish and Whatcom counties in Washington State through its ten full-service branches and five business centers, including our headquarters.

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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There are no material changes to the critical accounting policies from those disclosed in the Company's 2025 Form 10-K.

Comparison of Financial Condition at March 31, 2026 and December 31, 2025

Total assets increased to $2.13 billion, or 1.2%, at March 31, 2026, from $2.11 billion at December 31, 2025.

Cash and cash equivalents increased by $19.0 million, or 22.3%, to $104.1 million as of March 31, 2026, compared to $85.1 million as of December 31, 2025.

Investment securities increased $2.7 million, or 1.0%, to $273.0 million at March 31, 2026, from $270.3 million at December 31, 2025.

Purchases totaling $11.1 million were partially offset by maturities totaling $3.3 million, regular principal payments totaling $3.9 million and a $1.2 million increase in net unrealized losses during the three months ended March 31, 2026.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 6.8 years as of March 31, 2026 and 6.5 years as of December 31, 2025, and had an estimated average repricing term of 5.7 years as of March 31, 2026, compared to 6.7 years as of December 31, 2025, based on the interest rate environment at those times.

The effective duration of the investment portfolio was 4.7 years at March 31, 2026, compared to 4.6 years at December 31, 2025.

The investment portfolio was comprised of 55.1% in amortizing securities at March 31, 2026, compared to 54.2% at December 31, 2025.

Comparison of Financial Condition at June 30, 2026 and December 31, 2025

Total assets increased to $2.12 billion, or 0.8%, at June 30, 2026, from $2.11 billion at December 31, 2025.

Cash and cash equivalents increased by $13.2 million, or 15.6%, to $98.4 million as of June 30, 2026, compared to $85.1 million as of December 31, 2025.

Investment securities increased $16.7 million, or 6.2%, to $287.0 million at June 30, 2026, from $270.3 million at December 31, 2025.

Purchases totaling $38.9 million were partially offset by maturities totaling $13.1 million, regular principal payments totaling $8.4 million and a $649,000 increase in net unrealized losses during the six months ended June 30, 2026.

The investment portfolio, including mortgage-backed securities, had an estimated projected average life of 6.4 years as of June 30, 2026 and 6.5 years as of December 31, 2025, and had an estimated average repricing term of 6.0 years as of June 30, 2026, compared to 6.7 years as of December 31, 2025, based on the interest rate environment at those times.

The effective duration of the investment portfolio was 4.6 years at June 30, 2026, compared to 4.6 years at December 31, 2025.

The investment portfolio was comprised of 51.0% in amortizing securities at June 30, 2026, compared to 54.2% at December 31, 2025.

The projected average life of the securities portfolio may vary due to prepayment activity, particularly in the mortgage-backed securities portfolio, which is impacted by prevailing market interest rates.

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For additional information, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Net loans, excluding loans held for sale, increased $1.0 million, or 0.1%, to $1.61 billion at March 31, 2026, from $1.61 billion at December 31, 2025.

During the three months ended March 31, 2026, one-to-four family loans decreased $13.8 million during the three months ended March 31, 2026, as repayment activity exceeded $1.2 million in residential construction loans that converted to permanent amortizing loans and new loan originations totaling $450,000.

Multi-family loans decreased $17.6 million during the three months ended March 31, 2026, as prepayments and scheduled payments exceeded $1.8 million of new loan originations and $199,000 of construction loans converting into permanent amortizing loans.

Commercial real estate loans increased $560,000 during the three months ended March 31, 2026, with $4.5 million of new loan originations and $616,000 of construction loan conversions exceeding repayment activity.

Construction and land loans increased $1.1 million, or 1.8%, to $62.4 million at March 31, 2026, from $61.3 million at December 31, 2025, with draws on new and existing loan commitments totaling $11.4 million, partially offset by payment activity totaling $7.1 million and $2.0 million converting into fully amortizing loans.

Net loans, excluding loans held for sale, decreased $15.0 million, or 0.9%, to $1.60 billion at June 30, 2026, from $1.61 billion at December 31, 2025.

During the six months ended June 30, 2026, one-to-four family loans decreased $19.7 million during the six months ended June 30, 2026, as repayment activity exceeded $1.8 million in residential construction loans that converted to permanent amortizing loans and new loan originations totaling $3.2 million.

Multi-family loans decreased $32.7 million during the six months ended June 30, 2026, as prepayments and scheduled payments exceeded $3.7 million of new loan originations and $199,000 of construction loans converting into permanent amortizing loans.

Commercial real estate loans decreased $115,000 during the six months ended June 30, 2026, with repayment activity exceeding $13.2 million of new loan originations and $8.6 million of construction loan conversions.

Construction and land loans increased $429,000, or 0.7%, to $61.7 million at June 30, 2026, from $61.3 million at December 31, 2025, with draws on new and existing loan commitments totaling $25.5 million, partially offset by payment activity totaling $15.0 million, $10.4 million converting into fully amortizing loans and charge-offs totaling $371,000.

Home equity loan outstanding balances increased $4.9 million over the prior year end due to $16.4 million of net draws on new and existing line of credit commitments and $1.9 million of home equity loan originations, partially offset by prepayments and scheduled payments.

Auto and other consumer loans increased $11.5 million with auto loan purchases of $41.0 million and individual manufactured home loan purchases of $4.3 million, partially offset by prepayments and scheduled payments.

Commercial business loans increased $22.3 million, including a $23.0 million increase to our Northpointe Bank Mortgage Purchase Program ("Northpointe MPP") participation, $2.8 million of draws on existing line of credit commitments and $5.0 million of organic originations, partially offset by charge-offs totaling $1.2 million and other repayment activity.

Commercial business loans increased $20.7 million, including a $25.7 million increase to our Northpointe Bank Mortgage Purchase Program ("Northpointe MPP") participation, $12.4 million of organic originations and $3.5 million of draws on existing line of credit commitments, partially offset by charge-offs totaling $719,000 and other repayment activity.

Construction projects in the portfolio are geographically dispersed throughout Western Washington as well as one project in California.

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Other Washington

March 31, 2026

June 30, 2026

Construction Commitment

53 unchanged sentences

(2) Includes Kitsap, Mason, Thurston, Pierce, King, Snohomish, Skagit, Whatcom, and Island counties.

During the three months ended March 31, 2026, the Company added $29.9 million of organic loan originations, of which $14.4 million, or 48.1%, were located in the Puget Sound region, $13.4 million, or 44.9%, on the North Olympic Peninsula, and $2.1 million, or 7.0%, in other areas throughout Washington State.

The Company purchased an additional $21.5 million in auto loans and $1.6 million in manufactured home loans to borrowers located throughout the United States during the three months ended March 31, 2026.

The total loan portfolio was composed of 77.4% organic originations and 22.6% purchased loans at March 31, 2026.

During the six months ended June 30, 2026, the Company added $79.8 million of organic loan originations, of which $41.9 million, or 52.6%, were located in the Puget Sound region, $31.7 million, or 39.7%, on the North Olympic Peninsula, and $4.1 million, or 5.2%, in other areas throughout Washington State.

The Company purchased $41.0 million in auto loans and $4.4 million in manufactured home loans to borrowers located throughout the United States during the six months ended June 30, 2026.

The total loan portfolio was composed of 76.9% organic originations and 23.1% purchased loans at June 30, 2026.

We will continue to assess our lending strategies across all product lines and markets where we do business as well as evaluate opportunities to supplement organic growth through wholesale acquisitions with the goal of improving earnings while also prudently managing credit risk.

The ACLL decreased to $16.8 million at March 31, 2026, compared to $17.0 million at December 31, 2025.

A $256,000 reduction in the pooled loan reserve balance was driven by decreased loan balances in most categories combined with lower loss factors applied to one-to-four family and other consumer loans.

Decreases to the pooled loan reserve balance were partially offset by higher purchased auto and Northpointe MPP balances and higher loss factors applied to commercial real estate, multi-family and construction loan balances at the end of the current quarter.

The pooled loan reserve was impacted by a mild increase in gross domestic product, lower unemployment forecasts and a reduction in nonaccrual loans.

The ACLL decreased to $16.3 million at June 30, 2026, compared to $17.0 million at December 31, 2025.

A $703,000 reduction in the pooled loan reserve balance was driven by lower one-to-four family, multi-family and commercial business loan balances combined with lower loss factors applied to one-to-four family, commercial real estate, other consumer and commercial business loans.

The decrease to the pooled loan reserve balance was partially offset by higher purchased auto balances and higher loss factors applied to construction and home equity loan balances at the end of the current quarter.

The pooled loan reserve was impacted by a mild increase in gross domestic product, higher unemployment forecasts, net loan charge-offs and a reduction in nonaccrual loans.

The reserve on individually analyzed loans increased $22,000 due to a commercial business loan new to the category with a reserve at period end.

The ACLL as a percentage of total loans was 1.03% and 1.04% at March 31, 2026 and December 31, 2025, respectively.

The ACLL as a percentage of total loans was 1.01% and 1.04% at June 30, 2026 and December 31, 2025, respectively.

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

We believe the ACLL is adequate to cover current expected credit losses in the loan portfolio as of March 31, 2026.

Nonperforming loans decreased $896,000, or 4.0%, to $21.7 million at March 31, 2026, from $22.6 million at December 31, 2025.

Current quarter activity included principal payments totaling $806,000, payoffs totaling $776,000 and net recoveries on nonperforming loans totaling $505,000.

The decreases were partially offset by the transition into nonaccrual status of a residential mortgage, two auto loans, a commercial business loan and five other consumer loans totaling $1.2 million.

Nonperforming loans to total loans was 1.3% at March 31, 2026, compared to 1.4% at December 31, 2025.

The ACLL as a percentage of nonaccrual loans increased to 77.5% at March 31, 2026, up from 75.2% at December 31, 2025.

Classified loans decreased $685,000, or 1.9%, to $34.6 million at March 31, 2026, from $35.3 million at December 31, 2025, primarily due to payoffs totaling $653,000, principal payments totaling $567,000, net recoveries on previously charged-off loans totaling $501,000 and upgrades totaling $156,000.

The decreases were partially offset by downgrades of consumer loans totaling $566,000, a $524,000 residential mortgage loan and a $112,000 commercial business loan.

Four collateral-dependent loans totaling $26.5 million account for 77% of the classified loan balance at March 31, 2026.

We believe the ACLL is adequate to cover current expected credit losses in the loan portfolio as of June 30, 2026.

Nonperforming loans decreased $1.9 million, or 8.3%, to $20.7 million at June 30, 2026, from $22.6 million at December 31, 2025.

Current year activity included principal payments totaling $2.3 million and payoffs totaling $776,000 and net recoveries on nonperforming loans totaling $289,000.

The decreases were partially offset by the transition into nonaccrual status of two residential mortgages, two auto loans, a commercial business loan, a home equity loan and six other consumer loans totaling $1.5 million.

Nonperforming loans to total loans was 1.3% at June 30, 2026, compared to 1.4% at December 31, 2025.

The ACLL as a percentage of nonaccrual loans increased to 78.7% at June 30, 2026, up from 75.2% at December 31, 2025.

Classified loans decreased $9.8 million, or 27.7%, to $25.5 million at June 30, 2026, from $35.3 million at December 31, 2025, primarily due to payoffs totaling $14.9 million, principal payments totaling $1.5 million, net recoveries on previously charged-off loans totaling $285,000 and upgrades totaling $156,000.

The decreases were partially offset by downgrades across multiple loan categories totaling $6.9 million.

Four collateral-dependent loans totaling $18.3 million account for 72% of the classified loan balance at June 30, 2026.

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

In the first quarter of 2026, the Bank recorded net recoveries of $249,000 in commercial business loans.

Charge-offs of $226,000 to auto and other consumer loans, $171,000 to a commercial construction loan and $3,000 to commercial real estate loans partially offset the recoveries.

In the first half of 2026, the Bank recorded net recoveries of $288,000 in commercial business loans.

Net charge-offs of $242,000 to auto and other consumer loans, $371,000 to a commercial construction loan and $3,000 to commercial real estate loans partially offset the recoveries.

Charge-offs are based on individual loan evaluations and do not represent a universal decline in the collectability of all loans in these categories.

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(dollars in thousands)

March 31, 2026

June 30, 2026

December 31, 2025

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(dollars in thousands)

March 31, 2026

June 30, 2026

December 31, 2025

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Nonperforming MLTB loans included in total nonaccrual loans and total restructured loans above

Total liabilities increased to $1.98 billion at March 31, 2026, from $1.95 billion at December 31, 2025, due to increases in borrowings of $20.0 million and deposits of $2.5 million.

Deposit account balances increased $2.5 million, or 0.2%, to $1.60 billion at March 31, 2026 from $1.60 billion at December 31, 2025.

During the first three months of 2026, total customer deposit balances increased $24.9 million and brokered deposit balances decreased $22.4 million.

Within customer deposit balances, increases in customer CDs of $11.9 million, demand deposit accounts of $7.5 million and savings accounts of $7.3 million were partially offset by decreases in money market accounts of $1.8 million.

Total liabilities increased to $1.97 billion at June 30, 2026, from $1.95 billion at December 31, 2025, due to increases in deposits of $8.3 million and borrowings of $5.0 million.

Deposit account balances increased $8.3 million, or 0.5%, to $1.61 billion at June 30, 2026 from $1.60 billion at December 31, 2025.

During the first six months of 2026, total customer deposit balances increased $36.2 million and brokered deposit balances decreased $27.9 million.

All categories of customer deposits reflect increases, including customer CDs of $19.9 million, money market accounts of $11.1 million, demand deposit accounts of $2.8 million and savings accounts of $2.5 million.

The Bank utilizes Brokered CDs as an additional funding source when it proves beneficial to provide liquidity, manage cost of funds, reduce reliance on FHLB advances, and manage interest rate risk.

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

FHLB advances increased $20.0 million, or 7.7% to $280.0 million at March 31, 2026, from $260.0 million at December 31, 2025.

FHLB advances increased $5.0 million, or 1.9% to $265.0 million at June 30, 2026, from $260.0 million at December 31, 2025.

The short-term FHLB advances supported increased on balance sheet liquidity.

Total shareholders' equity decreased $298,000 to $157.0 million for the three months ended March 31, 2026, due to a decrease in the after-tax fair market values of the available-for-sale investment securities portfolio of $847,000, partially offset by a $295,000 increase in the investment portfolio hedge post-tax fair market value and net income of $6,000.

During the first three months of 2026, the Company did not repurchase any common stock under the Company's April 2024 stock repurchase plan, leaving 846,123 shares remaining in the current share repurchase program.

Comparison of Results of Operations for the Three Months Ended March 31, 2026 and 2025

The Company recorded net income of $6,000 for the three months ended March 31, 2026, compared to a net loss of $9.0 million for the three months ended March 31, 2025.

A $7.7 million decrease in provision for credit losses, a $3.3 million decrease in noninterest expense and a $593,000 increase in net interest income were partially offset by a $1.8 million decrease in noninterest income and an $805,000 decrease in income tax benefit.

Total shareholders' equity increased $1.1 million to $158.3 million for the six months ended June 30, 2026, due to an increase in the after-tax fair market values of the available-for-sale investment securities portfolio of $590,000, the allocation of compensation-related shares valued at $512,00 and net income of $314,000, partially offset by a $428,000 increase in the investment portfolio hedge post-tax fair market value.

During the first six months of 2026, the Company did not repurchase any common stock under the Company's April 2024 stock repurchase plan, leaving 846,123 shares remaining in the current share repurchase program.

Comparison of Results of Operations for the Three Months Ended June 30, 2026 and 2025

The Company recorded net income of $308,000 for the three months ended June 30, 2026, compared to net income of $3.7 million for the three months ended June 30, 2025.

A $3.6 million increase in noninterest expense, a $165,000 decrease in noninterest income and a $20,000 decrease in net interest income were partially offset by a $180,000 increase in recapture of provision for credit losses and a $280,000 decrease in income tax provision.

Net Interest Income.

Net interest income increased $593,000 to $14.4 million for the three months ended March 31, 2026, from $13.9 million for the three months ended March 31, 2025, as reduced deposit and borrowing costs outpaced declines in loan, investment and interest-earning deposit income.

The net interest margin increased 27 basis points to 3.03% for the three months ended March 31, 2026, compared to 2.76% for the same period in 2025.

Net interest income was flat at $14.2 million for the three months ended June 30, 2026, compared to the three months ended June 30, 2025, with declines in loan, investment and interest-earning deposit income offset by reduced deposit and borrowing costs.

The net interest margin increased 12 basis points to 2.95% for the three months ended June 30, 2026, compared to 2.83% for the same period in 2025.

Interest Income.

Total interest income decreased $1.5 million, or 5.6%, to $25.3 million for the three months ended March 31, 2026, from $26.8 million for the comparable period in 2025.

Total interest income decreased $1.7 million, or 6.2%, to $25.5 million for the three months ended June 30, 2026, from $27.1 million for the comparable period in 2025.

Average earning assets decreased $85.2 million year-over-year.

The yield on average interest-earning assets decreased 3 basis points to 5.32% for the three months ended March 31, 2026, compared to 5.35% for the same period in the prior year.

The yield on average interest-earning assets decreased 11 basis points to 5.30% for the three months ended June 30, 2026, compared to 5.41% for the same period in the prior year.

Interest and fees on loans receivable decreased $817,000 primarily due to a decrease in the average balance of net loans receivable of $50.9 million, a change in the mix of loans compared to the prior year and a 3 basis point decrease in average loan yields.

Interest from investment securities decreased $743,000 primarily due to the maturity of some higher-yielding investment securities during 2025 resulting in a 51 basis point decrease in average investment yields.

While the Company's yields dropped period-over-period, the decrease was significantly lower than the 75 basis point Fed Funds decrease over the same period.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:

Three Months Ended June 30,

(dollars in thousands)

Average Balance Outstanding

(Decrease) Increase in Interest Income

Loans receivable, net

Investment securities

Interest-earning deposits in banks

Total interest-earning assets

Interest Expense.

Total interest expense decreased $1.7 million, or 12.8%, to $11.3 million for the three months ended June 30, 2026, compared to $12.9 million for the three months ended June 30, 2025.

The average cost of interest-bearing liabilities decreased 23 basis points to 2.78% for the three months ended June 30, 2026, compared to 3.01% for the same period last year.

Interest expense on deposits decreased $1.5 million due to a $77.3 million decrease in the average balance and a 31 basis point decrease in the cost of interest-bearing deposits reflecting a decreased reliance on brokered deposits.

Interest expense on borrowings decreased $137,000 due to a $22.9 million decrease in the average balance of FHLB advances offset by a 16 basis point increase in the cost of borrowings due to the subordinated debt transition from a fixed to floating rate compared to the same period in 2025.

During the three months ended June 30, 2026, interest expense on brokered CDs decreased due to lower average balances of $72.6 million along with a 13 basis point decrease in the average rate paid, compared to the three months ended June 30, 2025.

Customer CDs represented 28.20% and 27.20% of total deposits at June 30, 2026 and 2025, respectively.

Brokered CDs represented 3.60% and 6.50% of total deposits at June 30, 2026 and 2025, respectively.

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

Three Months Ended June 30,

(dollars in thousands)

Average Balance Outstanding

(Decrease) Increase in Interest Expense

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit, customer

Certificates of deposit, brokered

Subordinated debt

Total interest-bearing liabilities

Provision for Credit Losses.

The Company recorded a $337,000 loan loss provision recapture and a $203,000 unfunded commitment provision recapture for the three months ended June 30, 2026.

This compares to a $296,000 loan loss provision recapture and a $64,000 unfunded commitment provision recapture for the three months ended June 30, 2025.

The current period recapture of provision for credit losses on loans reflects lower pooled reserve loan balances, a decrease in the reserve on individually evaluated loans, changes in the loan portfolio composition and lower loss factors at June 30, 2026, partially offset by net charge-offs totaling $177,000 for the three-month period.

The higher unfunded commitment provision recapture compared to the same period in 2025 was primarily due to lower qualitative loss factors.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:

Three Months Ended June 30,

(dollars in thousands)

Total loans receivable

Net charge-offs

Recapture of provision for credit losses on loans

Allowance for credit losses on loans

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

Total nonaccrual loans

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

Nonaccrual loans as a percentage of total loans receivable

Unfunded loan commitments

Recapture of provision for credit losses on unfunded commitments

Reserve for unfunded commitments

Noninterest Income.

Noninterest income decreased $165,000, or 7.6%, to $2.0 million for the three months ended June 30, 2026, from $2.2 million for the three months ended June 30, 2025.

Other income reflects period-over-period decreases in the recorded value of equity and fintech partnership investments of $63,000 and swap fee income of $48,000.

Nonrecurring income for the second quarter of 2025 included $81,000 of interest related to the ERC recorded in other income.

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

Three Months Ended June 30,

Increase (Decrease)

(dollars in thousands)

Loan and deposit service fees

Sold loan servicing fees and servicing rights mark-to-market

Net gain on sale of loans

Increase in BOLI cash surrender value

Total noninterest income

Noninterest Expense.

Noninterest expense increased $3.6 million, or 28.4%, to $16.4 million for the three months ended June 30, 2026, compared to $12.8 million for the three months ended June 30, 2025.

The increase in expenses compared to the same period in 2025 is mainly due to a $2.6 million employee retention credit recorded in compensation during the second quarter of 2025.

Other increases to compensation and benefits included period-over-period increases to incentive payments of $344,000 and medical insurance of $361,000.

Data processing expenses decreased in 2026 compared to the same period in 2025 as the Bank advanced its operating efficiency initiative and implemented more integrated systems.

Legal expense included in professional fees increased $639,000 period-over-period as the Company continues to defend against the claims detailed in Note 15 contained in Item 1 of this Form 10-Q.

Consulting costs included in professional fees increased $219,000 compared to the same period in 2025 as the Bank initiated a process improvement project in the second quarter of 2026.

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

Three Months Ended June 30,

Increase (Decrease)

(dollars in thousands)

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Professional fees

FDIC insurance premium

Other expense

Total noninterest expense

Provision for Income Tax.

An income tax provision of $17,000 was recorded for the three months ended June 30, 2026, compared to a provision of $297,000 for the three months ended June 30, 2025, due to a period-over-period decrease in net income before taxes of $3.6 million.

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

For additional information, see Note 7 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Comparison of Results of Operations for the Six Months Ended June 30, 2026 and 2025

The Company recorded net income of $314,000 for the six months ended June 30, 2026, compared to a net loss of $5.4 million for the six months ended June 30, 2025.

A $7.9 million decrease in provision for credit losses, and a $573,000 increase in net interest income were partially offset by a $1.9 million decrease in noninterest income, a $525,000 decrease in income tax benefit and a $312,000 increase in noninterest expense.

Net Interest Income.

Net interest income increased $573,000 to $28.6 million for the six months ended June 30, 2026, from $28.0 million for the six months ended June 30, 2025, as reduced deposit and borrowing costs outpaced declines in loan, investment and interest-earning deposit income.

The net interest margin increased by 19 basis points to 2.99% for the six months ended June 30, 2026, compared to 2.80% for the same period in 2025.

Interest Income.

Total interest income decreased $3.2 million, or 5.9%, to $50.8 million for the six months ended June 30, 2026, from $54.0 million for the comparable period in 2025.

Average earning assets decreased $93.3 million year-over-year.

The yield on average interest-earning assets decreased 7 basis points to 5.31% for the six months ended June 30, 2026, compared to 5.38% for the same period in the prior year.

Interest from investment securities decreased $2.0 million primarily due to the maturity of some higher-yielding investment securities during 2025.

Interest and fees on loans receivable decreased $231,000, to $22.0 million for the three months ended March 31, 2026, from $22.2 million for the three months ended March 31, 2025, primarily due to a decrease in the average balance of net loans receivable of $44.7 million and a change in the mix of loans compared to the prior year, partially offset by an increase in average loan yields to 5.59% for the three months ended March 31, 2026, from 5.49% for the same period in 2025.

Interest and fees on loans receivable decreased $1.1 million, to $44.0 million for the six months ended June 30, 2026, from $45.1 million for the six months ended June 30, 2025, primarily due to a decrease in the average balance of net loans receivable of $47.8 million and a change in the mix of loans compared to the prior year, partially offset by an increase in average loan yields to 5.57% for the six months ended June 30, 2026, from 5.54% for the same period in 2025.

For context, the Fed Funds rate decreased 75 basis points over the same period.

The following table compares average earning asset balances, associated yields, and resulting changes in interest income for the periods shown:

Three Months Ended March 31,

Six Months Ended June 30,

(dollars in thousands)

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Interest Expense.

Total interest expense decreased $2.1 million, or 16.0%, to $10.9 million for the three months ended March 31, 2026, compared to $13.0 million for the three months ended March 31, 2025.

The average cost of interest-bearing liabilities decreased 33 basis points to 2.72% for the three months ended March 31, 2026, compared to 3.05% for the same period last year.

Total interest expense decreased $3.7 million, or 14.4%, to $22.2 million for the six months ended June 30, 2026, compared to $25.9 million for the six months ended June 30, 2025.

The average cost of interest-bearing liabilities decreased 28 basis points to 2.75% for the six months ended June 30, 2026, compared to 3.03% for the same period last year.

Interest expense on deposits decreased $3.3 million due to a $71.2 million decrease in the average balance and a 36 basis point decrease in the cost of interest-bearing deposits.

A shift in the deposit mix from brokered CDs, interest-bearing demand and customer CDs to higher average balances of money market and savings accounts resulted in a lower cost of deposits.

Interest expense on borrowings decreased $275,000 due to a $30.4 million decrease in the average balance offset by a 5 basis point increase in the cost of borrowings, primarily FHLB advances, compared to the same period in 2025.

During the three months ended March 31, 2026, interest expense on brokered CDs decreased due to lower average balances of $88.2 million along with a 33 basis point decrease in the average rate paid, compared to the three months ended March 31, 2025.

Customer CDs represented 27.8% and 27.0% of total deposits at March 31, 2026 and 2025, respectively.

Brokered CDs represented 4.0% and 8.3% of total deposits at March 31, 2026 and 2025, respectively.

A reduced reliance on brokered CDs and a shift in the deposit mix from interest-bearing demand and customer CDs to higher average balances of money market and savings accounts resulted in a lower cost of deposits.

Interest expense on borrowings decreased $412,000 due to a $24.8 million decrease in the average balance of FHLB advances offset by a 10 basis point increase in the cost of borrowings due to the subordinated debt transition from a fixed to floating rate compared to the same period in 2025.

During the six months ended June 30, 2026, interest expense on brokered CDs decreased due to lower average balances of $80.3 million along with a 25 basis point decrease in the average rate paid, compared to the six months ended June 30, 2025.

Average deposit account balances were composed of 84.9% in interest-bearing deposits and 15.1% in noninterest-bearing deposits at June 30, 2026, compared to 85.3% and 14.7%, respectively, at June 30, 2025.

Customer CDs represented 29.3% and 29.1% of customer deposits at June 30, 2026 and 2025, respectively.

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

Three Months Ended March 31,

Six Months Ended June 30,

(dollars in thousands)

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Provision for Credit Losses.

The Company recorded a $13,000 loan loss provision recapture offset by a $91,000 unfunded commitment provision for the three months ended March 31, 2026.

This compares to a $7.8 million loan loss provision and a $15,000 unfunded commitment provision for the three months ended March 31, 2025.

The current period recapture of provision for credit losses on loans reflects lower pooled reserve loan balances, changes in the loan portfolio composition and reduced nonperforming loans at March 31, 2026, partially offset by net charge-offs totaling $151,000 for the three-month period and an increase in the reserve on individually evaluated loans.

The higher unfunded commitment provision compared to the same period in 2025 was due to higher qualitative loss factors.

The Company recorded a $350,000 loan loss provision recapture and a $112,000 unfunded commitment provision recapture for the six months ended June 30, 2026.

This compares to a $7.5 million loan loss provision and a $49,000 unfunded commitment provision recapture for the six months ended June 30, 2025.

The current period recapture of provision for credit losses on loans reflects lower pooled reserve loan balances and reduced loss factors, partially offset by an increase in the reserve on individually evaluated loans.

Net charge-offs recorded during the first half of 2026 totaled $328,000, compared to $9.6 million recorded during the first half of 2025.

The higher provision recapture on unfunded commitments compared to the same period in 2025 was primarily due to lower qualitative loss factors.

The following table details activity and information related to the allowance for credit losses on loans and reserve for unfunded commitments for the periods shown:

Three Months Ended March 31,

Six Months Ended June 30,

(dollars in thousands)

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Unfunded loan commitments

Provision for credit losses on unfunded commitments

Recapture of provision for credit losses on unfunded commitments

Reserve for unfunded commitments

Noninterest Income.

Noninterest income decreased $1.8 million, or 46.8%, to $2.0 million for the three months ended March 31, 2026, from $3.8 million for the three months ended March 31, 2025.

The prior year included a $1.1 million BOLI death benefit and an $846,000 gain on the extinguishment of debt related to repurchasing $5.0 million of subordinated debt at a discount recorded in other income.

Noninterest income decreased $1.9 million, or 32.5%, to $4.0 million for the six months ended June 30, 2026, from $6.0 million for the six months ended June 30, 2025.

Nonrecurring income for the first half of 2025 included a $1.1 million BOLI death benefit, an $846,000 gain on the extinguishment of debt related to repurchasing $5.0 million of subordinated debt at a discount recorded in other income and $81,000 of interest related to an Employee Retention Credit recorded in other income.

Also included in other income was a period-over-period decrease in swap fee income of $113,000.

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

Three Months Ended March 31,

Six Months Ended June 30,

Increase (Decrease)

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Noninterest Expense.

Noninterest expense decreased $3.3 million, or 16.6%, to $16.7 million for the three months ended March 31, 2026, compared to $20.0 million for the three months ended March 31, 2025.

The prior year included a $5.8 million legal settlement paid.

Legal expense included in professional fees increased $846,000 period-over-period as the Company continues to defend against the claims detailed in Note 15 contained in Item 1 of this Form 10-Q.

Consulting costs included in professional fees increased $432,000 compared to the same period in 2025 as the Bank utilized outside resources to assist with key duties of certain open positions.

Noninterest expense increased $312,000, or 1.0%, to $33.1 million for the six months ended June 30, 2026, compared to $32.8 million for the six months ended June 30, 2025.

Nonrecurring expenses for the first half of 2025 included a $5.8 million legal settlement paid and a $2.6 million Employee Retention Credit reduction to compensation expense.

Other increases to compensation and benefits included period-over-period increases to incentive payments of $616,000 and medical insurance of $354,000.

Legal expense included in professional fees increased $1.5 million period-over-period as the Company continues to defend against the claims detailed in Note 15 contained in Item 1 of this Form 10-Q.

Consulting costs included in professional fees increased $651,000 compared to the same period in 2025 as the Bank utilized outside resources to assist with key duties of certain open positions during the first quarter of 2026 and initiated a process improvement project in the second quarter of 2026.

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

Three Months Ended March 31,

Six Months Ended June 30,

Increase (Decrease)

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Provision for Income Tax.

An income tax benefit of $320,000 was recorded for the three months ended March 31, 2026, compared to a benefit of $1.1 million for the three months ended March 31, 2025, due to a period-over-period increase in net loss before taxes of $9.9 million and adjustments related to the tax penalty estimate for the early surrender of BOLI contracts.

An income tax benefit of $303,000 was recorded for the six months ended June 30, 2026, compared to a benefit of $828,000 for the six months ended June 30, 2025, due to a period-over-period decrease in net income before taxes of $6.2 million, partially offset by a tax penalty estimate for the early surrender of BOLI contracts recorded in 2025.

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

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The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities.

Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of March 31, 2026 and 2025.

Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the net spread as of June 30, 2026 and 2025.

Income and all average balances are monthly average balances, which management deems to be not materially different than daily averages.

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

Three Months Ended March 31,

Three Months Ended June 30,

(dollars in thousands)

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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 $633,000 and $338,000 for the three months ended March 31, 2026 and 2025, respectively.

(2) Interest earned on loans receivable includes net deferred costs of $775,000 and $148,000 for the three months ended June 30, 2026 and 2025, respectively.

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

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.04% and 2.39% for the three months ended March 31, 2026 and 2025, respectively.

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.04% and 2.31% for the three months ended June 30, 2026 and 2025, respectively.

(5) Net interest income divided by average interest-earning assets.

Six Months Ended June 30,

(dollars in thousands)

Interest-earning assets:

Loans receivable, net (1) (2)

Total investment securities

FHLB dividends

Interest-earning deposits in banks

Total interest-earning assets (3)

Noninterest-earning assets

Total average assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Certificates of deposit, customer

Certificates of deposit, brokered

Total interest-bearing deposits (4)

Subordinated debt

Total interest-bearing liabilities

Noninterest-bearing deposits (4)

Other noninterest-bearing liabilities

Total average liabilities

Average equity

Total average liabilities and equity

Net interest income

Net interest rate spread

Net earning assets

Net interest margin (5)

Average interest-earning assets to average interest-bearing liabilities

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

(2) Interest earned on loans receivable includes net deferred costs of $1.4 million and $486,000 for the six months ended June 30, 2026 and 2025, respectively.

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

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.04% and 2.35% for the six months ended June 30, 2026 and 2025, respectively.

(5) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

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Three Months Ended

March 31, 2026 Compared to March 31, 2025

Six Months Ended

June 30, 2026 Compared to June 30, 2025

Increase (Decrease) Due to

(dollars in thousands)

Total Increase (Decrease)

Interest-earning assets:

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These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.

For the three months ended March 31, 2026 and the year ended December 31, 2025, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

For the six months ended June 30, 2026 and the year ended December 31, 2025, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows.

Contractual Obligations

At March 31, 2026, our scheduled maturities of contractual obligations were as follows:

At June 30, 2026, our scheduled maturities of contractual obligations were as follows:

After 1 Year Through

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Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of March 31, 2026:

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of June 30, 2026:

Amount of Commitment by Expiration

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The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

At March 31, 2026, cash and cash equivalents totaled $104.1 million and unpledged securities classified as available-for-sale had a market value of $223.0 million.

The Bank pledged collateral of $553.3 million to support borrowings from the FHLB, with a remaining borrowing capacity of $181.6 million at March 31, 2026.

The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $17.6 million were pledged as of March 31, 2026, providing a borrowing capacity of $16.9 million.

At June 30, 2026, cash and cash equivalents totaled $98.4 million and unpledged securities classified as available-for-sale had a market value of $236.8 million.

The Bank pledged collateral of $512.7 million to support borrowings from the FHLB, with a remaining borrowing capacity of $157.7 million at June 30, 2026.

The Bank also has an established discount window borrowing arrangement with the FRB, for which available-for-sale securities with a market value of $17.3 million were pledged as of June 30, 2026, providing a borrowing capacity of $16.7 million.

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 has a $15.0 million borrowing arrangement with NexBank 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.

The remaining borrowing capacity of the NexBank line of credit was $1.5 million at March 31, 2026.

At March 31, 2026, we had commitments to fund $408,000 in standby letters of credit and $166.9 million in undisbursed loans, including $44.1 million in undisbursed construction loan commitments.

CDs due within one year as of March 31, 2026, totaled $462.8 million, or 90.9% of CDs with a weighted-average rate of 3.69%.

The remaining borrowing capacity of the NexBank line of credit was $1.5 million at June 30, 2026.

At June 30, 2026, we had commitments to fund $408,000 in standby letters of credit and $164.6 million in undisbursed loans, including $40.7 million in undisbursed construction loan commitments.

CDs due within one year as of June 30, 2026, totaled $450.2 million, or 88.0% of CDs with a weighted-average rate of 3.60%.

If these maturing deposits are not renewed, we will seek other sources of funds, including other CDs, non-maturity deposits, and borrowings.

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First Fed has a diversified deposit base with approximately 64% of deposit account balances held by consumers, 23% held by business and 9% by public fund depositors, and 4% in brokered deposits.

The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at March 31, 2026.

The average deposit account balance, excluding brokered and public fund accounts, was $29,000 at June 30, 2026.

We estimate that 20-25% of our customer deposit balances are over the $250,000 FDIC insurance limit, representing less than 5% of deposit customers.

1 unchanged sentence

The Company is a separate legal entity from the Bank and provides for its own liquidity.

At March 31, 2026, the Company, on an unconsolidated basis, had liquid assets of $6.6 million.

At June 30, 2026, the Company, on an unconsolidated basis, had liquid assets of $7.3 million.

In addition to its operating expenses, the Company is responsible for paying dividends declared, if any, to its shareholders, and for Company stock repurchases, interest payments on subordinated notes held at the Company level, payments on the NexBank revolving credit facility, and commitments related to limited partnership investments.

1 unchanged sentence

Capital Resources

At March 31, 2026, shareholders' equity totaled $157.0 million, or 7.4% of total assets.

Our book value per share of common stock was $16.52 at March 31, 2026, compared to $16.61 at December 31, 2025.

At March 31, 2026, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at March 31, 2026.

At June 30, 2026, shareholders' equity totaled $158.3 million, or 7.5% of total assets.

Our book value per share of common stock was $16.66 at June 30, 2026, compared to $16.61 at December 31, 2025.

At June 30, 2026, the Bank exceeded all regulatory capital requirements and was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results for First Fed at June 30, 2026.

Minimum Capital Requirements

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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 common equity tier 1 capital ("CET1"), of 2.5% of risk-weighted assets.

The Bank's capital conservation buffer was 5.5% at March 31, 2026, exceeding this requirement.

The Bank's capital conservation buffer was 5.4% at June 30, 2026, exceeding this requirement.

Effect of Inflation and Changing Prices

7 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-Q

Item 2. Management’s Discussion and Analysis