Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by the use of words such as "anticipates," "assumes," "believes," "can," "continues," "could," "estimates," "expects," "forecasts," "goal," "intends," "likely," "may," "might," "objective," "plans," "potential," "projects," "remains," "should," "target," "trend," "will," "would," or similar expressions. Forward-looking statements include, but are not limited to:

	•	statements of our goals, intentions and expectations;
	•	statements regarding our business plans, prospects, growth and operating strategies;
	•	statements regarding the quality of our loan and investment portfolios;
	•	statements regarding litigation; and
	•	estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

	•	risks associated with lending and potential adverse changes in the credit quality of our loan portfolio;
	•	legislative, regulatory and policy changes;
	•	uncertainties relating to litigation;
	•	the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand and the values and liquidity of loan collateral, securities and interest-sensitive assets and liabilities;
	•	changes in monetary and fiscal policies including interest rate policies of the Federal Reserve and the impacts of such changes on our earnings;
	•	our ability to successfully execute on growth strategies and integrate technology into our business;
	•	pressures on liquidity as a result of withdrawals of customer deposits or declines in the value of our investment portfolio;
	•	the soundness of other financial institutions and the impacts related to or resulting from bank failures and other economic and industry volatility, including increased regulatory requirements and costs and potential impact to macroeconomic conditions;
	•	increased competitive pressures among financial services companies, particularly from non-traditional banking entities such as challenger banks, fintech, and mega technology companies;
	•	changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking products and services, particularly in the event of a recession that affects our market areas;
	•	our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including those resulting from examinations by our primary or other regulatory authorities;
	•	our ability to implement, maintain, and improve an effective risk management framework, disclosure controls and procedures and internal controls over financial reporting;
	•	our ability to attract and retain executive officers and key employees;
	•	the costs and effects of disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, information technology systems;
	•	risks related to overall economic conditions;
	•	any failure of key third-party vendors to perform their obligations to us;
	•	risks related to natural disasters, including droughts, fires, floods, earthquakes, geopolitical events, acts of war or terrorism or other hostilities, public health crises, pandemics or other catastrophic events beyond our control;
	•	fluctuation in our stock price and general volatility in the stock market;
	•	the effects of any reputational damage to the Company, including resulting from any of the foregoing; and
	•	other economic, competitive, governmental, regulatory and technical factors affecting our operations, pricing, products and services and other risks described elsewhere in our filings with the Securities and Exchange Commission, including this Form 10-Q and the Company's 2025 Form 10-K.

Any of the forward-looking statements that we make in this report and in other statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot anticipate or predict. Any forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. Due to these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance on any forward-looking statements.

General

First Northwest, a Washington corporation, 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. The Company's business activities are generally focused on passive investment activities and oversight of the activities of First Fed.

First Northwest is subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve"). A financial holding company is a bank holding company that is permitted to engage in specified types of non-banking financial services. First Fed is examined and regulated by the Washington State Department of Financial Institutions, Division of Banks ("DFI") and by the Federal Deposit Insurance Corporation ("FDIC"). First Fed is required to have certain reserves set by the Federal Reserve and is a member of the Federal Home Loan Bank of Des Moines ("FHLB"), which is one of the 11 regional banks in the Federal Home Loan Bank System ("FHLB System").

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. We offer a wide range of products and services focused on the lending, deposit and money movement needs of the communities we serve. To diversify our portfolio and increase interest income, we increased our origination of commercial real estate, multi-family real estate, and commercial business loans. We also increased our auto and consumer loans through purchased auto loan programs and purchased manufactured homes. We continue to originate one-to-four family residential mortgage loans, primarily for sale into the secondary market to generate noninterest gain on sale and servicing fee revenue and manage interest rate risk or retain select loans in our portfolio to enhance interest income. Home equity, residential construction and commercial construction loans are also originated primarily in Western Washington. We offer traditional consumer and business deposit products, including transaction accounts, savings and money market accounts and certificates of deposit ("CDs" or "term certificates") for individuals, businesses and nonprofit organizations. Deposits are our primary source of funding for our lending and investing activities. 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. The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. The Bank signed a redemption agreement in February 2026 which sets forth the path to unwind its investment in the Hero Fund, with capital distributions anticipated to commence in the third quarter of 2026.

First Northwest's limited partnership investments include BankTech Ventures, LP; Canapi Ventures Fund, 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 The Meriwether Group, LLC ("MWG"), a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed, including equity and debt raising services. MWG holds a 20% general partner interest in Meriwether Group Capital, LLC ("MWGC"). MWGC holds a 0.01% general partner interest in the Hero Fund. The Company held a 25% equity interest as a general partner in MWGC prior to the February 2026 redemption of its interest.

The Company 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. Deposit flows are influenced by various factors, including changes in market rates; sales and marketing efforts; interest rates paid by competitors; available alternative investments such as money market mutual funds, the stock and bond markets; account maturities; government stimulus and unemployment programs; and the overall level of personal income and savings. Lending activities are influenced by prevailing interest rates and property values in our markets, the demand for funds, the number and quality of lenders employed by First Fed, and both regional and national economic cycles.

Our primary source of pre-tax income is net interest income. Net interest income is interest income earned on our loans and investments less interest expense paid on our deposits and borrowings. Changes in levels of interest rates may impact our net interest income. A secondary source of income for the Company 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.

An offset to net interest income is the provision for credit losses, which represents the periodic charge to operations required to adequately provide for probable losses inherent in our loan, unfunded commitments and investment portfolios through the allowance for credit loss for each respective portfolio. A recapture of previously recognized provision for credit losses may be recorded if forecasted macroeconomic factors improve, underlying balances decrease, or recoveries of amounts previously charged off are received.

Noninterest expenses incurred in operating our business consist of salaries and employee benefit costs, occupancy and equipment expenses, professional fees, deposit insurance premiums and regulatory assessments, digital delivery and data processing expenses, marketing and other customer acquisition expenses, expenses related to real estate and personal property owned, state and local taxes, federal income tax, and other miscellaneous expenses.

Recent Regulatory Developments

On March 19, 2026, the federal banking agencies issued several proposals to revise the U.S. regulatory capital framework. The proposals would, among other things, modify aspects of the standardized approach to risk-based capital that applies to the Company, including by making the risk weights for certain residential mortgage exposures more risk sensitive and decreasing the risk weights of corporate exposures, which could affect certain aspects of the Company's regulatory capital calculations. The Company is continuing to evaluate these proposals and their potential impact on its regulatory capital position.

Critical Accounting Policies

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

Assets. 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. 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. If prevailing market interest rates fall, we expect prepayments to accelerate due to the current coupons of fixed rate bonds. We anticipate the investment portfolio will continue to provide supplemental interest income and act as a source of liquidity. 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.

Home equity loan outstanding balances increased $1.2 million over the prior year end due to $6.8 million of net draws on new and existing line of credit commitments and $1.5 million of home equity loan originations, partially offset by prepayments and scheduled payments. Auto and other consumer loans increased $7.5 million with auto loan purchases of $21.5 million and individual manufactured home loan purchases of $1.6 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.

Construction projects in the portfolio are geographically dispersed throughout Western Washington as well as one project in California. The borrower associated with the California project has a longstanding history with the Bank. All construction projects are monitored by either a third-party firm or our internal construction administration team. Projects with larger loan commitments have more robust monitoring by firms with more services and expertise.

The following tables show our construction commitments by type and geographic concentrations at the dates indicated:

(dollars in thousands)		North Olympic Peninsula (1)				Puget Sound Region (2)				Other Washington				California				Total
March 31, 2026
Construction Commitment
One-to-four family residential		$	7,489			$	34,038			$	1,081			$	-			$	42,608
Multi-family residential			3,900				18,152				-				-				22,052
Commercial real estate			480				21,016				4,214				10,899				36,609
Total commitment		$	11,869			$	73,206			$	5,295			$	10,899			$	101,269
Construction Funds Disbursed
One-to-four family residential		$	1,915			$	16,090			$	852			$	-			$	18,857
Multi-family residential			3,126				9,193				-				-				12,319
Commercial real estate			191				16,077				3,753				5,928				25,949
Total disbursed for construction			5,232				41,360				4,605				5,928				57,125
Net deferred fees (costs)			26				(420	)			(1	)			(25	)			(420	)
Amortized cost for construction		$	5,258			$	40,940			$	4,604			$	5,903			$	56,705
Undisbursed Commitment
One-to-four family residential		$	5,574			$	17,948			$	229			$	-			$	23,751
Multi-family residential			774				8,959				-				-				9,733
Commercial real estate			289				4,939				461				4,971				10,660
Total undisbursed		$	6,637			$	31,846			$	690			$	4,971			$	44,144
Land Funds Disbursed
One-to-four family residential		$	1,545			$	1,763			$	-			$	-			$	3,308
Commercial real estate			1,143				1,152				-				-				2,295
Total disbursed for land			2,688				2,915				-				-				5,603
Net deferred fees			22				17				-				-				39
Amortized cost for land		$	2,710			$	2,932			$	-			$	-			$	5,642

(1) Includes Clallam and Jefferson counties.

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

(dollars in thousands)		North Olympic Peninsula (1)				Puget Sound Region (2)				Other Washington				California				Total
December 31, 2025
Construction Commitment
One-to-four family residential		$	5,460			$	40,189			$	1,081			$	-			$	46,730
Multi-family residential			3,900				18,153				-				-				22,053
Commercial real estate			480				21,855				4,214				9,706				36,255
Total commitment		$	9,840			$	80,197			$	5,295			$	9,706			$	105,038
Construction Funds Disbursed
One-to-four family residential		$	1,857			$	21,045			$	695			$	-			$	23,597
Multi-family residential			2,842				7,449				-				-				10,291
Commercial real estate			56				15,418				3,177				2,975				21,626
Total disbursed for construction			4,755				43,912				3,872				2,975				55,514
Net deferred fees (costs)			20				(441	)			2				(26	)			(445	)
Amortized cost for construction		$	4,775			$	43,471			$	3,874			$	2,949			$	55,069
Undisbursed Commitment
One-to-four family residential		$	3,603			$	19,144			$	386			$	-			$	23,133
Multi-family residential			1,058				10,704				-				-				11,762
Commercial real estate			424				6,437				1,037				6,731				14,629
Total undisbursed		$	5,085			$	36,285			$	1,423			$	6,731			$	49,524
Land Funds Disbursed
One-to-four family residential		$	1,929			$	1,792			$	121			$	-			$	3,842
Commercial real estate			1,147				1,158				-				-				2,305
Total disbursed for land			3,076				2,950				121				-				6,147
Net deferred fees			28				21				3				-				52
Amortized cost for land		$	3,104			$	2,971			$	124			$	-			$	6,199

(1) Includes Clallam and Jefferson counties.

(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. 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 reserve on individually analyzed loans increased $92,000 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. 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. 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. Charge-offs are based on individual loan evaluations and do not represent a universal decline in the collectability of all loans in these categories.

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

										Increase (Decrease)
(dollars in thousands)		March 31, 2026				December 31, 2025				Amount				Percent
Real Estate:
One-to-four family		$	362,984			$	376,731			$	(13,747	)			(3.6	)%
Multi-family			270,979				288,529				(17,550	)			(6.1	)
Commercial real estate			403,243				402,683				560				0.1
Construction and land			62,347				61,268				1,079				1.8
Total real estate loans			1,099,553				1,129,211				(29,658	)			(2.6	)
Consumer:
Home equity			86,292				85,088				1,204				1.4
Auto and other consumer			290,960				283,502				7,458				2.6
Total consumer loans			377,252				368,590				8,662				2.4
Commercial business loans			152,591				130,311				22,280				17.1
Total loans receivable			1,629,396				1,628,112				1,284				0.1
Less:
Derivative basis adjustment			(406	)			(903	)			497				(55.0	)
Allowance for credit losses on loans			16,823				16,987				(164	)			(1.0	)
Loans receivable, net		$	1,612,979			$	1,612,028			$	951				0.1

The following table summarizes nonperforming assets at the dates indicated:

										Increase (Decrease)
(dollars in thousands)		March 31, 2026				December 31, 2025				Amount				Percent
Nonaccrual loans:
Real estate loans:
One-to-four family		$	2,521			$	2,272			$	249				11.0	%
Commercial real estate			9,619				9,745				(126	)			(1.3	)
Construction and land			4,164				5,146				(982	)			(19.1	)
Total real estate loans			16,304				17,163				(859	)			(5.0	)
Consumer loans:
Home equity			53				53				-				-
Auto and other consumer			1,280				1,086				194				17.9
Total consumer loans			1,333				1,139				194				17.0
Commercial business			4,062				4,293				(231	)			(5.4	)
Total nonaccrual loans			21,699				22,595				(896	)			(4.0	)
Real estate owned:
One-to-four family			1,380				1,380				-				-
Total nonperforming assets		$	23,079			$	23,975			$	(896	)			(3.7	)
MLTB loans:
Multi-family		$	4,533			$	4,531				2				-
Commercial real estate			9,593				9,741			$	(148	)			(1.5	)
Commercial business			7				7				-				-
Total restructured loans		$	14,133			$	14,279			$	(146	)			(1.0	)
Nonaccrual loans as a percentage of total loans			1.33	%			1.39	%			(0.06	)%			(4.3	)
Nonperforming MLTB loans included in total nonaccrual loans and total restructured loans above		$	9,600			$	9,748			$	(148	)			(1.5	)%

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

Equity. 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

General. 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.

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.

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. Average earning assets decreased $101.5 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. Interest from investment securities decreased $1.2 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.

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,
		2026								2025
(dollars in thousands)		Average Balance Outstanding				Yield				Average Balance Outstanding				Yield				(Decrease) Increase in Interest Income
Loans receivable, net		$	1,597,287				5.59	%		$	1,641,937				5.49	%		$	(231	)
Investment securities			269,658				3.89				333,208				4.63				(1,218	)
FHLB stock			12,168				9.40				13,609				9.15				(25	)
Interest-earning deposits in banks			51,046				3.71				42,917				4.55				(15	)
Total interest-earning assets		$	1,930,159				5.32			$	2,031,671				5.35			$	(1,489	)

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. Interest expense on deposits decreased $1.8 million due to a $70.9 million decrease in the average balance and a 40 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.

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

		Three Months Ended March 31,
		2026								2025
(dollars in thousands)		Average Balance Outstanding				Rate				Average Balance Outstanding				Rate				(Decrease) Increase in Interest Expense
Interest-bearing demand deposits		$	140,574				0.21	%		$	168,414				0.63	%		$	(188	)
Money market accounts			446,467				2.13				414,425				2.29				(2	)
Savings accounts			243,322				1.45				216,499				1.47				88
Certificates of deposit, customer			438,176				3.60				451,936				4.06				(630	)
Certificates of deposit, brokered			70,123				4.35				158,269				4.68				(1,075	)
Advances			252,778				4.20				279,500				4.14				(236	)
Subordinated debt			34,651				4.04				38,370				4.06				(39	)
Total interest-bearing liabilities		$	1,626,091				2.72			$	1,727,413				3.05			$	(2,082	)

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 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,
(dollars in thousands)		2026				2025
Total loans receivable		$	1,629,396			$	1,657,576
Net charge-offs			(151	)			(7,650	)
(Recapture of) provision for credit losses on loans			(13	)			7,770
Allowance for credit losses on loans			16,823				20,569
Allowance for credit losses on loans as a percentage of total loans receivable at period end			1.03	%			1.24	%
Total nonaccrual loans			21,699				20,355
Allowance for credit losses on loans as a percentage of nonaccrual loans at period end			78	%			101	%
Nonaccrual loans as a percentage of total loans receivable			1.33	%			1.23	%
Unfunded loan commitments		$	166,899			$	175,100
Provision for credit losses on unfunded commitments			91				15
Reserve for unfunded commitments			685				614

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.

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,								Increase (Decrease)
(dollars in thousands)		2026				2025				Amount				Percent
Loan and deposit service fees		$	1,122			$	1,106			$	16				1.4	%
Sold loan servicing fees and servicing rights mark-to-market			127				195				(68	)			(34.9	)
Net gain on sale of loans			76				11				65				590.9
Increase in BOLI cash surrender value			468				372				96				25.8
Income from BOLI death benefit, net			-				1,059				(1,059	)			(100.0	)
Other income			215				1,034				(819	)			(79.2	)
Total noninterest income		$	2,008			$	3,777			$	(1,769	)			(46.8	)

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.

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

		Three Months Ended March 31,								Increase (Decrease)
(dollars in thousands)		2026				2025				Amount				Percent
Compensation and benefits		$	8,232			$	7,715			$	517				6.7	%
Data processing			2,228				2,011				217				10.8
Occupancy and equipment			1,565				1,592				(27	)			(1.7	)
Supplies, postage, and telephone			298				298				-				-
Regulatory assessments and state taxes			534				479				55				11.5
Advertising			304				265				39				14.7
Professional fees			2,026				777				1,249				160.7
FDIC insurance premium			363				434				(71	)			(16.4	)
Legal settlement			-				5,750				(5,750	)			(100.0	)
Other expense			1,134				679				455				67.0
Total noninterest expense		$	16,684			$	20,000			$	(3,316	)			(16.6	)

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. 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.

Average Balances, Interest and Average Yields/Cost

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. 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,
		2026												2025
		Average				Interest								Average				Interest
		Balance				Earned/				Yield/				Balance				Earned/				Yield/
(dollars in thousands)		Outstanding				Paid				Rate				Outstanding				Paid				Rate
Interest-earning assets:
Loans receivable, net (1) (2)		$	1,597,287			$	22,000				5.59	%		$	1,641,937			$	22,231				5.49	%
Total investment securities			269,658				2,585				3.89				333,208				3,803				4.63
FHLB dividends			12,168				282				9.40				13,609				307				9.15
Interest-earning deposits in banks			51,046				467				3.71				42,917				482				4.55
Total interest-earning assets (3)			1,930,159				25,334				5.32				2,031,671				26,823				5.35
Noninterest-earning assets			140,292												143,077
Total average assets		$	2,070,451											$	2,174,748
Interest-bearing liabilities:
Interest-bearing demand deposits		$	140,574			$	72				0.21			$	168,414			$	260				0.63
Money market accounts			446,467				2,343				2.13				414,425				2,345				2.29
Savings accounts			243,322				871				1.45				216,499				783				1.47
Certificates of deposit, customer			438,176				3,892				3.60				451,936				4,522				4.06
Certificates of deposit, brokered			70,123				752				4.35				158,269				1,827				4.68
Total interest-bearing deposits (4)			1,338,662				7,930				2.40				1,409,543				9,737				2.80
Advances			252,778				2,619				4.20				279,500				2,855				4.14
Subordinated debt			34,651				345				4.04				38,370				384				4.06
Total interest-bearing liabilities			1,626,091				10,894				2.72				1,727,413				12,976				3.05
Noninterest-bearing deposits (4)			240,637												243,569
Other noninterest-bearing liabilities			44,191												47,296
Total average liabilities			1,910,919												2,018,278
Average equity			159,532												156,470
Total average liabilities and equity		$	2,070,451											$	2,174,748
Net interest income						$	14,440											$	13,847
Net interest rate spread											2.60												2.30
Net earning assets		$	304,068											$	304,258
Net interest margin (5)											3.03												2.76
Average interest-earning assets to average interest-bearing liabilities			118.7	%											117.6	%

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

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i)changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

		Three Months Ended
		March 31, 2026 Compared to March 31, 2025
		Increase (Decrease) Due to
(dollars in thousands)		Volume				Rate				Total Increase (Decrease)
Interest-earning assets:
Loans receivable, net		$	(615	)		$	384			$	(231	)
Investments			(726	)			(492	)			(1,218	)
FHLB stock			(33	)			8				(25	)
Other (1)			91				(106	)			(15	)
Total interest-earning assets		$	(1,283	)		$	(206	)		$	(1,489	)
Interest-bearing liabilities:
Interest-bearing demand deposits		$	(43	)		$	(145	)		$	(188	)
Money market accounts			177				(179	)			(2	)
Savings accounts			99				(11	)			88
Certificates of deposit, customer			(136	)			(494	)			(630	)
Certificates of deposit, brokered			(1,017	)			(58	)			(1,075	)
Advances			(273	)			37				(236	)
Subordinated debt			(37	)			(2	)			(39	)
Total interest-bearing liabilities		$	(1,230	)		$	(852	)		$	(2,082	)
Change in net interest income		$	(53	)		$	646			$	593

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

Off-Balance Sheet Activities

In the normal course of operations, First Fed engages in a variety of financial transactions that are not recorded in the financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. 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.

Contractual Obligations

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

		Within				After 1 Year Through				After 3 Years Through				Beyond				Total
(dollars in thousands)		1 Year				3 Years				5 Years				5 Years				Balance
Certificates of deposit		$	462,799			$	42,774			$	3,657			$	-			$	509,230
FHLB advances			220,000				60,000				-				-				280,000
Line of credit			13,500				-				-				-				13,500
Subordinated debt obligation			-				-				-				34,660				34,660
Operating leases			2,171				4,295				4,266				15,906				26,638
Borrower taxes and insurance			2,691				-				-				-				2,691
Deferred compensation			215				326				302				537				1,380
Total contractual obligations		$	701,376			$	107,395			$	8,225			$	51,103			$	868,099

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:

		Amount of Commitment by Expiration
		Within				After 1 Year Through				After 3 Years Through				Beyond				Total Amounts
(dollars in thousands)		1 Year				3 Years				5 Years				5 Years				Committed
Commitments to originate loans:
Fixed-rate		$	68			$	-			$	-			$	-			$	68
Variable-rate			770				-				-				-				770
Unfunded commitments under lines of credit			19,521				15,882				10,701				76,651				122,755
Unfunded commitments under existing construction loans			33,058				7,393				-				3,693				44,144
Standby letters of credit			208				-				-				200				408
Unfunded commitments under partnership agreements			2,172				-				-				-				2,172
Total commitments		$	55,797			$	23,275			$	10,701			$	80,544			$	170,317

Liquidity Management

Liquidity is the ability to meet current and future short-term and long-term financial obligations. Our primary sources of funds consist of investment security principal and interest payments, customer and brokered deposit inflows, loan repayments and maturities, sales of securities, borrowings from the FHLB and utilization of the NexBank line of credit. While maturities and scheduled amortization of loans and securities are usually predictable sources of funds, deposit flows, calls of investment securities and borrowed funds, and prepayments on loans and investment securities are greatly influenced by general interest rates, economic conditions and competition, which can cause those sources of funds to fluctuate.

Management regularly adjusts investments in liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our liquidity management, interest-rate risk and investment policies.

The Company's most liquid assets are cash and cash equivalents followed by available-for-sale securities. 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. 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%. If these maturing deposits are not renewed, we will seek other sources of funds, including other CDs, non-maturity deposits, and borrowings. We can attract and retain deposits by adjusting the interest rates offered and through sales and marketing efforts in the markets we serve. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on CDs. We believe that our branch network, and the general cash flows from our existing lending and investment activities, will provide adequate short-term and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

First Fed has a diversified deposit base with approximately 65% of deposit account balances held by consumers, 22% 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. 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. Management believes that maintaining a diversified deposit base is an important factor in managing and maintaining adequate levels of liquidity.

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. 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. The Company may receive dividends or capital distributions from the Bank, although there may be regulatory limitations on the ability of the Bank to pay dividends.

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.

		Actual								Minimum Capital Requirements								Minimum Required to be Well-Capitalized
(dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier 1 leverage capital (to average assets)		$	198,624				9.6	%		$	82,888				4.0	%		$	103,609				5.0	%
Common equity tier 1 (to risk-weighted assets)			198,624				12.4				71,904				4.5				103,861				6.5
Tier 1 risk-based capital (to risk-weighted assets)			198,624				12.4				95,872				6.0				127,829				8.0
Total risk-based capital (to risk-weighted assets)			216,132				13.5				127,829				8.0				159,786				10.0

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.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this report have been prepared according to GAAP, 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. Unlike companies in many other industries, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.