Annual Report for Fiscal Year Ending 12-31, 2025 (Form 10-K)

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

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and notes thereto that appear in "Part II. Item 8. Financial Statements and Supplementary Data" of this Form 10-K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and notes and the business and financial information provided in this Form 10-K.

General

First Northwest is a bank holding company and a financial holding company. First Northwest is engaged in banking activities through its wholly owned subsidiary, First Fed, as well as certain non-banking financial activities. Non-banking investments include several limited partnership investments.

First Fed is a community-oriented commercial bank serving Clallam, Jefferson, King, Kitsap, Snohomish, and Whatcom counties in Washington State, through its twelve full-service branches and 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 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 Hero Fund which was previously held by First Northwest. The Hero Fund is a private commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. Subsequent to year end, the Bank signed a redemption agreement which sets forth the path to unwind its investment in the Hero Fund through capital distributions beginning in April 2026.

First Northwest's limited partnership investments include Canapi Ventures; BankTech Ventures, LP; and JAM FINTOP Frontier Fund, LP. These limited partnerships invest in fintech-related businesses with a focus on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33% interest in MWG, a boutique investment bank and consulting firm focused on providing entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest as a general partner in Meriwether Group Capital, LLC ("MWGC"), which provides financial advice for borrowers and capital for the Hero Fund. MWG also holds a 20% general partner interest in MWGC. MWGC holds a 0.01% general partner interest in the Hero Fund. Subsequent to year end, the Company redeemed its interest in MWGC in full at par.

First Fed is impacted by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal policy, including fiscal stimulus, interest rate policy and open market operations, housing, and consumer protection. 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 the difference between interest income earned on our loans and investments less interest expense paid on our deposits and borrowings. Changes in levels of interest rates may impact our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, debit card interchange income, mortgage banking income, treasury and other commercial banking related fees, earnings from bank-owned life insurance, loan servicing income, earnings from equity and partnership investments, and gains and losses from the sale of loans and securities.

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 our allowance for credit losses. A recapture of previously recognized provision for credit losses may be added to net interest income if forecasted macroeconomic factors improve, underlying balances decrease, or recoveries of amounts previously charged off are received.

The 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.

Our Business and Operating Strategy

Our objective is to be an independent, high performing bank focused on meeting the needs of individuals, small businesses and community organizations throughout our market areas with exceptional service and competitive products. We have adopted three strategic pillars that will be our focus in the upcoming years: process and data improvement to drive efficiencies, build a resilient core deposit base and grow the organic loan portfolio.

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

	•	Enhancing customer experience. We believe that continued investment in the digital and physical interfaces that connect customers to our products and services positions us to compete and grow in an increasingly technology-driven environment. We intend to strengthen our online presence and engage in digital strategies that will help us successfully compete in an ever-changing digital marketplace. To enable these initiatives, we are enhancing our data infrastructure with modern architecture to support the delivery of more personalized and valued products and services through both digital and in-person interactions.
	•	Creating operating leverage. We will continue to pursue opportunities to improve operational efficiency. We believe recent technology investments may also contribute to additional efficiencies. We have undertaken a broad process improvement initiative and a key component of future technology investments will focus on refining processes and improving synergy between systems to support our team members and enhance execution of their responsibilities.

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

	•	Attracting core deposits and other deposit products. We emphasize relationship banking with our customers to obtain a greater share of their deposits, with specific emphasis on primary transaction accounts. We believe this emphasis will help to increase our level of core deposits. In addition to our retail branches, we offer digital delivery solutions, such as personal financial management, business online banking, business remote deposit products, mobile remote deposit services through personal devices, consumer credit score access, real-time account-to-account transfer services between First Fed and other banks, and real-time person-to-person funds transfer, enabling us to compete effectively with banks of all sizes. We enhanced our mobile banking platform, online account opening solutions, foreign exchange capabilities and upgraded our business on-line banking platform to attract and better serve customers who prefer digital banking channels, which is a growing demographic in our area.
	•	Expanding offerings to small-to-medium sized business. Another priority for the Company is expanding offerings for small-to-medium sized business with a focus on entrepreneurs. We intend to accomplish this through the commercial team, with a focus on systems and support. For small-to-medium sized businesses, we believe there are multiple opportunities in payment processing for ACH, check, wire transfers, international payments and debit card interchange. In addition, we intend to build out our capabilities for accounts payable and receivable, payroll, merchant card acquisition and corporate card spend management solutions.
	•	Hiring experienced employees with a customer sales and service focus. Our goal is to compete by relying on the strength of our customer service and relationship building. We believe that our ability to continue to attract and retain banking professionals who have significant knowledge of existing and new market areas, possess strong commercial banking sales and service skills, and maintain a focus on community relationships will enhance our success. We intend to hire community bankers and lenders who are established in their communities to enhance our market position and add profitable growth opportunities as needed.

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

•

Remixing our loan portfolio. Through organic loan originations, we intend to increase the proportion of our loan portfolio consisting of higher-yielding commercial business loans. These loan types generally offer higher risk-adjusted returns and shorter maturities, which increase the portfolio's ability to reprice in changing interest rate environments. The shorter duration until maturity or renewal allow for more frequent repricing opportunities, allowing yields to better align with prevailing market conditions compared to traditional fixed-rate, one-to-four family residential loans.

	•	Maintaining our focus on asset quality. Maintaining strong asset quality is a key to our long-term financial success. We are focused on monitoring existing performing loans and resolving nonperforming loans. Nonperforming assets were $24.0 million at December 31, 2025 and $30.5 million at December 31, 2024. The current year decrease was primarily due to the legal settlement relating to certain of the Water Station loans, which resulted in the Bank receiving partial payments and charging-off the remaining balances. We are taking proactive steps to resolve our nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with our borrowers when appropriate. We also retain the services of independent firms to periodically review segments of our loan portfolio and provide feedback regarding our loan policies and procedures.
	•	Remaining open to alternative lending opportunities. We strive to grow the balance sheet and leverage capital in a safe and sound manner and believe that lending opportunities outside of organic originations may be a valuable source of interest income. We successfully increased our auto loan portfolio through our partnership with Woodside and our manufactured home loan portfolio through our partnership with Triad Financial Services. We may continue to explore other opportunities such as these as a means to improve net income and supplement organic loan originations.

Critical Accounting Policies

We have certain accounting policies that are important to the assessment of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

The following represent our critical accounting policies:

Allowance for Credit Losses on Loans. The ACLL is a valuation account that is deducted from the amortized cost of loans receivable to present the net amount expected to be collected. The allowance is established through the provision for credit losses on loans, which is charged to income. Determining the amount of the ACLL necessarily involves a high degree of judgment. Management has adopted a discounted cash flow ("DCF") methodology for most of its segments to calculate the ACLL. For certain segments with smaller portfolios or where data is prohibitive to running a DCF calculation, management has elected to use a remaining life methodology. The Company also uses established metrics to estimate qualitative risk factors by segment based on the identified risk. The Company evaluates individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis using either a collateral value or cash flow method. All of the factors used in these methodologies are susceptible to significant change. Management reviews and approves, at least quarterly, the level of the allowance and the provision for credit losses on loans based on anticipated future economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for credit losses on loans, future economic or other conditions may differ substantially from the assumptions used in making the evaluation. The FDIC and the DFI, as an integral part of their examination process, periodically review our ACLL and may require us to recognize adjustments to the allowance based on their judgment about information available at the time of their examination. A large loss could deplete the allowance and require increased provisions for credit losses on loans to replenish the allowance, which would adversely affect earnings. Management considers the ACLL to be a critical accounting estimate. Our accounting policies are discussed in detail in Notes 1 and 4 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

Income Taxes. First Fed accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes, which requires the use of the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for their future tax consequences, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Fair Value. Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. In the absence of quoted market prices, management determines the fair value of the Company's assets and liabilities using valuation models or third-party pricing services.

New Accounting Pronouncements

For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

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

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

Cash and cash equivalents increased by $12.7 million, or 17.5%, to $85.1 million as of December 31, 2025, compared to $72.5 million at December 31, 2024. Interest-bearing deposits in banks increased $14.0 million, improving on-hand liquidity at year end.

Total investment securities decreased $70.0 million, or 20.6%, to $270.3 million at December 31, 2025, from $340.3 million at December 31, 2024. The year-over-year decrease was primarily due to maturities and early redemptions totaling $65.8 million and $20.1 million of principal payments received. These items were partially offset by an increase in the portfolio market value of $10.4 million, which was mainly driven by changes in long-term interest rates.

The estimated average life of the total investment securities portfolio was 6.5 years as of December 31, 2025, compared to 6.9 years as of December 31, 2024, and the average repricing term was approximately 6.7 years as of December 31, 2025, compared to 5.3 years as of December 31, 2024, based on the interest rate environments at those times. Expected duration of the portfolio has increased to 4.6 years as of December 31, 2025, compared to 3.9 years as of December 31, 2024. If prevailing market interest rates fall, we expect prepayments will accelerate due to the current coupons of fixed rate bonds. We anticipate the investment portfolio will continue to provide supplemental interest income and act as a source of liquidity.

MBS represent the largest portion of our investment portfolio and totaled $125.1 million at December 31, 2025, a decrease of $45.3 million, or 26.6%, from $170.3 million at December 31, 2024. Municipal bonds are the second largest segment, totaling $80.3 million at December 31, 2025, an increase of $2.4 million, or 3.1%, from $77.9 million at December 31, 2024. Other investment securities totaled $65.0 million at December 31, 2025, a decrease of $27.2 million, or 29.5%, from $92.2 million at December 31, 2024. Included in MBS non-agency were $13.9 million of commercial mortgage-backed securities ("CMBS"), of which 87.3% were in "A" tranches with the remaining 12.7% in "B" tranches. Our largest exposure in the CMBS portfolio was to long-term care facilities, which comprised 50.9%, or $7.1 million, of our private label CMBS securities. All of the CMBS had credit enhancements ranging from 30.8% to 93.1%, with a weighted-average credit enhancement of 66.3%, that further reduced the risk of loss on these investments.

At December 31, 2025, the investment portfolio contained 54.2% of amortizing securities, compared to 60.2% at December 31, 2024. The projected average life of our securities may vary due to prepayment activity, which, particularly in the MBS portfolio, is generally affected by changing interest rates. We may purchase investment securities as a source of additional interest income. For additional information, see Note 2 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.

Total loans, excluding loans held for sale, decreased $67.7 million, or 4.0%, during the year ended December 31, 2025. Auto and other consumer loans increased $14.6 million, or 5.4%, with the purchases of specialty auto loans and individual manufactured home loans. Commercial real estate loans increased $12.3 million as new loan originations of $53.4 million exceeded payment activity. Multi-family real estate loans decreased $44.1 million as a result of payoffs and regular payments exceeding $11.1 million of construction loans converting into permanent amortizing loans and $2.7 million of new originations. Commercial business loans decreased $21.2 million as payments, maturities, charge-offs and a decrease in Northpointe MPP exceeded $26.0 million of advances on new and existing lines of credit, $5.2 million of equipment loan originations and $1.6 million of Bankers Healthcare Group loan purchases.

One-to-four family residential loans decreased $18.6 million, or 4.7%, with payoffs and regular payments exceeding $10.9 million in construction loans converting to permanent amortizing loans during the year and $7.5 million of new originations. We continue to focus on the origination of one-to-four family mortgage loans with the intention of selling the majority of our saleable production to Freddie Mac and other investors, while retaining certain adjustable-rate loans that may not be readily sold in the secondary market.

Construction and land loans decreased $16.8 million, or 21.6%, with $22.9 million converting into fully amortizing loans partially offset by draws on new and existing commitments. Undisbursed construction commitments totaled $49.5 million at December 31, 2025 compared to $51.7 million at December 31, 2024. Undisbursed construction commitments at December 31, 2025 included $14.6 million of commercial real estate construction, $23.1 million of mainly custom one-to-four family residential construction, and $11.8 million of multi-family construction. Our construction loans are geographically disbursed throughout the state of Washington with one project in California. 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.

During the year ended December 31, 2025, the Company originated $213.1 million of loans, of which $117.0 million, or 54.9%, were originated in the Puget Sound region; $50.5 million, or 23.7%, in the Olympic Peninsula region; $27.3 million, or 12.8%, in other areas in Washington; and $18.3 million, or 8.6%, in other states. The Company also purchased loans totaling $77.9 million with the largest concentration of these loans located in California. We will continue to strategically assess our lending strategies across all product lines and markets where we do business as well as evaluate opportunities to supplement organic originations through wholesale acquisitions with a goal of improving earnings while also prudently managing credit risk.

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

(dollars in thousands)		December 31, 2025				December 31, 2024
Real Estate:
One-to-four family		$	376,731			$	395,315
Multi-family			288,529				332,596
Commercial real estate			402,683				390,379
Construction and land			61,268				78,110
Total real estate loans			1,129,211				1,196,400
Consumer:
Home equity			85,088				79,054
Auto and other consumer			283,502				268,876
Total consumer loans			368,590				347,930
Commercial business loans			130,311				151,493
Total loans			1,628,112				1,695,823
Less:
Derivative basis adjustment			(903	)			188
Allowance for credit losses on loans			16,987				20,449
Total loans receivable, net		$	1,612,028			$	1,675,186

Our ACLL decreased $3.5 million, or 16.9%, during the year ended December 31, 2025, primarily due to a reduction in the reserves on individually evaluated loans, lower pooled loan reserve balances and a decrease in the loss factors applied to one-to-four family and other consumer loan balances. Asset quality improved with decreases in past due, nonaccrual and classified assets compared to the total loan portfolio. Management continues to closely monitor economic conditions for potential weaknesses that could expose the loan portfolio to losses. The ACLL as a percentage of total loans was 1.04% at December 31, 2025 and 1.21% at December 31, 2024. We believe our ACLL is adequate to cover current expected credit losses in the loan portfolio.

Nonperforming loans decreased $7.9 million, or 26.0%, during the year ended December 31, 2025 to $22.6 million. This decrease was mainly the result of decreases in commercial construction of $14.4 million, partially offset by increases in nonperforming commercial real estate of $4.2 million, commercial business of $1.2 million, one-to-four family of $795,000, auto and other consumer of $386,000 and home equity loans of $2,000. Nonperforming loans to total loans was 1.39% at December 31, 2025, an increase from 1.80% at December 31, 2024.

At December 31, 2025, classified loans, consisting solely of substandard loans, decreased by $7.2 million, or 17.0%, to $35.3 million at December 31, 2025, from $42.5 million at December 31, 2024. Changes in previously identified classified loans include $7.3 million of payments and sale proceeds received on a commercial construction loan, $5.6 million in charge-offs on a commercial real estate relationship, $4.0 million of payments received and an additional charge-off of $1.9 million on another commercial construction loan, $2.6 million of payments received on a group commercial business loans and an additional $700,000 charge-off followed by $1.4 million of sale proceeds on a commercial business loan. The decreases from previously identified classified loans were partially offset by downgrades of two commercial real estate loans totaling $16.0 million.Over 77% of the classified loan balance at December 31, 2025, is comprised of the following relationships: a $12.5 million commercial real estate loan relationship, which became classified in the fourth quarter of 2025; a $6.3 million commercial real estate loan relationship, which became classified in the third quarter of 2024; a $5.1 million construction loan relationship, which became a classified loan in the fourth quarter of 2022; and a $3.4 million commercial real estate loan relationship, which became classified in the second quarter of 2025. The Bank has exercised legal remedies, including the appointment of a third-party receiver and foreclosure actions, to liquidate the underlying collateral to satisfy the real estate loans in the third largest of these three collateral-dependent relationships.

At December 31, 2025, the Bank held $1.4 million of real estate owned ("REO") included in "prepaid expenses and other assets" on the Consolidated Balance Sheets. REO was comprised of five residential real estate properties, all located in Washington State. One property is expected to be listed for sale in early 2026. The four remaining properties will be held until July 2026, at which time they will be listed for sale.

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

Deposit account balances decreased $88.9 million, or 5.3%, to $1.6 billion at December 31, 2025 from $1.69 billion at December 31, 2024. Money market accounts increased $37.3 million, savings accounts increased $34.2 million, while transaction accounts decreased $32.4 million. Customer CDs decreased $31.7 million, or 6.8%, to $433.3 million and Brokered CDs decreased $96.4 million, or 52.7%, to $86.5 million at December 31, 2025. Competition for deposits across the industry continues to pose deposit retention challenges. Our focus continues to be on increasing core customer deposits, with an emphasis on small-to-medium sized business deposits, digital accounts and maintaining a stable source of funding to reduce interest expense as a percentage of liabilities.

Borrowings decreased $27.9 million, or 8.3%, to $308.1 million at December 31, 2025, from $336.0 million at December 31, 2024. Higher levels of cash and cash equivalents reduced reliance on FHLB overnight advances resulting in a $30.0 million decrease compared to the prior year end.

Equity. Total shareholders' equity increased $3.4 million, or 2.2%, to $157.3 million at December 31, 2025, from $153.9 million at December 31, 2024. The increase during the year resulted from a $7.8 million reduction in accumulated other comprehensive loss related to an improved unrealized market value of available for sale securities, net of tax, and an increase of $1.2 million related to share-based compensation plans. These increases were partially offset by a net loss of $4.2 million and $1.3 million in dividends paid in 2025. During the year ended December 31, 2025, no shares of common stock were repurchased under the Company's April 2024 Stock Repurchase Plan (the "Repurchase Plan"). There are 846,123 shares that remain available for repurchase under the Repurchase Plan.

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

General. The Company generated a loss on average assets of -0.20%, and a loss on average equity of -2.74%, for the year ended December 31, 2025, compared to a loss on average assets of -0.30% and a loss on average equity of -4.09% for the year ended December 31, 2024. Net income increased $2.4 million compared to 2024. We recorded a loss of $0.48 per common and diluted share for the year ended December 31, 2025, compared to a loss of $0.75 per common and diluted share for the year ended December 31, 2024.

Net Interest Income. Net interest income increased $979,000, or 1.7%, to $57.3 million for the year ended December 31, 2025, from $56.3 million for the year ended December 31, 2024, as decreases in rates paid outpaced decreases in yields earned. The $5.3 million decrease in interest income was largely attributable to changes in loans receivable with an average balance decrease of $57.1 million, at an average yield of 5.54%, for the year ended December 31, 2025 compared to an average yield of 5.56%, for the year ended December 31, 2024. Loans receivable was the main contributor to the decrease in interest income with $3.2 million due to a decrease in average loan balances and $307,000 due to lower yields.

Interest expense decreased $6.3 million. The decrease to the cost of average interest-bearing liabilities for the year ended December 31, 2025 was due primarily to lower costs of $4.6 million from reduced brokered CD average balances and lower costs of $3.3 million on reduced rates paid for all interest-bearing deposits and advances. Interest-bearing liability costs decreased to 2.94% for the year ended December 31, 2025 compared to 3.22% for the year ended December 31, 2024. The reduced liability costs contributed to a 14 basis point increase in our net interest margin to 2.88% for the year ended December 31, 2025, from 2.74% for the year ended December 31, 2024.

Interest Income. Interest income decreased $5.3 million, or 4.8%, to $107.0 million for the year ended December 31, 2025 from $112.3 million for the comparable period in 2024, primarily due to a decrease in the average balance of and lower yields on loans receivable. Interest and fees on loans receivable decreased $3.5 million during the year, driven largely by reductions in the construction loan, multi-family loan, and Northpointe MPP participation portfolios, partially offset by increased balances in the commercial real estate and purchased manufactured home loan portfolios. Loan yields decreased by 2 basis points year-over-year. The fair value hedge on loans added $392,000 to interest income for the year ended December 31, 2025, compared to $1.1 million for the year ended December 31, 2024.

Interest income on investment securities decreased $1.5 million to $13.5 million for the year ended December 31, 2025, compared to $15.0 million for the year ended December 31, 2024. The decrease in interest income on investment securities was driven by a decrease in the average yield during the year of 38 basis points as higher-yielding investments matured. The fair value hedge on investments added $142,000 and $621,000 to interest income for the years ended December 31, 2025 and 2024, respectively.

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

		Year Ended December 31,
		2025								2024
(dollars in thousands)		Average Balance Outstanding				Yield				Average Balance Outstanding				Yield				Increase/ (Decrease) in Interest Income
Loans receivable, net		$	1,629,888				5.54	%		$	1,686,972				5.56	%		$	(3,462	)
Investment securities			303,501				4.44				311,434				4.82				(1,541	)
FHLB stock			12,706				9.30				12,986				9.36				(33	)
Interest-earning deposits in banks			46,708				4.38				43,934				5.34				(303	)
Total interest-earning assets		$	1,992,803				5.37	%		$	2,055,326				5.47	%		$	(5,339	)

Interest Expense. Total interest expense decreased $6.3 million, or 11.3%, for the year ended December 31, 2025, compared to the prior year, with decreases in deposit costs and borrowing costs of $5.4 million and $911,000, respectively. Deposit costs decreased primarily due to the lower average balance and rate paid on brokered CDs. The average cost of all interest-bearing deposit products decreased 30 basis points to 2.65% for the year ended December 31, 2025 from 2.95% for the year ended December 31, 2024. The average balances of money market, customer CD and savings accounts increased year-over-year, while lower cost transaction average account balances declined. Borrowing costs decreased 21 basis points, due to lower rates paid combined with a decrease of $6.4 million in the average balance outstanding.

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

		Year Ended December 31,
		2025								2024
(dollars in thousands)		Average Balance Outstanding				Rate				Average Balance Outstanding				Rate				Increase/ (Decrease) in Interest Expense
Interest-bearing transaction		$	153,762				0.40	%		$	165,097				0.47	%		$	(162	)
Money market accounts			445,837				2.35				414,305				2.42				445
Savings accounts			228,622				1.52				223,505				1.57				(47	)
Certificates of deposit, customer			446,703				3.84				428,630				4.16				(666	)
Certificates of deposit, brokered			119,623				4.44				205,619				5.00				(4,977	)
FHLB and other advances			262,438				4.29				264,948				4.53				(752	)
Subordinated debt, net			35,543				3.99				39,475				4.00				(159	)
Total interest-bearing liabilities		$	1,692,528				2.94	%		$	1,741,579				3.22	%		$	(6,318	)

Provision for Credit Losses. The total provision for credit losses decreased $9.2 million to $7.3 million during the year ended December 31, 2025, compared to $16.5 million for 2024. The lower provision for credit losses on loans compared to 2024 is mainly the result of higher recoveries on charged-off loan balances, lower pooled loan reserve balances and a decrease in the loss factors applied to one-to-four family and other consumer loan balances. These decreases were partially offset by higher loss factors applied to commercial business, commercial real estate and multi-family pooled loans. The unfunded commitments recapture is due to a decrease in the loss factor applied to this pool.

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:

		Year Ended December 31,
(dollars in thousands)		2025				2024
Provision for credit losses on loans		$	7,320			$	16,716
Charge offs net of recoveries			(10,782	)			(13,777	)
Allowance for credit losses on loans			16,987				20,449
Allowance for credit losses on loans as a percentage of total gross loans receivable at the end of this period			1.04	%			1.21	%
Total nonaccrual loans			22,595				30,515
Allowance for credit losses on loans as a percentage of nonaccrual loans at end of period			75	%			67	%
Nonaccrual loans as a percentage of total loans			1.39	%			1.80	%
Total loans receivable		$	1,628,112			$	1,695,823
Recapture of provision for credit losses on unfunded commitments		$	(5	)		$	(218	)
Reserve for unfunded commitments			592				599
Unfunded loan commitments			167,897				163,827

Noninterest Income. Noninterest income decreased to $11.6 million for the year ended December 31, 2025, from $12.6 million for the year ended December 31, 2024. Nonrecurring transactions in 2025 included a $1.7 million insurance reimbursement received to offset the costs associated with ongoing legal matters, a BOLI death benefit payment and an $846,000 gain on extinguishment of subordinated debt. One-time transactions in 2024 included the gain on sale of six branch properties in the sale-leaseback transaction and a $1.1 million BOLI death benefit payment, partially offset by the loss on sale of securities and a $1.8 million equity investment write-down included in other income (loss) in the table below. Saleable mortgage loan production and related gains benefitted from lower mortgage rates. The BOLI exchange and reinvestment transactions during 2024 resulted in an increase in the cash surrender value for both years.

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

		Year Ended December 31,								Increase (Decrease)
(dollars in thousands)		2025				2024				Amount				Percent
Loan and deposit fees		$	4,359			$	4,291			$	68				1.6	%
Sold loan servicing fees and servicing rights mark-to-market			429				188				241				128.2
Net gain on sale of loans			112				312				(200	)			(64.1	)
Net loss on sale of investment securities			-				(2,117	)			2,117				(100.0	)
Net gain on sale of premises and equipment			-				7,919				(7,919	)			(100.0	)
Increase in BOLI cash surrender value, net			1,889				1,179				710				60.2
Income from BOLI death benefit, net			1,059				1,536				(477	)			(31.1	)
Other income (loss)			3,791				(694	)			4,485				(646.3	)
Total noninterest income		$	11,639			$	12,614			$	(975	)			(7.7	)%

Noninterest Expense. Noninterest expense increased to $67.1 million for the year ended December 31, 2025, from $60.0 million for the year ended December 31, 2024. The increase over the prior year is primarily due to nonrecurring other expenses including the $5.7 million legal settlement paid, $599,000 for costs associated with the early termination of the Bellevue Business Center lease, and $621,000 for branch closure costs. Costs related to ongoing legal matters resulted in an increase in professional fees. Compensation and benefits decreased primarily due to a $2.6 million employee retention credit ("ERC") recognized in 2025, commissions and incentives reduced $757,000 and regular compensation reduced $447,000. Other year-over-year changes include decreased advertising, data processing and FDIC insurance costs, partially offset by higher regulatory assessments and supply costs.

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

		Year Ended December 31,								Increase (Decrease)
(dollars in thousands)		2025				2024				Amount				Percent
Compensation and benefits		$	28,808			$	32,665			$	(3,857	)			(11.8	)%
Data processing			7,868				8,102				(234	)			(2.9	)
Occupancy and equipment			6,143				6,151				(8	)			(0.1	)
Supplies, postage, and telephone			1,320				1,266				54				4.3
Regulatory assessments and state taxes			2,226				1,978				248				12.5
Advertising			1,136				1,457				(321	)			(22.0	)
Professional fees			6,851				3,105				3,746				120.6
FDIC insurance premium			1,732				1,883				(151	)			(8.0	)
Legal settlement paid			5,740				-				5,740				100.0
Other expense			5,233				3,386				1,847				54.5
Total noninterest expense		$	67,057			$	59,993			$	7,064				11.8	%

Provision for Income Tax. The Company recorded an income tax benefit for the year ended December 31, 2025, of $1.2 million compared to a benefit of $944,000 for the year ended December 31, 2024, reflecting differences in pre-tax income. The effective tax rate decreased over the prior year as 2024 included an estimate for the penalty on the early surrender of the BOLI contracts. The provision includes accruals for both federal and state income taxes.

Average Balances, Interest and Average Yields/Cost

The following table sets 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 resultant spread at December 31, 2025 and 2024. Income and all average balances are daily average balances.

		Year Ended December 31,
		2025												2024
(dollars in thousands)		Average Balance Outstanding				Interest Earned/ Paid				Yield/ Rate				Average Balance Outstanding				Interest Earned/ Paid				Yield/ Rate
Interest-earning assets:
Loans receivable, net (1), (2)		$	1,629,888			$	90,290				5.54	%		$	1,686,972			$	93,752				5.56	%
Total investment securities			303,501				13,484				4.44				311,434				15,025				4.82
FHLB dividends			12,706				1,182				9.30				12,986				1,215				9.36
Interest-earning deposits in banks			46,708				2,045				4.38				43,934				2,348				5.34
Total interest-earning assets (3)			1,992,803				107,001				5.37				2,055,326				112,340				5.47
Noninterest-earning assets			146,555												144,812
Total average assets		$	2,139,358											$	2,200,138
Interest-bearing liabilities:
Interest-bearing demand deposits		$	153,762			$	615				0.40			$	165,097			$	777				0.47
Money market accounts			445,837				10,462				2.35				414,305				10,017				2.42
Savings accounts			228,622				3,465				1.52				223,505				3,512				1.57
Certificates of deposit, customer			446,703				17,172				3.84				428,630				17,838				4.16
Certificates of deposit, brokered			119,623				5,306				4.44				205,619				10,283				5.00
Total interest-bearing deposits (4)			1,394,547				37,020				2.65				1,437,156				42,427				2.95
FHLB and other advances			262,438				11,263				4.29				264,948				12,015				4.53
Subordinated debt, net			35,543				1,419				3.99				39,475				1,578				4.00
Total interest-bearing liabilities			1,692,528				49,702				2.94				1,741,579				56,020				3.22
Noninterest-bearing deposits (4)			246,566												252,600
Other noninterest-bearing liabilities			47,201												44,217
Total average liabilities			1,986,295												2,038,396
Average equity			153,063												161,742
Total average liabilities and equity		$	2,139,358											$	2,200,138
Net interest income						$	57,299											$	56,320
Net interest rate spread											2.43												2.25
Net earning assets		$	300,275											$	313,747
Net interest margin (5)											2.88												2.74
Average interest-earning assets to average interest-bearing liabilities			117.7	%											118.0	%

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

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

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

(4) Cost of all deposits, including noninterest-bearing demand deposits, was 2.26% and 2.51% for the years ended December 31, 2025 and 2024, 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. The presentation distinguishes between the changes related to outstanding balances and the changes in interest rates. For each component, 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.

		Year Ended December 31, 2025 vs. 2024
		Increase (Decrease) Due to								Total Increase
(dollars in thousands)		Volume				Rate				(Decrease)
Interest-earning assets:
Loans receivable (1)		$	(3,155	)		$	(307	)		$	(3,462	)
Investment securities			(385	)			(1,156	)			(1,541	)
FHLB stock			(25	)			(8	)			(33	)
Other (2)			146				(449	)			(303	)
Total interest-earning assets		$	(3,419	)		$	(1,920	)		$	(5,339	)
Interest-bearing liabilities:
Interest-bearing demand deposits		$	(54	)		$	(108	)		$	(162	)
Money market accounts			760				(315	)			445
Savings accounts			74				(121	)			(47	)
Certificates of deposit, customer			757				(1,423	)			(666	)
Certificates of deposit, brokered			(4,304	)			(673	)			(4,977	)
FHLB and other advances			(118	)			(634	)			(752	)
Subordinated debt, net			(156	)			(3	)			(159	)
Total interest-bearing liabilities		$	(3,041	)		$	(3,277	)		$	(6,318	)
Net change in interest income		$	(378	)		$	1,357			$	979

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

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

Asset and Liability Management and Market Risk

Risk Management Overview. Managing risk is an essential part of successfully managing a financial institution. Our Enterprise Risk Management Committee reports key risk indicators to the Board of Directors through the Audit Committee. The most prominent risk exposures management monitors are strategic, credit, interest rate, liquidity, operational, compliance, reputational, cybersecurity, and legal risk. The Asset Liability Committee ("ALCO") establishes and guides the Bank's strategic direction and risk tolerances related to Asset Liability Management ("ALM"), including interest rate risk. ALCO meets quarterly to monitor the Bank's performance against established standards as well a monitor the overall price, credit, interest rate and liquidity risk profile. The ALM policy is approved by the Board.

Interest Rate Risk. Interest rate risk represents the risk that changes in market interest rates will adversely affect our financial condition and results of operations. Our primary exposure to market risk is interest rate risk arising from differences in the repricing characteristics of our interest-earning assets and interest-bearing liabilities.

Management of Interest Rate Risk Management. Managing interest rate risk is an integral part of our overall risk management framework. Management's objective is to control exposure to interest rate fluctuations while maintaining acceptable levels of profitability and capital adequacy. The Bank employs the services of outside firms to assist us in our asset and liability management and our analysis of market and interest rate risk.

We manage interest rate risk by monitoring repricing gaps, earnings sensitivity, and changes in the economic value of equity under various interest rate scenarios. The economic value of equity represents the difference between the estimated market value of assets and liabilities, including adjustments for off-balance-sheet items. Our balance sheet composition includes adjustable-rate investment securities, home equity lines of credit, and certain commercial real estate loans tied to market indices such as the prime rate, the twelve-month constant maturity treasury, TSOFR, or similar term FHLB borrowing rates. These instruments generally reprice more rapidly than fixed-rate assets in rising interest rate environments. Deposit accounts may also reprice more quickly due to their shorter effective maturities.

Interest Rate Sensitivity Analysis. We use interest rate sensitivity analysis to evaluate our exposure to changes in market interest rates. This analysis measures the estimated change in the present value of expected cash flows from assets, liabilities, and off-balance-sheet instruments under a range of assumed interest rate movements.

The analysis models the impact of an instantaneous and sustained parallel shift in interest rates ranging from a 100 to 400 basis point increase or decrease, assuming no changes to management's balance sheet strategies in response to those rate movements. At December 31, 2025, our balance sheet was more asset-sensitive in the short-term horizon, reflecting slower loan prepayment speeds driven by higher interest rates and deposit migration from non-maturity deposits to certificates of deposit with shorter average lives.

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

			December 31, 2025
(dollars in thousands)			Projected Net Interest Income
Change in Interest Rates (basis points)			$ Amount				$ Change				% Change
+ 400			$	73,892			$	7,992				12.1	%
+ 300				72,220				6,320				9.6
+ 200				70,372				4,472				6.8
+ 100				68,473				2,573				3.9
0				65,900				-				-
-100			63,730				(2,170		)		(3.3		)
-200			61,817				(4,083		)		(6.2		)
-300			59,736				(6,164		)		(9.4		)
-400			56,792				(9,108		)		(13.8		)

Key Assumptions and Limitations. The interest rate sensitivity analysis is based on a number of assumptions, including projected interest rate paths, loan prepayment rates, deposit decay rates, and the estimated market values of certain assets and liabilities under differing interest rate scenarios. Actual results may differ materially from those modeled due to changes in market conditions, customer behavior, or management actions.

This analysis has inherent limitations. Assets and liabilities with similar maturities or repricing characteristics may respond differently to changes in interest rates. Certain instruments include embedded features such as interest rate caps or floors that may limit repricing. In addition, changes in interest rates may significantly alter prepayment speeds on loans and early withdrawal behavior on certificates of deposit, which could differ from assumptions used in the models.

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

Liquidity Management

Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of investment security principal and interest payments, deposit inflows, brokered deposits, loan repayments, maturities, sales of securities, and borrowings from the FHLB. 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 our holdings of liquid assets based upon an assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and objectives of our interest-rate risk and investment policies.

Our 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 December 31, 2025, cash and cash equivalents totaled $85.1 million and securities classified as available-for-sale had a market value of $270.3 million. We have pledged loan collateral with principal balances totaling $871.3 million to support borrowings from the FHLB of $260.0 million, with a remaining borrowing capacity of $204.4 million. We have also pledged collateral of $17.3 million to the Federal Reserve Bank of San Francisco to secure discount window advances; the Company has performed periodic borrowing tests on this line with the Federal Reserve; however, no such funds were borrowed as of December 31, 2025. Another source of short-term funding for the Bank is through PCBB's Fed Funds Borrowing Facility, which provides up to $50.0 million of unsecured borrowing for up to ten consecutive days. First Northwest maintains a $15.0 million line of credit with NexBank, with an available borrowing capacity of $1.5 million at year end, which is secured by First Northwest's personal property assets (with certain exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership investments. The line of credit matures in November 2026.

At December 31, 2025, we had $168.6 million in commitments to grant loans, undisbursed lines of credit, undisbursed construction commitments, and standby letters of credit. The Company also had unfunded partnership commitments totaling $2.3 million.

Customer CDs due within one year as of December 31, 2025, totaled $380.5 million, or 73.2% of total CDs. Brokered CDs due within one year as of December 31, 2025, totaled $70.4 million, or 13.5% of total CDs. Management believes a significant portion of our customer CDs will be renewed or rolled into new certificates of deposit given the current rate environment. If these maturing deposits are not renewed or rolled into other deposit products, we will seek other sources of funds, which may include borrowings and brokered deposits. We also attract and retain deposits by adjusting the interest rates offered, including the offering of promotional rates on certificates of deposit to encourage the renewal or rollover of maturing certificates of deposit and mitigate the risk of loss of these deposits. Depending on market conditions, we may pay higher rates on borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate offerings. However, rates on these sources of funds may also be less than what the market demands for customer deposits. We believe relationships developed by our sales teams, including our commercial relationship managers, branch managers and members of our branch network, and the general cash flows from our existing lending and investment activities, will afford us sufficient short- and long-term liquidity. For additional information, see the Consolidated Statements of Cash Flows included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.

First Fed has a diversified deposit base with approximately 64% of deposit account balances held by consumers, 31% held by business and public fund depositors, and 5% in brokered deposits. The average deposit account balance, excluding brokered and public fund accounts, was $28,000 at December 31, 2025. We estimate that 20-25% of our customer deposit balances, or $371.3 million, 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 liquidity.

The Company is a separate legal entity from the Bank and relies on dividends from its subsidiary, First Fed, the NexBank line of credit and future investment redemptions for liquidity to pay its operating expenses and other financial obligations. At December 31, 2025, the Company (on an unconsolidated basis) had liquid assets of $7,587,000.

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 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.

Commitments and Off-Balance Sheet Arrangements

The following table summarizes our commitments and contingent liabilities with off-balance sheet risks as of December 31, 2025:

		Amount of Commitment Expiration
(dollars in thousands)		Within 1 Year				After 1 Year Through 3 Years				After 3 Years Through 5 Years				Beyond 5 Years				Total Amounts Committed
Commitments to originate loans:
Fixed-rate loans		$	424			$	-			$	-			$	-			$	424
Variable-rate loans			323				-				-				-				323
Unfunded commitments under lines of credit			18,495				13,014				5,611				80,845				117,965
Unfunded commitments under existing construction loans			34,035				14,094				-				1,395				49,524
Standby letters of credit			208				-				-				200				408
Unfunded commitments under partnership agreements			2,270				-				-				-				2,270
Total		$	55,755			$	27,108			$	5,611			$	82,440			$	170,914

Capital Resources

First Northwest is a financial holding company (a type of bank holding company) subject to regulation by the Federal Reserve. As a bank holding company, we are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Our subsidiary, First Fed, is subject to minimum capital requirements imposed by the FDIC. Capital adequacy requirements are quantitative measures established by regulation that require us to maintain minimum amounts and ratios of capital.

First Fed is subject to meeting minimum capital adequacy requirements for CET1 capital, Tier 1 risk-based capital, total risk-based capital, and tier 1 capital ("leverage"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by bank regulators that, if undertaken, could have a direct material effect on the Company's financial statements.

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

In order to avoid limitations, based on percentages of eligible retained income, on paying dividends, engaging in share repurchases, and paying discretionary bonuses, the Bank must maintain risk-based capital in an amount greater than the required minimum levels plus a capital conservation buffer, comprised of CET1, of 2.5% of risk-weighted assets. The Bank's capital conservation buffer was 5.55% at December 31, 2025, exceeding this requirement by over 3.00%.

Consistent with our goals to operate a sound and profitable organization, our policy for First Fed is to maintain its "well-capitalized" status in accordance with regulatory standards. At December 31, 2025, the Bank and consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results at December 31, 2025.

		Actual								Minimum Capital Requirements								Minimum Required to be Well-Capitalized
(dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Tier I leverage capital (to average assets)
Bank only		$	198,895				9.5	%		$	83,639				4.0	%		$	104,549				5.0	%
Common equity tier I (to risk-weighted assets)
Bank only			198,895				12.5				71,656				4.5				103,504				6.5
Tier I risk-based capital (to risk-weighted assets)
Bank only			198,895				12.5				95,542				6.0				127,389				8.0
Total risk-based capital (to risk-weighted assets)
Bank only			215,737				13.6				127,389				8.0				159,236				10.0

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the U.S., which require the measurement of financial and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Unlike most industrial companies, 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.

Recent Accounting Pronouncements

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