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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.13pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.39pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.12pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adverse+16
adversely+14
litigation+11
failure+10
damage+7
Positive rising
effective+11
able+4
successfully+3
successful+2
enhance+2
Risk Factors (Item 1A)
11,666 words
Item 1A. Risk Factors.
The following is a discussion of what we currently believe are the most significant risks and uncertainties that may affect our business, financial condition, and future results. You should carefully consider the following risks, together with all of the other information contained in this Form 10-K, including the sections entitled "Forward-Looking Statements" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes thereto. Any of the following risks could have an adverse effect on our business, financial condition, and results of operations and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Our business, financial condition, and results of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Economy and Our Markets
Our business and operations are concentrated in Washington, and adverse economic conditions in that area could adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
limitations+2
challenges+1
termination+1
closure+1
Positive rising
enhance+2
strengthen+2
efficiencies+1
effective+1
succeed+1
MD&A (Item 7)
9,267 words
Item 7. 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 on sale and servicing fee revenue and manage interest rate risk or retain select loans in our portfolio to 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.
A significant portion of our loans are to businesses and individuals in the state of Washington. An economic decline affecting our region could have a material adverse effect on our business, financial condition, results of operations, and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent on international trade. Deterioration in the national economy may also have an adverse effect on the region.
Any future deterioration in economic conditions in the market areas we serve, in particular the North Olympic Peninsula and Puget Sound area of Washington State, could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition, and results of operations:
Loan delinquencies, problem assets and foreclosures may increase;
Demand for our products and services may decline, possibly resulting in a decrease in our total loans or assets;
Loan collateral may decline in value, exposing us to increased risk of loss on existing loans and reducing customers’ borrowing power;
The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
The amount of our deposits may decrease and the composition of our deposits may be adversely affected.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected. Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans, and generally have a negative effect on our business, financial condition and results of operations.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs, which could adversely affect our earnings and capital levels.
Liquidity is essential to our business. We rely on a variety of sources in order to meet our potential liquidity demands. We require enough liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. A tightening of the credit markets and the inability to obtain adequate funding may negatively affect our liquidity, asset growth and, consequently, our earnings capability and capital levels. In addition to any deposit growth, and the sale of loans or investment securities, maturity of investment securities and loan payments, we rely from time to time on advances from the FHLB and certain other wholesale funding sources to meet liquidity demands. Our liquidity position could be significantly constrained if we were unable to access funds from the FHLB or other wholesale funding sources.
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Factors that could detrimentally impact our access to liquidity sources include actions by the FRB, a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as consumer and business behavior utilizing funds on deposit to pay down higher cost debt or to seek higher yielding investments, a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities or other collateral to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality's fiscal policies and cash flow needs.
Competition for deposits may limit our ability to grow.
Our loan growth is primarily dependent on retaining and attracting additional customer deposits. While we emphasize the generation of low-cost core deposits as a source of funding, there is strong competition for such deposits in our market area, including from internet-based banking institutions, which have grown rapidly in recent years.
Deposit flows are influenced by various factors, including customer relationships, sales and marketing efforts, interest rates paid by competitors, alternative investments such as money market mutual funds, equities and bonds, government stimulus programs, and the overall levels of business and personal income and savings. The interest rate environment impacts competition for deposits across the banking industry, and deposit balances may decrease if customers perceive alternative investments as providing a better risk/return tradeoff or if customers turn to other alternatives to deposits, such as stablecoins.
Additionally, negative news about us or the banking industry in general could negatively impact market and/or customer perceptions of the Company, which could lead to a loss of depositor confidence and an increase in deposit withdrawals, particularly among those with uninsured deposits. Furthermore, as banking organizations experienced in the Spring of 2023, the failure of other financial institutions may cause deposit outflows as customers spread deposits among several different banks so as to maximize their amount of FDIC insurance, move deposits to banks deemed "too big to fail" or remove deposits from the banking system entirely. We may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of our depositors sought to withdraw their accounts, regardless of the reason.
Our failure to grow or retain deposits may result in a loss of market share and slower or negative loan growth, which likely would have an adverse effect on our financial condition and results of operations.
Public health crises , geopolitical developments, acts of terrorism, natural disasters, climate change and other events out of our control could harm our business.
Public health crises, domestic or geopolitical crises, such as the current wars in Ukraine and the Middle East, political instability or civil unrest, terrorism or other events outside of our control, could cause disruptions to our business and those of our customers, counterparties and service providers or the U.S.' economy, resulting in potentially adverse operating results. Natural disasters may disrupt our operations and those of our customers, counterparties and service providers, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate. Climate change may worsen the severity and impact of future natural disasters and other extreme weather-related events that could cause disruption to our business and operations. Chronic results of climate change such as shifting weather patterns could also cause disruption to the business and operations of our customers, with potentially negative effects on our loan portfolio and growth opportunities. A significant natural disaster, such as a tsunami, earthquake, drought, fire or flood, where we or our customers live and do business, could have a material adverse impact on our local market areas and our ability to conduct business, especially if our insurance coverage is insufficient to compensate for losses that may occur. We also could be adversely affected if our key personnel or a significant number of our employees were to become unavailable due to a public health crisis (such as an outbreak of a contagious disease), natural disaster, war, act of terrorism, accident or other reason. The effects of any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations.
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We may be impacted by the actions, soundness or creditworthiness of other financial institutions, which can cause disruption within the industry and increase expenses.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We execute transactions with various counterparties in the financial industry, including broker-dealers, commercial banks, and investment banks. Defaults or failures of financial services institutions and instability in the financial services industry in general can lead to market-wide liquidity problems, increased credit risk and withdrawals of uninsured deposits. Such events could adversely affect our business, results of operations, and financial condition, as well as the market price and volatility of our common stock.
Bank failures may increase the risk of a recession or lead to regulatory changes and initiatives, such as enhanced capital, liquidity, or risk management requirements, which could adversely impact us. Changes to laws or regulations, or the imposition of additional restrictions through supervisory or enforcement activities, could have a material impact on our business. Regulatory changes could also adversely impact our ability to access funding, increase the cost of funding, limit our access to capital markets, and negatively impact our overall financial condition. For example, certain bank failures in 2023 resulted in a special assessment by the FDIC to replenish the DIF.
We operate in a highly competitive industry.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. These competitors primarily include national, regional, community and digital banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including savings and loans, credit unions, mutual funds, mortgage banking finance companies, brokerage firms, insurance companies and other financial intermediaries or alternative investment vehicles. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies, non-fungible tokens, and other digital assets. For example, financial technology companies and other firms have begun to offer services such as stablecoins that may serve as alternatives to traditional banking products such as deposits. Additionally, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Competitors in these nonbank sectors may have fewer regulatory constraints, as well as lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability and result in a material adverse effect on our financial condition and results of operations.
Failure to keep up with the rapid technological changes in the financial services industry could have an adverse effect on our competitive position and profitability.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm our ability to compete effectively and could have an adverse effect on our business, financial condition, and results of operations. As these technologies improve in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have an adverse effect on our business, financial condition, and results of operations.
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Credit and Asset Quality
Our emphasis on commercial real estate lending subjects us to various risks that could adversely impact our results of operations and financial condition.
Our commercial real estate and multi-family loans represent a significant portion of our portfolio, with balances of $691.2 million, or 42.5%, of our total loan portfolio, at December 31, 2025, and $723.0 million, or 42.6%, of our total loan portfolio at December 31, 2024. We intend to continue, subject to market demand, our origination and purchase of commercial real estate loans. As an institution’s concentration in commercial real estate lending increases, it becomes subject to more scrutiny under the FDIC's policies for management of its commercial real estate loan portfolio.
Our focus on this type of lending has increased our risk profile. Commercial real estate loans are intended to enhance the average yield of our earning assets; however, they do involve a different level of risk compared to one-to-four family loans. The repayment of commercial real estate loans typically depends on the successful operation and income stream of the borrowers’ operating business, or their ability to lease the commercial property at sufficient rates. The value of the commercial real estate securing the loan as collateral is a secondary source of repayment in case of default, which can be significantly affected by economic conditions. The FDIC has issued pronouncements alerting banks of its concerns about banks with a heavy concentration of commercial real estate loans. Moreover, federal bank regulators have highlighted the increased risk associated with commercial real estate loans, including with respect to the higher vulnerability of these credits to pressure as interest rates remain elevated and market conditions in many metropolitan areas continue to show signs of stress. These loans also involve larger balances to a single borrower or groups of related borrowers. Some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development on a single one-to-four family residential mortgage loan.
Since commercial real estate loans generally have large balances, deterioration in the quality of commercial loans may result in the need to significantly increase our provision for credit losses on loans and charge-offs will likely be larger on a per loan basis compared to consumer loans. As a result, deterioration of this portfolio could have a materially adverse effect on our future earnings. Collateral evaluation and financial statement analysis for commercial loans also requires a more detailed review at origination and on an ongoing basis. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral is typically longer than for a one-to-four family residence because the market for most types of commercial real estate is not readily liquid, resulting in less opportunity to mitigate credit risk by selling part or all of our interest in these assets. At December 31, 2025, we had $9.8 million of nonperforming commercial real estate loans in our portfolio.
We have a concentration of large loans outstanding to a limited number of borrowers that increases our risk of loss.
First Fed has extended significant amounts of credit to borrowers connected with high-end residential real estate and commercial and multi-family real estate loans. These types of loans generally are viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about significant loan concentrations. At December 31, 2025, the aggregate amount of loans, including unused commitments, to First Fed's five largest borrowers (including related entities) amounted to approximately $88.8 million. Outstanding loan balances for the ten largest borrowing relationships at December 31, 2025, totaled $146.5 million, or 9.0% of total loans. Although none of the loans to First Fed's 20 largest borrowers were nonperforming as of December 31, 2025, concentration of credit to a limited number of borrowers increases the risk in First Fed's loan portfolio. The deterioration of one or a few of these loans may cause a significant increase in our non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, any of which would have an adverse impact, which could be material, on our business, financial condition and results of operations.
Our construction and land loans are based upon estimates of costs and the value of the completed project.
During the year ended December 31, 2025, our construction and land loans decreased $16.8 million, or 21.6%, to $61.3 million, or 3.8%, of the total loan portfolio at December 31, 2025 and consisted of properties secured by commercial real estate of $23.0 million, one-to-four family residential of $22.0 million, multi-family of $10.1 million, and land of $6.2 million. Land loans include raw land and land acquisition and development loans.
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Construction and land development lending generally involves additional risks when compared with permanent residential lending because funds are advanced upon estimates of costs in relation to values associated with the completed project that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, the market value of the completed project, the effects of governmental regulation on real property, and changes in demand, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio, which may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders.
A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us, and an adverse development with respect to one loan or one credit relationship may expose us to a significantly greater risk of loss.
In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the successful outcome of the project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold, which also complicates the process of working out problem construction loans. Under these circumstances we may be required to advance additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation costs. Any of these results could have a material and adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected by credit risk associated with residential real estate.
At December 31, 2025, $461.8 million, or 28.4% of our total loan portfolio, consisted of one-to-four family mortgage loans and home equity loans secured by residential properties. Lending on residential property is sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in residential real estate values securing these types of loans may increase the level of borrower defaults and losses above the recent charge-off experience on these loans. Jumbo one-to-four family residential loans that do not conform to secondary market mortgage requirements for our market areas would not be immediately saleable to Freddie Mac or other investors and may expose us to increased risk because of their larger balances. Further, a significant amount of our home equity lines of credit consist of loans in a subordinate lien position to a first lienholder.
For home equity lines secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan balances in the event of default unless we repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons we may experience higher rates of delinquencies, default and losses on loans secured by junior liens. Any of these results could have a material and adverse effect on our business, financial condition and results of operations.
In addition, if we foreclose on and take title to real property securing loans, there is a risk that hazardous or toxic substances could be found on these properties and that we could be liable for remediation costs, as well as personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have an adverse effect on our business, financial condition, and results of operations.
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Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At December 31, 2025, we had $130.3 million, or 8.0% of total loans, in commercial business loans. Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral-based lending with loan amounts based on the value of the collateral and predetermined loan to collateral ratios; liquidation of the underlying real estate collateral is the primary source of repayment in the event of borrower default. Our commercial business loans are primarily supported by the cash flow of the borrower and secondarily by the underlying collateral provided by the borrower. The borrowers' cash flows may be unpredictable, and the collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Factors affecting the value of this type of collateral include uncollectable accounts receivable and obsolete or limited use inventory, among others.
We depend on the accuracy and completeness of information provided by customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon customers’ representations that their financial statements conform to GAAP and present fairly the financial condition, results of operations, and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our customers. Our business, financial condition, and results of operations could be adversely affected if we rely on misleading, false, inaccurate, or fraudulent information.
Our allowance for credit losses on loans may prove to be insufficient to absorb losses in our loan portfolio.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the allowance for credit losses on loans, we review our loan portfolios, loss and delinquency trends, and economic conditions. If our assumptions are incorrect, our allowance for credit losses on loans may not be sufficient to cover incurred losses, resulting in additions to our allowance for credit losses on loans through the provision for credit losses on loans which is charged against income.
Additionally, pursuant to our growth strategy, management recognizes that significant new loan growth, new loan products, new market areas, and the refinancing of existing loans, resulting in portfolios composed of unseasoned loans that may not perform in a historical or projected manner, may increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Significant provisions to our allowance could materially decrease our net income. In addition, bank regulatory agencies periodically review our allowance for credit losses on loans and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.
In addition, if charge-offs in future periods exceed the allowance for credit losses on loans, we will need additional provisions to replenish the allowance for credit losses on loans. Any additional provisions will result in a decrease in net income, and possibly capital, and may have a material adverse effect on our financial condition and results of operations.
We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
At December 31, 2025, our nonperforming assets, which consist of nonaccrual loans, real estate owned and repossessed assets, were $24.0 million, or 1.1% of total assets. Our level of nonperforming assets is closely tied to the overall credit quality of our loan portfolio and the creditworthiness of our borrowers. Adverse changes in economic conditions, borrower financial performance, collateral values or other factors affecting credit risk could result in an increase in delinquencies, defaults and nonaccrual loans. Nonperforming assets adversely affect our net income in various ways. If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our financial condition and results of operations.
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Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, ratings agency actions, defaults or other adverse events affecting the issuer or the underlying collateral, if any, of the security, changes in market interest rates, and continued instability in the capital markets. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including the current wars in Ukraine and the Middle East, terrorism, or other geopolitical events. A need for additional liquidity may also require us to sell investment securities at depressed prices. These factors, among others, could result in an allowance for credit losses on investment securities, realized and/or unrealized losses in future periods, and declines in other comprehensive income, which could materially affect our business, financial condition, and results of operations. Determining an allowance for credit losses on investment securities requires complex, subjective judgments about the future financial performance and liquidity of the security's issuer and underlying collateral, if any, to assess the probability of receiving all contractual principal and interest payments due, and these estimates may differ significantly from actual future performance of the security.
We may incur losses due to direct and indirect minority investments in fintech and specialty finance companies.
We have and may continue to make minority investments in fintech and specialty finance companies or make investments in funds that do the same. We currently have investments in Canapi Venture, BankTech Ventures, LP and JAM FINTOP Frontier Fund, LP to strategically invest in fintech-related businesses. In addition, we have invested in Meriwether Group Capital Hero Fund LP, Meriwether Group Capital, LLC and The Meriwether Group, LLC, which provide funding and services to lower-middle market businesses and entrepreneurs. We generally are not able to influence the activities of companies or funds in which we invest and may sufferlosses due to these activities. In addition, the companies or funds we invest in may have economic or business interests, values, or goals that are inconsistent or conflict with ours, which could damage our reputation or business. Additionally, the companies or funds we invest in may experience financial difficulties, default on their obligations, diminished liquidity or insolvency; or our management team’s distraction relative to the potential financial benefit may be disproportional. If the companies we invest in, directly or indirectly, seek additional financing in the future to fund their growth strategies, these financing transactions may result in dilution to our ownership stakes and these transactions may occur at lower valuations than the investment transaction through which we acquired such ownership interest, which could significantly decrease the fair value of our investment in those entities. We may also be unable to dispose of our minority investments within our contemplated time horizon or at all or withdraw our investment from funds in which we participate. Our inability to dispose of our minority investment in an entity, a downward adjustment to or impairment of an equity investment or our inability to access funds otherwise invested could adversely impact our business, financial condition, results of operations, or cash flows.
If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.
We update our valuation assessments in the form of appraisals and tax assessed values when a loan has been foreclosed and the property taken in as real estate owned and at certain other times during the asset’s holding period. Our net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of our real estate owned may not be sufficient to recover our carrying value in such assets, resulting in the need for additional charge-offs. In addition, bank regulators periodically review our real estate owned and may require us to recognize further charge-offs. Significant charge-offs to our real estate owned could have a material adverse effect on our financial condition and results of operations.
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We are subject to certain risks in connection with our use of networks and technology systems.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage. Notwithstanding the strength of defensive measures, cybersecurity threats and the tactics, techniques and procedures used in cyberattacks change, develop and evolve rapidly and continuously, including from emerging technologies, such as artificial intelligence, which may be used to enhance the tactics, techniques and procedures described above and facilitate new cyber threats.
We support the ability of our customers to transact business through multiple automated methods. As such, we may be susceptible to fraud performed through these technologies.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures, which could result in significant legal liability, heightened regulatory scrutiny or fines, violations of consumer protection and privacy laws, and significant damage to our reputation and our business, financial condition and results of operations.
Our security measures may not protect us from systems failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties, we have difficulty in communicating with them, or they terminate their services our ability to adequately process and account for transactions, among other things, could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer and consumer information through various third-party vendors and their personnel.
The occurrence of any failures or interruptions may require us to identify alternative sources of such services, and we cannot assure that we would be able to negotiate terms that are as favorable to us or obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
Interest Rates, Operations and Risk Management
We are subject to interest rate risk, which could adversely affect our earnings .
Our earnings and cash flows are largely dependent on our net interest income. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. The Federal Reserve decreased the federal funds target rate beginning in September 2024, with the most recent decrease occurring in December 2025. When the Federal Reserve Board decreases the Fed Funds rate, overall interest rates are likely to fall, which may positively impact housing markets by increasing refinancing activity and new home purchases. A falling interest rate environment may also positively affect the U.S. economy and, as a result, our business as a whole. However, there can be no assurance of the timing or amount of any future rate adjustments. Further, there can be no assurance regarding any forecasts or predictions about the effect that any future rate adjustment may have on our results of operations.
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Further changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect, among other things, (i) our ability to originate and/or sell mortgage and SBA loans; (ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders' equity, and our ability to realize gains from sales of such assets; (iii) our ability to obtain and retain deposits in competition with other available investment alternatives; (iv) the ability of our borrowers to repay adjustable or variable rate loans; and (v) the average duration of our MBS portfolio and other interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Increases in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the net interest income divided by average interest-earning assets. Further changes in interest rates, up or down, could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up. Changes in the slope of the "yield curve", or the spread between short-term and long-term interest rates, could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
A sustained increase in market interest rates could adversely affect our earnings. As a result of the exceptionally low interest rate environment in the years prior to 2022, a high percentage of our deposits were composed of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would likely incur a higher cost of funds to retain these deposits in an elevated interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, would be adversely affected.
Changes in interest rates also affect the value of our interest-earning assets, including our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on our shareholders’ equity.
Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our business, financial condition and results of operations. Further, our interest rate risk modeling techniques and assumptions likely will not fully predict or capture the impact of actual interest rate changes on our balance sheet. See Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk," in this Form 10-K for additional information.
Our enterprise risk management program may not be effective at mitigating the risks to which we are subject, based upon our size, scope, and complexity.
We have established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which we are subject, including capital, market, liquidity, credit, operational, compliance, legal, strategic, technology and reputational risks. Although we seek to manage our exposure to such risks, and employ a broad and diverse set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown or unanticipated. Any system of control and any system to reduce risk exposure, however well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Further, in some cases we use analytical or forecasting models in our management of risks. If the models are inadequate, or are subject to ineffective governance, our risk management program may also prove ineffective. Actions taken to mitigate identified risks may prove less effective than anticipated. If our risk management program proves ineffective, we could sufferunexpectedlosses and reputational damage.
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If we fail to maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud. We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control over financial reporting in the future, and our failure to maintain effective internal control over financial reporting could have an adverse effect on our business, financial condition, and results of operations.
We have in the past identified and may in the future identify material weaknesses or significant deficiencies in our internal control over financial reporting, which require remediation. A material weakness is defined by the standards issued by the PCAOB as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The existence of a material weaknessprecludes management from concluding that internal control over financial reporting is effective and precludes our independent registered public accounting firm from rendering their report addressing an assessment of the effectiveness of our internal control over financial reporting. In addition, disclosures of deficiencies of this type in our SEC reports could cause investors to lose confidence in our financial reporting, may negatively affect the market price of our common stock, and could result in the delisting of our securities from the securities exchanges on which they trade. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our internal control over financial reporting, such deficiencies may adversely affect us.
Our business may be adversely impacted by litigation and regulatory enforcement actions, which could expose us to significant liabilities and/or damage our reputation.
From time to time, we have and may become party to various litigationclaims and legal proceedings. Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them. For example, we are currently engaged in litigation with 3|5|2 Capital and Socotra, as described in more detail in Note 14 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. The risk of litigation may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, as a publicly-traded company, we are subject to the risk of claims under the federal securities laws, and volatility in our stock price and those of other financial institutions increases this risk. Actions brought against us may result in injunctions, settlements, damages, fines or penalties, which could have an adverse effect on our business, financial condition or results of operations or require changes to our business. Even if we defend ourselves successfully, the cost of litigation may be substantial, and public reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or negatively impact the confidence of counterparties, rating agencies and stockholders, consequently negatively affecting our earnings.
In the ordinary course of our business, we also are subject to various regulatory, governmental and enforcement inquiries, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be specifically directed at us. In enforcement matters, claims for disgorgement, the imposition of civil and criminalpenalties and the imposition of other remedial sanctions are possible.
Actual outcomes, losses and related expenses of pending legal proceedings may differ materially from assessments and estimates, and may exceed the amount of any reserves we have established, which could adversely affect our reputation, business, financial condition and results of operations.
Decreased volumes and lower gains on sales of loans could adversely impact our noninterest income.
We originate and sell one-to-four family mortgage loans. Our mortgage banking income is a significant portion of our noninterest income. We generate gains on the sale of one-to-four family mortgage loans pursuant to programs currently offered by Freddie Mac and other secondary market investors. Any future changes in their purchase programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations.
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Further, in a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in noninterest income. In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.
A portion of our loan portfolio is serviced by third parties, which may limit our ability to foreclose on or repossess such loans.
At December 31, 2025 , $141.9 million of our consumer, $24.0 million of our comm ercial real estate , and $13.3 million of our one-to-four family loan portfolios were serviced by third parties. When a loan goes into default, it is the responsibility of the third-party servicer to enforce the borrower’s obligation to repay the outstanding indebtedness. We are reliant on the servicer to bring the loan current, enter into a satisfactory loan modification or foreclose on the property on behalf of First Fed. We must comply with any loan modification entered into by the servicer even if we would not otherwise agree to the modified terms, which may result in a reduction in our interest income due to the loan modification. Delays in foreclosing on property, whether caused by restrictions under state or federal law or the failure of a third-party servicer to timely pursue foreclosure action, may increase our potential loss on such property, due to factors such as lack of maintenance, unpaid property taxes and adverse changes in market conditions. These delays may adversely affect our ability to limit our credit losses.
As a regulated entity, we are subject to capital requirements, and a failure to meet these standards could adversely affect our financial condition.
We are subject to certain capital and liquidity rules, which establish the minimum capital adequacy requirements and may require us to increase our regulatory capital or liquidity targets, increase regulatory capital ratios, or change how we calculate regulatory capital. We may be required to increase our capital levels, even in the absence of actual adverse economic conditions or forecasts, and enhance capital planning based on hypothetical future adverse economic scenarios. As of December 31, 2025, First Northwest and First Fed each met the minimum capital ratio requirements applicable to them and exceeded the capital conservation buffer requirement. Compliance with capital requirements may limit capital-intensive operations and increase operational costs, and we may be limited or prohibited from distributing dividends or repurchasing our stock. This could adversely affect our ability to expand or maintain present business levels, which may adversely affect our business, results of operations and financial condition. Additional information on the regulatory capital requirements applicable to First Northwest and First Fed is set forth in Item 1, "Business – How We Are Regulated," of this Form 10-K.
As a holding company, First Northwest depends on dividends and distributions from First Fed for liquidity and to pay dividends, if any.
First Northwest derives most of its cash flow from dividends paid by First Fed. These dividends are the primary source from which we may pay dividends on our common stock, if any, and principal and interest on our debt obligations. Various federal and Washington laws and regulations, as well as regulatory expectations, limit the amount of dividends that First Fed may pay to First Northwest. See Item 1, "Business – How We Are Regulated," of this Form 10-K for a discussion of regulatory requirements applicable to dividends by First Northwest and First Fed. Through May 2025, we historically declared cash dividends on our common stock. However, we have not done so since then, as part of a prudent approach to capital management. We are not required to pay dividends and there can be no assurance we will resume doing so in the future. Failure to pay dividends could adversely affect the market price of our common stock.
Our reputation is critical to our business, and damage to it could have an adverse effect on us.
A key differentiating factor for our business is the strong reputation we have built in our market. Maintaining a positive reputation is critical to attracting and retaining customers and employees. Adverse perceptions of us could make it more difficult for us to execute on our strategy. Harm to our reputation can arise from many sources, including actual or perceived employee misconduct, errors or misconduct by our third-party vendors or other counterparties, litigation (such as the litigation with 3|5|2 Capital and Socotra described in more detail in Note 14 of the Notes to Consolidated Financial Statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K) or regulatory actions, our failure to meet our high customer service and quality standards, and compliance failures.
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In particular, is not always possible to prevent employee error or misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon processing systems to record and process transactions and our large transaction volume may further increase the risk that employee errors, tampering, or manipulation of those systems will result in losses that are difficult to detect. Employee error or misconduct could also subject us to financial claims. If our internal control systems fail to prevent or detect an occurrence, or if any resulting loss is not insured, exceeds applicable insurance limits, or if insurance coverage is denied or not available, it could have an adverse effect on our business, financial condition, and results of operations.
Additionally, as a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers, and other third parties targeting us and our customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts. Although we devote substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, we may experience financial losses or reputational harm as a result of fraud.
Negative publicity about us, whether accurate or not, may also damage our reputation, which could have an adverse effect on our business, financial condition, and results of operations.
Regulatory Matters
Our lending limit may restrict our growth.
Washington law provides that Washington chartered commercial banks are subject to loans-to-one-borrower restrictions, which generally restrict total loans and extensions of credit by a bank to 20% of its unimpaired capital and surplus. As a result, under Washington law, First Fed would be limited to loans to one borrower of $43.2 million at December 31, 2025. Under its current policy, First Fed has elected to restrict its loans to one borrower to no more than 75% of the Bank's lending limit, which is adjusted quarterly and was $40.5 million at December 31, 2025, unless specifically approved by the Senior Loan Committee as an exception to policy. This amount is significantly less than that of many of our competitors and may discourage potential commercial borrowers who have credit needs in excess of our loans to one borrower lending limit from doing business with us. Our loans to one borrower restriction also impacts the efficiency of our commercial lending operation because it lowers our average loan size, which means we have to generate a higher number of transactions to achieve the same portfolio volume. We can accommodate larger loans by selling participations in those loans to other financial partners, but this strategy is not the most efficient or always available. We may not be able to attract or maintain clients seeking larger loans or may not be able to sell participations in these loans on terms we consider favorable.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive examination, supervision and comprehensive regulation by the Federal Reserve, the FDIC as insurer of our deposits, and by the DFI. First Northwest is subject to regulation and supervision by the Federal Reserve (as a financial holding company) and regulation by the State of Washington (as a Washington corporation). The Bank is subject to regulation and supervision by the FDIC and the DFI. Such regulation and supervision govern the activities in which we may engage, primarily for the protection of depositors and the DIF. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, require additional capital, reclassify assets, determine the adequacy of an institution’s allowance for credit losses on loans and determine the level of deposit insurance premiums assessed. Any future changes to the laws, rules and regulations applicable to us could make compliance more difficult and expensive, or otherwise adversely affect our business, financial condition or prospects.
We are also subject to tax, accounting, securities, insurance, monetary laws and regulations, rules, standards, policies, and interpretations that control the methods by which financial institutions conduct business. These may change significantly over time, which could materially impact our business and have a significant adverse effect on our cost of regulatory compliance and results of operations. Further, changes in accounting standards and their interpretation may materially impact how we report, potentially retroactively, our financial condition and results of operations.
Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing, and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. If changes to laws, rules and/or regulations applicable to us are made, such changes could offset the otherwise anticipated increase in operating and compliance costs (included in noninterest expense); however, no assurance can be given as to whether such changes will occur or what may result from such changes.
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We are subject to laws regarding the privacy, information security, and protection of personal information, and any violation of these laws or other incidents involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information ("PII"), in various information systems that we maintain and in those maintained by third-party service providers. We also maintain important internal company data such as PII about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees, and other third parties). For example, our business is subject to the GLBA, which, among other things: (i) imposes certain limitations on our ability to share nonpublic PII about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing, and security practices and afford customers the right to "opt out" of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement, and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory, or law enforcement notification in the event of a security breach. For example, the California Consumer Privacy Act grants California residents the rights to know about personal information collected about them, to delete certain of this personal information, to opt out of the sale of personal information, and to non-discrimination for exercising these rights.
Ensuring that our collection, use, transfer, and storage of PII complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential, or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations, and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines, or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations.
We are subject to numerous fair lending laws and other laws and regulations designed to protect consumers, and failure to comply with these laws could lead to a wide variety of sanctions.
We are subject to extensive and evolving federal and state fair lending laws and regulations. For example, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The FDIC, the U.S. Department of Justice, and other federal and state agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s compliance with fair lending or consumer protection laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation. In addition, an institution’s receipt of a less-than-Satisfactory CRA rating, which could result from a violation of fair lending or consumer protection laws or from an unsatisfactory record of meeting the credit needs of low- and moderate-income communities, could similarly result in an inability of the institution to engage in mergers or other expansionary activity. Such actions and limitations could have a material adverse effect on our business, financial condition, and results of operations.
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General Risk Factors
We are dependent on key personnel and the loss of one or more of those key persons may materially and adversely affect our prospects.
We rely heavily on the efforts and abilities of our executive officers, and certain other key management personnel, which make up our management team. As previously disclosed, the former President, Chief Executive Officer and member of the Board of Directors departed effective July 12, 2025. In addition, the former Chief Banking Officer of First Fed retired on July 2, 2025, and the former Chief Strategy Officer of First Fed departed on August 9, 2025. Subsequent to year-end, the former Chief Operating Officer departed on February 4, 2026. The loss of the services of these individuals, and the potential loss of any of our current management team, could have a material adverse impact on our business, financial condition, and results of operations. While we believe that our relationship with our remaining management team is good, we cannot guarantee that all members of our management team will remain with our organization. The ability to attract, retain, and season replacements to our management team presents risks to executing our business plan.
Our consideration of whole bank, branch acquisitions, or fintech partnerships in the future may expose us to financial, execution and operational risks that could adversely affect us.
We may evaluate supplementing organic growth by acquiring other financial institutions or their businesses that we believe will help us fulfill our strategic objectives and enhance our earnings. There are risks associated with this strategy, however, including the following:
We may be exposed to potential asset quality issues or unknown or contingent liabilities of the financial institutions, businesses, assets and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected;
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;
To finance a future acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and
If market or regulatory conditions change, we may be unable to successfully compete for, complete, or integrate potential future acquisitions as anticipated or at all. Downturns in the stock market and the market price of our stock, changes in our capital position, heightened regulatory scrutiny, and changes in our regulatory standing could each have a negative impact on our ability to complete future acquisitions.
Our expansion strategy will cause our expenses to increase and may negatively affect our earnings.
Over the past eight years, we have opened four new full-service branches and three business centers. We also acquired a branch from another financial institution in 2021. We may continue to open or purchase new branches and lending centers, and the success of our expansion strategy into new markets is contingent upon numerous factors, such as our ability to select suitable locations, assess each market's competitive environment, secure managerial resources, hire and retain qualified personnel and implement effective marketing strategies. The opening of new offices may not increase the volume of our loans and deposits as quickly or to the degree that we projected and opening new offices will increase our operating expenses. The cost of opening additional de novo branches and lending centers is uncertain, and projected timelines and estimated dollar amounts involved in opening new offices could differ significantly from actual results. In addition, we may not successfully manage the costs and implementation risks associated with our branching strategy. Accordingly, any new branch or lending center may negatively impact our earnings for some period of time until the office reaches certain economies of scale, and there is a risk that our new offices will not be successful even after they have been established. For example, the branch acquired in 2021 will be closedeffective April 30, 2026.
We may also expand our digital footprint through technology or partnerships. The new technology and companies we invest in may not be as successful as anticipated or may fail, resulting in a total loss of our related investment.
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The price of our common stock may be volatile or may decline.
During the year ended December 31, 2025, our stock price fluctuated from a low of $6.96 to a high of $11.88. The price of our common stock may fluctuate in response to various factors, some of which are outside our control. These factors include the risk factors discussed herein, as well as:
actual or anticipated quarterly fluctuations in our results of operations and financial condition;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts and rating agencies;
speculation or changes in perception in the press or investment community;
strategic actions and announcements by us or our competitors, such as acquisitions or restructurings;
actions by institutional stockholders;
addition or departure of key personnel;
fluctuations in the stock price and operating results of our competitors;
general market conditions and, in particular, market conditions in the financial services industry;
anticipated, proposed or adopted regulatory changes or developments;
cyclical fluctuations;
trading volume of our common stock; and
anticipated or pending investigations, proceedings or litigation that involve or affect us.
Industry factors, general economic and political conditions and events, such as cybersecurity incidents or terrorist attacks, economic downturn or recessions, interest rate changes, credit default trends, currency fluctuations, changes to fiscal, monetary or trade policies, or public health issues could also cause our stock price to decline regardless of our operating results. A significant decline in our stock price could result in substantial losses for stockholders.
gain
enhance
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.
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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.
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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 i ntegral 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.
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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 approximate ly 6.7 years as of December 31, 2025, compared to 5.3 years as of December 31, 2024 , based on the interest rate environments at those times. Expected duration of the portfolio has 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.
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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
Multi-family
Commercial real estate
Construction and land
Total real estate loans
Consumer:
Home equity
Auto and other consumer
Total consumer loans
Commercial business loans
Total loans
Less:
Derivative basis adjustment
Allowance for credit losses on loans
Total loans receivable, net
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.
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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.
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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,
(dollars in thousands)
Average Balance Outstanding
Yield
Average Balance Outstanding
Yield
Increase/ (Decrease) in Interest Income
Loans receivable, net
Investment securities
FHLB stock
Interest-earning deposits in banks
Total interest-earning assets
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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,
(dollars in thousands)
Average Balance Outstanding
Rate
Average Balance Outstanding
Rate
Increase/ (Decrease) in Interest Expense
Interest-bearing transaction
Money market accounts
Savings accounts
Certificates of deposit, customer
Certificates of deposit, brokered
FHLB and other advances
Subordinated debt, net
Total interest-bearing liabilities
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)
Provision for credit losses on loans
Charge offs net of recoveries
Allowance for credit losses on loans
Allowance for credit losses on loans as a percentage of total gross loans receivable at the end of this period
Total nonaccrual loans
Allowance for credit losses on loans as a percentage of nonaccrual loans at end of period
Nonaccrual loans as a percentage of total loans
Total loans receivable
Recapture of provision for credit losses on unfunded commitments
Reserve for unfunded commitments
Unfunded loan commitments
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 gainsbenefitted from lower mortgage rates. The BOLI exchange and reinvestment transactions during 2024 resulted in an increase in the cash surrender value for both years.
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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)
Amount
Percent
Loan and deposit fees
Sold loan servicing fees and servicing rights mark-to-market
Net gain on sale of loans
Net loss on sale of investment securities
Net gain on sale of premises and equipment
Increase in BOLI cash surrender value, net
Income from BOLI death benefit, net
Other income (loss)
Total noninterest income
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)
Amount
Percent
Compensation and benefits
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Professional fees
FDIC insurance premium
Legal settlement paid
Other expense
Total noninterest expense
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.
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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,
(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)
Total investment securities
FHLB dividends
Interest-earning deposits in banks
Total interest-earning assets (3)
Noninterest-earning assets
Total average assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit, customer
Certificates of deposit, brokered
Total interest-bearing deposits (4)
FHLB and other advances
Subordinated debt, net
Total interest-bearing liabilities
Noninterest-bearing deposits (4)
Other noninterest-bearing liabilities
Total average liabilities
Average equity
Total average liabilities and equity
Net interest income
Net interest rate spread
Net earning assets
Net interest margin (5)
Average interest-earning assets to average interest-bearing liabilities
(1) The average loans receivable, net balances include nonaccrual loans.
(2) Interest earned on loans receivable includes net deferred costs of $1.7 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.
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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)
Investment securities
FHLB stock
Other (2)
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit, customer
Certificates of deposit, brokered
FHLB and other advances
Subordinated debt, net
Total interest-bearing liabilities
Net change in interest income
(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.
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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
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.
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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.
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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
Variable-rate loans
Unfunded commitments under lines of credit
Unfunded commitments under existing construction loans
Standby letters of credit
Unfunded commitments under partnership agreements
Total
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.
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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
Common equity tier I (to risk-weighted assets)
Bank only
Tier I risk-based capital (to risk-weighted assets)
Bank only
Total risk-based capital (to risk-weighted assets)
Bank only
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.
