First Northwest Bancorp

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data) (Unaudited)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands) (Unaudited)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended September 30, 2024 and 2023

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2024 and 2023

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

FIRST NORTHWEST BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note1 - Basis of Presentation and Critical Accounting Policies

Organization and nature of business - First Northwest Bancorp, a Washington corporation ("First Northwest"), became the holding company of First Fed Bank ("First Fed" or the "Bank") on* January 29, 2015,*upon completion of the Bank's conversion from a mutual to stock form of organization (the "Conversion").

In connection with the Conversion, the Company issued an aggregate of 12,167,000 shares of common stock at an offering price of $10.00 per share for gross proceeds of $121.7 million. An additional 933,360 shares of Company common stock and $400,000 in cash were contributed to the First Federal Community Foundation ("Foundation"), a charitable foundation that was established in connection with the Conversion, resulting in the issuance of a total of 13,100,360 shares. The Company received $117.6 million in net proceeds from the stock offering of which $58.4 million was contributed to the Bank upon Conversion.

Pursuant to the Bank's Plan of Conversion (the "Plan") adopted by its Board of Directors, and as approved by its members, the Company established an employee stock ownership plan ("ESOP"). On* December 18, 2015,*the ESOP completed its open market purchases, with funds borrowed from the Company, of 8% of the common stock issued in the Conversion for a total of 1,048,029 shares.

In* April 2021,First Northwest entered into an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") with the Bank, Peace of Mind, Inc. ("POM"), and Quin Ventures, Inc. ("Quin" or "Quin Ventures"). First Northwest extended $8.0 million to Quin Ventures under a capital financing agreement and related promissory note and issued 29,719 shares of the Company's common stock to POM with a value of $500,000. Quin Ventures sold substantially all of its assets in December 2022to Quil Ventures, Inc. ("Quil"), at which time POM returned the 29,719 shares previously issued and the joint venture agreement was terminated. As part of the sale transaction, the Company received a 5% ownership stake in Quil valued at $225,000 and recorded a $1.5 million commitment receivable. In June 2023,First Northwest determined that Quin Ventures wasno* longer a going concern. The Company wrote off the remaining investment in Quin Ventures through retained earnings in accordance with applicable non-controlling interest accounting methods. The noncontrolling interest in Quin Ventures balance was moved to retained earnings, withno change to total shareholders' equity as a result of the transaction. In* December 2023,the Company determined that Quil wasno* longer a going concern, making the collectability of the receivable from and investment in Quil unlikely. As result, the related investment of $225,000 and commitment receivable of $1.5 million were written off during thefourth quarter of2023, impacting other noninterest income and other noninterest expense, respectively.

On* October 31, 2021,*the Bank converted from a State Savings Bank Charter to a State Commercial Bank Charter and was simultaneously renamed First Fed Bank from First Federal Savings and Loan Association of Port Angeles.

On* August 5, 2022,*First Northwest's election to be treated as a financial holding company became effective, allowing the Company to engage in activities that are financial in nature or incidental to financial activities.

First Northwest and the Bank are collectively referred to as the "Company." For periods prior to* June 30, 2023,*Company references also include Quin Ventures.

First Northwest's business activities generally are limited to passive investment activities and oversight of its investment in First Fed and former controlling interest in Quin Ventures. Accordingly, the information set forth in this report, including the consolidated unaudited financial statements and related data, relates primarily to the Bank for balance sheet related disclosures and the Bank and Quin Ventures for income statement related disclosures.

The Bank is a community-oriented financial institution providing commercial and consumer banking services to individuals and businesses in western Washington State with offices in Clallam, Jefferson, Kitsap, King, and Whatcom counties. These services include deposit and lending transactions that are supplemented with borrowing and investing activities.

Basis of presentation - The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they donot include all the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form10-K for the year ended* December 31, 2023*. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements in accordance with GAAP have been included. Operating results for thethree andnine months ended* September 30, 2024*, arenot necessarily indicative of the results that* may*be expected for future periods.

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In preparing the unaudited interim consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to a determination of the allowance for credit losses ("ACL"), fair value of financial instruments and derivatives, and deferred tax assets and liabilities.

Restatement - On* October 21, 2024,the Audit Committee of the Board of Directors (the "Audit Committee") of the Company, based on the recommendation of, and after consultation with, the Company’s management and independent registered public accounting firm, concluded that certain charge-offs of commercial construction loans, commercial business loans and the Splash unsecured consumer loan program as well as increased provision on Splash consumer loans should have been reported in the interim period ending June 30, 2024.On October 25, 2024,the Company filed amendments to its quarterly report for the period ended June 30, 2024to restate the consolidated financial statements included therein. The consolidated financial statements as of and for thenine* months ended* September 30, 2024*, reflect the effects of the restatement as of and for the period ended* June 30, 2024.*

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First Northwest; its wholly owned subsidiary, First Fed, and its former controlling interest in Quin Ventures. All material intercompany accounts and transactions have been eliminated in consolidation. Through* June 2023,First Northwest and POM shared equal ownership in Quin Ventures; however, it was previously determined that First Northwest had a controlling interest for financial reporting purposes under Accounting Standards Codification Topic810.* The Quin Ventures net loss allocable to POM is shown on the financial statements where applicable through a noncontrolling interest adjustment.

Subsequent events- The Company has evaluated subsequent events for potential recognition and disclosure.

Recently adopted accounting pronouncements

In* June 2022,the FASB issued ASUNo.* 2022-03, Fair Value Measurement (Topic820*): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions*. ASU2022-03 clarifies that a contractual restriction on the sale of an equity security shouldnot be considered in measuring fair value, nor should the contractual restriction be recognized and measured separately. Further, this ASU requires disclosure of the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet, the nature and remaining duration of the restriction(s), and the circumstances that could cause a lapse in the restriction(s). ASU2022-03 is effective for the Company for fiscal years beginning after* December 15, 2023,including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU didnot* have a material impact on the consolidated financial statements and related disclosures.

In* March 2023,the FASB issued ASU2023*-02, Investments - Equity Method and Joint Ventures (Topic323*): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force*. ASU2023-02 allows an entity the option to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits if certain conditions are met. Prior to this ASU, the application of the proportional amortization method of accounting was limited to investments in low-income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this ASU, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. In addition, the amendments in this ASU require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph323-740-25-3, requiring a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this ASU, low-income housing tax credit investments for which the proportional amortization method isnot applied canno longer be accounted for using the delayed equity contribution guidance. Further, this ASU specifies that impairment of low-income housing tax credit investmentsnot accounted for using the equity method must apply the impairment guidance in Subtopic323-10: Investments - Equity Method and Joint Ventures - Overall. This ASU also clarifies that for low-income housing tax credit investmentsnot accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic321: Investments - Equity Securities. The amendments in this ASU also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. ASU2023-02 is effective for the Company for fiscal years beginning after* December 15, 2023,including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU didnot* have a material impact on the consolidated financial statements and related disclosures.

In* November 2023,the FASB issued ASU2023*-07, Segment Reporting (Topic280*): Improvements to Reportable Segment Disclosures*. ASU2023-07 requires public companies to provide more transparency in both quarterly and annual reports about the expenses they incur from revenue generating business units to better understand the Company's overall performance and potential future cash flows. The Company has identifiedone reporting segment. ASU2023-07 is effective for the Company for fiscal years beginning after* December 15, 2023,including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU didnot* have a material impact on the consolidated financial statements and related disclosures.

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Recently issued accounting pronouncementsnot yet adopted

In* March 2024,the FASB issued ASU2024*-01, Compensation—Stock Compensation (Topic718*): Scope Application of Profits Interest and Similar Awards*. ASU2024-01 added an illustrative example to demonstrate how an entity should apply the scope guidance in paragraph718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic718. Awardsnot meeting the criteria should be accounted for in accordance with Topic710. The illustrative example providesfour fact patterns which are intended to reduce complexity in determining whether a profits interest award is subject to the guidance in Topic718 and reduce existing diversity in practice. ASU2024-01 is effective for the Company for fiscal years beginning after* December 15, 2024,including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU isnot* expected to have a material impact on the consolidated financial statements and related disclosures.

In* November 2024,the FASB issued ASU2024*-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic220*-40): Disaggregation of Income Statement Expenses*. ASU2024-03 requires additional disclosure of the nature of expenses included in the income statement in response to requests from investors for more information to better understand an entity's performance and potential future cash flows. The new standard requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. ASU2024-03 is effective for the Company for fiscal years beginning after* December 15, 2026,including interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU isnot* expected to have a material impact on the consolidated financial statements and related disclosures.

Note2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at* September 30, 2024* are summarized as follows:

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-for-sale at* December 31, 2023*, are summarized as follows:

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There wereno securities classified as held-to-maturity at* September 30, 2024* and* December 31, 2023*. There wasno allowance for credit losses on investment securities recorded at* September 30, 2024* and* December 31, 2023*, based on analysis performed by the Company.

Accrued interest receivable on available-for-sale debt securities totaled $2.4 million and $1.9 million as of* September 30, 2024* and* December 31, 2023*, respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Balance Sheets and is excluded from the calculation of the allowance for credit losses on investment securities.

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of* September 30, 2024*:

The following shows the unrealized gross losses and fair value of the investment portfolio by length of time that individual securities in each category have been in a continuous loss position as of* December 31, 2023*:

There were 10 available-for-sale securities with unrealized losses of less thanone year, and 145 available-for-sale securities with an unrealized loss of more thanone year at* September 30, 2024*. There were 6 available-for-sale securities with unrealized losses of less thanone year, and 156 available-for-sale securities with an unrealized loss of more thanone year at* December 31, 2023*. Management believes that the unrealized losses on our investment securities relate principally to the general change in interest rates, market liquidity and demand, and market volatility that has occurred since the initial purchase, and such unrecognized losses or gains will continue to vary with general interest rate level and market fluctuations in the future. We donot believe the unrealized losses on our securities are related to a deterioration in credit quality. Certain investments in a loss position are guaranteed by government entities or government sponsored entities. The Company believes that it is unlikely that we would be required to sell these investments prior to a market price recovery or maturity. Based on the Company’s evaluation of these securities,no credit impairment was recorded at* September 30, 2024*, or* December 31, 2023*.

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The amortized cost and estimated fair value of investment securities by contractual maturity are shown in the following tables at the dates indicated. Expected maturities of mortgage-backed securities* maydiffer from contractual maturities because borrowers may*have the right to call or prepay obligations with or without call or prepayment penalties; therefore, these securities are shown separately.

Sales of available-for-sale securities were as follows:

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Note3 - Loans Receivable

The Company has identifiedthree segments of its loan portfolio that reflect the structure of the lending function, the Company's strategic plan and the manner in which management monitors performance and credit quality. Thethree loan portfolio segments are: Real Estate Loans, Consumer Loans and Commercial Business Loans. These segments are further disaggregated into classes based on similar attributes and risk characteristics.

Loan amounts are presented at amortized cost which is comprised of the loan balance net of unearned loan fees in excess of unamortized costs and unamortized purchase premiums of $19.5 million as of* September 30, 2024* and $14.8 million as of* December 31, 2023*. The amortized cost reflected in total loans receivable doesnot include accrued interest receivable. Accrued interest receivable on loans was $6.5 million as of* September 30, 2024* and $6.0 million as of* December 31, 2023*, and was reported in accrued interest receivable on the consolidated balance sheets and is excluded from the calculation of the allowance for credit losses on loans.

The amortized cost of loans receivable, net of the allowance for credit losses on loans ("ACLL"), consisted of the following at the dates indicated:

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Nonaccrual Loans. The accrual of interest on loans is discontinued at the time the loan is90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued butnot collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For those loans placed on nonaccrual status due to payment delinquency, return to accrual status will generallynot occur until the borrower demonstrates repayment ability over a period ofnot less thansix months.

The following table presents the amortized cost of nonaccrual loans by class of loan at the dates indicated:

Interest income recognized on a cash basis on nonaccrual loans for thethree months ended* September 30, 2024and2023*, was $1,000 and $19,000, respectively. Interest income recognized on a cash basis on nonaccrual loans for thenine months ended* September 30, 2024and2023*, was $35,000 and $52,000, respectively.

Past due loans.** Loans are considered past due if the required principal and interest payments havenot been received as of the date such payments were due. There wereno loans past due90 days or more and still accruing interest at September 30, 2024 and* December 31, 2023*.

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The following tables present the amortized cost of past due loans (including both accruing and nonaccruing loans) by segment and class as of the periods shown:

Credit quality indicator. Federal regulations provide for the classification of lower quality loans and other assets, such as debt and equity securities, as substandard, doubtful, or loss; risk ratings6, 7, and8 in our8-point risk rating system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies arenot corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve isnot warranted.

When First Fed classifies problem assets as either substandard or doubtful, it* maychoose to individually evaluate the expected credit loss or maydetermine that the characteristics arenot* significantly different from those in pooled loan analysis. The Company evaluates individual loans for expected credit losses when those loans donot share similar risk characteristics with loans evaluated using a collective (pooled) basis. When an insured institution classifies problem assets as a loss, it is required to charge off such assets in the period in which they are deemed uncollectible. Assets that donot currently expose First Fed to sufficient risk to warrant classification as substandard or doubtful but possess identified weaknesses are designated as either watch or special mention assets; risk ratings4 and5 in our risk rating system, respectively. Loansnot otherwise classified are considered pass graded loans and are rated1-3 in our risk rating system.

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The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of* September 30, 2024*, as well as gross charge-off activity for thenine months ended* September 30, 2024*. Term loans that are renewed or extended for periods longer than90 days are presented as a new origination in the year of most recent renewal or extension.

(1) Term loans that are renewed or extended for periods longer than90 days are presented as a new origination in the year of most recent renewal or extension.

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The following table presents the amortized cost of loans receivable by internally assigned risk grade and class of loans as of* December 31, 2023*, as well as gross charge-off activity for the year then ended. Term loans that are renewed or extended for periods longer than90 days are presented as a new origination in the year of most recent renewal or extension.

(1) Term loans that are renewed or extended for periods longer than90 days are presented as a new origination in the year of most recent renewal or extension.

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Individually Evaluated Loans. The Company evaluates loans collectively for purposes of determining the ACLL in accordance with ASC326 by aggregating loans deemed to possess similar risk characteristics and individually evaluates loans that it believesno longer possess risk characteristics similar to other loans in the portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified loans made to borrowers experiencing financial difficulty, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral.

Loans that are deemed by management to possess unique risk characteristics are evaluated individually for purposes of determining an appropriate lifetime ACLL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent. Collateral dependent loans are evaluated based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company* may*increase or decrease the ACLL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. In cases where the loan is well-secured and the estimated value of the collateral exceeds the amortized cost of the loan,no ACLL is recorded. Changes in the ACLL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

As of* September 30, 2024*, $31.8 million of loans were individually evaluated with $2.6 million of ACLL attributed to such loans. At* September 30, 2024*,eight individually evaluated loans totaling $4.6 million were evaluated using a discounted cash flow approach and the remaining loans totaling $27.2 million were evaluated based on the underlying value of the collateral. One loan evaluated using the discounted cash flow method remained on accrual at quarter end, while the other loans evaluated using the discounted cash flow method and all loans evaluated based on collateral value were on nonaccrual at* September 30, 2024*.

At* December 31, 2023*, $20.0 million of loans were individually evaluated with $165,000 of ACLL attributed to such loans. At* December 31, 2023*,one individually evaluated loan with a recorded investment of $2.5 million was evaluated using a discounted cash flow approach and the remaining loans totaling $17.5 million were evaluated based on the underlying value of the collateral. The loan evaluated using the discounted cash flow method was accruing at year end, while the collateral dependent loans were all on nonaccrual status at* December 31, 2023.*

Collateral Dependent Loans. Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral.

The following table summarizes individually evaluated collateral dependent loans by segment and collateral type as of the periods shown:

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Modified Loans to Troubled Borrowers. On* January 1, 2023,the Company adopted ASU2022*-02, which introduced new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. The Company refers to these loans as modified loans to troubled borrowers ("MLTB"). A MLTB arises from a modification made to a loan in order to alleviate temporary difficulties in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. GAAP requires that certain types of modifications be reported, which consist of the following: principal forgiveness, interest rate reduction, other-than-insignificant payment delay, term extension, or any combination of the foregoing. The ACLL for a MLTB is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loansno longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACLL for a MLTB is determined through individual evaluation.

During thenine months ended* September 30, 2024*, there wasone new MLTB, a commercial business loan with a recorded investment of $17,000 for which the Bank agreed to defer payments. The borrower has agreed to resume principal and interest payments at the end of the deferral period. The loan was current at* September 30, 2024*, based on the modified terms.

During the year ended* December 31, 2023,*there wasone new MLTB, a commercial business loan with a recorded investment of $119,000 for which the Bank agreed to defer principal payments. The borrower continues to make interest-only payments and the loan was current at year end based on the modified terms.

Note4 - Allowance for Credit Losses on Loans

The Company maintains an ACLL and an ACLUC in accordance with ASC326: Financial Instruments - Credit Losses. ASC326 requires the Company to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents the Company’s best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACLL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the Bank's Current Expected Credit Loss ("CECL") model. The reserve is an estimate based upon factors and trends at the time the financial statements are prepared. The Company adopted ASU2016-13 effective* January 1, 2023,*which increased the beginning ACLL.

The Company has identified segments of loans with similar risk characteristics for which it then appliesone oftwo loss methodologies. The Company uses a 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 will evaluate individual loans for expected credit losses when those loans donot share similar risk characteristics with loans evaluated using a collective (pooled) basis. The allowance for individually evaluated loans is calculated using the collateral value method, which considers the likely source of repayment as the value of the collateral, less estimated costs to sell, or another method such as the cash flow method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt. When the cash flow method is used, cash flows are discounted back by the effective interest rate and compared to the total recorded investment. If the present value of cash flows is less than the total recorded investment, a reserve is calculated.

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The following tables detail activity in the allowance for credit losses on loans by class for the periods shown:

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Allowance for Credit Losses on Unfunded Loan Commitments. The Company estimates expected credit losses on unfunded, off-balance sheet commitments over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The Company has determined thatno allowance is necessary for its home equity line of credit portfolio as it has the contractual ability to unconditionally cancel the available lines of credit. The allowance methodology is similar to the ACLL, but additionally includes an estimate of the future utilization of the commitment as determined by historical commitment utilization. The credit risks associated with the unfunded commitments are consistent with the risks outlined for each loan class. The allowance is recognized in accrued expenses and other liabilities on the Consolidated Balance Sheets and is adjusted as a provision, or recapture of provision, for credit losses on unfunded commitments on the Consolidated Statements of Income. The allowance for unfunded commitments was $704,000 and $817,000 at* September 30, 2024*, and* December 31, 2023*, respectively.

Note5 - Premises and Equipment

Premises and equipment consist of the following as of:

Depreciation expense for thethree months ended* September 30, 2024and2023*, was $346,000 and $402,000, respectively. Depreciation expense for thenine months ended* September 30, 2024and2023*, was $1.1 million and $1.2 million, respectively.

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Note6 - Leases

The Bank has lease agreements with unaffiliated parties forfifteen locations, comprised ofeleven full-service branches, three business centers, and a parking easement. Lease expirations range fromone totwenty years, with additional renewal options on certain leases ranging fromtwo toten years. If the exercise of a renewal option is considered to be reasonably certain, the Company includes the extended term in the calculation of the right-of-use asset and lease liability. At* September 30, 2024*, the Company's ROU assets and lease liabilities were $17.3 million and $17.8 million, respectively.

Total costs incurred by the Company, as a lessee, were $1.6 million and $857,000 for thenine months ended* September 30, 2024and2023*, respectively, and principally related to contractual lease payments on operating leases. The Company's leases donot impose significant covenants or other restrictions on the Company.

The following table presents amounts relevant to the Company's assets leased for use in its operations at the dates indicated:

The following table presents the weighted-average remaining lease terms and discount rates of the Company's assets leased for use in its operations at the dates indicated:

All lease agreements require the Bank to pay its pro-rata share of building operating expenses. The minimum annual lease payments under non-cancelable operating leases with initial or remaining terms ofone year or more through the initial lease term are as follows:

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Note7 - Deposits

Deposits and weighted-average interest rates at the dates indicated are as follows:

The aggregate amount of time deposits in excess of the Federal Deposit Insurance Corporation ("FDIC") insured limit, currently*$250,000,* at* September 30, 2024* and* December 31, 2023*, were $170.7 million and $173.8 million, respectively.

Maturities of certificates at the dates indicated are as follows:

At* September 30, 2024* and* December 31, 2023*, deposits included $119.0 million and $114.2 million, respectively, in public fund deposits. The Bank had an outstanding letter of credit from the Federal Home Loan Bank of Des Moines ("FHLB") with a notional amount of $60.0 million at* September 30, 2024* and* December 31, 2023*, to secure public deposits. This exceeds the minimum collateral requirements established by the Washington Public Deposit Protection Commission. Also included in deposits at* September 30, 2024* and* December 31, 2023*, were funds held by federally recognized tribes totaling $20.7 million and $18.4 million, respectively. Investment securities with a carrying value of $24.2 million and $23.8 million were pledged as collateral for these deposits at* September 30, 2024* and* December 31, 2023*, respectively. This exceeds the minimum collateral requirements established by the Bureau of Indian Affairs.

Interest on deposits by type for the periods shown was as follows:

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Note8 - Borrowings

First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 35% of total assets, subject to the amount of FHLB stock ownership and certain collateral requirements.

First Fed maintains borrowing arrangements with the FHLB to borrow funds primarily under long-term, fixed-rate advance agreements. First Fed also has overnight borrowings through FHLB which renew daily until paid. First Fed periodically uses fixed-rate advances maturing in less thanone year as an alternative source of funds. Available borrowing capacity was $226.1 million and $253.8 million at* September 30, 2024* and* December 31, 2023*, respectively. All borrowings are secured by collateral consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts of $907.3 million and $896.2 million at* September 30, 2024* and* December 31, 2023*, respectively. The Bank had outstanding letters of credit from the FHLB with notional amounts of $60.0 million to secure public deposits and $772,000 to secure the Bellevue, Washington branch lease at* September 30, 2024*.

First Fed also has an established borrowing arrangement with the Federal Reserve Bank of San Francisco ("FRB") to utilize the discount window for short-term borrowing. Available borrowing capacity was $18.7 million and $6.6 million at* September 30, 2024* and* December 31, 2023*, respectively. An overnight test of the line of credit was performed at the end of* June 2024.Investment securities with a carrying value of $19.3 million and $6.9 million were pledged to the FRB at September 30, 2024* and* December 31, 2023*, respectively.

On* March 25, 2021,the Company completed a private placement of $40.0 million of 3.75% fixed-to-floating rate subordinated notes due2031* (the "Notes") to certain qualified institutional buyers and institutional accredited investors. The net proceeds to the Company from the sale of the Notes were approximately $39.3 million after deducting placement agent fees and other offering expenses. The Notes have been structured to qualify as Tier2 capital for the Company for regulatory capital purposes. The Company used the net proceeds of the offering for general corporate purposes.

On* May 20, 2022,First Northwest consummated a borrowing arrangement with NexBank for a $20.0 million revolving line of credit. Borrowings are secured by a blanket lien on 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 on May 17, 2025*.

In* June 2023,First Fed established a Bank Term Funding Program ("BTFP") borrowing arrangement with the FRB as an additional source of liquidity. Available borrowing capacity was $15.2 million at December 31, 2023.No funds were borrowed between June 2023and March 2024,when the BTFP stopped funding new loans, effectively ending the Bank's participation in the program. Investment securities with a carrying value of $12.9 million were pledged to secure the BTFP at December 31, 2023.*

The following table sets forth information regarding our borrowings at the end of and during thenine months ended* September 30, 2024*. The table includes both long- and short-term borrowings.

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The amounts by year of maturity and weighted-average interest rate of FHLB long-term, fixed-rate advances at* September 30, 2024* are as follows:

The following table sets forth information regarding our borrowings at the end of and during the year ended* December 31, 2023*. The table includes both long- and short-term borrowings.

Note9 - Income Tax

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. These calculations are based on many complex factors including estimates of the timing of reversals of temporary differences, the interpretation of federal income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax assets and liabilities.

The effective tax rates were 25.5% and 19.9% for thenine months ended* September 30, 2024and2023*, respectively. The effective tax rates differ from the statutory maximum federal tax rate for2024 and2023 of 21%, largely due to the nontaxable earnings on bank-owned life insurance ("BOLI") and tax-exempt interest income earned on certain investment securities and loans. The current period rate includes an estimate for taxes and penalties on the early surrender of a BOLI contract which was recorded in thefirst quarter of2024.

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Note10 - Earnings (Loss) per Common Share

Thetwo-class method is used for computing basic and diluted earnings per share. Under thetwo-class method, EPS is determined for each class of common stock and participating security according to dividends declared and participating rights in undistributed earnings. The Company has issued restricted shares under share-based compensation plans which qualify as participating securities.

The following table presents a reconciliation of the components used to compute basic and diluted earnings per share for the periods shown:

Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. At* September 30, 2024* and2023, antidilutive shares as calculated under the treasury stock method totaled 20,663 and 13,582, respectively.

Note11 - Employee Benefits

Employee Stock Ownership Plan

In connection with the Conversion, the Company established an ESOP for eligible employees of the Company and the Bank. Employees of the Company and the Bank who have been credited with at least 1,000 hours of service during a 12-month period are eligible to participate in the ESOP.

Pursuant to the Plan, the ESOP purchased shares in the open market with funds borrowed from First Northwest. The Bank will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to First Northwest over a period of 20 years, bearing estimated interest at 2.46%. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Bank's discretionary contributions to the ESOP and earnings on the ESOP assets. Principal and interest payments of $837,000 and $835,000, respectively, were made by the ESOP during thenine months ended* September 30, 2024and2023*.

As shares are committed to be released from collateral, the Company reports compensation expense equal to the average daily market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued monthly throughout the year. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

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Compensation expense related to the ESOP for thethree months ended* September 30, 2024and2023*, was $136,000 and $167,000, respectively. Compensation expense related to the ESOP for thenine months ended* September 30, 2024and2023*, was $481,000 and $507,000, respectively.

Shares issued to the ESOP as of the dates indicated are as follows:

Note12 - Stock-based Compensation

In* May 2020,the Company's shareholders approved the First Northwest Bancorp2020* Equity Incentive Plan ("2020 EIP"), which provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock shares or restricted stock units, and performance share awards to eligible participants through* May 2030.The cost of awards under the2020* EIP generally is based on the fair value of the awards on their grant date. The maximum number of shares that* maybe utilized for awards under the2020* EIP is 520,000. As of* September 30, 2024*, there were 210,093 total shares available for grant under the2020 EIP, all of which are available to be granted as restricted shares.

As a result of the approval of the2020 EIP, the First Northwest Bancorp2015 Equity Incentive Plan (the*"2015* EIP") was frozen andno additional awards will be made. As of* September 30, 2024*, there wereno shares available for grant under the2015 EIP. At this date, there are 10,220 shares granted under the2015 EIP that are expected to vest subject to the2015 EIP plan provisions.

There were 81,181 and 32,449 shares of restricted stock awarded, respectively, during thenine months ended* September 30, 2024and2023*. Awarded shares of restricted stock vest ratably over periods ranging fromone tofive years from the date of grant provided the eligible participant remains in service to the Company. The Company recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the grant date amortized over the vesting period.

For thethree months ended* September 30, 2024and2023*, total compensation expense for the equity incentive plans was $260,000 and $349,000, respectively. Included in the compensation expense for thethree months ended* September 30, 2024and2023*, was directors' equity compensation of $75,000 and $59,000, respectively.

For thenine months ended* September 30, 2024and2023*, total compensation expense for the equity incentive plans was $781,000 and $1.1 million, respectively. Included in the compensation expense for thenine months ended* September 30, 2024and2023*, was directors' equity compensation of $185,000 and $190,000, respectively.

The following tables provide a summary of changes in non-vested restricted stock awards for the periods shown:

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As of* September 30, 2024*, there was $1.1 million of total unrecognized compensation cost related to non-vested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of approximately 1.94 years.

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Note13 - Fair Value Measurements

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants in the Company’s principal market. The Company has established and documented its process for determining the fair values of its assets and liabilities, where applicable. Fair value is based on quoted market prices, when available, for identical or similar assets or liabilities. In the absence of quoted market prices, management determines the fair value of the Company’s assets and liabilities using valuation models orthird-party pricing services, both of which rely on market-based parameters when available, such as interest rate yield curves, option volatilities and credit spreads, or unobservable inputs. Unobservable inputs* may*be based on management’s judgment, assumptions, and estimates related to credit quality, liquidity, interest rates, and other relevant inputs.

Any changes to valuation methodologies are reviewed by management to ensure they are relevant and justified. Valuation methodologies are refined as more market-based data becomes available.

Athree-level valuation hierarchy is used in determining fair value that is based on the transparency of the inputs used in the valuation process. The inputs used in determining fair value in each of thethree levels of the hierarchy are as follows:

Level1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level2 - Either: (i) quoted prices for similar assets or liabilities; (ii) observable inputs, such as interest rates or yield curves; or (iii) inputs derived principally from or corroborated by observable market data.

Level3 - Unobservable inputs.

The hierarchy gives the highest ranking to Level1 inputs and the lowest ranking to Level3 inputs. The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the overall fair value measurement.

The Company used the following methods to measure fair value on a recurring and nonrecurring basis.

Securities available for sale: Where quoted prices are available in an active market, securities are classified as Level1. Level1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury, and exchange-traded equity securities. If quoted prices arenot available, management determines fair value using pricing models, quoted prices of similar securities, which are considered Level2, or discounted cash flows. In certain cases, where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. Such instruments are classified as Level3.

Equity and partnership investments: Management determines fair value using quoted prices of similar investments or discounted cash flows, which are considered Level2, when available. Where there is limited activity in the market for an instrument, assumptions must be made to determine their fair value. The Company believes that the net asset value obtained through financial statements provided by each partnership approximates fair value. Such instruments are classified as Level3.

Sold loan servicing rights, at fair value: The fair value of sold loan servicing rights is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds, discount rates, and delinquency rate assumptions as inputs. Servicing rights are classified as Level3 due to reliance on assumptions used in the valuation.

Loans receivable, net: The fair value of loans is estimated by discounting the future cash flows using the current rate at which similar loans and leases would be made to borrowers with similar credit and for the same remaining maturities. Additionally, to be consistent with the requirements under FASB ASC Topic820 for Fair Value Measurements and Disclosures, the loans were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

Interest rate swap derivative: The fair values of interest rate swap agreements are based on valuation models using observable market data as of the measurement date (Level2). The Company’s securities derivatives are traded in an over-the-counter market where quoted market prices arenot always available. The Company also entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans. The fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including market transactions andthird-party pricing services. The fair values of all interest rate swaps are determined fromthird-party pricing services without adjustment.

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Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be valued on a recurring basis if fair value is measured regularly (i.e., daily, weekly, monthly, or quarterly). The following tables show the Company’s assets and liabilities measured at fair value on a recurring basis at the dates indicated:

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The following tables provide a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level3 and measured at fair value on a recurring basis at the dates indicated:

The following tables summarize the changes in Level3 assets measured at fair value on a recurring basis, at the dates indicated:

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(1) In thesecond quarter of2024, a redemption of First Northwest's limited partnership investment in Meriwether Group Hero Fund LP was offset by a subsequent limited partnership investment in the same entity by First Fed.

Assets and liabilities measured at fair value on a nonrecurring basis - Assets are considered to be valued on a nonrecurring basis if the fair value measurement of the instrument doesnot necessarily result in a change in the amount recorded on the consolidated balance sheets. Generally, nonrecurring valuation is the result of the application of other accounting pronouncements that require assets or liabilities to be assessed for impairment or recorded at the lower of cost or fair value.

The following tables present the Company’s assets measured at fair value on a nonrecurring basis at the dates indicated:

At* September 30, 2024* and* December 31, 2023*, there wereno individually evaluated loans with discounts to appraisal disposition value or other unobservable inputs.

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The following tables present the carrying value and estimated fair value of financial instruments at the dates indicated:

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Note14- Change in Accumulated Other Comprehensive Income ("AOCI")

Our AOCI includes unrealized gains (losses) on available-for-sale securities, defined benefit plan assets and derivatives as well as an unrecognized defined benefit plan prior service cost. The following table presents changes to accumulated other comprehensive income after-tax for the periods shown:

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Note15 - Derivatives and Hedging Activities

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the Secured Overnight Financing Rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreement without the exchange of the underlying notional amount. The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheets. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk, are recognized in interest income in the Company’s consolidated statements of income.

The following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges for the periods shown.

(1) These amounts include the amortized cost basis of a closed portfolio of AFS securities used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At* September 30, 2024* and* December 31, 2023*, the amortized cost basis of the closed portfolio used in this hedging relationship was $56.8 million and $57.4 million, respectively; the cumulative basis adjustments associated with this hedging relationship was $1.4 million and $1.1 million, respectively; and the amount of the designated hedged items was $50.0 million for both periods.

(2) These amounts include the amortized cost basis of a closed portfolio of loans receivable used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At* September 30, 2024*, the amortized cost basis of the closed portfolio used in this hedging relationship was $283.2 million, the cumulative basis adjustments associated with this hedging relationship was $1.6 million, and the amount of the designated hedged items was $100.0 million.No prior year end information is provided as this hedging relationship was initiated in2024.

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The following table summarizes the Company’s derivative instruments at the date indicated. The Company has master netting agreements with derivative dealers with which it does business, but reflects gross assets and liabilities as “Other assets” and “Other liabilities,” respectively, on the Consolidated Balance Sheets, as follows:

The following table summarizes the effect of fair value accounting on the Consolidated Statements of Income for the periods shown:

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Credit Risk-related Contingent Features

The Company is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions with investment grade credit ratings. However, this doesnot eliminate the Company’s exposure to credit risk with these institutions. This credit risk is limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted.

The Company has interest rate swap agreements with its derivative counterparties that contain provisions where if the Company either defaults or fails to maintain its status as a well or adequately capitalized institution, then the Company could be required to terminate the contract or post additional collateral. At* September 30, 2024*, the Company had derivatives in a net liability position related to these agreements. The Company has minimum collateral posting thresholds with its derivative counterparties and has posted cash of $3.5 million at* September 30, 2024*, to secure the related interest rate swap agreements as needed. In certain cases, the Company will have posted excess collateral compared to total exposure due to initial margin requirements or day-to-day rate volatility.

As of* September 30, 2024*, the Company was in compliance with all credit risk-related contingent features. Given the considerations described above, the Company considers the impact of the risk of counterparty default to be immaterial.

Note16 - Segment Reporting

First Fed is engaged in the business of attracting deposits and providing lending services. Substantially all income is derived from a diverse base of commercial, mortgage, and consumer lending activities and investments. The Company’s activities are considered to be a single industry segment for financial reporting purposes. The chief operating decision maker ("CODM") is comprised of the chief financial officer, chief operating officer and the chief executive officer.

The accounting policies of the Bank are the same as those described in the summary of significant accounting policies in Note1 of the Company's Annual Report on Form10-K for the year ended* December 31, 2023* ("2023 Form10-K"). The CODM assesses performance for the Bank and decides how to allocate resources based on net income that is reported on the income statement as consolidated net income. The measurement of segment assets is reported on the balance sheet as total consolidated assets.

The CODM uses net income to evaluate income generated from the segment assets (return on assets) in deciding whether to reinvest profits into the Bank or into other parts of the entity, such as to pay dividends or a share repurchase plan. Net income is used to monitor budget versus actual results and assess the performance of the Bank.

Note17 - Sale and Leaseback of Premises

On* January 30, 2024,the Bank entered into an agreement for the purchase and sale of real property (the "Sale Agreement") with Mountainseed Real Estate Services, LLC, a Georgia limited liability company ("Mountainseed"), providing for the Bank’s sale to Mountainseed of up tosix* properties (the "Properties"). All of the Properties are currently operated as branches and located in Clallam County, Washington or Jefferson County, Washington. Upon signing the agreement, the Company classified the related properties as held for sale and presented them separately on the Consolidated Balance Sheets at cost, net of accumulated amortization.

The sale of allsix properties was completed on* May 7, 2024,for an aggregate cash sales price of $14.7 million. A pre-tax gain on sale of $7.9 million was recorded in noninterest income for thesecond* quarter of2024. Premises and equipment, net of depreciation, decreased by $6.8 million in thesecond quarter of2024.

Concurrent with the closing of the sale of the Properties, the Bank entered into triple net lease agreements (the "Lease Agreements") to lease back each of the Properties sold. Each Lease Agreement has an initial term of 15 years withone 15-year renewal option. Going forward, a monthly rent expense of $130,000 in the aggregate for all Properties will be recorded in Occupancy and Equipment. The total estimated rent expense for the leaseback of these properties for2024 is $1.0 million. The annual increase in rent is expected to be partially offset by the elimination of annualized depreciation expense on the buildings of $204,000. The executed Lease Agreements also generated ROU assets totaling $12.2 million and lease liabilities of $12.2 million resulting in increases to other assets and other liabilities, respectively, on the Consolidated Balance Sheets that was recorded during thesecond quarter of2024.

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