First Northwest Bancorp Annual Report 2022

FY2022 Annual Report · First Northwest Bancorp

Loading PDF…

ANNUAL REPORT 2022

20 22 ANNUAL REPORT

April 13, 2023

To Our Stakeholders:

On behalf of the team at First Northwest Bancorp and First Fed Bank, we are proud to share our 2022 Annual Report with you.

Last year we worked diligently to meet the changing needs of our customers, employees, shareholders, and the communities we

serve by continually sharpening our focus on our vision: to create wellbeing and prosperity for our employees, customers, and

communities. This commitment means we worked continually to improve service across our customer base, further develop our

small business service lines, and sustain our investment in technology and digital delivery channels.

2020

TOTAL

OPERATING

REVENUE:

$59.8M

2021

TOTAL

OPERATING

REVENUE:

$73.9M

2022

TOTAL

OPERATING

REVENUE:

$80.2M

OUR FINANCIAL PERFORMANCE

This commitment to our vision is evident in our results! First Northwest reported another year of record profits in 2022, totaling

$15.6 million. Basic and diluted earnings per share increased to $1.71 for 2022 compared to $1.63 for the previous year. This

continued increase in earnings per share resulted from the combined impact of improved earnings and the successful execution

of our share repurchase program.

We also announced strategic partnerships with Splash Financial and The Meriwether Group, a Portland, Oregon-based advisory

and boutique investment banking firm. These opportunities will generate diversified non-interest revenue for First Fed along with

bolstering our small business lending relationships.

$2.1M

$2.2M

$1.7M

$69.9M

$58.3M

$44.0M

9.09%

8.19%

5.79%

2020FY
2021FY

2022FY

TOTAL
SHAREHOLDERS’
EQUITY
$158.3M

Interchange Income

Net Interest Income

Return on Average Equity

FIRST N ORTHWEST BANCORP

20 22 ANNUAL REPORT

Looking forward, we are focused on strength in liquidity, capital management, and asset quality. Our capital position remains

strong and improves each quarter as we add net profits to equity. Net loans increased $181 million, or 13.4%, and total assets

grew $121 million, or 6.3%, reaching $2 billion in 2022 despite the challenging economic climate of high inflation and rising

interest rates.

OUR GOVERNANCE COMMITMENT

In furtherance of our commitment to strong governance, our Board

recommended, and our shareholders approved, a declassification of our director

terms in 2022. The Board’s recommendation was based on First Northwest’s

maturity as a public company and the belief that shareholders would be better

served by a board structure that promotes accountability through the annual

election of all directors. As a result, all nine of our continuing directors are

nominated for election at the 2023 Annual Meeting of Shareholders.

As part of its continual review of governance, our Board identified an

opportunity to strengthen the current skills and experience of its

membership by adding Lynn Terwoerds as a member. Ms. Terwoerds’

impressive background in technology and cybersecurity strategy adds

valuable insight and expertise to our Board. She was appointed in January

2023 and has been nominated for election at the Annual Meeting.

OUR COMMUNITY INVESTMENT

First Northwest, through First Fed, takes great pride in our

long history of investing in our local communities, which goes

far beyond financial metrics and translates to sponsorships

and donations of over $1.2 million (combined with the First

Fed Foundation) in 2022. Last year, our employees used paid

volunteer hours and personal time to invest over 6,900

volunteer service hours in the communities we serve to

empower our neighbors, stimulate local economic growth,

and generate long-term customer loyalty.

FIRST N ORTHWEST BANCORP

20 22 ANNUAL REPORT

100th Anniversary Save-the-Date

September 3, 2023

Our Centennial Celebra(cid:2)on will be held on September 3,
2023. The free community event will take place in our
hometown of Port Angeles in the area around Field Hall.

“While we have expanded signiﬁcantly since 1923, our
commitment to our customers and communi(cid:2)es has
only grown stronger over the last 100 years,” said Ma(cid:3)
Deines, CEO of First Fed.

Everyone is invited to enjoy the fes(cid:2)vi(cid:2)es which will include
ﬁreworks, food trucks, beer garden, family ac(cid:2)vi(cid:2)es,
community corner, and live music performed by PNW bands.

OUR FUTURE

We are excited to celebrate our 100th anniversary in 2023! This milestone is a wonderful reminder of the innovation and

adaptability it has taken to serve our communities for a century. Looking forward, we remain focused on delivering solutions for

our customers and communities through investment in traditional banking, small business services, and technology. We value

your ongoing support and loyalty, and we work every day to ensure First Northwest is positioned to deliver extraordinary value to

our customers, employees, shareholders, and communities for centuries to come.

Sincerely,

CINDY H. FINNIE
Chair, Board of Directors

MATTHEW P. DEINES
President and Chief Executive Officer

FIRST N ORTHWEST BANCORP

20 22 ANNUAL REPORT

2022 Foundation Contributions

“THE FOUNDATION HAS CREATED LASTING IMPACT IN THE COMMUNITIES WE SERVE

WITH OVER $6.1 MILLION IN SUPPORT SINCE 2015.”

2022 TOTAL CONTRIBUTIONS: $800,000

—MATTHEW P. DEINES, PRESIDENT & CEO, FIRST FED BANK

$215,000
ECONOMIC
DEVELOPMENT
GRANTS

$280,000
AFFORDABLE
HOUSING
GRANTS

$800,000
2022 TOTAL
CONTRIBUTIONS

$150,000
COMMUNITY
SUPPORT
GRANTS

$100,000
COMMUNITY
DEVELOPMENT
GRANTS

First Fed Foundation, a private charitable corporation, began making grants in 2015 thanks to a

generous gift from First Northwest Bancorp, the parent company of First Fed Bank, during its

conversion to a publicly-traded company.

First Northwest’s gift underscored its commitment to continue First Fed’s legacy of giving back to the

communities it serves. In that same spirit, First Fed Foundation is committed to creating broad impact

that benefits low-to moderate-income, disadvantaged and/or marginalized individuals and families in

the communities where First Fed operates full service branches. The Foundation funds projects and

programs that improve quality of life (including a range of community support efforts), address

homelessness and the availability of affordable housing, as well as contribute to both community and

economic development.

FIRST N ORTHWEST BANCORP

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

hh ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2022

jj TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-36741

FIRST NORTHWEST BANCORP
(Exact name of registrant as specified in its charter)

Washington
(State or other jurisdiction of incorporation or organization)

46-1259100
(I.R.S. Employer I.D. Number)

105 West 8th Street, Port Angeles, Washington
(Address of principal executive offices)

Registrant's telephone number, including area code:

98362
(Zip Code)

(360) 457-0461

Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.01 per share

Trading Symbol(s):
FNWB

Name of each exchange on which registered:
The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes jj No hh

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes jj No hh

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes hh No jj

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes hh No jj

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting
company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer jj Accelerated filer jj Non-accelerated filer hh Smaller reporting company hh Emerging growth company jj

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. jj

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. Yes jj No hh

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. jj

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to Section 240.1D-1(b). jj

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes jj No hh

At March 10, 2023, the registrant had 9,674,055 shares of common stock issued and outstanding. The aggregate market value of the voting
stock held by non-affiliates of the registrant based on the closing price of such stock as quoted on The Nasdaq Stock Market, LLC as of June
30, 2022, was $148,356,296.

Portions of the registrant's Proxy Statement for the 2023 Annual Meeting of Shareholders are incorporated by reference into Part III.

DOCUMENTS INCORPORATED BY REFERENCE:

- 1 -

FIRST NORTHWEST BANCORP
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

Forward-Looking Statements
Available Information
PART I

Item 1. Business

General
Market Area
Lending Activities
Asset Quality
Investment Activities
Deposit Activities and Other Sources of Funds
Subsidiary and Other Activities
Competition
Employees and Human Capital Resources
How We Are Regulated
Taxation
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General
Our Business and Operating Strategy
Critical Accounting Policies
New Accounting Pronouncements
Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Comparison of Results of Operations for the Years Ended December 31, 2022 and

December 31, 2021

Average Balances, Interest and Average Yields/Cost
Rate/Volume Analysis
Asset and Liability Management and Market Risk
Liquidity Management
Off-Balance Sheet Activities
Commitments and Off-Balance Sheet Arrangements
Capital Resources
Effect of Inflation and Changing Prices
Recent Accounting Pronouncements

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data

4
5

6
6
7
9
25
33
36
41
42
43
44
56
57
69
69
69
69

70
70
71
71
72
74
75
76

79
83
84
84
86
87
87
87
88
89
89
89

- 2 -

FIRST NORTHWEST BANCORP
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS (Continued)

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections

PART III.

Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services

PART IV.

Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures

151
151
152
152

152
152

153
153
153

153
154
155

As used in this report, the terms, “we,” “our,” and “us,” and “Company” refer to First Northwest Bancorp ("First
Northwest"), its consolidated subsidiary and its joint venture controlling interest, unless the context indicates
otherwise. When we refer to “First Fed” or the “Bank” in this report, we are referring to First Fed Bank, the wholly
owned subsidiary of First Northwest Bancorp. When we refer to "Quin" or "Quin Ventures" in this report, we are
referring to Quin Ventures, Inc., a First Northwest joint venture. First Northwest, the Bank, and Quin Ventures are
collectively referred to as the "Company."

- 3 -

Forward-Looking Statements

Certain matters in this Annual Report on Form 10-K ("Form 10-K"), including information included or

incorporated by reference, constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions that are not historical facts, and other statements often identified by
words such as "believes," "expects," "anticipates," "estimates," or similar expressions.

These forward-looking statements are based on current beliefs and expectations of management and are

inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which
are beyond our control. Actual results may differ materially from those contemplated by the forward-looking
statements due to, among others, the following factors:

•

•
•
•

•

•
•

•

•
•
•

the risks associated with lending and potential adverse changes in the credit quality of loans in our
portfolio, particularly with respect to borrowers affected by the COVID-19 pandemic, natural disasters,
or climate change;
legislative or regulatory changes, including expanded consumer protection regulation and responses to
inflation and climate change issues, which could adversely affect the Company's business;
a continued decrease in the market demand for loans that we originate for sale;
our ability to control operating costs and expenses;
whether our management team can implement our operational strategy, including but not limited to our
efforts to achieve loan and revenue growth;
our ability to successfully execute on merger and/or acquisition strategies and integrate any newly
acquired assets, liabilities, customers, systems, and management personnel into our operations and our
ability to realize related cost savings within expected time frames;
our ability to successfully execute on growth strategies related to our entry into new markets and delivery
channels, including banking as a service;
our ability to develop user-friendly digital applications to serve existing customers and attract new
customers;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be
incorrect and result in significant declines in valuation;
changes in monetary policy and fiscal policies including interest rate policies of the Federal Reserve, and
the relative differences between short and long-term interest rates, deposit interest rates, our net interest
margin and funding sources;
increased competitive pressures among financial services companies, particularly from non-traditional
banking entities such as challenger banks, fintech, and mega technology companies;
our ability to attract and retain deposits at a reasonable cost;
changes in consumer spending, borrowing and savings habits, resulting in reduced demand for banking
products and services, particularly in the event of a recession that affects our market areas;
results of examinations of us by the Washington State Department of Financial Institutions, Department
of Banks, the Federal Deposit Insurance Corporation, Federal Reserve Bank of San Francisco, or other
regulatory authorities, which could result in restrictions that may adversely affect our liquidity and
earnings;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our
information technology systems or on the third-party vendors who perform several of our critical
processing functions;
the impacts related to or resulting from Russia's military action in Ukraine, including the broader impacts
to financial markets and economic conditions;
any failure of key third-party vendors to perform their obligations to us;
the effects of any reputational damage to the Company resulting from any of the foregoing; and
other economic, competitive, governmental, regulatory and technical factors affecting our operations,
pricing, products and services and other risks described elsewhere in our filings with the Securities and
Exchange Commission, including risks discussed under "Item 1.A. -- Risk Factors" in this Form 10-K.

- 4 -

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

Available Information

The Company provides an Investor Relations link on its website (www.ourfirstfed.com) to the Securities

and Exchange Commission’s ("SEC") website (www.sec.gov) for purposes of providing copies of its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and proxy statements. Other than an
investor’s own internet access charges, these filings are available free of charge. The information contained on our
website is not included as part of, or incorporated by reference into, this Form 10-K.

- 5 -

Item 1. Business

General

PART I

First Northwest Bancorp, a Washington corporation, is a bank holding company and a financial holding

company and is engaged in banking activities through its wholly owned subsidiary, First Fed Bank, as well as
certain non-banking financial activities. Non-financial investments include a controlling interest in Quin Ventures,
Inc. and several limited partnership investments, including a 33% interest in The Meriwether Group, LLC.

At December 31, 2022, the Company had total assets of $2.04 billion, net loans of $1.53 billion, total

deposits of $1.56 billion, and total shareholders' equity of $158.3 million. The Company's business activities are
generally focused on passive investment activities and oversight of the activities of First Fed Bank. The Company
has entered into partnerships to strategically invest in financial technology-related businesses, which may result in
the development of additional investment opportunities. Aside from these investments, the information set forth in
this report, including consolidated financial statements and related data, relates primarily to First Fed.

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

First Fed Bank is a community-oriented financial institution founded in 1923 in Port Angeles, Washington.

We have 16 locations including 12 full-service branches and four business centers in Clallam, Jefferson, King,
Kitsap, and Whatcom counties. First Fed’s business and operating strategy is focused on building sustainable
earnings by delivering a fully array of financial products and services for individuals, small business, and
commercial customers. Lending activities include the origination of first lien one- to four-family mortgage loans,
commercial and multi-family real estate loans, residential and commercial construction and land loans, commercial
business loans, Small Business Administration ("SBA") loans, and consumer loans, consisting primarily of home
equity loans and lines of credit. Over the last five years, we have significantly increased the origination of
commercial real estate, multi-family real estate, construction, and commercial business loans, and have increased
our consumer loan portfolio through our manufactured home and auto loan purchase programs. We offer traditional
consumer and business deposit products, including transaction accounts, savings and money market accounts and
certificates of deposit for individuals and businesses. Deposits are our primary source of funding for our lending and
investing activities. Additionally, First Fed has started building strategic partnerships with financial technology
(“fintech”) companies to develop and deploy digitally focused financial solutions to meet customers’ needs on a
broader scale.

Quin Ventures, Inc. was a fintech joint venture between First Northwest and Peace of Mind, Inc. ("POM")
formed in April 2021 to focus on financial wellness and lifestyle protection products for consumers nationwide. In
December 2022, in connection with termination of the joint venture agreement, Quin Ventures sold substantially all
of its assets, including intellectual property, to Quil Ventures, Inc. (“Quil”). Quil was created by the founders of
POM, in partnership with a third-party financing source, to pursue a new business model with another sponsor bank.
As part of the transaction, First Northwest received a 5% ownership stake in Quil. First Northwest retains a 50%
equity interest in Quin Ventures and will receive a portion of Quil’s monthly subscription fee income, the value of
which is reflected as a commitment receivable under "Other Assets." The fair value of the Quil ownership stake and
the commitment receivable were evaluated by a third party with extensive experience in valuing bank assets and
liabilities.

- 6 -

First Northwest's limited partnership investments include Canapi Ventures Fund, LP; BankTech Ventures,
LP; and JAM FINTOP Blockchain, LP. These limited partnerships invest in fintech-related businesses with a focus
on developing digital solutions applicable to the banking industry. In 2022, First Northwest acquired a 33% interest
in The Meriwether Group, LLC, a boutique investment bank and consulting firm focusing on providing
entrepreneurs with resources to help them succeed. Also in 2022, the Company acquired a 25% equity interest in
Meriwether Group Capital, LLC, which provides financial advice for borrowers and capital for the Meriwether
Group Capital Hero Fund LP ("Hero Fund"). The Meriwether Group, LLC, also holds a 20% interest in Meriwether
Group Capital, LLC. In addition, First Northwest invested in the Hero Fund, a private commercial lender focused on
lower-middle market businesses, primarily in the Pacific Northwest.

The executive office of the Company is located at 105 West 8th Street, Port Angeles, Washington 98362,

and its telephone number is (360) 457-0461.

Market Area

We operate through twelve full-service branch offices and four business centers located in Washington

State. We have five branches in Clallam County, one in Jefferson County, one in King County, two in Kitsap
County, and three in Whatcom County. We have two business centers located in Clallam County, one in King
County and one in Whatcom County. All population and income data below is derived from the U.S. Census Bureau
website.

Clallam County has a population of approximately 78,209 and estimated median family income of $60,044.
The economic base in Clallam County is dependent on government, healthcare, education, tourism, marine services,
forest products, agriculture, and technology industries. The primary employers in Clallam County include the
Olympic Medical Center, Peninsula College, the Port Angeles School District, Clallam County government,
Jamestown S'Klallam Tribe, Clallam Bay Corrections Center, and the Westport Shipyard. According to the U.S.
Bureau of Labor Statistics, the unemployment rate for Clallam County was 6.1% at December 31, 2022, compared
to 4.5% at December 31, 2021. By comparison, the unemployment rate for the state of Washington was 4.0%, and
the national average was 3.5% at December 31, 2022.

Jefferson County has a population of approximately 33,605 and estimated median family income
of $59,968. The economic base in Jefferson County is dependent on government, healthcare, education, tourism, arts
and culture, maritime and boat building, and small-scale manufacturing. The primary employers in Jefferson County
include Port Townsend Paper, Jefferson Healthcare, Port Townsend School District, the Port Authority of Port
Townsend and related marine trade, Amazon, and the Jefferson County government. According to the U.S. Bureau
of Labor Statistics, the unemployment rate for Jefferson County was 5.4% at December 31, 2022, compared
to 4.1% at December 31, 2021.

Kitsap County has a population of approximately 274,314 and estimated median family income of $84,600.

The economic base of Kitsap County is largely supported by the United States Navy through personnel stationed at
Kitsap Naval Base along with other employers supporting the military. Private industries that support the economic
base are healthcare, retail and tourism. Other primary employers in Kitsap County include the Department of
Defense, Amazon, Walmart, St. Michael Medical Center, Catholic Health Initiatives, and Port Madison Enterprises,
which owns and operates the Clearwater Casino and Resort, gas stations and other retail operations. According to
the U.S. Bureau of Labor Statistics, the unemployment rate for Kitsap County was 4.3% at December 31, 2022,
compared to 3.3% at December 31, 2021.

Whatcom County has a population of approximately 228,831 and estimated median family income of

$70,011. The economic base of Whatcom County is largely supported by healthcare, education and crude oil
refinery industries. There is some niche manufacturing and a large variety of other small businesses that create a
well-rounded economy with a close proximity to the Canadian border bringing in shoppers seeking retail products
and services. The primary employers in Whatcom County include PeaceHealth Medical Center, Western
Washington University, Bellingham School District, Avamere Living, and BP Cherry Point Refinery. According to
the U.S. Bureau of Labor Statistics, the unemployment rate for Whatcom County was 5.0% at December 31, 2022,
compared to 4.0% at December 31, 2021.

- 7 -

King County, which includes the City of Seattle, has a population of approximately 2.3 million and

estimated median family income of $106,326. The economic base of King County is largely supported by
technology, services, and manufacturing industries. The primary employers in King County include Microsoft,
Amazon, Boeing, University of Washington, Starbucks, Salesforce, and the King County government. According to
the U.S. Bureau of Labor Statistics, the unemployment rate for King County was 2.8% at December 31, 2022,
compared to 3.2% at December 31, 2021.

As a part of our business plan, we intend to extend our traditional and digital operations throughout the

Puget Sound Region and beyond. This region dominates the economy of the Pacific Northwest and is broadly
defined as the area surrounding the Puget Sound that extends into the northwestern section of the state of
Washington. The population of this additional region (beyond our current market area) is approximately 2.3 million,
or 29.5% of the state's population. The market area is a mix of urban, suburban and rural areas, with the Seattle
metropolitan area as a well-developed urban center. The region extends from Whatcom County in the north on the
Canadian border to Thurston and Pierce counties to the south. Other key metropolitan areas within the Puget Sound
region include Bellingham (Whatcom County), Mount Vernon (Skagit County), Everett (Snohomish County),
Tacoma (Pierce County) and Olympia (Thurston County).

Key employment sectors include aerospace, military, information technology, biotechnology, education,

logistics, international trade, and tourism. The region is well known for the long-term presence of The Boeing
Company and Microsoft, two major industry leaders, and since the turn of the century, Amazon.com. The military
presence includes a number of large installations serving the U.S. Air Force, Army and Navy. Given the
employment profile and the presence of the University of Washington and other universities, the region's workforce
is highly educated. Washington's geographic proximity to the Pacific Rim along with a deep-water port makes it a
center for international trade, which contributes significantly to the regional economy. The local ports make
Washington the ninth largest exporting state in the nation. The top five trading partners with Washington include
China, Canada, Japan, South Korea and Mexico. Tourism has also developed into a major industry, due to the scenic
beauty, temperate climate, and incredible food and culture. The maritime industry, supported by the trade and
fishing industries, is also an important employment sector.

For a discussion regarding the competition in our primary market area, see "Competition."

- 8 -

Lending Activities

General. First Fed’s principal lending activities are concentrated in real estate secured loans with first lien
one- to four-family mortgage, commercial, and multi-family loans. First Fed also makes construction and land loans
(including lot loans and multi-family acquisition-renovation loans), commercial business loans, and consumer loans,
consisting primarily of home-equity loans and lines of credit. The Bank also purchases automobile and
manufactured home loans.

Loan Portfolio Analysis

The following table represents information concerning the composition of our loan portfolio, excluding

loans held for sale, by the type of loan at the dates indicated:

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:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
Total loans, net

December 31,

2022

Amount

Percent

2021
Amount Percent

(Dollars in thousands)

343,825
253,551
390,246
194,646
1,182,268

52,322
222,794
275,116

22.4%$ 294,965
172,409
16.5
363,299
25.5
224,709
12.7
1,055,382
77.1

21.7%
12.7
26.8
16.5
77.7

3.4
14.5
17.9

39,172
182,769
221,941

2.9
13.5
16.4

76,996

5.0

79,838

5.9

1,534,380

100.0% 1,357,161

100.0%

2,786
(15,957)
16,116
1,531,435

4,772
(12,995)
15,124
$1,350,260

- 9 -

Fixed-Rate and Adjustable-Rate Loans

The following table shows the composition of our loan portfolio, excluding loans held for sale, in dollar

amounts and in percentages by fixed rates and adjustable rates at the dates indicated:

Fixed-rate loans:
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 fixed-rate loans

Adjustable-rate loans:
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 adjustable-rate loans

Total loans
Less:
Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses
Total loans, net

2022

Amount

December 31,

Percent
Amount
(Dollars in thousands)

2021

Percent

$ 253,351
100,189
148,607
103,259
605,406

16.5% $ 203,746
65,331
127,522
73,104
469,703

6.5
9.7
6.7
39.4

15.0%
4.8
9.4
5.4
34.6

23,613
222,457
246,070
23,918
875,394

90,474
153,362
241,639
91,387
576,862

28,709
337
29,046
53,078
658,986

1.5
14.5
16.0
1.6
57.0

5.9
10.0
15.7
6.0
37.6

1.9
—
1.9
3.5
43.0

18,910
182,412
201,322
52,406
723,431

91,219
107,078
235,777
151,605
585,679

20,262
357
20,619
27,432
633,730

1.4
13.4
14.8
3.9
53.3

6.7
7.9
17.4
11.2
43.2

1.5
—
1.5
2.0
46.7

1,534,380

100.0% 1,357,161

100.0%

2,786
(15,957)
16,116
$ 1,531,435

4,772
(12,995)
15,124
$ 1,350,260

- 10 -

e
l
b
a
i
t
o
g
e
n
e
r

r
o
e
l
b
a
t
s
u
j
d
a

e
v
a
h
t
a
h
t

s
e
g
a
g
t
r
o
M

.
2
2
0
2
,
1
3
r
e
b
m
e
c
e
D

t
a

o
i
l
o
f
t
r
o
p
n
a
o
l

r
u
o
f
o
y
t
i
r
u
t
a
m

l
a
u
t
c
a
r
t
n
o
c

e
h
t

s
e
t
a
r
t
s
u
l
l
i

e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
T

t
c
e
l
f
e
r

t
o
n
s
e
o
d
e
l
b
a
t

e
h
T

.
n
o
i
l
l
i

m
9
.
6
0
6
$
s
i

s
e
t
a
r

t
s
e
r
e
t
n
i

e
l
b
a
t
s
u
j
d
a

e
v
a
h
t
a
h
t

e
t
a
d
h
c
u
s

r
e
t
f
a

e
u
d
s
n
a
o
l

f
o
t
n
u
o
m
a

l
a
t
o
t

e
h
t

e
l
i
h
w

,
n
o
i
l
l
i

m
9
.
1
7
8
$
s
i

s
e
t
a
r

t
s
e
r
e
t
n
i

d
e
x
i
f

e
v
a
h
t
a
h
t

,
3
2
0
2
,
1
3
r
e
b
m
e
c
e
D

r
e
t
f
a

e
u
d
s
n
a
o
l

f
o
t
n
u
o
m
a

l
a
t
o
t

e
h
T

.
e
u
d

s
i

t
c
a
r
t
n
o
c

e
h
t

h
c
i
h
w
g
n
i
r
u
d
d
o
i
r
e
p
e
h
t

n
i
g
n
i
r
u
t
a
m
s
a
n
w
o
h
s

e
r
a

s
e
t
a
r

t
s
e
r
e
t
n
i

.
s
t
n
e
m
y
a
p
e
r
p
l
a
p
i
c
n
i
r
p
e
l
b
a
t
c
i
d
e
r
p
n
u
f
o
s
t
c
e
f
f
e

e
h
t

y
t
i
r
u
t
a
M
n
a
o
L

%
7
7
.
3

9
2
.
4

4
1
.
5

1
5
.
5

1
0
.
6

8
2
.
7

9
1
.
7

d
e
t
h
g
i
e

e
g
a
r
e
v
A

e
t
a
R

l
a
t
o
T

5
2
8
,
3
4
3

1
5
5
,
3
5
2

6
4
2
,
0
9
3

6
4
6
,
4
9
1

2
2
3
,
2
5

4
9
7
,
2
2
2

0
2
.
5

1
9
.
6

4
8
.
3

3
5
.
7

7
8
.
5

1
8
1
,
1

4
3
6
,
4
1

3
6
9
,
3
5

3
8
2
,
3
2

2
6
7
,
6
7

6
3
.
4

1
1
.
5

0
6
.
5

5
7
.
4

6
7
.
6

8
3
.
6

)
s
d
n
a
s
u
o
h
t
n
i

s
r
a
l
l
o
D

(

t
n
u
o
m
A

e
t
a
R

t
n
u
o
m
A

e
t
a
R

t
n
u
o
m
A

e
t
a
R

t
n
u
o
m
A

e
t
a
R

t
n
u
o
m
A

e
t
a
R

t
n
u
o
m
A

d
e
t
h
g
i
e

e
g
a
r
e
v
A

n
e
e
t
f
i

F
d
n
o
y
e
B

s
r
a
e
Y

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
e
t
h
g
i
e

e
g
a
r
e
v
A

s
r
a
e
Y

s
r
a
e
Y
e
v
i

F
h
g
u
o
r
h
T

s
r
a
e
Y
e
e
r
h
T
h
g
u
o
r
h
T

)
1
(

s
r
a
e
Y
e
v
i

F
r
e
t
f

n
e
e
t
f
i

F
h
g
u
o
r
h
T

s
r
a
e
Y
e
e
r
h
T
r
e
t
f

r
a
e
Y
e
n
O

r
e
t
f

r
a
e
Y
e
n
O
n
i
h
t
i

%
6
7
.
3

6
2
0
,
2
0
3
$

%
9
8
.
3

9
0
2
,
7
3

%
8
4
.
3

6
8
1
,
4

%
4
9
.
3

9
9
3

%
0
7
.
2

3
5
7
,
5
5
1

9
5
9
,
2
8
2

0
2
9
,
8
4

2
1
.
4

2
6
.
4

9
4
.
4

5
0
5
,
8
2

7
0
5
,
0
2
1

7
6
.
7

7
4
.
5
1

0
2
1
,
7
4

4
2
6
,
1
7

3
7
5
,
9
2

4
7
3

7
4
5
,
6
1

4
8
.
3

1
3
.
6

3
5
.
4

2
3
.
4

4
3
.
1
1

1
0
0
,
6
3

9
2
0
,
8
2

5
5
5
,
2
2

3
5

9
4
2
,
8

5
7
.
3

1
5
.
6

7
9
.
8

1
3
.
6

2
9
.
9

3
4

3
5
4
,
6

5
3
6
,
9
3

7
0
1

9
2
7

y
l
i

m
a
f
-
r
u
o
f

o
t

-
e
n
O

e
t
a
t
s
e

l
a
e
r

l
a
i
c
r
e
m
m
o
C

d
n
a
l

d
n
a
n
o
i
t
c
u
r
t
s
n
o
C

y
l
i

m
a
f
-
i
t
l
u
M

:
e
t
a
t
s
e

l
a
e
R

r
e
m
u
s
n
o
c

r
e
h
t
o

d
n
a

o
t
u
A

y
t
i
u
q
e

e
m
o
H

:
r
e
m
u
s
n
o
C

- 11 -

%
7
1
.
5

0
8
3
,
4
3
5
,
1
$

%
5
3
.
4

9
4
8
,
1
7
4
$

%
5
2
.
5

6
5
9
,
8
0
7
$

%
3
6
.
5

8
4
1
,
2
8
1
$

%
3
7
.
5

7
8
8
,
5
1
1
$

%
1
6
.
8

0
4
5
,
5
5
$

s
n
a
o
l

l
a
t
o
T

.
s
n
a
o
l

t
f
a
r
d
r
e
v
o
d
n
a

,
y
t
i
r
u
t
a
m
d
e
t
a
t
s
o
n

g
n
i
v
a
h

s
n
a
o
l

,
s
n
a
o
l

d
n
a
m
e
d

s
e
d
u
l
c
n
I

)
1
(

_
_
_
_
_
_
_
_
_
_
_
_
_
_
_

6
9
9
,
6
7

—

3
0
1
,
5
3

1
5
.
7

4
2
7
,
2
1

8
1
.
8

1
0
6
,
0
2

7
4
.
8

8
6
5
,
8

s
n
a
o
l

s
s
e
n
i
s
u
b

l
a
i
c
r
e
m
m
o
C

%
4
.
2
2

5
.
6
1

5
.
5
2

7
.
2
1

1
.
7
7

4
.
3

5
.
4
1

9
.
7
1

0
.
5

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

5
2
8
,
3
4
3

1
5
5
,
3
5
2

6
4
2
,
0
9
3

6
4
6
,
4
9
1

8
6
2
,
2
8
1
,
1

2
2
3
,
2
5

4
9
7
,
2
2
2

6
1
1
,
5
7
2

6
9
9
,
6
7

2
.
5

1
.
3

4
.
1

4
.
4

—

6
.
1
9

2
.
4
7

3
.
4
3

l
a
t
o
T

)
3
(

s
e
t
a
t
S
r
e
h
t
O

l
l

e
t
a
t
S

n
o
t
g
n
h
s
a
W

r
e
h
t
O

n
o
t
g
n
h
s
a
W
n

l
a
t
o
T

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

)
s
d
n
a
s
u
o
h
t
n
i

s
r
a
l
l
o
D

(

t
n
u
o
m
A

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

d
n
u
o
S
t
e
g
u
P

)
2
(
n
o
i
g
e
R

c
i
p
m
y
l
O
h
t
r
o
N

)
1
(

a
l

u
s
n

n
e
P

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

.
s
e
g
a
t
n
e
c
r
e
p
d
n
a

s
t
n
u
o
m
a

r
a
l
l
o
d

n
i

o
i
l
o
f
t
r
o
p
n
a
o
l

r
u
o
f
o
n
o
i
t
u
b
i
r
t
s
i
d
c
i
h
p
a
r
g
o
e
g
e
h
t

,
2
2
0
2
,
1
3
r
e
b
m
e
c
e
D

t
a

s
w
o
h
s

e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
T

s
n
a
o
L
r
u
o
f
o
n
o
i
t
u
b
i
r
t
s
i
D
c
i
h
p
a
r
g
o
e
G

%
0
.
7

4
4
9
,
3
2

%
0
.
3
9

0
2
1
,
3
1

4
0
2
,
2
1

6
0
8
,
2

4
7
0
,
2
5

8
.
4
9

9
.
6
9

6
.
8
9

6
.
5
9

1
8
8
,
9
1
3

1
3
4
,
0
4
2

2
4
0
,
8
7
3

0
4
8
,
1
9
1

4
9
1
,
0
3
1
,
1

—

4
1
1
,
4
0
2

4
.
8

8
.
5
2

0
.
0
0
1

2
2
3
,
2
5

0
8
6
,
8
1

2
0
0
,
1
7

9
7
3
,
6
2

7
.
5
6

7
1
6
,
0
5

%
7
.
1

6
6
9
,
5

%
5
.
8
5

2
7
9
,
0
0
2
$

%
8
.
2
3

3
4
9
,
2
1
1
$

y
l
i

m
a
f
-
r
u
o
f

o
t

-
e
n
O

:
s
n
a
o
l

e
t
a
t
s
e

l
a
e
R

3
.
6

3
.
5

5
.
6

0
.
4
1

2
.
2

0
.
1

2
.
1

3
.
5

3
7
4
,
5
3

7
5
7
,
4
2

8
3
3
,
0
1

4
3
5
,
6
7

8
4
1
,
1

5
1
2
,
2

3
6
3
,
3

3
.
8
7

8
.
0
7

4
.
1
8

5
.
0
7

3
.
4

3
.
9

6
.
0
3

0
4
7
,
8
9
1

8
4
9
,
5
7
2

4
0
3
,
8
5
1

4
6
9
,
3
3
8

1
2
6
,
9

5
3
0
,
6
1

6
5
6
,
5
2

5
.
2

8
.
9
1

9
.
1
1

6
.
8
1

1
.
3

2
.

7
6

3
.

5
1

8
1
2
,
6

7
3
3
,
7
7

8
9
1
,
3
2

e
t
a
t
s
e

l
a
e
r

l
a
i
c
r
e
m
m
o
C

d
n
a
l

d
n
a
n
o
i
t
c
u
r
t
s
n
o
C

y
l
i

m
a
f
-
i
t
l
u
M

6
9
6
,
9
1
2

s
n
a
o
l

e
t
a
t
s
e

l
a
e
r

l
a
t
o
T

4
4
8
,
6

9
3
1
,
5
3

3
8
9
,
1
4

s
n
a
o
l

r
e
m
u
s
n
o
c

l
a
t
o
T

r
e
m
u
s
n
o
c

r
e
h
t
o

d
n
a

o
t
u
A

- 12 -

y
t
i
u
q
e

e
m
o
H

:
s
n
a
o
l

r
e
m
u
s
n
o
C

2
9
0
,
4

2
.
0
3

0
3
2
,
3
2

2
.
0
3

5
9
2
,
3
2

s
n
a
o
l

s
s
e
n
i
s
u
b

l
a
i
c
r
e
m
m
o
C

%
0
.
0
0
1

0
8
3
,
4
3
5
,
1
$

%
4
.
8
1

7
6
5
,
2
8
2
$

%
6
.
1
8

3
1
8
,
1
5
2
,
1
$

%
5
.
5

9
8
9
,
3
8
$

%
5
.
7
5

0
5
8
,
2
8
8
$

%
6
.
8
1

4
7
9
,
4
8
2
$

_
_
_
_
_
_
_
_
_
_
_
_

s
n
a
o
l

l
a
t
o
T

.
s
e
i
t
n
u
o
c

d
n
a
l
s
I

d
n
a

m
o
c
t
a
h
W

,
t
i
g
a
k
S

,
h
s
i
m
o
h
o
n
S

,
g
n
i
K

,
e
c
r
e
i

,
n
o
t
s
r
u
h
T

,
n
o
s
a

,
p
a
s
t
i

K
s
e
d
u
l
c
n
I

.
a
d
i
r
o
l

F
d
n
a

,
n
o
g
e
r
O

,
a
i
n
r
o
f
i
l
a
C
n
i

y
l
i
r
a
m

i
r
p
d
e
t
a
c
o
l

s
n
a
o
l

s
e
d
u
l
c
n
I

.
s
e
i
t
n
u
o
c

n
o
s
r
e
f
f
e
J
d
n
a
m
a
l
l
a
l
C
s
e
d
u
l
c
n
I

)
1
(

)
2
(

)
3
(

One- to Four-Family Real Estate Lending. At December 31, 2022, one- to four-family residential
mortgage loans (excluding loans held for sale) totaled $343.8 million, or 22.4%, of our total loan portfolio, including
$23.9 million, or 7.0%, of loans secured by properties outside the state of Washington, primarily purchased loans in
the state of California. We originate both fixed and adjustable-rate residential loans, which can be sold in the
secondary market or retained in our portfolio, and supplement those originations with loan purchases from time to
time, depending on our balance sheet objectives. Residential loans are underwritten to either secondary market
standards for sale or to internal underwriting standards, which may not meet Federal Home Loan Mortgage
Corporation ("Freddie Mac") or Federal National Mortgage Association ("Fannie Mae") eligibility requirements.

Fixed-rate residential mortgages are offered with repayment terms between 10 and 30 years, priced from

Freddie Mac posted daily pricing indications adjusted for economic and competitive considerations. Adjustable-rate
residential mortgage products with similar amortization terms are also offered, with an interest rate that is typically
fixed for an initial period ranging from one to seven years with annual adjustments thereafter. Future interest rate
adjustments include periodic caps of no more than 2% and lifetime caps of 5% to 6% above the initial interest rate,
with no borrower prepayment restrictions.

Adjustable-rate mortgage loans could increase credit risk when interest rates rise. An increase to the

borrower's loan payment may affect the borrower's ability to repay and could increase the probability of default. To
mitigate this risk to both the borrower and First Fed, adjustable-rate loans contain both periodic and lifetime interest
rate caps, limiting the amount of payment changes. In addition, depending on market conditions, we may underwrite
the borrower at a higher interest rate and payment amount than the initial rate. At December 31, 2022, the average
interest rate on our adjustable-rate mortgage loans was approximately 367 basis points under the fully indexed rate.
As of December 31, 2022, we had $90.5 million, or 26.3%, of adjustable-rate residential mortgage loans in our
residential loan portfolio.

The underwriting process considers a variety of factors including credit history, debt to income ratios,

property type, loan to value ratio, and occupancy. For loans with over 80% loan to value ratios, we typically require
private mortgage insurance, which reduces our exposure to loss in the event of a loan default. Credit risk is also
mitigated by obtaining title insurance, hazard insurance, and flood insurance. Residential mortgage loans which
require appraisals are appraised by independent fee-based appraisers.

In connection with rules and regulations issued by the Consumer Financial Protection Bureau ("CFPB"),
we are required to make a reasonable, good-faith determination before or when we consummate a mortgage loan
that the borrower has a reasonable ability to repay the loan, and in some cases involving qualified mortgages, we are
presumed to have complied with this requirement. We believe that mortgage loans originated by the bank meet these
standards.

First Fed does not actively engage in subprime mortgage lending, either through advertising, marketing,

underwriting and/or risk selection, and has no established program to originate or purchase subprime mortgage
loans.

Commercial and Multi-Family Real Estate Lending. At December 31, 2022, $390.3 million, or 25.5%,

and $253.6 million, or 16.5%, of our total loan portfolio was secured by commercial and multi-family real estate
property, respectively. At December 31, 2022, we have identified $102.0 million, or 15.9%, of our commercial and
multi-family real estate portfolio as owner-occupied commercial real estate and $541.8 million, or 84.1%, is secured
by income producing, or non-owner-occupied, commercial and multi-family real estate. Over 95% of our
commercial real estate and multi-family loans are secured by properties located in the state of Washington.

- 13 -

Commercial and multi-family real estate loans are generally priced at a higher rate of interest than one- to

four-family residential loans, to compensate for the greater risk associated with higher loan balances and the
complexity of underwriting and monitoring these loans. Repayment on loans secured by commercial or multi-family
properties is dependent on successful management by the property owner to create sufficient net operating income to
meet debt service requirements. Changes in economic and real estate market conditions can affect net operating
income, capitalization rates, and ultimately the valuation and marketability of the collateral. As a result, we analyze
market data including vacancy rates, absorption percentages, leasing rates, and competing projects under
development. Interest rate, occupancy and capitalization rate stress testing are required as part of our underwriting
analysis. If the borrower is a corporation, we generally require and obtain personal guarantees from principals,
which include underwriting of their personal financial statements, tax returns, cash flows and individual credit
reports, to provide us with additional support and a secondary source for repayment of the debt.

We offer both fixed- and adjustable-rate loans on commercial and multi-family real estate, which may
include balloon payments. As of December 31, 2022, we had $241.6 million in adjustable-rate commercial real
estate loans and $153.4 million in adjustable-rate multi-family loans. Commercial and multi-family real estate loans
with adjustable rates generally adjust after an initial period of three to five years and have maturity dates of three to
ten years. Amortization terms are generally limited to terms up to 25 years on commercial real estate loans and up to
30 years on multi-family loans. Adjustable-rate multi-family residential and commercial real estate loans are
generally priced to market indices with appropriate margins, which may include The Wall Street Journal prime rate,
the U.S. Constant Maturity Treasury Rate, or a similar term FHLB borrowing rate. Adjustable-rate loans could
increase credit risk when interest rates rise. An increase to the borrower's loan payment may affect the borrower's
ability to repay and could increase the probability of default. To mitigate this risk to both the borrower and First Fed,
adjustable-rate loans may contain both periodic and lifetime interest rate caps, limiting the amount of payment
changes.

During 2019, the Bank moved away from the London Interbank Offered Rate ("LIBOR") as a market index

in anticipation of its complete sunset in 2023 and in order to mitigate the transition of existing loans tied to LIBOR
to the Term Secured Overnight Financing Rate ("TSOFR") index. We currently utilize LIBOR on Main Street
Lending contracts and floating rate adjustable-rate conversion ("ARC") loans originated in prior years; however,
these contracts stipulate that we can use a different index upon the sunset of LIBOR. Of the adjustable-rate
commercial and multi-family real estate loans, 67.69% are subject to a floor rate and the weighted average floor rate
on these loans was 3.56% at December 31, 2022. Of the adjustable-rate commercial loans, 100.00% are subject to a
ceiling rate and the weighted average ceiling rate on those loans was 16.37% at December 31, 2022.

The maximum loan to value ratio for commercial and multi-family real estate loans is typically limited to

75% of an appraiser opinion of market value. The minimum debt service coverage ratio is 1.25 for non-owner-
occupied and owner-occupied properties. We require independent appraisals or evaluations on all loans secured by
commercial or multi-family real estate from an approved appraisers list.

Once commercial real estate or multi-family loans are originated, we review most relationships at least

annually to assure the borrower continues to meet certain loan requirements as set forth at origination, which may
include an annual inspection of the property. The scope of the review is based on relationship size, with those $1.5
million or greater subject to a full credit review at least annually, which includes detailed financial and cash flow
analysis, property inspection, covenant compliance and annual risk rating certification. Relationships $750,000 or
greater are subject to brief financial and cash flow analysis, covenant compliance and annual risk rating certification.
While we cannot prevent loans from becoming delinquent, we believe our monitoring and formal review processes
provide us with the opportunity to better identify problem loans in a timely manner and to work with the borrower
prior to the loan becoming delinquent.

- 14 -

The following table provides information on multi-family and commercial real estate loans by type at the

dates indicated:

Non-owner occupied

Multi-family
Office building
Retail
Hospitality
Condominium
Mixed use
Health care
Warehouse
Self-storage
Vehicle dealership
Other non-owner occupied

2022

Amount

Percent

December 31,
2021

Amount
Percent
(Dollars in thousands)

2020

Amount

Percent

$ 253,551
60,541
56,701
48,387
22,846
19,022
12,208
8,954
5,997
1,114
52,434

39.4% $ 172,409
63,209
47,710
44,385
19,781
20,938
8,374
15,374
13,246
1,152
38,705

9.4
8.8
7.5
3.5
3.0
1.9
1.4
0.9
0.2
8.1

32.2% $ 158,964
58,715
11.8
45,645
8.9
50,243
8.3
3,923
3.7
19,920
3.9
16,365
1.6
7,193
2.8
12,290
2.5
1,169
0.2
21,198
7.2

34.6%
12.8
9.9
10.9
0.9
4.3
3.6
1.5
2.7
0.2
4.6

Total non-owner occupied

541,755

84.1

445,283

83.1

395,625

86.0

Owner occupied
Health care
Office building
Warehouse
Retail
Vehicle dealership
Mixed use
Hospitality
Condominium
Manufacturing
Other owner-occupied

23,547
21,365
19,434
11,031
8,820
4,412
1,011
938
80
11,404

3.7
3.3
3.0
1.7
1.4
0.7
0.2
0.1
—
1.8

24,123
20,769
16,266
8,777
4,289
4,458
374
372
1,987
9,010

4.5
3.9
3.0
1.6
0.8
0.8
0.1
0.1
0.4
1.7

21,595
10,455
4,444
7,713
6,716
4,487
346
376
2,103
5,181

4.7
2.3
1.0
1.7
1.5
1.0
0.1
0.1
0.5
1.1

Total owner occupied

102,042

15.9

90,425

16.9

63,416

14.0

Summary by type
Multi-family
Office building
Retail
Hospitality
Health care
Warehouse
Condominium
Mixed use
Vehicle dealership
Self-storage
Manufacturing
Other non-owner occupied
Other owner-occupied

253,551
81,906
67,732
49,398
35,755
28,388
23,784
23,434
9,934
5,997
80
52,434
11,404

39.4
12.7
10.5
7.7
5.6
4.4
3.6
3.7
1.6
0.9
—
8.1
1.8

172,409
83,978
56,487
44,759
32,497
31,640
20,153
25,396
5,441
13,246
1,987
38,705
9,010

32.2
15.7
10.5
8.4
6.1
5.8
3.8
4.7
1.0
2.5
0.4
7.2
1.7

158,964
69,170
53,358
50,589
37,960
11,637
4,299
24,407
7,885
12,290
2,103
21,198
5,181

34.6
15.1
11.6
11.0
8.3
2.5
1.0
5.3
1.7
2.7
0.5
4.6
1.1

Total multi-family and commercial

real estate

$ 643,797

100.0% $ 535,708

100.0% $ 459,041

100.0%

- 15 -

If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period can

be a lengthy process with substantial holding costs. Vacancies, deferred maintenance, repairs and market factors can
result in losses during the time it takes to stabilize a property. Depending on the individual circumstances, initial
charge-offs and subsequent losses relating to multi-family and commercial loans can be substantial and
unpredictable.

The average outstanding loan in our commercial real estate portfolio, including multi-family loans, was

$1.5 million as of December 31, 2022. We generally target individual commercial and multi-family real estate loans
between $1.0 million and $10.0 million to small and mid-size owners and investors in our market areas as well as
other parts of Washington. We will also make commercial and multi-family real estate loans in other states if we
have a pre-existing relationship with the borrower.

Our three largest commercial and multi-family borrowing relationships, including current loan balances and

unused commitments, at December 31, 2022 consisted of a $21.3 million relationship secured by commercial real
estate and business assets in King County, Washington; a $17.7 million relationship secured by multi-family
residential and multi-family construction in Benton, Pierce, and Spokane Counties; and a $17.6 million relationship
secured by commercial real estate in Kitsap, King and Thurston Counties.

Construction and Land Lending. Our construction and land loans totaled $194.7 million, or 12.7% of the

total loan portfolio at December 31, 2022 and the undisbursed portion of construction loans in process
totaled $120.7 million.

First Fed offers an "all-in-one" residential custom construction loan product, which upon completion of

construction will be held in our loan portfolio. We also originate construction loans for certain commercial real
estate projects. These projects include, but are not limited to, subdivisions, multi-family, retail, office, warehouse,
hotel, and office buildings. We also offer commercial acquisition-renovation loans that have a small construction
component combined with a traditional real estate loan. Underwriting criteria on construction loans include, but are
not limited to, minimum debt service coverage requirements of 1.25x or better, loan to value limitations, pre-leasing
requirements, construction cost over-run contingency reserves, interest and absorption period reserves, occupancy,
capitalization rates and interest rate stress testing, as well as other underwriting criteria. Underwriting criteria on
commercial acquisition-renovation loans during the interest-only period include, but are not limited to, loan to value
limitations and debt service coverage requirements of 1.00x or better, based on in-place rents and amortization of
full commitment. These loans begin amortizing once renovations have been completed.

Construction loan applications generally require architectural and working plans, a material specifications

list, a detailed cost breakdown and a construction contract. Construction loan advances are based on progress
payments for "work in place" based on detailed line-item construction budgets. Independent construction inspectors
are used to evaluate the construction draw request relative to the progress. Our construction administrator reviews all
construction projects, inspection reports, and construction loan advance requests to ensure they are appropriate and
in compliance with all loan conditions. Other risk management tools include title insurance, date down
endorsements or periodic lien inspections prior to the payment of construction loan advances. In some cases, general
contractors may be required to provide sub-contractor lien releases for any work performed prior to the filing of our
deed of trust or prior to each construction loan advance.

Custom and speculative construction valuations are based on the assumption that the project will be built in
accordance with plans and specifications submitted to us at the time of the loan application. The appraiser takes into
consideration the proposed design and market appeal of the improvements, based on current market conditions and
demand for homes, although the improvements may not be completed for twelve months or longer, depending on the
complexity of the plans and specifications and market conditions.

- 16 -

Land acquisition, development and construction loans are available to local contractors and developers for
the purpose of holding and/or developing residential building sites and homes when market conditions warrant such
activity. Land acquisition loans are secured by a first lien on the property and are generally limited to 65% of the
acquisition price or the appraised value, whichever is less. Development land loans are generally limited to 75% of
the discounted appraised value based on the projected lot sale absorption rate and associated carry and liquidation
costs of the developed lots and homes. Underwriting criteria for acquisition and development loans include evidence
of preliminary plat approval, and a review of compliance with state and Federal environmental protection and
disclosure laws, engineering plans, detailed cost breakdowns and marketing plans. Other risk management tools
include acquisition of title insurance and review of feasibility and market absorption reports. These loans have been
limited to projects within the state of Washington.

At December 31, 2022, the average construction commitment for single-family residential construction was
$872,000, $3.1 million for multi-family construction, $2.4 million for acquisition-renovation loans, and $1.9 million
for commercial real estate construction. The largest construction commitments for multi-family, acquisition-
renovation, and commercial real estate were $13.9 million, $14.3 million, and $14.3 million, respectively, at
December 31, 2022.

Substantially all of our adjustable-rate land acquisition, development and construction lending have rates of

interest based on The Wall Street Journal prime rate. During the term of construction, the accumulated interest on
the loan is either added to the principal of the loan through an interest reserve or billed monthly, as is the case for
acquisition and development loans. When original interest reserves set up at origination are exhausted, no additional
reserves are permitted unless the loan is re-analyzed and it is determined that the additional reserves are appropriate.

The success of land acquisition, development and construction lending is dependent upon completion of the
project and the sale or leasing of the property for repayment of the loan. Because of the uncertainties inherent in the
estimates related to construction costs, the market value of the completed project, the demand for the property at
completion, market conditions, the rates of interest paid, and other factors, actual results are difficult to predict and
variations from expectations can have a significant adverse effect on a borrower's ability to repay loans and the
value and marketability of the underlying collateral. In addition, because an incomplete construction project is
difficult to sell in the event of default, we may be required to advance additional funds and/or contract with another
builder in order to complete construction. There is a risk that we may not fully recover unpaid loan funds and
associated construction and liquidation costs under these circumstances. Speculative construction loans carry
additional risk associated with identifying an end-purchaser for the finished project. In 2020, we implemented an
extension fee policy to entice commercial borrowers to finish projects on time, which we believe mitigates risk and
enhances the return on these loans.

We also originate individual lot loans, which are secured by a first lien on the property, for borrowers who

are planning to build on the lot within the next five years. Generally, these loans have a maximum loan to value ratio
of 75% for improved lands (legal access, water and power). The interest rate on these loans is fixed with a 20-year
amortization and a five-year term.

At the dates indicated, the composition of our construction and land portfolio was as follows:

One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Land

Total construction and land

2022

December 31,
2021
(In thousands)

58,739 $
77,026
19,323
27,716
11,842
194,646 $

39,733 $
89,655
51,099
35,671
8,551
224,709 $

2020

24,029
34,513
39,346
16,918
8,821
123,627

- 17 -

Our construction and land loans are geographically disbursed primarily throughout the state of Washington

and, as a result, these loans are susceptible to risks that may be different depending on the location of the project.
We manage our construction lending by utilizing a licensed third-party vendor to assist us in monitoring our higher-
risk construction projects while lower-risk projects are monitored by internal staff.

The following tables show our construction commitments by type and geographic concentration at the dates

indicated:

Olympic
Peninsula

Puget
Sound
Region

Other
Washington

Oregon

Idaho

Total

(In thousands)

— $
415

—
540
955 $

— $
42

—
12
54 $

— $
373

—
528
901 $

—
—
— $

— $

3,592

126,791
115,732

—
—
3,592 $

20,261
40,734
303,518

— $

2,752

58,739
77,026

—
—
2,752 $

19,323
27,716
182,804

— $
840

68,052
38,706

—
—
840 $

938
13,018
120,714

— $
—
— $

7,341
4,501
11,842

December 31, 2022

Construction Commitment

One- to four-family residential
Multi-family residential
Commercial acquisition-

renovation

Commercial real estate
Total commitment

Construction Funds Disbursed
One- to four-family residential
Multi-family residential
Commercial acquisition-

renovation

Commercial real estate
Total disbursed

Undisbursed Commitment

One- to four-family residential
Multi-family residential
Commercial acquisition-

renovation

Commercial real estate
Total undisbursed

39,031 $
—

75,745 $

102,429

12,015 $
9,296

1,636
349
41,016 $

18,625
39,845
236,644 $

—
—
21,311 $

17,557 $
—

36,902 $
68,936

1,636
212
19,405 $

17,687
27,492
151,017 $

4,280 $
5,296

—
—
9,576 $

21,474 $
—

38,843 $
33,493

7,735 $
4,000

—
137
21,611 $

938
12,353
85,627 $

—
—
11,735 $

Land Funds Disbursed

One- to four-family residential
Commercial real estate

Total disbursed for land

3,552
372
3,924 $

3,370
4,129
7,499 $

419
—
419 $

- 18 -

December 31, 2021

Construction Commitment

One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total commitment

Construction Funds Disbursed
One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total disbursed

Undisbursed Commitment

One- to four-family residential
Multi-family residential
Commercial acquisition-renovation
Commercial real estate
Total undisbursed

Land Funds Disbursed

One- to four-family residential
Commercial real estate

Total disbursed for land

Olympic
Peninsula

Puget Sound
Region

Other
Washington
(In thousands)

Oregon

Total

32,785 $
—
2,938
12,489
48,212 $

57,050 $

182,151
36,536
50,372
326,109 $

4,430 $
4,095
16,638
2,535
27,698 $

— $

8,435
—
—
8,435 $

94,265
194,681
56,112
65,396
410,454

10,242 $
—
2,449
3,486
16,177 $

28,929 $
79,707
32,789
29,484
170,909 $

562 $

2,414
15,861
2,701
21,538 $

— $

7,534
—
—
7,534 $

39,733
89,655
51,099
35,671
216,158

22,543 $
—
489
9,003
32,035 $

28,121 $

102,444
3,747
20,888
155,200 $

3,868 $
1,681
777
(166)
6,160 $

— $
901
—
—
901 $

54,532
105,026
5,013
29,725
194,296

3,502
—
3,502 $

3,556
1,302
4,858 $

191
—
191 $

— $
—
— $

7,249
1,302
8,551

Consumer Lending. We offer consumer loans, including home equity loans, home equity lines of

credit and personal lines of credit. At December 31, 2022, home equity loans and lines of credit totaled $52.3
million, or 3.4%, of the loan portfolio. Our interest rates on home equity loans are priced for risk based on credit
score, loan to value and overall capacity of the applicant. Home equity loans are made for the improvement of
residential properties and other consumer needs. Some of these loans are secured by first liens; however, the
majority of these loans are secured by a second deed of trust on the residential property. Fixed rate, fully amortizing
home equity loans in first lien position are available with repayment periods ranging from 5 to 20 years. We also
offer, to borrowers who qualify, a ten-year home equity line of credit with an option for a discounted initial fixed
interest rate for the first year with the interest rate adjusting monthly thereafter based on a margin over the prime
rate; payments are interest-only during the ten-year draw period. The balance and rate are fixed after that period and
the principal amortized over the remaining fifteen-year period of the loan. Options for equity loans on non-owner
occupied properties are offered under more conservative requirements. Additionally, terms are available under a
bridge loan product consisting of a short-term equity loan used to facilitate the acquisition of a separate residential
property. Home equity fixed and line of credit products in second lien positions behind a non-First Fed mortgage
have a maximum loan amount of $250,000. Home equity loans and lines of credit have greater risk than one- to
four-family residential mortgage loans because they are secured by mortgages subordinated to the existing first
mortgage on the property. We may or may not have private mortgage insurance coverage.

At December 31, 2022, auto loans totaled $130.9 million, of which $122.8 million were purchased and
$4.8 million were originated through indirect dealer programs described below; the remaining $3.3 million were
originated through our branches. Auto loans may have a maximum term of up to 180 months depending on the age
and condition of the vehicle and strength of the borrower. Loan rates for auto lending, as well as all other consumer
loans, are priced based on the specific loan type and the risks involved. Indirect lending sources are used to purchase
auto loans. In-house and direct lending sources have been used to originate auto loans in prior years.

- 19 -

We purchase auto loans through a partnership with a loan originator that operates in all 50 states,
underwriting and funding loans for classic (25 years or older) and collector (premium price with limited production)
vehicles. These loans typically range from $10,000 to over $600,000 with terms that range from 84 to 180 months
and generally require down payments of 10% to 20%. We receive loan pools each week with complete packages that
we are able to underwrite to determine whether to purchase or pass on all loans submitted. These loans present
unique risks with the collateral being located across the country; however, our loan originator mitigates risk of loss
by providing an option to facilitate the collection efforts should repossession become necessary, for which we would
incur a cost if we did it ourselves. Historically, losses on these types of loans have been less than 1% and First
Fed experienced a loss rate of 0.06% for each of the years ended December 31, 2022 and 2021.

Indirect auto loans were originated with auto dealerships located throughout our market areas through a

third-party service provider that also facilitated a portion of the underwriting and origination of these loans based on
our underwriting and pricing criteria. During 2020, we ended our relationship with that service provider, effectively
eliminating new production. We may, however, work directly with local auto dealerships in the future. Indirect auto
loan customers receive a fixed rate loan in an amount and at an interest rate that is based on review of their FICO
credit score, age of the vehicle, and loan term. Our underwriting and pricing criteria for indirect auto loans focuses
primarily on the ability of the borrower to repay the loan rather than the value of the underlying collateral. The loan
term on indirect auto loans averages 70 months, which is comparable to national auto industry data.

We began purchasing manufactured home loans during 2020 through a partnership with a loan originator

that underwrites and funds these loans. At December 31, 2022, $78.3 million of manufactured home loans was
included in consumer loans. These loans range from $18,000 to $335,000 with terms that range from 120 to 360
months. We receive loan pools with complete packages that we underwrite to determine whether to purchase or pass
on some, or all, of the loans submitted. The seller retains the servicing on these loans. The collateral may include
both real estate and personal property depending on whether or not the title to the subject property has been
eliminated. A reserve account equal to approximately 8% of the unpaid balance serves as a credit enhancement to
help protect against charge offs and prepaid loans. The loan originator has had an average loss rate of 0.6% since
2007 for this program and First Fed has not experienced any loss on these loans to-date.

Consumer loans represent additional risks because of the mobility and rapidly depreciating nature of

consumer assets in contrast to real estate-based collateral. If a borrower defaults, repossession and liquidation of the
collateral may not provide sufficient proceeds to satisfy the outstanding loan balance. Other factors that may account
for potential loan losses on consumer loans include deferred maintenance and damages. While subsequent legal
actions and judgments against borrowers in default may be appropriate, such collection efforts and costs may not
always be warranted and are evaluated on a case-by-case basis. Consumer loan collections are dependent on the
borrower’s continuing financial stability and federal and state laws, including federal and state bankruptcy and
insolvency laws, which may limit the amount that can be recovered on these loans.

Commercial Business Lending. As of December 31, 2022, commercial business loans totaled $77.0

million, or 5.0% of our loan portfolio.

During the years ended December 31, 2021 and 2020, we provided assistance to many small businesses

through the SBA's Paycheck Protection Program ("SBA PPP"). This program provided small businesses with funds
to pay up to eight weeks of payroll costs including benefits. A portion of the funds could also be used to pay interest
on mortgages, rent, and utilities. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was
enacted. Main provisions of the PPPFA extended the repayment period from two to five years, extended the covered
expense period from eight to 24 weeks, and lowered the percent of forgiveness amount required to be used for
eligible payroll costs to 60%. The PPPFA also extended the repayment start date until after the SBA finalized the
application process for loan forgiveness.

- 20 -

We processed $32.2 million of loans for 515 customers through the SBA PPP program as of December 31,
2020, the average loan amount approved was approximately $63,000. We processed an additional $35.0 million of
loans for 427 customers during the second round of SBA PPP funding with an average loan amount of $82,000.
Payments by borrowers on these loans begin six months after the note date, and interest, at 1%, continued to accrue
during the six-month deferment. Loans can be forgiven in whole or part (up to full principal and any accrued
interest). We received $1.8 million and $1.4 million of fee income for loans originated in 2021 and 2020,
respectively, which is accreted into income over the life of the loan. The remaining fee balance is taken into income
when the loan pays off. We recognized deferred fee income, net of deferred costs, of $377,000 and $1.7 million for
the years ended December 31, 2022 and 2021, respectively, through SBA PPP loan accretion and payoff activity.
The remaining net deferred fee balance at December 31, 2022, was $13,000. We partnered with a third-party
financial technology provider to assist our borrowers with the loan forgiveness application process. SBA PPP loan
balances totaling $99,000 were included in commercial business loans at December 31, 2022.

The remaining balance of commercial business loans includes lines of credit, term loans, and letters of

credit used for general business purposes, including seasonal and permanent working capital, equipment financing,
and general investments. These loans are typically secured by business assets, and loan terms vary from one to seven
years with floating rates indexed to similar FHLB advance rates, The Wall Street Journal prime rate, LIBOR or
other indices. These loans typically have shorter maturity terms and higher interest spreads than real estate loans but
generally involve more credit risk because of the type and nature of the collateral. Our commercial business lending
underwriting includes an analysis of the borrower’s financial condition, past, present and future cash flows, and the
collateral pledged as security. We generally obtain personal guarantees on our commercial business loans. We focus
our commercial lending activities on small-to-medium sized, privately held companies with local or regional
businesses that operate in our market area.

Commercial business loans are originated based on the cash flow of the borrowing entity, which may be
unpredictable due to normal business cycles, industry changes, and economic and political conditions. Secondary
and tertiary sources of repayment are guarantor cash flows and collateral liquidation. Most often, collateral for
commercial business loans consists of real estate, accounts receivable, inventory, or equipment. Collateral may
fluctuate in value, which can reduce liquidation proceeds, and our ability to collect on accounts receivable or other
third-party payments can affect the amount of losses we incur in the event of default. Similar to commercial and
multi-family real estate loans, commercial business relationships of $1.5 million or greater are subject to a formal
review of the entire lending relationship at least annually.

Included in total commercial business loans is $7.0 million of loans originated by First Northwest. These
loans may contain clauses which allow for a portion of the debt to be converted into securities, mezzanine debt or
other non-standard terms.

Loan Origination and Underwriting. Our loans are obtained from a variety of sources, including existing

or walk-in customers, business development, referrals, and advertising, among others. All of our consumer loan
products, including residential mortgage loans and secured and unsecured consumer loans, are processed through
our centralized processing and underwriting center. Commercial business loans, including commercial and multi-
family real estate loans, are originated by our relationship managers ("RMs") and underwritten centrally with credit
presentations submitted for approval to the appropriate individuals and committee(s) with lending authority
designated by the Board of Directors (the "Board").

Lending Authority. Through its current policy, the Board delegates lending authority to the Bank’s

management and staff and to the Senior Loan Committee ("SLC"). Overdrafts and small business express loans
require one signature. The Chief Banking Officer ("CBO") and the Chief Operating Officer ("COO") have the
authority to approve overdrafts up to $100,000; the Chief Credit Officer ("CCO"), Chief Financial Officer ("CFO"),
and Chief Executive Officer ("CEO") have the authority to approve overdrafts up to $250,000; and certain other
staff and management have authority to approve overdrafts ranging from $5,000 to $50,000. Our small business
express loans, which are commercial business loans of $100,000 or less, are approved by the CCO or designated
personnel and management. In addition, the CCO may approve Automated Clearing House and Remote Deposit
Capture transactions in any amount and has the authority to approve most modifications and extensions of credit in
any amount for terms of less than one year.

- 21 -

Mortgage loan underwriters have approval authority up to $667,000. The Director of Mortgage and
Consumer Credit has approval authority of $1.0 million, and the CCO has approval authority of $2.0 million.
Mortgage loans over $2.0 million are approved by the SLC.

For commercial loans, the CCO has approval authority of $10.0 million based on aggregate credit

exposure, and other personnel have approval authority ranging from $500,000 to $4.0 million. Commercial loan
relationships over $10.0 million are approved by the SLC.

The Director of Mortgage and Consumer Credit has approval authority for consumer loans up to $1.0

million and certain named individuals have authority ranging from $150,000 to $500,000. Additionally, we have
assigned authority to approve indirect auto loans and wholesale partnerships meeting our underwriting and pricing
criteria to our third-party service providers.

The SLC (on a monthly basis) and the Board Loan Committee ("BLC") (on a quarterly basis) review loan
portfolio quality, credit concentrations, production, and industry trends and provide directional oversight over our
lending policies. The BLC also reviews, on a quarterly basis, policy exceptions, and related risk concerns.
Additionally, all loan approval policies are reviewed no less than annually.

Washington law provides for loans to one borrower restrictions, which restricts total loans and extensions

of credit by a bank to 20% of its unimpaired capital and surplus, which was $46.3 million at December 31, 2022.
First Fed, however, restricts its loans to one borrower to no more than 60% of the Bank's lending limit, which is
adjusted quarterly and was $34.7 million at December 31, 2022, unless specifically approved by the SLC as an
exception to policy. The following table provides a summary of our five largest relationships at December 31, 2022.

Total Commitment

(In thousands)
$17,232
15,839
15,689
15,420
15,248

Number of Loans in
Relationship

4
6
2
1
7

Primary Collateral Type

Multi-family Real Estate
Multi-family Real Estate
Commercial Real Estate
Multi-family Real Estate
Multi-family Real Estate

Loan Originations, Servicing, Purchases and Sales. We originate mortgage, consumer, multi-family and

commercial real estate, and commercial business loans for our portfolio utilizing fixed- and adjustable-rate loan
terms. We also purchase whole and participation loans on a servicing retained or released basis. During the years
ended December 31, 2022, 2021, and 2020, our total loan originations were $548.3 million, $780.5 million, and
$871.3 million, respectively.

During the years ended December 31, 2022, 2021, and 2020, we purchased $96.1 million, $115.5 million,

and $88.3 million of loans, respectively. During the last year, the majority of purchases consisted of auto loans
purchased through our partnership with an originator specializing in classic and collector vehicles and manufactured
home loans purchased through our partnership with an originator specializing in that type of lending. A secondary
source of purchased loans were commercial real estate loans and participations, whereby we receive a portion of a
loan originated by another lender who retains the servicing and customer relationship and may, depending on the
terms of the agreement, retain a portion of the interest as a servicing fee. Loan pools purchased prior to 2018
consisted mainly of loans exceeding conforming loan limits, or "jumbo loans," secured by single family residential
properties located in the states of Washington and California. Purchased loans, loan pools, and participations are
underwritten by our credit administration department and approved by the appropriate loan committee(s) prior to
purchase, according to our lending authority guidelines. We may pay a purchase premium or receive a purchase
discount on fully originated loans that we purchase. Premiums and discounts are capitalized at the time of purchase
and amortized over the remaining contractual life of the loan. We had $16.0 million, $13.0 million, and $6.1 million
of net premiums paid on purchased loans at December 31, 2022, 2021, and 2020.

- 22 -

The Olympic Peninsula region, which includes a substantial concentration of our depositors, has

experienced limited population growth, and the region's unemployment rate is higher than both the state and national
unemployment rates. As a result, it has been part of our strategy to originate and purchase loans outside of these
areas in the counties surrounding the Puget Sound and elsewhere. As part of that, we may purchase loans with
different credit and underwriting criteria than those we originate organically.

We sell residential first mortgage loans in the secondary market. The majority of residential mortgages we

originate are fixed rate, which we may sell to the secondary market to manage our interest rate risk and improve
noninterest income. During the years ended December 31, 2022, 2021, and 2020, we sold $26.1 million,
$113.0 million, and $184.4 million of residential mortgage loans, respectively. Our secondary market relationship
for residential loans is with Freddie Mac and other select third-party purchasers, which provides us greater flexibility
in choosing the best pricing, whether we are selling on a servicing retained or released basis.

At December 31, 2022, we were servicing $418.8 million of loans for others. We earned sold loan servicing

income of $972,000, $1.0 million, and $424,000 for the years ended December 31, 2022, 2021, and 2020,
respectively. Servicing rights for these loans had a fair value of $3.9 million at December 31, 2022. See Note 6 of
the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data,"
of this Form 10-K.

In general, loans are sold on a non-recourse basis to third-party purchasers, subject to a provision for

repurchase in the event of a breach of representation, warranty or covenant made at the time of sale. During fiscal
2008, we sold loans with "life of the loan" recourse provisions to Freddie Mac, and beginning in May 2013, Freddie
Mac has required loans guaranteed by the United States Department of Agriculture to be sold with "life of the loan"
recourse provisions as well. These recourse provisions require us to repurchase the loan upon default. The balance of
loans serviced for others with life of the loan recourse provisions was $1.9 million at December 31, 2022. There
were no loans repurchased during the years ended December 31, 2022, 2021, and 2020.

We may solicit one or more financial institutions to take a portion of a commercial real estate loan in order

to manage risk, concentrations, or to generate income through gain on sale or servicing fees. In that case, a
participation agreement outlines the indirect relationship between the Bank and the participant with regard to
borrower access, loan servicing, loan documentation, and other matters. The participant's involvement is typically
limited, and the participation interest is generally sold without recourse. We typically retain an ownership interest in
the loan as well as the loan servicing rights in order to maintain our direct relationship with the borrower and better
manage our credit risk. During the year ended December 31, 2022, we sold $6.0 million in commercial business
loans, $3.1 million in commercial construction loans, and $750,000 in commercial real estate loan participations,
retaining both the servicing and a portion of the loan balances. During the year ended December 31, 2021, we sold
$43.5 million in multi-family real estate loans, retaining only the servicing, and $4.3 million in commercial
construction loans, retaining both the servicing and a portion of the loan balances.

In 2021, we expanded our relationship with the SBA to include additional products. The SBA loans

generally carry a government guarantee ranging from 75%-90% of the loan balance. The Bank sells the guaranteed
portion and holds the remaining unguaranteed portion of the note. The Bank retains the servicing on these loans. We
sold $5.7 million and $4.1 million of SBA participations during the years ended December 31, 2022 and 2021,
respectively.

Gains, losses and transfer fees on sales of one- to four-family and commercial real estate loans are

recognized at the time of the sale. Our net gain on sale of residential real estate, commercial real estate, and SBA
loans was $824,000, $5.3 million, and $6.4 million for the years ended December 31, 2022, 2021, and
2020, respectively.

- 23 -

The following table shows our loan origination, sale and repayment activities for the periods indicated:

2022

Year Ended December 31,
2021
(In thousands)

2020

Originations by type:
Fixed-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Total fixed-rate
Adjustable-rate:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business

Total adjustable-rate
Total loans originated

Purchases by type:
One- to four-family
Multi-family
Commercial business
Construction and land
Auto
Manufactured homes

Total loans purchased
Sales and Repayments:
One- to four-family sold
Multi-family sold
Commercial real estate sold
Construction sold
Commercial business sold

Total loans sold

68,799 $
29,638
38,988
76,736
8,768
3,606
9,957
236,492

167,712 $
62,044
66,182
127,440
6,613
10,525
39,331
479,847

24,645
67,637
65,469
61,953
32,956
62
59,043
311,765
548,257

779
—
6,364
—
61,930
26,989
96,062

26,088
—
750
3,144
11,670
41,652

19,600
48,492
69,776
111,554
30,012
12
21,172
300,618
780,465

1,440
1,014
—
4,134
64,644
44,230
115,462

113,031
43,491
1,837
4,340
2,267
164,966

Total principal repayments, charge-offs and transfers to
real estate owned and repossessed assets

Total reductions

Net loan activity

425,448
467,100
177,219 $

527,833
692,799
203,128 $

- 24 -

247,802
42,663
55,641
59,623
5,994
2,970
43,964
458,657

25,606
50,749
34,472
185,686
13,183
—
102,988
412,684
871,341

28,652
2,000
—
—
37,626
20,003
88,281

184,356
—
—
—
—
184,356

504,990
689,346
270,276

Loan Origination and Other Fees. Loan origination fees paid by borrowers generally are based on a

percentage of the principal amount of the loan. Accounting standards require that certain fees received, net of certain
origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs
associated with loans that are prepaid or sold are recognized as income or expense at the time of prepayment or sale.
We had $2.8 million, $4.8 million, and $4.3 million of net deferred loan fees at December 31, 2022, 2021, and 2020,
respectively. Included in these totals at December 31, 2022, 2021, and 2020, was $13,000, $390,000, and $492,000,
respectively, of PPP loan fees. In addition, we receive fees for loan commitments, late payments and miscellaneous
services.

Asset Quality

Management of asset quality includes loan performance monitoring and reporting as well as utilization of

both internal and independent third-party loan reviews. The primary objective of our loan review process is to
measure borrower performance and assess risk for the purpose of identifying loan weakness in order to minimize
loan loss exposure. From the time of origination through final repayment, all loans are assigned a risk rating based
on pre-determined criteria. The risk rating is monitored annually for most loans and may change during the life of
the loan as appropriate.

Loan reviews vary by loan type and complexity. Some loans may warrant detailed individual review, while

other loans may have less risk based upon size, or be of a homogeneous nature, such as consumer loans and loans
secured by residential real estate. Homogeneous loans may be reviewed based on indicators such as delinquency or
credit rating. In cases of significant concern, re-evaluation of the loan and associated risks are documented by
completing a loan risk assessment and action plan.

The following table shows our delinquent loans by type of loan and number of days delinquent as of

December 31, 2022.

Loans Delinquent For:

60-89 Days

90 Days and Over

Total Loans Delinquent
60 Days or More

Number Amount

Percent
of Loan
Category Number Amount

Percent
of Loan
Category

(Dollars in thousands)

2 $
1
3

155
19
174

—%
—
—

3 $

—
3

652
—
652

1
14
15

—
697
697

—
0.3
0.3

1
2
3

11
554
565

0.2%
—
0.1

—
0.2
0.2

5 $
1
6

807
19
826

2
16
18

11
1,251
1,262

0.2%
—
0.1

—
0.6
0.5

Real estate loans:
One- to four-family
Construction and land

Total real estate loans

Consumer loans:
Home equity
Auto and other consumer
Total consumer loans

Total loans

18 $

871

0.1%

6 $ 1,217

0.1%

24 $ 2,088

0.1%

- 25 -

Nonperforming Assets. Nonperforming assets include nonperforming loans, real estate owned, and other

repossessed assets. Troubled debt restructurings ("TDR") include nonperforming and performing loans that have
been restructured. Nonperforming assets as a percent of total assets were 0.1% at each of December 31, 2022, 2021,
and 2020. At each of the dates indicated in the following table, there were no loans delinquent more than 90 days
that were accruing interest.

Nonaccrual loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land

Total real estate loans

Home equity
Auto and other consumer
Total consumer loans

Total nonaccrual loans

Repossessed personal property

Total nonperforming assets

TDR loans:
One- to four-family
Home equity

Total restructured loans

Nonaccrual and 90 days or more past due loans as

a percentage of total loans

Nonperforming TDR loans included in total nonaccrual

loans and total restructured loans above

2022

December 31,
2021
(Dollars in thousands)

2020

957
—
51
16
1,024

194
572
766

1,790

—

494
—
71
22
587

282
512
794

1,381

—

912
284
157
26
1,379

73
821
894

2,273

1,790

1,381

2,275

1,726
27
1,753

1,792
51
1,843

2,162
62
2,224

0.1%

0.2%

108

For the years ended December 31, 2022, 2021, and 2020, gross interest income which would have been

recorded had the nonaccrual loans been current in accordance with their original terms amounted to
$699,000, $679,000, and $686,000, respectively. The amount that was included in interest income on a cash basis on
nonaccrual loans was $28,000, $48,000, and $85,000 for the years ended December 31, 2022, 2021, and 2020,
respectively.

Other Loans of Concern. In addition to nonperforming assets set forth in the table above, as of December

31, 2022, there were 20 loans totaling $36.4 million that continue to accrue interest but for which management has
concerns about the ability of these borrowers to comply with loan repayment terms. These loans are classified as
special mention or substandard and have been considered in management's determination of our allowance for loan
losses.

- 26 -

Real Estate Owned and Repossessed Property. Real property we acquire through collection and
foreclosure efforts is classified as real estate owned. These properties are recorded at the lower of cost, which is the
unpaid principal balance of the related loan, or the fair market value of the property less selling costs. Real estate
owned properties are generally listed with a real estate broker, included in the multiple listing service, and actively
marketed. Other repossessed property, including automobiles, is also recorded at the lower of cost or fair market
value less selling costs. As of December 31, 2022, we had no repossessed real or personal property owned.

Restructured Loans. According to United States Generally Accepted Accounting Principles ("GAAP"),

we are required to account for certain loan modifications or restructurings as a TDR. In general, the modification or
restructuring of a debt is considered a TDR if we, for economic or legal reasons related to a borrower’s financial
difficulties, grant a concession to the borrower under more favorable terms and conditions than we would grant to an
ordinary bank customer under the normal course of business.

We engage in other general loan restructures and modifications not considered as TDR loans, which may
include lowering interest rates, extending the maturity date, deferring or re-amortizing monthly payments or other
concessions, provided that such concessions are not below market rates or considered material and outside of the
terms and conditions granted to other borrowers in the ordinary course of business. These general loan restructures
and modifications are made on a case-by-case basis.

Adversely classified loans that are subsequently modified and placed in nonaccrual status are generally not
returned to accrual status until a period of at least six months with consecutive satisfactory payment performance has
occurred, and a return to accrual status is further supported by current financial information and analysis which
demonstrates a particular borrower has the financial capacity to meet future debt service requirements.

As of December 31, 2022, we had loans with an aggregate principal balance of $1.8 million that were

identified as TDR loans, of which all but $29,000 were performing in accordance with their revised payment terms
and on accrual status. Included in the allowance for loan losses at December 31, 2022, was a reserve of $18,000
related to TDR loans. Nonaccrual TDR loans are classified as substandard while accruing TDR loans may be
classified at any level in our loan grading system depending upon verified repayment sources, collateral values and
repayment history.

Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets
as substandard, doubtful or loss. An asset is considered substandard when material conditions are identified which
raise issues about the financial capacity, collateral or other conditions which may compromise the borrower’s ability
to satisfactorily perform under the terms of the loan. Substandard assets include those characterized by the distinct
possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all
the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present
make near term collection or liquidation highly questionable and improbable. Assets classified as loss are those
considered uncollectible or of no material value. Assets that do not currently expose us to sufficient risk to warrant
classification as substandard or doubtful but possess identified weaknesses are classified by us as either watch or
special mention assets. Our credit administration department, management, and the Board review the analysis and
approve the specific loan loss allowance for these loans.

General reserve loan loss allowances represent loss allowances which have been established to recognize
the inherent risk associated with lending activities, but which, unlike specific allowances on impaired loans, have
not been specifically allocated to particular problem assets. When an institution identifies a problem asset as an
unavoidable and imminent loss, it is required to partially or fully charge-off such assets in the period in which they
are deemed uncollectible. Our determination as to the classification of our assets and the amount of our valuation
allowances is subject to review by the DFI and the FDIC, who can order specific charge-offs or the establishment of
additional loan loss allowances.

- 27 -

We review, at least quarterly, the problem assets in our portfolio to determine whether any assets require
reclassification. Based on our review, as of December 31, 2022, 2021, and 2020, we had classified loans of $16.9
million, $12.6 million, and $7.5 million, respectively. We had no other classified assets at these dates. In addition,
we had $20.8 million, $12.3 million and $24.0 million of special mention loans at December 31, 2022, 2021, and
2020, respectively.

Classified loans, consisting solely of substandard loans, were as follows at the dates indicated:

Real estate loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land

Total real estate loans

Consumer loans:
Home equity
Auto and other consumer
Total consumer loans

Commercial business loans

2022

December 31,
2021
(In thousands)

2020

1,497 $
—
1,134
14,002
16,633

764 $
—
10,948
22
11,734

194
91
285

—

350
513
863

—

1,771
284
4,155
64
6,274

154
868
1,022

232

Total loans

16,918 $

12,597 $

7,528

- 28 -

.
s
e
g
a
t
n
e
c
r
e
p
d
n
a

s
t
n
u
o
m
a

r
a
l
l
o
d
n
i

s
n
a
o
l

d
e
i
f
i
s
s
a
l
c

r
u
o
f
o
n
o
i
t
u
b
i
r
t
s
i
d
c
i
h
p
a
r
g
o
e
g
e
h
t

,
2
2
0
2
,
1
3
r
e
b
m
e
c
e
D

t
a

s
w
o
h
s

e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
T

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

)
s
d
n
a
s
u
o
h
t

n
i

s
r
a
l
l
o
D

(

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

f
o
%

n
i

l
a
t
o
T

y
r
o
g
e
t
a
C

t
n
u
o
m
A

l
a
t
o
T

s
e
t
a
t
S
r
e
h
t
O

l
l

e
t
a
t
S
n
o
t
g
n
h
s
a
W

l
a
t
o
T

d
n
u
o
S
t
e
g
u
P

)
2
(
n
o
i
g
e
R

c
i

p
m
y
l
O
h
t
r
o
N

)
1
(
a
l
u
s
n
n
e
P

%
4
.
0

3
.
0

2
.
7

4
.
1

4
.
0

—

1
.
0

7
9
4
,
1

4
3
1
,
1

2
0
0
,
4
1

3
3
6
,
6
1

1
9

4
9
1

5
8
2

%
—

—

%
1
.
1

8
1
9
,
6
1

%
—

—

4
7

%
3
.
1

4
4
8
,
6
1

%
8
.
1

6
8
9
,
5
1

%
3
.
0

8
5
8

s
n
a
o
l

l
a
t
o
T

.
s
e
i
t
n
u
o
c

d
n
a
l
s
I
d
n
a

m
o
c
t
a
h
W

,
t
i
g
a
k
S

,
h
s
i
m
o
h
o
n
S

,
g
n
i
K

,
e
c
r
e
i

,
n
o
t
s
r
u
h
T

,
n
o
s
a

,
p
a
s
t
i

K
s
e
d
u
l
c
n
I

.
s
e
i
t
n
u
o
c

n
o
s
r
e
f
f
e
J

d
n
a
m
a
l
l
a
l
C
s
e
d
u
l
c
n
I

)
1
(

)
2
(

%
5
.
0

3
.
0

3
.
7

5
.
1

4
.
0

1
.
0

3
.
0

7
9
4
,
1

4
3
1
,
1

2
0
0
,
4
1

3
3
6
,
6
1

7
1

4
9
1

1
1
2

%
4
.
0

0
0
9

%
5
.
0

4
.
0

8
.
8

9
.
1

—

2
.
0

1
.
0

3
8
0
,
1

6
8
9
,
3
1

9
6
9
,
5
1

—

7
1

1
.
0

3
.
0

6
.
0

—

5
.
0

1
5

6
1

7
9
5

4
6
6

—

4
9
1

s
n
a
o
l

e
t
a
t
s
e

l
a
e
r

l
a
t
o
T

e
t
a
t
s
e

l
a
e
r

l
a
i
c
r
e
m
m
o
C

d
n
a
l
d
n
a

n
o
i
t
c
u
r
t
s
n
o
C

y
l
i

m
a
f
-
r
u
o
f

o
t

-
e
n
O

:
s
n
a
o
l

e
t
a
t
s
e

l
a
e
R

s
n
a
o
l

r
e
m
u
s
n
o
c

l
a
t
o
T

r
e
m
u
s
n
o
c

r
e
h
t
o

d
n
a

o
t
u
A

:
s
n
a
o
l

r
e
m
u
s
n
o
C

y
t
i
u
q
e

e
m
o
H

- 29 -

Allowance for Loan Losses. The allowance for loan losses was $16.1 million, or 1.05% of total loans, at

December 31, 2022, compared to $15.1 million, or 1.11%, at December 31, 2021. On a quarterly basis, management
prepares a report of the allowance for loan losses and establishes the provision for credit losses based on its analysis
of the risk composition of our loan portfolio, delinquency levels, loss experience, economic conditions, seasoning of
the loan portfolios, and other factors related to the collectability of the loan portfolio.

Quantitative analysis is necessary to calculate accounting estimates for loan loss reserves, and we also

recognize that qualitative factors such as economic, market, industry and political changes can adversely affect loan
quality. These qualitative factors are updated and approved by management on a quarterly basis. Each quarter, a
report on the allowance for loan losses, including the application and discussion of quantitative and qualitative
factors established during the quarter, is reviewed by the Board's loan committee and presented for approval to the
full Board. The allowance is increased or decreased by the provision for or recapture of loan losses, which is
charged or credited against current period operating results, and decreased by the amount of actual loan charge-offs,
net of recoveries, and improvements in asset quality.

Our methodology for analyzing the allowance for loan losses consists of two components: general and

specific allowances. The formula for the general loan loss reserve allowance is determined by applying an estimated
quantified loss percentage, as well as qualitative factors, to various groups of loans. We use a three-year loss history
including loss percentages based on various historical measures such as the amount and type of classified loans, past
due ratios, loss experience, and economic conditions, which could affect the collectability of the respective loan
types. Qualitative factors and adjustments to the loan loss reserve calculations are largely subjective but also include
objective variables such as unemployment rates, falling or rising real estate values, real estate and retail sales,
demographics and other known significant economic indicators. A general allowance is then established, based upon
the analysis of the above conditions, to recognize the inherent risk associated with the entire loan portfolio. A
specific allowance is established when management believes a borrower’s financial and/or collateral condition has
materially deteriorated to a point of impairment, and loss is highly probable for that specific loan.

We define a loan as being impaired when, based on current information and events, it is probable we will

be unable to collect amounts due under the contractual terms of the loan agreement. Large groups of smaller balance
homogeneous loans, such as residential mortgage loans and consumer loans, are grouped together for impairment
analysis and reserve calculation. All other loans are evaluated for impairment on an individual basis. In the process
of identifying loans as impaired, management takes into consideration factors which include payment history,
collateral value, financial condition of the borrower, and the probability of collecting scheduled payments in the
future. Minor payment delays and insignificant payment shortfalls typically do not result in a loan being classified as
impaired. The significance of payment delays and shortfalls is considered by management on a case-by-case basis,
after taking into consideration the totality of circumstances surrounding the loans and borrowers, including payment
history and amounts of any payment shortfall, length and reason for delay, and likelihood of return to stable
performance. As of December 31, 2022, we had impaired loans of $3.0 million, compared to $3.2 million at
December 31, 2021.

In determining specific reserves for those loans evaluated for impairment on an individual basis,
management utilizes the valuation shown in the most recent appraisal of the collateral and may adjust that valuation
as additional information becomes available. Generally, appraisals or evaluations are updated subsequent to the time
of origination, whenever management identifies a loan as impaired or potentially being impaired. Events which may
trigger an updated appraisal or evaluation include, but are not limited to, borrower delinquency, material technical
defaults, annual review of borrower’s financial condition, property tax and/or assessment delinquency, deferred
maintenance or other information known or discovered by us.

- 30 -

Impaired collateral dependent loans require a current valuation and analysis to determine the net value of

the collateral for loan loss reserve purposes. Our policy is to update these values every 12 months if the loan and
collateral remains impaired, except for smaller balance, homogeneous loans, which are applied a reserve according
to their risk weighting and loan class. Certain types of collateral, depending on market conditions, may require more
frequent appraisals, updates or evaluations. When the results of the impairment analysis indicate a potential loss, the
loan is classified as substandard and is analyzed to determine if a specific reserve amount is to be established or
adjusted to reflect any further deterioration in the value of the collateral that may occur prior to liquidation or
reinstatement. The impairment analysis takes into consideration the primary, secondary, and tertiary sources of
repayment and whether impairment is likely to be temporary in nature or liquidation is anticipated.

Management believes that our allowance for loan losses as of December 31, 2022, is adequate to absorb the

known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and
assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance
that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future
provisions will not exceed the amount of past provisions or that any increased provision that may be required will
not adversely impact our financial condition and results of operations. In addition, the determination of the amount
of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process,
which may result in the establishment of additional reserves based upon their evaluation of information available to
them at the time of their examination.

The following table summarizes the distribution of our allowance for loan losses at the dates indicated.

2022

Percent of
loans in each
category to
total

Amount

December 31,
2021

Percent of
loans in each
category to
total

Amount
(Dollars in thousands)

2020

Percent of
loans in each
category to
total

Amount

Allocated at end of period to:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer
Commercial business
Unallocated
Total

3,343
2,468
4,217
2,344
549
2,024
786
385
16,116

22.4% $
16.5
25.5
12.7
3.4
14.5
5.0
—
100.0% $

3,184
1,816
3,996
2,672
407
2,221
470
358
15,124

21.7% $
12.7
26.8
16.5
2.9
13.5
5.9
—
100.0% $

3,469
1,764
3,420
1,461
368
2,642
429
294
13,847

26.8%
14.1
25.7
10.7
2.9
11.1
8.7
—
100.0%

- 31 -

The following table sets forth an analysis of our allowance for loan losses:

Allowance at beginning of period
Charge-offs:

Construction and land
Home equity
Auto and other consumer

Total charge-offs

Recoveries:

One- to four-family
Construction and land
Home equity
Auto and other consumer
Commercial business
Total recoveries

Net (charge-offs) recoveries
Provision for loan losses
Balance at end of period

2022

Year Ended December 31,
2021
(Dollars in thousands)
$

13,847

15,124

—
—
(1,025)
(1,025)

114
2
30
194
142
482

—
(12)
(865)
(877)

6
8
76
714
—
804

2020

9,628

(5)
—
(992)
(997)

58
5
13
94
—
170

(543)
1,535
16,116

(73)
1,350
15,124

(827)
5,046
13,847

Net (charge-offs) recoveries as a percentage of average
loans outstanding

—%

(0.1)%

Net (charge-offs) recoveries as a percentage of average
nonperforming assets

(34.2)%

(4.0)%

(39.1)%

Allowance as a percentage of nonperforming loans

900.3%

1095.1%

609.2%

Allowance as a percentage of total loans

1.05%

1.11%

1.20%

Average loans receivable, net

Average total loans

1,448,777

1,453,156

1,239,919

1,249,605

970,039

978,799

- 32 -

Investment Activities

General. Under Washington law, commercial banks are permitted, subject to certain limitations, to invest
in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain
certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements,
federal funds, commercial paper, investment grade corporate debt, investment grade commercial and residential
mortgage-related securities, and obligations of states and their political subdivisions.

Our Treasurer, under the direction of the CFO, has the responsibility for the management of our investment

portfolio. Various factors are considered when making investment decisions, including the marketability, maturity
and tax consequences of the proposed investment. The maturity structure of investments will be affected by various
market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend
of deposit inflows, and the anticipated demand for funds from deposit withdrawals and loan originations and
purchases.

The general objective of our investment portfolio is to provide liquidity, generate earnings, and manage

risk, including credit, reinvestment, liquidity and interest rate risk.

Securities. Total investment securities decreased $17.6 million, or 5.1%, to $326.6 million at December 31,

2022, from $344.2 million at December 31, 2021, mainly as a result of changes in market value, sales and principal
payments partially offset by purchases.

The issuers of mortgage-backed agency securities ("MBS") held in our portfolio, which include Fannie

Mae, Freddie Mac, and Government National Mortgage Association ("Ginnie Mae"), and certain issuers of agency
bonds held in our portfolio, which include FHLB and Fannie Mae, guarantee the timely principal and interest
payments in the event of default. Municipal bonds consist of a mix of taxable and non-taxable revenue and general
obligation bonds issued by various local and state government entities that use their revenue-generating and taxing
authority as a source of repayment of their debt. Our municipal bonds are considered investment grade, and we
monitor their credit quality on an ongoing basis.

Non-agency MBS securities have no guarantees in the event of default and therefore warrant continued

monitoring for credit quality. Our non-agency MBS securities consist of fixed and variable rate mortgages issued by
various corporations, which we believe have sufficient subordination to mitigate the risk of loss on these
investments, and certain corporate debt securities. Monitoring of these securities may include, but is not limited to,
reviewing credit quality standards such as delinquency, subordination, and credit ratings. Our rated non-agency and
corporate debt securities are considered investment grade and non-rated securities are subject to regular internal
review to ensure they meet the Company's investment criteria.

During the fourth quarter of 2019, the Bank marked its held to maturity investments as available for sale in

order to provide greater flexibility to manage changes in the investment portfolio. Management does not intend to
place securities into a held-to-maturity portfolio in the foreseeable future.

As a member of the FHLB, we had an average balance of $8.5 million in stock of the FHLB for the twelve

months ended December 31, 2022. We received $502,000, $190,000, and $255,000 in dividends from the FHLB
during the years ended December 31, 2022, 2021, and 2020, respectively.

- 33 -

The table below sets forth information regarding the composition of our securities portfolio and other

investments at the dates indicated. At December 31, 2022, our securities portfolio contained securities issued by the
United States Government and its agencies as well as securities issued by Capital Funding Mortgage Trust
("CFGMS") which had an aggregate book value in excess of 10% of our equity capital. The book value and fair
market value of CFGMS securities were $30.2 million and $29.6 million, respectively, at December 31, 2022, and
are included in non-agency issued mortgage-backed securities below.

2022

December 31,
2021

2020

Book
Value

Fair
Value

Book
Value

Fair
Value

Book
Value

Fair
Value

(In thousands)

Securities available for sale:
Municipal bonds
U.S. Treasury notes
International agency issued bonds

(Agency bonds)

U.S. government agency issued asset-
backed securities (ABS agency)

Corporate issued asset-backed securities

(ABS corporate)

Corporate issued debt securities

(Corporate debt)

U.S. Small Business Administration

securities (SBA)
Mortgage-backed:

U.S. government agency issued

mortgage-backed securities (MBS
agency)

Non-agency issued mortgage-backed

securities (MBS non-agency)
Total available for sale

FHLB stock

Total securities

$ 119,990 $ 98,050 $ 110,497 $ 113,364 $ 122,667 $ 127,862
—

2,469

2,364

—

1,955

1,702

1,947

1,920

—

62,934

63,820

14,556

14,489

29,661

29,280

60,700

55,499

58,906

59,789

35,408

35,510

—

14,404

14,680

18,420

18,564

88,930

75,648

80,877

79,962

61,859

62,683

101,139
375,183

93,306
326,569

60,317
341,504

60,008
344,212

26,458
357,407

26,577
364,296

11,681

5,196

5,977

$ 386,864 $ 338,250 $ 346,700 $ 349,408 $ 363,384 $ 370,273

- 34 -

s
e
i
t
i
r
u
c
e
S

l
a
t
o
T

s
r
a
e
y

0
1

r
e
v
O

2
2
0
2

,
1
3

r
e
b
m
e
c
e
D

o
t

r
e
v
O

s
r
a
e
y

0
1

r
a
e
y

r
e
v
O

s
r
a
e
y

o
t

r
i
a
F

e
u
l
a
V

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

)
s
d
n
a
s
u
o
h
t
n
i

s
r
a
l
l
o
D

(

s
s
e
l

r
o
r
a
e
y

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

,
1
2
0
2
,
1
3
r
e
b
m
e
c
e
D
d
n
a
2
2
0
2
,
1
3
r
e
b
m
e
c
e
D

t
a

o
i
l
o
f
t
r
o
p
t
n
e
m
t
s
e
v
n
i

r
u
o
f
o
s
e
i
t
i
r
u
t
a
m

l
a
u
t
c
a
r
t
n
o
c

d
n
a

n
o
i
t
i
s
o
p
m
o
c

e
h
T

.
s
e
i
t
i
r
u
c
e
S
f
o
y
t
i
r
u
t
a
M

.
s
i
s
a
b
t
n
e
l
a
v
i
u
q
e

x
a
t

n
o
d
e
t
u
p
m
o
c

n
e
e
b
t
o
n
e
v
a
h
s
d
n
o
b
l
a
p
i
c
i
n
u
m
n
o
s
d
l
e
i
y
e
h
T

.
e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
t

n
i

d
e
t
a
c
i
d
n
i

e
r
a

,
k
c
o
t
s
B
L
H
F
g
n
i
d
u
l
c
x
e

0
5
0
,
8
9

%
1
5
.
2

0
9
9
,
9
1
1

%
7
4
.
2

3
0
2
,
9
9

%
3
7
.
2

7
8
4
,
0
2

%
5
2
.
4

4
6
3
,
2

2
0
7
,
1

9
9
4
,
5
5

8
4
6
,
5
7

6
0
3
,
3
9

4
3
.
2

2
2
.
1

8
4
.
4

0
3
.
2

6
1
.
4

9
6
4
,
2

5
5
9
,
1

0
0
7
,
0
6

0
3
9
,
8
8

9
3
1
,
1
0
1

—

3
1
.
4

2
3
.
2

4
5
.
3

—

0
0
0
,
1

7
1
0
,
1
8

4
6
9
,
2
5

—

8
7
.
4

2
1
.
2

0
4
.
4

—

4
2
7
,
3
4

3
1
9
,
7

3
2
5
,
5

4
3
.
2

2
2
.
1

7
6
.
3

—

8
0
.
4

0
0
3

9
6
4
,
2

5
5
9
,
1

6
7
9
,
5
1

—

0
9
8
,
8
2

%
—

—

1
6
.
6

—

2
6
7
,
3
1

:
e
l
a
s

r
o
f

e
l
b
a
l
i
a
v
a

s
e
i
t
i
r
u
c
e
S

s
d
n
o
b

l
a
p
i
c
i
n
u
M

s
e
t
o
n

y
r
u
s
a
e
r
T

S
U

y
c
n
e
g
a
-
n
o
n
S
B
M

y
c
n
e
g
a
S
B
M

:
d
e
k
c
a
b
-
e
g
a
g
t
r
o
M

s
d
n
o
b

y
c
n
e
g
A

t
b
e
d

e
t
a
r
o
p
r
o
C

9
6
5
,
6
2
3
$

%
2
2
.
3

3
8
1
,
5
7
3

%
6
6
.
2

4
8
1
,
4
3
2

%
4
9
.
3

7
4
6
,
7
7

%
5
7
.
3

0
9
5
,
9
4

%
1
6
.
6

2
6
7
,

3
1

e
l
a
s

r
o
f

e
l
b
a
l
i
a
v
a

s
e
i
t
i
r
u
c
e
s

l
a
t
o
T

1
2
0
2

,
1
3

r
e
b
m
e
c
e
D

r
i
a
F

e
u
l
a
V

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

d
e
t
h
g
i
e

e
g
a
r
e
v
A

d
l
e
i
Y

d
e
z
i
t
r
o
m
A

t
s
o
C

s
e
i
t
i
r
u
c
e
S

l
a
t
o
T

s
r
a
e
y

0
1

r
e
v
O

o
t

r
e
v
O

s
r
a
e
y

0
1

r
a
e
y

r
e
v
O

s
r
a
e
y

o
t

s
s
e
l

r
o
r
a
e
y

)
s
d
n
a
s
u
o
h
t
n
i

s
r
a
l
l
o
D

(

4
6
3
,
3
1
1
$

%
6
4
.
2

7
9
4
,
0
1
1

%
6
4
.
2

9
3
5
,
9
9

%
9
3
.
2

8
5
6
,
0
1

%
5
2
.
4

0
2
9
,
1

9
8
4
,
4
1

9
8
7
,
9
5

0
8
6
,
4
1

2
6
9
,
9
7

8
0
0
,
0
6

2
2
.
1

7
8
.
1

7
9
.
3

2
4
.
2

8
6
.
1

6
1
.
3

7
4
9
,
1

6
5
5
,
4
1

6
0
9
,
8
5

4
0
4
,
4
1

7
7
8
,
0
8

7
1
3
,
0
6

—

1
8
.
1

3
1
.
4

6
2
.
2

0
7
.
1

9
2
.
2

—

0
2
5
,
8

0
0
0
,
1

1
8
1
,
5

5
1
4
,
4
7

9
3
1
,
6
2

2
2
.
1

5
3
.
2

1
9
.
3

3
5
.
2

0
5
.
1

2
3
.
1

7
4
9
,
1

4
1
0
,
2

4
5
1
,
9

6
0
9
,
5
5

0
6
4
,
6

6
0
0
,
2

—

8
7
.
1

0
5
.
5

8
7
.
0

1
7
.
0

0
0
.
4

—

0
0
3

9
6

2
2
0
,
4

0
0
0
,
2

%
—

—

6
4
3
,
4
2

2
1
.
1

5
9
.
3

2
1
2
,
4
4
3
$

%
3
6
.
2

4
0
5
,
1
4
3

%
5
1
.
2

4
9
7
,
4
1
2

%
5
2
.
3

5
4
1
,
8
8

%
0
8
.
3

8
3
7
,
0
3

%
5
9
.
3

—

6
2
8
,
7

7
2
8
,

:
e
l
a
s

r
o
f

e
l
b
a
l
i
a
v
a

s
e
i
t
i
r
u
c
e
S

s
d
n
o
b

l
a
p
i
c
i
n
u
M

s
d
n
o
b

y
c
n
e
g
A

e
t
a
r
o
p
r
o
c
S
B
A

t
b
e
d

e
t
a
r
o
p
r
o
C

A
B
S

y
c
n
e
g
a
-
n
o
n
S
B
M

y
c
n
e
g
a
S
B
M

:
d
e
k
c
a
b
-
e
g
a
g
t
r
o
M

e
l
a
s

r
o
f

e
l
b
a
l
i
a
v
a

s
e
i
t
i
r
u
c
e
s

l
a
t
o
T

- 35 -

The Company may hold certain investment securities in an unrealized loss position that are not considered
other than temporarily impaired ("OTTI"). At December 31, 2022, of the 185 investment securities held, there were
182 investment securities with $48.6 million of unrealized losses and a fair value of approximately $323.8 million.
At December 31, 2021, of the 164 investment securities held, there were 76 investment securities with $2.5 million
of unrealized losses and a fair value of approximately $156.4 million. We had no OTTI on investment securities at
either December 31, 2022 or December 31, 2021. Management believes that the unrealized losses on investment
securities relate principally to general changes in interest rates and market liquidity that have occurred since the
initial purchase, and not to changes in credit quality. These unrecognized losses or gains will continue to vary with
general interest rate fluctuations in the future. Certain investments in a loss position are guaranteed by government
entities or government sponsored entities. The Company does not intend to sell the securities in an unrealized loss
position and believes it is not likely it will be required to sell these investments prior to a market price recovery or
maturity.

Deposit Activities and Other Sources of Funds

General. Deposits, borrowings and loan and investment cash flows are the major sources of our funds for

lending, investment, and general business purposes. Scheduled loan and investment repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by
general interest rates and other market conditions. Borrowings from the FHLB and subordinated debt are used to
supplement the availability of funds from other sources and as a source of term funds to assist in the management of
interest rate risk.

Our deposit composition consists of interest and noninterest-bearing checking, savings, money market

accounts, and certificates of deposit. We rely on marketing activities, digital channels, branch facilities, mail and
contact center services, relationship management, word of mouth referrals, and a broad range of deposit products
and payment services to attract and retain customer deposits.

Deposits. Deposits are attracted from within our market area through the offering of a broad selection of

deposit instruments, including checking accounts, money market deposit accounts, savings accounts and certificates
of deposit with a variety of rates. Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit, and the interest rate, among other factors. In determining the terms of our
deposit accounts, we consider the development of long-term profitable customer relationships, current market
interest rates, current maturity structure and deposit mix, our customer preferences, and the profitability of acquiring
customer deposits compared to alternative sources.

Deposit Activity. The following table sets forth activity in our total deposit balance for the periods

indicated.

Beginning balance
Net deposits
Interest credited
Ending balance

Net (decrease) increase

Percent (decrease) increase

2022

Year Ended December 31,
2021
(Dollars in thousands)

1,580,580
(21,523)
5,198
1,564,255

(16,325)

1,333,517
243,667
3,396
1,580,580

247,063

2020

1,001,645
325,209
6,663
1,333,517

331,872

(1.0)%

18.5%

33.1%

- 36 -

0
2
0
2

f
o

t
n
e
c
r
e
P

l
a
t
o
T

t
n
u
o
m
A

,
1
3
r
e
b
m
e
c
e
D

1
2
0
2

f
o

t
n
e
c
r
e
P

l
a
t
o
T

t
n
u
o
m
A

)
s
d
n
a
s
u
o
h
t

n
i

s
r
a
l
l
o
D

(

2
2
0
2

f
o

t
n
e
c
r
e
P

l
a
t
o
T

t
n
u
o
m
A

s
e
t
a
d

e
h
t

t
a
d
e
r
e
f
f
o
e
w
s
m
a
r
g
o
r
p
s
t
i
s
o
p
e
d
f
o
s
e
p
y
t

s
u
o
i
r
a
v
e
h
t

n
i

s
t
i
s
o
p
e
d
f
o
t
n
u
o
m
a

r
a
l
l
o
d
e
h
t
h
t
r
o
f

s
t
e
s

e
l
b
a
t

g
n
i
w
o
l
l
o
f

e
h
T

.
s
t
i
s
o
p
e
D

f
o
s
e
p
y
T

d
e
t
a
c
i
d
n
i

%
7
.
1
1

6
.
0
2

3
.
2
1

2
.
2
3

8
.
6
7

8
.
4

7
.
3

1
.
0

—

6
.
4
1

2
.
3
2

1
4
2
,
6
5
1

0
3
9
,
4
7
2

4
3
4
,
4
6
1

3
4
1
,
9
2
4

8
4
7
,
4
2
0
,
1

—

3
0
5
,
3
6

5
0
4
,
9
4

6
9
2
,
1

5
6
5
,
4
9
1

9
6
7
,
8
0
3

%
5
.
2
1

8
.
1
2

3
.
2
1

8
.
7
3

4
.
4
8

5
.
2

0
.
1

—

1
.
2
1

6
.
5
1

0
7
9
,
6
9
1

2
3
9
,
3
4
3

0
2
6
,
4
9
1

5
1
8
,
7
9
5

7
3
3
,
3
3
3
,
1

—

8
2
2
,
0
4

9
7
4
,
5
1

6
3
5
,
1
9
1

%
4
.
2
1

1
.
0
2

8
.
2
1

3
.
0
3

6
.
5
7

3
.
7

8
.
2

5
.
5

3
.
6

5
.
2

3
4
2
,
7
4
2

4
.
4
2

0
0
2
,
4
4

1
9
1
,
6
8

9
0
0
,
9
9

3
2
6
,
8
3

2
6
6
,
3
1
1

5
8
6
,
1
8
3

%
0
.
0
0
1

7
1
5
,
3
3
3
,
1

%
0
.
0
0
1

0
8
5
,
0
8
5
,
1

%
0
.
0
0
1

5
5
2
,
4
6
5
,
1

8
5
5
,
3
9
1

3
8
0
,
5
1
3

0
2
9
,
0
0
2

9
0
0
,
3
7
4

:
s
t
i
s
o
p
e
D
s
g
n
i
v
a
S
d
n
a
s
n
o
i
t
c
a
s
n
a
r
T

n
o
i
t
c
a
s
n
a
r
t

g
n
i
r
a
e
b
-
t
s
e
r
e
t
n
i
n
o
N

n
o
i
t
c
a
s
n
a
r
t

g
n
i
r
a
e
b
-
t
s
e
r
e
t
n
I

s
t
n
u
o
c
c
a

t
e
k
r
a
m
y
e
n
o
M

s
t
n
u
o
c
c
a

s
g
n
i
v
a
S

0
7
5
,
2
8
1
,
1

s
t
i
s
o
p
e
d
s
g
n
i
v
a
s
d
n
a
n
o
i
t
c
a
s
n
a
r
t

l
a
t
o
T

)
1
(

:
s
e
t
a
c
i
f
i
t
r
e
C

%
9
9
.

–

0
0
0

0
0
1

0
0
2

0
0
3

0
0
4

s
e
t
a
c
i
f
i
t
r
e
c

l
a
t
o
T

s
t
i
s
o
p
e
d

l
a
t
o
T

- 37 -

0
6
5
,
9
8

4
3
7
,
5
6

1
6
8
,
3
3
1

s
e
t
a
c
i
f
i
t
r
e
c

n
i
d
e
d
u
l
c
n
i

t
i
s
o
p
e
d
f
o
s
e
t
a
c
i
f
i
t
r
e
c

d
e
r
e
k
o
r
B

)
1
(

s
e
t
a
d
e
h
t

t
a

d
e
F

t
s
r
i
F
y
b
d
e
r
e
f
f
o
s
m
a
r
g
o
r
p
t
i
s
o
p
e
d
f
o
s
e
p
y
t

s
u
o
i
r
a
v
e
h
t

n
i

s
t
i
s
o
p
e
d
f
o
s
e
c
n
a
l
a
b

e
h
t
h
t
r
o
f

s
t
e
s

e
l
b
a
t
g
n
i
w
o
l
l
o
f

e
h
T

w
o
l
F
t
i
s
o
p
e
D

d
e
t
a
c
i
d
n
i

)
9
4
5
,
4
(

%
3
.
2
1

5
7
6
,
4
5
1

7
5
0
,
1
8
1

)
3
2
3
,
5
5
(

)
6
3
8
,
9
(

8
4
8
,
5
6

3
.
2
3

2
.
2
3

1
.
8

1
.
1

9
.
3
1

/
e
s
a
e
r
c
n
I

)
e
s
a
e
r
c
e
D

(

0
2
0
2

t
n
e
c
r
e
P

l
a
t
o
T
f
o

t
n
u
o
m
A

/
e
s
a
e
r
c
n
I

)
e
s
a
e
r
c
e
D

(

1
2
0
2

t
n
e
c
r
e
P

l
a
t
o
T
f
o

t
n
u
o
m
A

/
e
s
a
e
r
c
n
I

)
e
s
a
e
r
c
e
D

(

2
2
0
2

t
n
e
c
r
e
P

l
a
t
o
T
f
o

,
1
3
r
e
b
m
e
c
e
D

)
s
d
n
a
s
u
o
h
t

n
i

s
r
a
l
l
o
D

(

4
3
4
,
4
6
1

1
7
1
,
1
3
4

3
4
1
,
9
2
4

6
8
1
,
0
3

%
3
.
2
1

1
3
7
,
9
0
1

2
7
6
,
8
6
1

2
.
4
3

8
.
7
3

0
2
6
,
4
9
1

2
0
9
,
0
4
5

5
1
8
,
7
9
5

0
0
3
,
6

%
8
.
2
1

)
1
6
2
,
2
3
(

)
6
0
8
,
4
2
1
(

5
.
2
3

2
.
0
3

t
n
u
o
m
A

0
2
9
,
0
0
2

1
4
6
,
8
0
5

9
0
0
,
3
7
4

4
0
8
,
5
8
1

2
2
1
,
8
0
1

3
4
8
,
4
1

)
2
3
3
,
2
3
(

)
2
3
5
,
5
3
(

8
3
3
,
6

7
.
9

6
.
4

3
.
1

0
9
5
,
2
7

1
8
1
,
1
2

2
7
4
,
3
5
1

)
4
8
6
,
8
(

9
0
4
,
4
3

7
1
7
,
8
0
1

8
.
6

8
.
0

8
.
6
1

9
8
1
,
2
6
2

9
9
9
,
6
0
1

7
9
4
,
2
1

2
7
8
,
1
3
3

%
0
.
0
0
1

7
1
5
,
3
3
3
,
1
$

3
6
0
,
7
4
2

%
0
.
0
0
1

0
8
5
,
0
8
5
,
1
$

)
5
2
3
,
6
1
(

%
0
.
0
0
1

5
5
2
,
4
6
5
,
1
$

l
a
t
o
T

- 38 -

s
r
a
e
y
2
n
i
h
t
i

t
u
b
r
a
e
y
1
r
e
t
f

s
r
a
e
y
5
n
i
h
t
i

t
u
b
s
r
a
e
y
2
r
e
t
f

e
r
u
t
a
m
h
c
i
h
w
s
e
t
a
c
i
f
i
t
r
e
c

e
t
a
r
-
d
e
x
i
F

r
a
e
y
1

n
i
h
t
i

:
g
n
i
d
n
e

r
a
e
y
e
h
t

n
i

s
t
n
u
o
c
c
a

t
e
k
r
a
m
-
y
e
n
o
M

s
t
n
u
o
c
c
a
n
o
i
t
c
a
s
n
a
r
T

s
t
n
u
o
c
c
a

s
g
n
i
v
a
S

Deposit Maturities. The following table sets forth the rate and maturity information of our time deposit

certificates at December 31, 2022.

0.00-
0.99 %

1.00-
1.99 %

2.00-
2.99 %

3.00-
3.99 %

4.00-
4.99 % Total

Percent
of Total

(Dollars in thousands)

Certificate accounts maturing in
quarter ending:
March 31, 2023
June 30, 2023
September 30, 2023
December 31, 2023
March 31, 2024
June 30, 2024
September 30, 2024
December 31, 2024
March 31, 2025
June 30, 2025
September 30, 2025
December 31, 2025
Thereafter

$ 24,216 $ 2,714
2,392
10,997
2,539
232
—
237
4,689
11,524
724
286
607
7,259

16,109
25,694
14,496
3,629
5,452
1,456
5,833
1,176
798
5,756
3,935
5,112

$ 8,156
17,143
21,771
24,167
1,951
2,136
2,652
2,446
5,497
146
—
—
126

$ 32,500
23,350
—
9,663
15,925
—
—
14,754
2,389
428
—
—
—

$ 2,095
15,006
8,005
1,176
2,011
2,191
2,011
2,362
3,766
—
—
—
—

$ 69,681
74,000
66,467
52,041
23,748
9,779
6,356
30,084
24,352
2,096
6,042
4,542
12,497

18.3%
19.4
17.4
13.6
6.2
2.6
1.7
7.8
6.4
0.5
1.6
1.2
3.3

Total

$113,662 $ 44,200

$ 86,191

$ 99,009

$ 38,623

$381,685

100.0%

Percent of total

29.8%

11.6%

22.6%

25.9%

10.1%

100.0%

Jumbo Certificates. The following table indicates the amount of our jumbo certificates of deposit by time

remaining until maturity as of December 31, 2022. Jumbo certificates of deposit are certificates in amounts of
$100,000 or more.

3 Months
or Less

Over 3 to 6
Months

Maturity
Over 6 to
12 Months
(In thousands)

Over 12
Months

Total

Certificates of deposit less than $100,000
Certificates of deposit of $100,000 or more

Total certificates

48,056 $
21,625

49,098 $
24,902

56,599 $
61,909

44,781 $ 198,534
183,151
74,715

69,681 $

74,000 $ 118,508 $ 119,496 $ 381,685

The Federal Reserve requires First Fed to maintain reserves on transaction accounts or non-personal time
deposits. These reserves may be in the form of cash or noninterest-bearing deposits with the Federal Reserve Bank
of San Francisco. Negotiable order of withdrawal accounts and other types of accounts that permit payments or
transfers to third parties fall within the definition of transaction accounts and are subject to the reserve requirements,
as are any non-personal time deposits at a commercial bank. As of December 31, 2022, our deposit with the Federal
Reserve Bank of San Francisco and vault cash exceeded our reserve requirements.

- 39 -

Borrowings. We use advances from the FHLB, including short-term overnight, short-term advances with
initial maturities of less than one year, and longer-term advances maturing in one year or more, to supplement our
supply of lendable funds, to meet ongoing liquidity needs, and to mitigate interest rate risk. As a member of the
FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of
that stock and certain pledged assets including mortgage loans and investment securities. Advances are made under
various terms pursuant to several different credit programs, each with its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the financial condition of the
member institution and the adequacy of collateral pledged to secure the credit. We maintain a committed credit
facility with the FHLB, and at December 31, 2022, had pledged loan and security collateral to support a borrowing
capacity of $533.4 million. In addition, we have a letter of credit established in conjunction with assuming the
Bellevue branch lease liability. At December 31, 2022, outstanding advances from the FHLB totaled $234.0
million and the letter of credit balance was $772,000, leaving a remaining borrowing capacity of $298.6 million.

First Fed also established a borrowing arrangement to use the Federal Reserve Board of San Francisco's
("FRB") discount window. At December 31, 2022, we had pledged securities as collateral to support a borrowing
capacity of $8.6 million. No funds have been borrowed on this arrangement to date.

On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-
floating rate subordinated notes due 2031 (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 Tier
2 capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the
offering for general corporate purposes and provided $20.0 million to the Bank as Tier 1 capital.

On May 20, 2022, First Northwest entered into a borrowing arrangement with NexBank for a $20.0 million

revolving line of credit. Borrowings under the arrangement with NexBank 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 19, 2023, with the
option for two 364-day extensions.

The following tables set forth information regarding our borrowings at the end of and during the periods

indicated. The tables include both long- and short-term borrowings.

Maximum balance:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Line of credit
Subordinated debt, net

Average balances:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Line of credit
Subordinated debt, net

Weighted average interest rate:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Line of credit
Subordinated debt, net

2022

Year Ended December 31,
2021
(Dollars in thousands)

2020

80,000
42,500
206,000
12,000
39,358

80,000
15,208
90,983
5,770
39,312

1.52%
1.82
2.83
6.76
4.01

80,000
—
40,000
—
39,310

52,500
—
5,207
—
30,370

1.46%
—
0.30
—
3.96

55,000
—
100,021
—
—

50,000
—
54,548
—
—

1.75%
—
0.60
—
—

- 40 -

Balance outstanding at end of period:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Line of credit
Subordinated debt, net
Total borrowings

Weighted average interest rate at end of period:
FHLB long-term advances
FHLB short-term advances
FHLB overnight borrowings
Line of credit
Subordinated debt, net

Subsidiary and Other Activities

2022

Year Ended December 31,
2021
(Dollars in thousands)

2020

80,000
10,000
144,000
12,000
39,358
285,358

80,000
—
—
—
39,280
119,280

50,000
—
59,977
—
—
109,977

1.52%
2.12
4.30
8.00
4.01

1.52%
—
0.31
—
3.06

1.53%
—
0.32
—
—

First Fed has one active subsidiary in order to participate in historic tax credit transactions. Makers Square

Master Tenant, LLC was formed in February 2021 in partnership with the Fort Worden Foundation. A former
subsidiary, 202 Master Tenant, LLC, was formed in August 2016 in partnership with the Peninsula College
Foundation and ended in April 2022. These entities meet the criteria for reporting under the equity method of
accounting.

In December 2019, the Company entered into a limited partnership with Canapi Ventures Fund,

LP ("Canapi Ventures") to strategically invest in fintech-related businesses. The Company is dedicated to the
discovery of, and investment in, those fintech-related companies that we expect may also contribute to the evolution
of digital solutions applicable to the banking industry. This commitment to Canapi Ventures will be for up to ten
years, with cash installments totaling up to $3.0 million to be paid into the partnership over a period not to exceed
the first five years, beginning in 2020. As of December 31, 2022, $2.2 million had been contributed to this
partnership. The recorded investment was $3.1 million at December 31, 2022.

In April 2021, First Northwest, the Bank, POM, and Quin Ventures became parties to a joint venture

agreement. 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 was in a research and development phase during 2021. In early 2022, an initial product was rolled out that
attracted significant initial customer interest but had lower than expected customer retention as well as higher than
anticipated expenses. In the second half of 2022, another investor showed interest in the joint venture. In December
2022, Quin Ventures sold substantially all of its assets to Quil, at which time POM returned the 29,719 shares
previously issued and the joint venture agreement was terminated. First Northwest continues to maintain a
controlling interest in Quin Ventures.

In September 2021, the Company entered into a limited partnership with BankTech Ventures,

LP ("BankTech") to strategically invest in fintech-related businesses. The commitment to BankTech will be for up
to ten years, with cash installments totaling up to $1.0 million to be paid into the partnership over a period not to
exceed the first five years, beginning in 2021. As of December 31, 2022, $220,000 had been contributed to this
partnership. The recorded investment was $194,000 at December 31, 2022.

- 41 -

In December 2021, the Company entered into a limited partnership with JAM FINTOP Blockchain, LP to

strategically invest in fintech-related businesses. This commitment will be for up to ten years, with cash installments
totaling up to $1.0 million to be paid into the partnership over a period not to exceed the first five years, beginning
in 2022. As of December 31, 2022, $150,000 had been contributed to this partnership. The recorded investment
was $152,000 at December 31, 2022.

In February 2022, the Bank invested in a Small Business Investment Company through Canapi Ventures.
This commitment will be for up to ten years with two possible one-year extensions, with cash installments totaling
up to $2.0 million to be paid into the company over the commitment period, beginning in 2022. As of December 31,
2022, $137,000 has been contributed to this fund. The recorded investment was $127,000 at December 31, 2022.

In April 2022, First Northwest invested $3.0 million in Meriwether Group Capital Hero Fund LP, a private

commercial lender focused on lower-middle market businesses, primarily in the Pacific Northwest. A second $3.0
million investment was made in May 2022, bringing the Company's total investment in the Hero Fund to $6.0
million.

In April 2022, First Northwest made an initial investment for a 5% interest in Meriwether Group Capital,
LLC, which provides financial advice for borrowers and capital for the Hero Fund. In October 2022, the Company
completed an additional purchase and holds a 25% equity interest valued at $150,000 at December 31, 2022. The
Meriwether Group, LLC also holds a 20% interest in Meriwether Group Capital, LLC.

In June 2022, First Northwest made an initial investment for a 5% interest in The Meriwether Group, LLC,

a modern-day merchant bank focusing on providing entrepreneurs with resources to help them succeed. In
September 2022, the Company completed an additional purchase and holds a 33% interest valued at $2.8 million at
December 31, 2022. First Northwest issued 115,777 shares of stock with a value of $1.9 million to the existing
partners as consideration in the acquisition transaction.

In 2023 and beyond, the Company may explore additional opportunities to expand its fintech capabilities

that will advance its competitive position.

Competition

We face competition in originating loans from other banks, credit unions, life insurance companies,

mortgage bankers, public and private capital markets, and digital lenders. In general, the primary factors in
competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of
service. We offer competitive terms and conditions and compete by delivering high-quality, personal service to our
customers. Competition for loans is also strong due to the number and variety of institutions competing in our
market areas. For instance, competition for loans is particularly intense in the larger markets in the Puget Sound
area, such as Seattle, Washington.

Competition for deposits is primarily from other banks, credit unions, mutual funds, and other alternative

investment vehicles such as securities firms, insurance companies, etc., which may be offered locally or via the
internet. We expect continued competition from such financial institutions and investment vehicles in the
foreseeable future, including competition from digital banking competitors, challenger banks, and "Fintech"
companies that rely on technology to provide financial services. We compete for these deposits by offering excellent
service and a variety of deposit accounts at competitive rates and through our branch network. We also compete for
deposits by offering a variety of financial services, including online and mobile banking capabilities. Based on the
most recent branch data provided by the FDIC, as of June 30, 2022, First Fed’s share of bank, savings bank and
savings and loan association deposits in Clallam and Jefferson counties was 40.1% and 23.0%, respectively, and was
less than 4% in Whatcom, Kitsap and King counties.

- 42 -

Employees and Human Capital Resources

At December 31, 2022, we had 285 full-time equivalent employees. At that date, the average tenure of all

of our full-time employees was approximately 4.9 years while the average tenure of our executive officers was
approximately 4.0 years. None of our employees are represented by collective bargaining agreements. We believe
our employee relations to be excellent.

Our Board of Directors guides the implementation of our corporate mission, vision, and values as an

important element of risk oversight because our people are integral to the success of our corporate strategy. Our
Board holds senior management accountable for embodying, maintaining, and communicating our culture to
employees. In that regard, our corporate mission, vision, and values are designed to promote commitment to making
the lives of all those around us better and to uphold that principle in everything we do. That commitment has been a
central pillar in our approach to our employees and the communities we have proudly served for nearly 100 years.
Our culture is designed to adhere to the timeless values of optimism, respect, initiative, growth, and ownership. In
keeping with that culture, we strive to be a force for good in everyday life and expect our employees to treat each
other and our customers with the highest level of care and respect, going out of their way to do the right thing. We
dedicate resources to promote a safe and inclusive workplace; attract, develop, and retain talented, diverse
employees; promote a culture of integrity, caring, and excellence; and reward and recognize employees for both the
results they deliver and, just as importantly, how they deliver them. We also seek to design fulfilling careers, with
competitive compensation and benefits with a positive work-life balance. We dedicate resources to fostering
professional and personal growth with continuing education, on-the-job training, and development programs. This
devotion to our people has earned us recognition on Forbes magazine's Best-in-State Bank list in 2021.

Our employees are the cornerstone of our success as an organization. We are committed to attracting,

retaining, and promoting highly qualified individuals from a diverse array of backgrounds. We believe employing a
diverse workforce enhances our ability to serve our customers and our communities. We have established a
voluntary, employee-led and -staffed Empathy and Inclusion team that is committed to promoting a diverse,
equitable, and inclusive work environment for all employees. We seek to better understand the financial needs of our
prospective and current customers by promoting and fostering a workforce that reflects the communities we serve,
along with providing relevant financial service products. As we move forward, we will continue to grow our
diversity, equity, and inclusion efforts in a manner consistent with our company vision: to create well-being and
prosperity for our employees, customers, and communities.

Information About Our Executive Officers

The following is a description of the principal occupation and employment of the executive officers of the

Company and the Bank as of December 31, 2022:

Matthew P. Deines, age 49, became President and Chief Executive Officer ("CEO") and Director of First

Fed on August 1, 2019, and was elected President, CEO, and director of the Company on December 5, 2019. In over
18 years of banking, he has experience in a variety of areas, including strategic planning and acquisitions, investor
relations, financial reporting, and fintech, as well as operations, information technology, payments, internal controls
and board governance. Mr. Deines served as Executive Vice President and Chief Financial Officer ("CFO") of
Liberty Bay Bank from November 2018 until May 2019. Prior to that, he began work at Sound Community Bank as
its CFO in February 2002 and was promoted to Executive Vice President in January 2005. In 2008, Mr. Deines also
became Executive Vice President, CFO, and Corporate Secretary of Sound Financial Bancorp, Inc. ("SFBC"). He
held these roles at Sound Community Bank and SFBC until March 2018. In 2000, he received his Washington
Certified Public Accountant certificate, currently inactive, while working for O'Rourke, Sacher & Moulton, LLP.
Mr. Deines serves as a Director for the Washington Bankers Association ("WBA") and has been a conference
speaker and instructor for the WBA. He is actively involved with several non-profit organizations.

- 43 -

Geri Bullard, age 57, is Executive Vice President and Chief Financial Officer of First Fed, a position she
has held since March 2020. Ms. Bullard joined First Fed as Senior Vice President and Treasurer in January 2020.
Prior to joining First Fed, Ms. Bullard served as Controller and Chief Financial Officer at Salal Credit Union,
located in Seattle, from August 2018 to January 2020; Chief Financial Officer of First Sound Bank, also in Seattle,
from February 2017 to August 2018; and Controller at Sound Community Bank from October 2015 to February
2017. Ms. Bullard also served as a bank examiner for the State of Idaho. Ms. Bullard holds a Bachelor of Science
degree from Humboldt State University, is a graduate of the Pacific Coast Banking School at the University of
Washington, and is a licensed CPA.

Christopher W. Neros, age 53, is Executive Vice President and Chief Lending Officer of First Fed, a

position he has held since April 2022. Mr. Neros has over 27 years of banking experience with experience in
lending, commercial banking, and retail banking. Prior to joining First Fed, he served as a lender, commercial
banking leader and Executive at Peoples Bank from May 2006 to April 2022. He holds a Bachelor of Business
Administration in Marketing from the University of Alaska Anchorage, a Master of Business Administration from
Regis University, and is a graduate of the Pacific Coast Banking School at the University of Washington.

Christopher J. Riffle, age 47, is Executive Vice President and Chief Operating Officer (COO), Chief

Digital Officer (CDO) and General Counsel of the Company and First Fed. Mr. Riffle has held the COO position
since October 2018, the CDO position since January 2022, and has served as General Counsel since September
2017. Prior to joining First Fed, Mr. Riffle was a partner at the Platt Irwin Law Firm in Port Angeles, Washington,
where he managed a civil legal practice representing clients in a variety of contexts. Mr. Riffle was at Platt Irwin
Law Firm from 2008 to 2017 and served as outside general counsel for First Fed starting in 2009.

Terry Anderson, age 54, is Executive Vice President and Chief Credit Officer of First Fed, a position he
has held since 2018. Mr. Anderson has more than two decades of management experience in credit administration,
sales, commercial banking and strategic planning. He most recently served as Executive Vice President and Chief
Credit Officer for South Sound Bank for more than six years and has previously worked in a variety of positions
with West Coast Bank, US Bank, and Bank of America.

Derek J. Brown, age 52, is Executive Vice President and Chief Human Resources and Marketing Officer

of First Fed, a position he has held since March 2020. Mr. Brown served as a Senior Vice President and Chief
Human Resources and Marketing Officer for First Fed from January 2018 to March 2020, and Senior Vice President
and Director of Human Resources from October 2015 to January 2018. Prior to joining First Fed, he served as a
Human Resources and business leader at Citibank and held Human Resources leadership roles within the financial,
professional services, and healthcare industries. He holds a Bachelor of Science degree in Management and Human
Resources from Utah State University, a Master of Business Administration from Weber State University, and is a
graduate of the Pacific Coast Banking School at the University of Washington.

How We Are Regulated

First Northwest Bancorp and First Fed are subject to federal, state, and local laws that may change from
time to time. This section provides a general overview of the federal and state regulatory framework applicable to
First Northwest Bancorp and First Fed. The descriptions of laws and regulations included herein do not purport to be
complete and are qualified in their entirety by reference to the actual laws and regulations.

These statutes and regulations, as well as related policies, continue to be subject to change by Congress,

state legislatures, and federal and state regulators. Changes in statutes, regulations, or regulatory policies applicable
to First Northwest Bancorp and First Fed (including their interpretation or implementation) cannot be predicted and
could have a material effect on First Northwest Bancorp’s and First Fed’s business and operations. Numerous
changes to the statutes, regulations, and regulatory policies applicable to First Northwest Bancorp and First Fed have
been made or proposed in recent years. Any such legislation or regulatory changes in the future by the FDIC, DFI,
Federal Reserve or the CFPB could adversely affect our operations and financial condition.

- 44 -

Regulation of First Fed Bank

General. First Fed, as a state-chartered commercial bank, is subject to applicable provisions of Washington

law and to regulations and examinations of the DFI. It also is subject to examination and regulation by the FDIC,
which insures the deposits of First Fed to the maximum extent permitted by law. During these state or federal
regulatory examinations, the examiners may, among other things, require First Fed to provide for higher general or
specific loan loss reserves, which can impact our capital and earnings. This regulation of First Fed is intended for the
protection of depositors and the deposit insurance fund ("DIF") of the FDIC and not for the purpose of protecting the
shareholder(s) of First Fed or First Northwest Bancorp. First Fed is required to maintain minimum levels of
regulatory capital and is subject to some limitations on the payment of dividends to First Northwest Bancorp. See "–
Capital Requirements" and "– Dividends."

Federal and State Enforcement Authority and Actions. As part of its supervisory authority over
Washington-chartered commercial banks, the DFI may initiate enforcement proceedings to obtain a cease-and-desist
order against an institution believed to have engaged in unsafe and unsound practices or to have violated a law,
regulation, or other regulatory limit, including a written agreement. The FDIC also has the authority to initiate
enforcement actions against insured institutions for similar reasons and may terminate the deposit insurance of such
an institution if the FDIC determines that the institution has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition. Both agencies may utilize less formal supervisory tools to address their concerns about
the condition, operations, or compliance status of a commercial bank.

Regulation by the Washington Department of Financial Institutions. State laws and regulations govern
First Fed's ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to
make consumer loans, to invest in securities, to offer various banking services to its customers, and to establish
branch offices. As a state-chartered commercial bank, First Fed must pay semi-annual assessments, examination
costs and certain other charges to the DFI.

Washington law generally provides the same powers for Washington commercial banks as federally and

other-state chartered banks and savings institutions with branches in Washington, subject to the approval of the DFI.
Washington commercial banks are permitted to charge the maximum interest rates on loans and other extensions of
credit to Washington residents which are allowable for a national bank in another state if higher than Washington
limits. In addition, the DFI may approve applications by Washington commercial banks to engage in an otherwise
unauthorized activity if the DFI determines that the activity is closely related to banking and First Fed is otherwise
qualified under the statute. This additional authority, however, is subject to review and approval by the FDIC if the
activity is not permissible for national banks.

Regulation of Management. Federal law (1) sets forth circumstances under which officers or directors of

a bank may be removed by the bank's federal supervisory agency; (2) as discussed below, places restraints on
lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (3)
generally prohibits management personnel of a bank from serving as directors or in other management positions of
another financial institution whose assets exceed a specified amount or which has an office within a specified
geographic area.

Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive
officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on
substantially the same terms (including interest rates and collateral) and follow credit underwriting procedures that
are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the
lending bank; and (2) must not involve more than the normal risk of repayment or present other unfavorable
features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of
these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement
actions, and other regulatory sanctions. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(the "Dodd-Frank Act") and federal regulations place additional restrictions on loans to insiders and generally
prohibit loans to senior officers other than for certain specified purposes.

- 45 -

Insurance of Accounts and Regulation by the FDIC. The DIF of the FDIC insures deposit accounts in

First Fed up to $250,000 per separately insured depositor. As insurer, the FDIC imposes deposit insurance premiums
and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. Our deposit
insurance premiums for the year ended December 31, 2022, were $888,000. No institution may pay a dividend to its
parent holding company if it is in default on its federal deposit insurance assessment.

The FDIC determines the amount of insurance premiums based on each financial institution's deposit base

and the applicable assessment rate. The assessment rate for small institutions (those with less than $10 billion in
assets) is based on an institution’s weighted average CAMELS component ratings and certain financial ratios.
Currently, assessment rates range from 3 to 16 basis points for institutions with CAMELS composite ratings of 1 or
2, 6 to 30 basis points for those with a CAMELS composite score of 3, and 16 to 30 basis points for those with
CAMELS composite scores of 4 or 5, subject to certain adjustments.

The FDIC has authority to increase assessment rates and in October 2022 adopted a Final Rule, applicable
to all insured depository institutions, increasing assessment rate schedules uniformly by two basis points beginning
with the first quarterly assessment period of 2023. Increases to insurance assessments have an adverse effect on the
operating expenses and results of operations of First Fed. The FDIC communicated that the new assessment rate
schedules will remain in effect unless and until the reserve ratio meets or exceeds two percent. Progressively lower
assessment rates can be expected when the reserve ratio reaches two percent. Management cannot predict what
assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in

unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The FDIC may also prohibit any insured
institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF. We do
not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.

Prompt Corrective Action. Federal statutes establish a supervisory framework, designed to place
restrictions on an insured depository institution if its capital levels begin to show signs of weakness, based on five
capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." An institution’s category depends upon where its capital levels are in relation to
relevant capital measures, which include risk-based capital measures, Tier 1 and common equity Tier 1 capital
measures, a leverage ratio capital measure, and certain other factors. The federal banking agencies have adopted
regulations that implement this statutory framework.

Under these regulations, an institution is treated as well capitalized if it has a ratio of total capital to risk-

weighted assets of 10.0% or more (the total risk-based capital ratio); a ratio of common equity Tier 1 capital to risk-
weighted assets (the Tier 1 risk-based capital ratio) of 8.0% or more; a ratio of Tier 1 common equity capital to risk-
weighted assets of 6.5% or more (the common equity Tier 1 capital ratio); a ratio of Tier 1 capital to average
consolidated assets (the leverage ratio) of 5.0% or more; and the institution is not subject to a federal order,
agreement, or directive to meet a specific capital level. An institution is considered adequately capitalized if it is not
well capitalized but it has a total risk-based capital ratio of 8.0% or more; a Tier 1 risk-based capital ratio of 6.0% or
more; a common equity Tier 1 capital ratio of 4.5% or more; and a leverage ratio of 4.0% or more. The
classifications for "undercapitalized," "significantly undercapitalized" and "critically undercapitalized" institutions
are also set forth in the regulations. An institution that is not well capitalized is subject to certain restrictions on
brokered deposits, including restrictions on the rates it can offer on its deposits generally. Any institution which is
neither well capitalized nor adequately capitalized is considered undercapitalized. Further, an institution may be
downgraded to a category lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound
condition, or if the institution receives an unsatisfactory examination rating.

- 46 -

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory

controls, and restrictions which become more extensive as an institution becomes more severely undercapitalized.
Failure by First Fed to comply with applicable capital requirements would, if not remedied, result in restrictions on
its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to
ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or
conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not
meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may
be dependent on compliance with capital requirements. At December 31, 2022, First Fed was categorized as "well
capitalized" under the regulatory capital requirements described below. For additional information, see Note 11 of
the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data,"
of this Form 10-K.

Capital Requirements. Federal regulations require insured depository institutions and bank holding
companies (including financial holding companies) to meet several minimum capital standards. The minimum
capital level requirements applicable to First Northwest Bancorp and First Fed are: (i) a common equity Tier 1
("CET1") capital to risk-based assets ratio of 4.5%; (ii) a Tier 1 capital to risk-based assets ratio of 6%; (iii) a total
capital to risk-based assets ratio of 8%; and (iv) a Tier 1 capital to total assets leverage ratio of 4%.

In addition to the minimum risk-based capital ratios, the capital regulations require a capital conservation
buffer, designed to absorb losses during periods of economic stress, consisting of additional CET1 capital of more
than 2.5% of risk-weighted assets above the required minimum risk-based ratios in order to avoid limitations on
paying dividends, engaging in share repurchases, and paying discretionary bonuses.

As of December 31, 2022, First Northwest Bancorp and First Fed each met the requirements to be "well
capitalized" and met the capital conservation buffer requirement. Management monitors the capital levels of First
Northwest Bancorp and First Fed to provide for current and future business opportunities and to meet regulatory
guidelines for "well capitalized" institutions. For additional information regarding First Northwest Bancorp’s and
First Fed’s required and actual capital levels at December 31, 2022, see Note 11 of the Notes to Consolidated
Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K.

The Federal Reserve and the FDIC have authority to establish individual minimum capital requirements in

appropriate cases upon a determination that an institution’s capital level is or may become inadequate considering
particular risks or circumstances. Management believes that, under the current regulations, First Northwest Bancorp
and First Fed will continue to meet their minimum capital requirements in the foreseeable future.

Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by

regulation, guidelines for all insured depository institutions relating to internal controls, information systems and
internal audit systems; loan documentation; credit underwriting; interest rate risk exposure; asset growth; asset
quality; earnings; and compensation, fees, and benefits. The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at insured depository institutions before
capital becomes impaired. Each insured depository institution must implement a comprehensive written information
security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size
and complexity and the nature and scope of its activities. The information security program must be designed to
ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards
to the security or integrity of such information, protect against unauthorized access to or use of such information that
could result in substantial harm or inconvenience to any customer, and ensure the proper disposal of customer and
consumer information. Each insured depository institution must also develop and implement a risk-based response
program to address incidents of unauthorized access to customer information in customer information systems. If the
FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to
the FDIC an acceptable plan to achieve compliance. First Fed has established comprehensive policies and risk
management procedures to ensure the safety and soundness of First Fed.

- 47 -

Federal Home Loan Bank System. First Fed is a member of the FHLB of Des Moines. As a member,

First Fed is required to purchase and maintain stock in the FHLB. At December 31, 2022, First Fed held $11.7
million in FHLB stock, which was in compliance with this requirement. Each FHLB serves as a reserve or central
bank for its members within its assigned region, and it is funded primarily from proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. Each FHLB makes loans or advances to members
in accordance with policies and procedures, established by its Board of Directors, subject to the oversight of the
Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB, and all long-term advances are required to provide funds for residential home
financing. At December 31, 2022, First Fed had $234.0 million of outstanding advances from the FHLB of Des
Moines. See Item 1, "Business – Deposit Activities and Other Sources of Funds – Borrowings."

The FHLBs continue to contribute to low- and moderately-priced housing programs through direct loans or
interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.
These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the
future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction
in value of First Fed's FHLB of Des Moines stock may result in a corresponding reduction in its capital.

Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally
limits the activities and equity investments of FDIC insured, state-chartered banks to those that are permissible for
national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a
majority interest in a subsidiary, (2) investing as a limited partner in a partnership, the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to
10% of the voting stock of a company that solely provides or reinsures directors’ and officers’ liability insurance
coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (4) acquiring or
retaining the voting shares of a depository institution if certain requirements are met.

Dividends. Dividends from First Fed, which are subject to regulation and limitation, constitute a major

source of funds for dividends paid by First Northwest Bancorp to shareholders. As a general rule, regulatory
authorities may prohibit banks and financial holding companies from paying dividends in a manner that would
constitute an unsafe or unsound banking practice. For example, regulators have stated that paying dividends that
deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice and that
an institution should generally pay dividends only out of current operating earnings. In addition, a bank may not pay
cash dividends if that payment could reduce the amount of its capital below the minimum applicable regulatory
capital requirements. According to Washington law, First Fed may not declare or pay a cash dividend on its capital
stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the
net worth requirements, if any, imposed by the Director of the DFI. Dividends on First Fed’s capital stock may not
be paid in an aggregate amount greater than the aggregate retained earnings of First Fed without the approval of the
Director of the DFI.

Affiliate Transactions. Federal laws strictly limit the ability of banks to engage in certain transactions with

their affiliates, including their financial holding companies. The Dodd-Frank Act further extended the definition of
an "affiliate" and treats credit exposure arising from derivative transactions, securities lending, and borrowing
transactions as covered transactions under the regulations. Transactions deemed to be a "covered transaction" under
Section 23A of the Federal Reserve Act and between a subsidiary bank and its parent company or the nonbank
subsidiaries of the bank holding company are limited to 10% of the bank subsidiary’s capital and surplus and, with
respect to the parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s
capital and surplus. Further, covered transactions that are loans and extensions of credit generally are required to be
secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain
other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as
favorable to the bank as transactions with non-affiliates.

- 48 -

Community Reinvestment Act. First Fed is subject to the provisions of the Community Reinvestment Act

of 1977 (the "CRA"). Under the CRA, federal bank regulators assess a bank’s performance under the CRA in
meeting the credit needs of the communities serviced by the bank, including low-and moderate -income
neighborhoods. The regulatory agency’s assessment of a bank’s record is made available to the public. Further, a
bank’s CRA performance rating must be considered in connection with a bank’s application, among other things, to
establish a new branch office that will accept deposits; to relocate an existing office; or to merge or consolidate with,
or acquire the assets or assume the liabilities of, a federally regulated financial institution. In some cases, a bank's
failure to comply with the CRA, or CRA protests filed by interested parties during applicable comment periods, can
result in the denial or delay of such transactions. First Fed received a "satisfactory" rating during its most recent
CRA examination. In May 2022, federal bank regulators released a notice of proposed rulemaking to “strengthen
and modernize” CRA regulations and related regulatory framework. Future changes in the evaluation process or
requirements under CRA could impact the Bank’s rating.

Commercial Real Estate Ratios. The federal banking regulators issued guidance reminding financial

institutions to reexamine the existing regulations regarding concentrations in commercial real estate lending,
including acquisition, development and construction lending. The purpose of the guidance is to guide banks in
developing risk management practices and capital levels commensurate with the level and nature of real estate
concentrations. The banking regulators are directed to examine each bank’s exposure to commercial real estate loans
that are dependent on cash flow from the real estate held as collateral and to focus their supervisory resources on
institutions that may have significant commercial real estate loan concentration risk. The guidance provides that the
strength of an institution’s lending and risk management practices with respect to such concentrations will be
considered in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to
a specified concentration level.

Privacy Standards. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA)

modernized the financial services industry by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial service providers. First Fed is subject to
FDIC regulations implementing the privacy protection provisions of the GLBA. These regulations require First
Fed to disclose its privacy policy, including informing consumers of its information sharing practices and informing
consumers of their rights to opt out of certain practices.

Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") is a federal statute that generally imposes strict liability on
all prior and present "owners and operators" of sites containing hazardous waste. However, the term "owner and
operator" excludes a person whose ownership is limited to protecting its security interest in the site. Since the
enactment of the CERCLA, this "secured creditor exemption" has been the subject of judicial interpretations which
have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold
as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including First Fed, that
have made loans secured by properties with potentially hazardous waste contamination (such as petroleum
contamination) could be subject to liability for cleanup costs that often substantially exceed the value of the
collateral property.

Federal Reserve System. The Federal Reserve Board requires that all depository institutions maintain

reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or
noninterest-bearing deposits with the regional Federal Reserve Bank. Negotiable order of withdrawal (NOW)
accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to the reserve requirements, as are any non-personal time deposits at a
commercial bank. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement
ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. As of December
31, 2022, First Fed was in compliance with the reserve requirements in place at that time.

- 49 -

Anti-Money Laundering and Anti-Terrorism. The Bank Secrecy Act ("BSA") requires all financial

institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering
and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements (such as
reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your
customer" documentation requirements.

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted in January

2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money
laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for
financial institutions; requires the U.S. Department of the Treasury to promulgate priorities for anti-money
laundering and countering the financing of terrorism policy; requires the development of standards for testing
technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority,
including increasing available sanctions for certain BSA violations; and expands BSA whistleblower incentives and
protections. Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other
measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation
guidance. In June 2021, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the
Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy required
under the AMLA. The priorities include corruption, cybercrime, terrorist financing, fraud, transnational crime, drug
trafficking, human trafficking and proliferation financing.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and

Obstruct Terrorism Act of 2001 ("Patriot Act"), intended to combat terrorism, was renewed with certain
amendments in 2006. In relevant part, the Patriot Act (1) prohibits banks from providing correspondent accounts
directly to foreign shell banks; (2) imposes due diligence requirements on banks opening or holding accounts for
foreign financial institutions or wealthy foreign individuals; (3) requires financial institutions to establish an anti-
money laundering compliance program; and (4) eliminates civil liability for persons who file suspicious activity
reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism,
including expanded government access to bank account records.

Regulators are directed to consider a bank holding company’s and a bank’s effectiveness in combating
money laundering when reviewing and ruling on applications under the BHCA and the Bank Merger Act. First
Northwest Bancorp and First Fed have established comprehensive compliance programs designed to comply with
the requirements of the BSA and Patriot Act.

Other Consumer Protection Laws and Regulations. The Dodd-Frank Act, among other things,
established the CFPB as an independent bureau of the Federal Reserve Board. The CFPB assumed responsibility for
the implementation of the federal financial consumer protection and fair lending laws and regulations and has
authority to impose new requirements. First Fed is subject to consumer protection regulations issued by the CFPB,
but as a smaller financial institution, it is generally subject to supervision and enforcement by the FDIC and the DFI
with respect to our compliance with consumer financial protection laws and CFPB regulations. The CFPB has issued
and continues to issue numerous regulations under which we may incur additional expense in connection with our
ongoing compliance obligations. Significant recent CFPB developments that may affect operations and compliance
costs include:

• Positions taken by the CFPB on fair lending, most recently expanding its supervisory approach to prevent
discrimination by using the unfairness standard under the unfair, deceptive, or abuse acts or practices
framework in the Dodd-Frank Act in addition to the historical reliance on regulatory requirements under the
Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (“FHA”);

• The CFPB's Final Rule amending Regulation C, which implements the Home Mortgage Disclosure Act,

requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair
lending concerns and other information shortcomings identified by the CFPB;

• Positions taken by the CFPB regarding the Electronic Fund Transfer Act and Federal Reserve Regulation E,
which require companies to obtain consumer authorizations before automatically debiting a consumer’s
account for pre-authorized electronic funds transfers;

- 50 -

• Efforts focused on enforcing certain compliance obligations the CFPB deems a priority, such as automobile
and student loan servicing (including certain forbearance requirements related to the COVID-19 pandemic),
debt collection, collateral repossession, mortgage origination and servicing, remittances, and fair lending,
among others; and

• Positions and focused efforts on enforcing compliance obligations related to deposit account fees, including

overdraft, non-sufficient funds, and returned deposit fees.

First Fed is subject to a broad array of federal and state consumer protection laws and regulations that

govern almost every aspect of its business relationships with consumers. While the list set forth below is not
exhaustive, some of these laws and regulations include the Truth-in-Lending Act, the Truth in Savings Act, the
Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Home Ownership and
Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the
Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in
connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and
various regulations that implement some or all of the foregoing. These laws and regulations mandate certain
disclosure requirements and regulate the way financial institutions must deal with customers when taking deposits,
making loans, collecting loans, and providing other services. In recent years, examination and enforcement by
federal and state banking agencies for compliance with consumer protection laws and regulations have increased and
become more intense. Failure to comply with these laws and regulations can subject First Fed to various penalties
including, but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive
damages, and the loss of certain contractual rights. First Fed has established a comprehensive compliance system to
ensure consumer protection.

Regulation and Supervision of First Northwest Bancorp

General. First Northwest Bancorp is a financial holding company (a type of bank holding company)

registered with the Federal Reserve and the sole shareholder of First Fed. Bank holding companies and financial
holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and the regulations promulgated thereunder. This regulation and
oversight is generally intended to ensure that First Northwest Bancorp limits its activities to those allowed by law
and that it operates in a safe and sound manner without endangering the financial health of First Fed. During 2022,
First Northwest elected to be treated as a financial holding company, allowing the Company to engage in non-
banking activities that are financial in nature or incidental to financial activities.

As a bank holding company, First Northwest Bancorp is required to file semi-annual and annual reports
with the Federal Reserve and any additional information required by the Federal Reserve and is subject to regular
examinations by the Federal Reserve. The Federal Reserve also has extensive enforcement authority over bank
holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders
and to require that a bank holding company divest subsidiaries (including its bank subsidiaries). In general,
enforcement actions may be initiated for violations of law and regulations and/or for unsafe or unsound practices.

The Bank Holding Company Act. Under the BHCA, First Northwest Bancorp is supervised by the

Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of
financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding
company should serve as a source of strength to its subsidiary banks by being prepared to use available resources to
provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity (including at
times when a bank holding company may not be in a financial position to provide such resources or when it may not
be in the bank holding company’s or its shareholders' best interests to do so), and should maintain the financial
flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks.

- 51 -

Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to
certain other indebtedness of the bank subsidiaries. A bank holding company's failure to meet its obligation to serve
as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe
and unsound banking practice or a violation of the Federal Reserve's regulations, or both.

Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in

any company the activities of which the Federal Reserve has determined to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto. These activities generally include,
among others, operating a savings institution, mortgage company, finance company, credit card company, or
factoring company; performing certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks, and U.S. Savings Bonds; real estate
and personal property appraising; providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers.

Acquisitions. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring
ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding
company and from engaging in activities other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. A bank holding company that meets certain supervisory and financial standards and
elects to be designated as a financial holding company may also engage in certain securities, insurance and merchant
banking activities, and other activities determined to be financial in nature or incidental to financial activities.

Regulatory Capital Requirements. The Federal Reserve has adopted capital rules pursuant to which it

assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing
applications under the BHCA. These rules apply on a consolidated basis to bank holding companies with $3.0
billion or more in assets, or with fewer assets but certain risky activities, and on a bank-only basis to other
companies. When applicable, the bank holding company capital adequacy and conservation buffer rules are the same
as those imposed by the FDIC. For additional information, see the section above entitled "- Regulation of First
Fed Bank - Capital Regulation" and Note 11 of the Notes to Consolidated Financial Statements included in Item 8,
"Financial Statements and Supplementary Data," of this Form 10-K.

Interstate Banking. The Dodd-Frank Act eliminated interstate branching restrictions that were
implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act")
and removed many restrictions on de novo interstate branching by state and federally chartered banks. The Federal
Reserve may approve an application of a bank holding company to acquire control of, or acquire all or substantially
all of the assets of, a bank located in a state other than the bank holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state.

The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the
minimum time period of five years, or longer if specified by the law of the host state. In addition, the Federal
Reserve generally may not approve an application for an interstate merger transaction if the applicant controls or
would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a branch. Federal law does not affect the
authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a
bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.
Banks may establish de novo branches in any state, subject to regulatory approval.

- 52 -

The federal banking agencies are authorized to approve interstate merger transactions without regard to

whether the transaction is prohibited by the law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches are permitted only if the law of the state in which
the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration amounts described above. Federal bank regulations prohibit
banks from using their interstate branches primarily for deposit production, and federal bank regulatory agencies
have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted

rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain
electronic transactions are "reasonable and proportional" to the costs incurred by issuers for processing such
transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee, among other
requirements. As of December 31, 2022, First Northwest Bancorp and First Fed qualified for the small issuer
exemption from the Federal Reserve’s interchange fee cap, which applies to any debit card issuer that has total
consolidated assets of less than $10 billion as of the end of the previous calendar year.

Restrictions on Dividends. First Northwest Bancorp's ability to declare and pay dividends is subject to the
Federal Reserve limits and Washington law, and it may depend on its ability to receive dividends from First Fed, as
discussed above.

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding

companies. In particular, the policy limits the payment of a cash dividend by a bank holding company if the holding
company's net income for the past year is not sufficient to cover both the cash dividend and a rate of earnings
retention that is consistent with capital needs, asset quality, and overall financial condition. A bank holding company
that does not meet any applicable capital standard would not be able to pay any cash dividends under this policy. A
bank holding company not subject to consolidated capital requirements is expected not to pay dividends unless its
debt-to-equity ratio is less than 1:1, and it meets certain additional criteria. The Federal Reserve also has indicated
that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay
dividends. The capital conservation buffer requirements may limit First Northwest Bancorp's ability to pay
dividends.

Except for a company that meets the well-capitalized standard for bank holding companies, is well

managed, and is not subject to any unresolved supervisory issues, a bank holding company is required to give the
Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10.0% or more of the company's consolidated net worth.
The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would
constitute an unsafe or unsound practice or would violate any law, regulation or regulatory order, condition, or
written agreement.

Under Washington corporate law, First Northwest Bancorp generally may not pay dividends if after that

payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total
assets would be less than the sum of its total liabilities. These various laws and regulatory policies may affect First
Northwest Bancorp’s ability to pay dividends or otherwise engage in capital distributions.

Tying Arrangements. First Northwest Bancorp and First Fed are prohibited from engaging in certain tie-in

arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For
example, with certain exceptions, neither First Northwest Bancorp nor First Fed may condition an extension of
credit to a customer on either (1) a requirement that the customer obtain additional services provided by First
Northwest Bancorp or First Fed; or (2) an agreement by the customer to refrain from obtaining other services from a
competitor.

- 53 -

The Dodd-Frank Act. The Dodd-Frank Act was signed into law in July 2010 and imposes restrictions and

an expanded framework of regulatory oversight for financial institutions, including depository institutions, and
required new capital regulations that are discussed above under "- Regulation of First Fed - Capital Regulations." In
addition, among other changes, the Dodd-Frank Act requires public companies, like First Northwest Bancorp, to (i)
provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to
executive officers and (b) at least once every six years on whether they should have a "say on pay" vote every one,
two, or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named
executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions, or other transactions
that would trigger the parachute payments; and (iii) provide disclosure in annual proxy materials concerning the
relationship between the executive compensation paid and the financial performance of the issuer.

In August 2015, the Securities and Exchange Commission ("SEC") adopted a rule mandated by the Dodd-

Frank Act that requires a public company to disclose the ratio of the Chief Executive Officer's annual total
compensation to the median annual total compensation of all other employees. The rule is intended to provide
shareholders with information that they can use to evaluate a Chief Executive Officer’s compensation.

Federal Securities Law. The stock of First Northwest Bancorp is registered with the SEC under the

Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result, First Northwest Bancorp is subject
to the information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act.

First Northwest Bancorp stock held by persons who are affiliates of First Northwest Bancorp may not be

resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally
considered to be officers, directors and principal shareholders. If First Northwest Bancorp meets specified current
public information requirements, each affiliate of First Northwest Bancorp will be able to sell in the public market,
without registration, a limited number of shares in any three-month period.

The SEC has adopted regulations and policies under the Sarbanes-Oxley Act of 2002 that apply to First
Northwest Bancorp as a registered company under the Exchange Act. The stated goals of these Sarbanes-Oxley
requirements are to increase corporate responsibility, provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws. The SEC and Sarbanes-Oxley-related regulations and policies
include very specific additional disclosure requirements and new corporate governance rules. The Sarbanes-Oxley
Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the
regulation of the accounting profession, and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees.

Recent and Proposed Legislation. The economic and political environment of the past several years has
led to a number of proposed legislative, governmental, and regulatory initiatives that may significantly impact the
banking industry. Other regulatory initiatives by federal and state agencies may also significantly impact First
Northwest Bancorp's and First Fed’s business. First Northwest Bancorp and First Fed cannot predict whether these
or any other proposals will be enacted or the ultimate impact of any such initiatives on its operations, competitive
situation, financial conditions, or results of operations. Recent history has demonstrated that new legislation or
changes to existing laws or regulations typically result in a greater compliance burden (and therefore increase the
general costs of doing business), and the current administration under President Biden has indicated a general intent
to regulate the financial services industry more strictly than the administration of his predecessor.

Effects of Federal Government Monetary Policy. First Northwest Bancorp’s earnings and growth are

affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to promote
maximum employment, stable prices, and moderate long-term interest rates. Through its open market operations in
U.S. government securities, control of the discount rate applicable to borrowings, establishment of reserve
requirements against certain deposits, and control of the interest rate applicable to excess reserve balances and
reverse repurchase agreements, the Federal Reserve influences the availability and cost of money and credit and,
ultimately, a range of economic variables including employment, output, and the prices of goods and services.

- 54 -

Recently, the Federal Reserve shifted its focus from economic growth to addressing continued concerns
with inflation. During 2022, the Federal Reserve increased the federal funds rate seven times, an increase of 425
basis points for the year, and communicated that it anticipates ongoing increases. Changes in monetary policy,
including increases in the federal funds rate, can affect net interest income and margin, overall profitability, and
shareholders' equity. The nature and impact of future changes in monetary policies and their impact on First
Northwest Bancorp and First Fed cannot be predicted with certainty.

Cybersecurity. In February 2018, the SEC published interpretive guidance to assist public companies in

preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory
guidance, are in addition to notification and disclosure requirements under state and federal banking law and
regulations.

The federal banking regulators regularly issue new guidance and standards, and update existing guidance
and standards, intended to enhance cyber risk management among financial institutions. Financial institutions are
expected to comply with such guidance and standards and to accordingly develop appropriate security controls and
risk management processes. If First Fed fails to observe such regulatory guidance or standards, it could be subject to
various regulatory sanctions, including financial penalties.

In November 2021, the federal banking agencies adopted a Final Rule, with compliance required by May 1,

2022, establishing new notification requirements for banking organizations. The new rule requires banks to notify
their primary banking regulator within 36 hours of determining that a “computer-security incident” rising to the
level of a "notification incident" has occurred. A "notification incident" is one that materially affects or is reasonably
likely to affect, the viability of the banking operations and resulting in material loss or potential impact to the
stability of the United States.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards

and regulations. Recently, several states have adopted regulations requiring certain financial institutions to
implement cybersecurity programs and many states, including Washington, have also recently implemented or
modified their data breach notification, information security and data privacy requirements. We expect this trend of
state-level activity in those areas to continue, and are continually monitoring developments in the states in which our
customers are located.

Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are

expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these
threats, as well as the expanding use of internet banking, mobile banking and other technology-based products and
services by us and our customers. Cybersecurity concerns are further heightened by Russia's current invasion of
Ukraine.

Environmental, Social and Governance. Bank regulatory agencies and the SEC have shown
increasing interest in environmental, social and internal governance matters (often referred to as “ESG”) and have
stated their intent to heighten regulatory oversight of companies’ efforts to address the effect of ESG issues on their
businesses. First Northwest Bancorp and First Fed are committed to considering ESG factors, which we recognize
are key drivers of long-term business growth, in the development of our business strategies. We believe our
commitment to good corporate citizenship and the achievement of ESG policy goals enhances our ability to pursue
business opportunities, manage risk across our business, and uphold our values by addressing the environmental and
social challenges faced by the communities we serve. Our Board oversees our ESG activities, including our ESG
strategies, compliance, and goals. Additionally, our Nominating and Corporate Governance Committee oversees our
policies and operational controls for environmental, health, safety and social risks. The Nominating and Corporate
Governance Committee meets regularly to set ESG goals for the Company, as well as to monitor progress and
results.

- 55 -

Taxation

Federal Taxation

General. First Northwest Bancorp and First Fed are subject to federal income taxation in the same general
manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to First Northwest Bancorp or First Fed. First Fed is no longer subject to U.S. federal income
tax examinations by tax authorities for years ended before December 31, 2018. See Note 9 of the Notes to
Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data," of this Form
10-K.

First Northwest Bancorp will file a consolidated federal income tax return with First Fed. Accordingly, any

cash distributions made by First Northwest Bancorp to its shareholders would be considered taxable dividends and
not as a non-taxable return of capital to shareholders for federal and state tax purposes.

Method of Accounting. For federal income tax purposes, First Fed currently reports its income and

expenses on the accrual method of accounting. Federal income tax returns are filed using a December 31 year end.

Corporate Dividends-Received Deduction. First Northwest Bancorp may eliminate from its income
dividends received from First Fed as a wholly owned subsidiary of First Northwest Bancorp if it elects to file a
consolidated return with First Fed. The corporate dividends-received deduction is 100%, or 65%, in the case of
dividends received from corporations with which a corporate recipient does not file a consolidated tax return,
depending on the level of stock ownership of the payor of the dividend. Corporations that own less than 20% of the
stock of a corporation distributing a dividend may deduct 50% of dividends received or accrued on their behalf.

Washington Taxation

The Company and First Fed are subject to a business and occupation tax imposed under Washington law at

the rate of 1.75% of gross receipts. Interest received on loans secured by mortgages or deeds of trust on residential
properties and certain investment securities are exempt from this tax.

- 56 -

Item 1A. Risk Factors.

Economy and Our Markets

Adverse economic conditions in market areas we serve could adversely impact our earnings and could
increase the credit risk associated with our loan portfolio.

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 as a result
of continued inflation, the rising interest rate environment, and recurring supply chain issues 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 financial
condition and results of operations.

Public health crises, geopolitical developments, acts of terrorism, natural disasters, climate change and other
external factors could harm our business.

Public health crises, domestic or geopolitical crises, such as the current invasion of Ukraine by Russia,

political instability or civil unrest, terrorism, human error or other events outside of our control, could cause
disruptions to our business or the United States' economy, resulting in potentially adverse operating results. Natural
disasters may disrupt our operations, 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, 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. The
effects of any of the foregoing factors could have a material adverse effect on our business, operations and financial
condition.

- 57 -

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.

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.

The continued economic effects of the COVID-19 pandemic could adversely impact our financial results and
those of our customers.

The COVID-19 pandemic and related government actions caused significant economic turmoil in the U.S.

and around the world, resulting in a slow-down in economic activity, increased unemployment levels and
disruptions in global supply chains and financial markets. The long-term economic effects of the COVID-19
pandemic are difficult to predict due to the ongoing dynamic nature of COVID-19 variants, the possibility of a
similar health crisis and potential for additional government action. Management is confronted with a significant and
unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset
values.

Although the Company estimates loan losses related to the pandemic as part of its evaluation of the

allowance for loan losses, such estimates involve significant judgment and are made in the context of substantial
uncertainty as to the long-term impact of the pandemic on the credit quality of our loan portfolio. Consistent with
guidance provided by banking regulators, we modified loans by providing various loan payment deferral options to
our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, not every borrower may
be able to recover and make full payments on their loans. Any increases in the allowance for credit losses will result
in a decrease in net income and may have a material negative effect on our financial condition and results of
operations.

- 58 -

Although the U.S. and global economies have started recovering as governments lift or reduce health-
related restrictions and as demand for goods and services increases, some adverse consequences including labor
shortages, disruptions of global supply chains, and increasing inflation, continue to negatively impact the
international, national, and local economies. As a result, our business may be materially and adversely affected. To
the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or
results of operations, it may also have the effect of heightening many of the other risks described in this section.

Credit and Asset Quality

Our increased emphasis on commercial real estate lending subjects us to various risks that could adversely
impact our results of operations and financial condition.

We have increased the amount of our commercial real estate and multi-family loans to $643.8 million,

or 42.0% of our total loan portfolio, at December 31, 2022, from $535.7 million, or 39.5%, of our total loan
portfolio at December 31, 2021. We intend to continue to increase, 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 increased 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. Recently,
federal banking regulators highlighted the increased risk associated with commercial real estate loans as a result of
the stress COVID-19 created for some industries, and the higher vulnerability of these credits to pressure from the
current rising interest rate environment and overall inflationary pressures in the economy. 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 loan losses 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, 2022, we
had $51,000 of nonperforming commercial real estate loans and $0 of nonperforming multi-family loans in our
portfolio.

- 59 -

The significant growth in our loan portfolio and expansion into new markets may increase our credit risk.

Since the completion of our initial public offering in January 2015, we have grown substantially in terms of

total assets, total loans, total deposits, employees, and locations, expanding our business activities throughout the
Puget Sound region. Our commercial loan portfolio, which includes loans for commercial and multi-family real
estate as well as other business loans, has increased to $720.8 million, or 47.0% of total loans, at December 31,
2022, from $615.6 million, or 45.4% of total loans, at December 31, 2021. One- to four-family loans have increased
to $343.8 million, or 22.4% of total loans, at December 31, 2022, from $295.0 million, or 21.7% of total loans, at
December 31, 2021. Total consumer loans have increased to $275.1 million, or 17.9% of total loans, at December
31, 2022, from $221.9 million, or 16.4% of total loans, at December 31, 2021. Rapidly growing loan portfolios are,
by their nature, less seasoned and our experience with these loans may not provide us with a significant payment
history pattern. Rapid growth combined with the geographic expansion of our lending area may make estimating
loan loss allowances more difficult and more susceptible to changes in estimates, and to losses exceeding estimates,
than our more seasoned portfolio of loans in our traditional lending area. As a result, it is difficult to predict the
future performance of these parts of our loan portfolio. These loans may develop delinquency or charge-off levels
above our historical experience, which could adversely affect our future performance.

We plan to continue both strategic and opportunistic growth, understanding that we may see a slowing of
growth as we mature and manage capital down to more efficient levels. Continued growth can present substantial
demands on management personnel, line employees, and other aspects of our operations, especially if our growth
occurs rapidly. We may face difficulties in managing that growth effectively, which could damage our reputation,
limit our growth, and negatively affect our operating results. Also see "Our expansion strategy will cause our
expenses to increase and may negatively affect our earnings."

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 certain borrowers, largely in connection with high-
end residential real estate and commercial and multi-family real estate loans. At December 31, 2022, the aggregate
amount of loans, including unused commitments, to First Fed's five largest borrowers (including related entities)
amounted to approximately $79.4 million. Outstanding loan balances for the ten largest borrowing relationships at
December 31, 2022, totaled $151.9 million, or 9.9% of total loans. Although none of the loans to First Fed's 20
largest borrowers were nonperforming loans as of December 31, 2022, concentration of credit to a limited number of
borrowers increases the risk in First Fed's loan portfolio. If one or more of these borrowers is not able to service the
contractual repayment, the potential loss to First Fed is more likely to have a material adverse impact 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, 2022, our construction and land loans decreased $30.1 million, or
13.4%, to $194.7 million, or 12.7%, of the total loan portfolio at December 31, 2022 and consisted of properties
secured by one- to four-family residential of $58.7 million, multi-family of $77.0 million, commercial acquisition-
renovation of $19.3 million, commercial real estate of $27.7 million, and land of $11.8 million. Land loans include
raw land and land acquisition and development loans.

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.

- 60 -

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. This may require us 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.

Our business may be adversely affected by credit risk associated with residential real estate.

At December 31, 2022, $396.2 million, or 25.8% 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.

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, 2022, we had $77.0 million, or 5.0% 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.

- 61 -

Our allowance for loan losses 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 loan losses, we review our loan portfolios, loss
and delinquency trends, and economic conditions. If our assumptions are incorrect, our allowance for loan losses
may not be sufficient to cover incurred losses, resulting in additions to our allowance for loan losses through the
provision for 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 loan losses 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 loan losses, we will need additional

provisions to replenish the allowance for loan losses. 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.

In addition, the Financial Accounting Standards Board ("FASB") adopted Accounting Standard Update

("ASU") 2016-13 which became effective on January 1, 2023. This standard, referred to as Current Expected Credit
Loss ("CECL"), will require financial institutions to determine periodic estimates of lifetime expected credit losses
on loans, and recognize the expected credit losses as allowances for credit losses. In March 2022, FASB amended
ASU 2016-13 related to CECL implementation and guidance on Troubled Debt Restructurings ("TDRs") and
vintage disclosures. These updates will change the current method of providing allowances for credit losses that are
probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data
we would need to collect and review to determine the appropriate level of the allowance for credit losses. For more
information on this ASU, see Note 1 of the Notes to Consolidated Financial Statements - Recently Issued
Accounting Pronouncements contained in Item 8 of this report.

If our nonperforming assets increase, our earnings will be adversely affected.

At December 31, 2022, our nonperforming assets, which consist of nonaccrual loans, real estate owned and

repossessed assets, were $1.8 million, or 0.1% of total assets. Our 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.

- 62 -

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
invasion by Russia of Ukraine, terrorism, or other geopolitical events. These factors, among others, could cause
other-than-temporary-impairment ("OTTI"), 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 OTTI 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.

If our real estate owned is not properly valued or declines further in value, our earnings could be reduced.

We obtain updated valuations 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.

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
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, mortgage banking finance companies, brokerage
firms, insurance companies and other financial intermediaries. The financial services industry could become even
more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also,
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.

- 63 -

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.

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.

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, or if we have difficulty in communicating with them, our ability to
adequately process and account for transactions 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 other 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.

- 64 -

Interest Rates, Operations and Risk Management

We are subject to interest rate risk.

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. While the federal funds target rate remained
at or near historical lows during 2020 and 2021 as part of the fiscal response to the COVID-19 pandemic, the
Federal Reserve increased the federal funds target rate seven times in 2022 for a total annual increase of 425 basis
points. Furthermore, the Federal Reserve has communicated that it anticipates ongoing increases until inflationary
pressures subside. When the Federal Reserve Board increases the Fed Funds rate, overall interest rates will likely
rise, which may negatively impact housing markets by reducing refinancing activity and new home purchases. A
rising interest rate environment may also adversely affect the U.S. economy and, as a result, our business as a whole.

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 (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 mortgage-backed securities 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.

Additional changes 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, as at the end of 2022, 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 for the past few years, an increasing percentage of our deposits have
been composed of deposits bearing no or a relatively low rate of interest and having a shorter duration than our
assets. We would incur a higher cost of funds to retain these deposits in this rising 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.

- 65 -

Although management believes it has implemented effective asset and liability management strategies to
reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or
prolonged change in market interest rates could have a material adverse effect on our financial condition and results
of operations. Also, 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," of
this Form 10-K for additional information.

Changes in the method of determining the LIBOR or other reference rates may adversely impact the value of
loans receivable and other financial instruments we hold that are linked to LIBOR or other reference rates in
ways that are difficult to predict and could adversely impact our financial condition or results of operations.

In July 2017, the United Kingdom Financial Conduct Authority announced the potential replacement of the

London Interbank Offered Rate ("LIBOR") at the end of 2021. LIBOR is used extensively in the U.S. and globally
as a "benchmark" or "reference rate" for various commercial and financial contracts. In response, the Alternative
Reference Rates Committee (“ARRC”), made up of financial and capital market institutions, was convened to
address the replacement of LIBOR in the U.S. The ARRC identified a potential successor to LIBOR in the Term
Secured Overnight Financing Rate (“TSOFR”) and has crafted a plan to facilitate the transition. Our subordinated
debt issued in March 2021 provides for application the TSOFR rate to determine the interest that will be payable on
the Notes beginning in March 2026. In March 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”)
was enacted, providing that LIBOR-based contracts that lack practicable replacement benchmarks will automatically
transition to the applicable reference rates recommended by the Federal Reserve. In December 2022, the Federal
Reserve issued a Final Rule establishing benchmark replacements based on TSOFR. However, the ICE Benchmark
Administration (“IBA”), the authorized and regulated administrator of LIBOR, expects to continue publishing some
LIBOR tenors until June 2023 and may be compelled to continue publishing other tenors under a different
methodology after the Financial Conduct Authority (“FCA”) completes a consultation and makes a final
determination on the matter (expected in 2023).

Despite the progress made through the LIBOR Act and the Federal Reserve's Final Rule, it is impossible to

predict the effect of any such alternatives on the value of LIBOR-based securities, variable rate loans, and other
securities or financial arrangements. The transition to a new reference rate requires changes to contracts, risk and
pricing models, valuation tools, systems, product design and hedging strategies. It is not currently possible to
determine whether, or to what extent, the replacement of LIBOR will impact the value of any loans and other
financial obligations or extensions of credit we hold or that are due to us, that are linked to LIBOR or other
reference rates, or whether, or to what extent, such changes may impact our financial condition or 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.

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.

- 66 -

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, 2022, $83.4 million of our consumer, $25.3 million of our one- to four-family, and

$18.1 million of our commercial real estate 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.

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 $46.3
million at December 31, 2022. Under its current policy, First Fed has elected to restrict its loans to one borrower
to no more than 60% of the Bank's lending limit, which is adjusted quarterly and was $34.7 million at December 31,
2022, 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 Bancorp 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 Deposit Insurance Fund. 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 loan losses 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.

- 67 -

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.

The CFPB, which was created under the Dodd-Frank Act, has issued, and continues to issue, rules related

to consumer protection, including The Truth in Lending Act and the Real Estate Settlement Procedures Act
Integrated Disclosure (TRID), which combines certain disclosures that consumers receive in connection with
applying for and closing a mortgage loan. These CFPB rules, including rules generally prohibiting creditors from
extending mortgage loans without regard for the consumer's ability to repay, may adversely affect the volume of
mortgage loans that we underwrite and subject us to increased potential liabilities related to such residential loan
origination activities. The CFPB has adopted a number of additional requirements and issued additional guidance,
including with respect to indirect auto lending, appraisals, escrow accounts and servicing, each of which may entail
increased compliance costs.

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. The loss of the services of any of our current management team
could have a material adverse impact on our operations. The ability to attract, retain and season replacements to our
management team presents risks to executing our business plan. Changes in our current management team and their
responsibilities may be disruptive to our business and operations and could have a material adverse effect on our
business, financial condition, and results of operations. While we believe that our relationship with our management
team is good, we cannot guarantee that all members of our management team will remain with our organization.

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; and

• 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.

- 68 -

Our expansion strategy will cause our expenses to increase and may negatively affect our earnings.

Over the past seven years, we have opened four new full-service branches and two 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.

We may also expand our digital footprint through partnerships with and investments in fintech companies.

The new technology and start-up companies we invest in may not be as successful as anticipated or may fail,
resulting a total loss of our related investment.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company's main administrative office is located at 105 West Eighth Street, Port Angeles, WA 98362.
As of December 31, 2022, we conducted our business through twelve branch offices located in Clallam, Jefferson,
King, Kitsap, and Whatcom Counties, Washington; two business centers located in King and Whatcom Counties,
Washington; and our main administrative office and a support service center located in Clallam County,
Washington. The Company owns seven branch offices, the main administrative office and the support services
center. The remaining five branch offices and two business centers are leased. The net book value of the Company’s
properties totaled $15.9 million at December 31, 2022. Additional information is presented in Note 4 - Premises and
Equipment and Note 5 - Leases of the Notes to the Consolidated Financial Statements included in "Item 8. Financial
Statements and Supplementary Data."

Item 3. Legal Proceedings

The Company and First Fed are involved from time to time in various claims and legal actions arising in
the ordinary course of business. There are currently no matters that, in the opinion of management, would have a
material adverse effect on our consolidated financial position, results of operation, or liquidity.

Item 4. Mine Safety Disclosures

Not applicable

- 69 -

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Market and Holder Information. Our common stock is listed on The Nasdaq Stock Market LLC’s Global

Market, under the symbol "FNWB." As of the close of business on March 10, 2023, there were 9,674,055 shares of
common stock issued and outstanding and we had approximately 530 shareholders of record, excluding persons or
entities who hold stock in nominee or "street name" accounts with brokers.

Stock Repurchases. The Company's repurchase programs permit shares to be repurchased in the open

market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in
accordance with the SEC's Rule 10b5-1. On October 28, 2020, the Company announced that its Board of Directors
had authorized the repurchase and retirement of up to an additional 1,023,420 shares of its common stock.

The following table provides information regarding repurchases of the Company's common stock during

the quarter ended December 31, 2022.

Total
Number of
Shares
Purchased
(1), (3)

Average
Price Paid
per Share
15.46
14.59
14.51
14.64

12,409 $

200,146
47,307
259,862 $

Total
Number of
Shares
Repurchased
as Part of
Publicly
Announced
Plan

12,409
198,030
14,232
224,671

Maximum
Number of
Shares that
May Yet Be
Repurchased
Under the Plan
(2)

514,289
316,259
302,027

Period
October 1, 2022 - October 31, 2022
November 1, 2022 - November 30, 2022
December 1, 2022 - December 31, 2022
Total

(1) Shares repurchased by the Company during the quarter include shares acquired from participants in connection
with cancellation of restricted stock to pay withholding taxes totaling 0 shares, 2,116 shares, and 3,356 shares,
respectively, for the periods indicated.

(2) On October 28, 2020, the Company announced that its Board of Directors had authorized the repurchase of up
to an additional 1,023,420 shares of its common stock, or approximately 10% of its shares of common stock
issued and outstanding as of October 27, 2020. As of December 31, 2022, a total of 721,393 shares, or 70.5%
percent of the shares authorized in the October 2020 stock repurchase plan, have been purchased at an average
cost of $16.16 per share, leaving 302,027 shares available for future purchases.

(3) On December 30, 2022, the other 50% owners of Quin Ventures returned 29,719 shares to FNWB in

conjunction with the asset sale to Quil Ventures, Inc.

Item 6. [Reserved]

- 70 -

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

First Northwest is a bank holding company and a financial holding company and is engaged in banking

activities through its wholly owned subsidiary, First Fed Bank, as well as certain non-banking financial activities,
including a controlling interest in Quin Ventures, Inc. and several limited partnership investments. The Company's
business activities are generally focused on passive investment activities and oversight of the activities of First Fed
and Quin Ventures. The Company has also entered into partnerships to strategically invest in fintech-related
businesses, which may result in the development of additional investment opportunities.

First Fed is a community-oriented financial institution serving Clallam, Jefferson, King, Kitsap, and
Whatcom counties in Washington State, through its twelve full-service branches and four business centers. We offer
a wide range of products and services focused on the lending, deposit and money movement needs of the
communities we serve. While we have a concentration of first lien one- to four-family mortgage loans, in order to
diversify our portfolio and increase interest income, we have increased our origination of commercial real estate,
multi-family real estate, construction, and commercial business loans, and have increased our auto and consumer
loans through originations, indirect auto lending, and purchased auto loan programs. We continue to originate one-
to four-family residential mortgage loans and regularly sell conforming loans into the secondary market to increase
noninterest income and manage interest rate risk or retain select loans in our portfolio to enhance interest income.
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 is impacted by prevailing economic conditions as well as government policies and regulations

concerning, among other things, monetary and fiscal affairs, including fiscal stimulus, interest rate policy and open
market operations, housing and financial institutions. Deposit flows are influenced by various factors, including
sales and marketing efforts, interest rates paid on competing deposits, available alternative investments such as 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 regional
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 and interest expense paid on our deposits and borrowings.
Changes in levels of interest rates can affect 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, and gains and losses from sales of
loans and securities.

An offset to net interest income is the provision for loan losses, which represents the periodic charge to

operations required to adequately provide for probable losses inherent in our loan portfolio through our allowance
for loan losses. As a loan's risk rating improves, property values increase, or recoveries of amounts previously
charged off are received, a recapture of previously recognized provision for loan losses may be added to net interest
income.

The noninterest expenses we incur in operating our business consist of salaries and employee benefit costs,
occupancy and equipment expenses, federal deposit insurance premiums and regulatory assessments, digital delivery
and data processing expenses, advertising and promotion expenses, expenses related to real estate and personal
property owned, state and local taxes, federal income tax, and other miscellaneous expenses.

- 71 -

Our Business and Operating Strategy

Our operating strategy is focused on diversifying our loan portfolio, expanding our deposit product

offerings, and enhancing our infrastructure. Certain highlights of our operations in the last three years include:

• Expanding our market presence. We hired several experienced and talented bankers with connections
throughout Western Washington. In 2021, we opened a full-service branch in Ferndale, Washington and
purchased a branch in Bellevue, Washington. Through these new locations, we have realized growth in
deposits and expanded our ability to secure customer relationships and lending opportunities outside of our
market areas in the North Olympic Peninsula; Kitsap Peninsula; and Bellingham, Washington. We also
utilize technology to expand our market presence and to service new and existing businesses and consumers
in Western Washington and beyond.

• Investing in financial technology ("fintech") companies. We have a ten-year commitment to invest in

Canapi Ventures, which provides funding to fintech start-ups. The Canapi Ventures relationship allows us
early access to companies producing technology and apps that may be of interest as we grow in the fintech
sector. We also have ten-year commitments to invest in BankTech Ventures and JAM FINTOP, two fintech-
focused venture capital funds designed for community banks.

• Enhancing the loan portfolio. We have significantly increased the origination of commercial real estate,
multi-family real estate, and construction and land loans, as well as our portfolio of commercial business
loans. This helped to increase overall net interest income.

• Adding new servicing capabilities. In addition to traditional consumer and business deposit products, we
offer remote deposit capture, consumer and small business digital banking, and commercial digital banking
capabilities. We implemented interactive teller machines, allowing our customers to conduct business with a
teller through an interactive screen, at several locations.

• Enhancing our infrastructure. We have focused on upgrading our infrastructure, in terms of technology,
equipment and personnel, in order to support our changing lending and deposit capabilities and position
ourselves for growth.

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 intend to implement these strategies to achieve our objectives:

• Increasing our portfolio of higher yielding commercial loans. Through increased loan originations, we
intend to increase the percentage of our loan portfolio consisting of higher-yielding commercial real estate
and commercial business loans. These loan categories offer higher risk-adjusted returns, shorter maturities
and more sensitivity to interest rate fluctuations than traditional fixed-rate, one- to four-family residential
loans. Our commercial and multifamily real estate and commercial business loans have increased to $720.8
million, or 47.0% of total loans, at December 31, 2022, from $615.6 million, or 45.4% of total loans, at
December 31, 2021. The increase resulted in part from adding talented leaders to the commercial
team; developing relationships with loan referral sources, including our Board of Directors and loan
brokers; pursuing loan purchase and participation opportunities; and competing successfully in new and
existing markets.

• Increasing noninterest income. We offer SBA loan products, which provide the opportunity to sell the

guaranteed portion of loans originated, adding to our gain on sale of loans while also generating servicing
fee income. We will continue our participation in the ARC swap program to generate additional fee income.
We will maintain our focus on mortgage loan sales to increase income from both sale and servicing fees. We
may also sell loans in order to manage concentrations and risk, which would generate gain and possibly
additional servicing income. We anticipate that future revenue will be generated through treasury
management products, merchant services, fintech partnerships and banking-as-a-service, which would add
income and increased interchange fee income.

- 72 -

• 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, resolving nonperforming loans, and
selling foreclosed assets. Nonperforming assets were $1.8 million at December 31, 2022 and $1.4 million at
December 31, 2021. We have taken 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.

• 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 smartphones and tablets, consumer credit
score access, account-to-account transfer services between First Fed and other banks, and person-to-person
funds transfer, enabling us to compete effectively with banks of all sizes. We enhanced our mobile banking
platform, upgraded our business on-line banking platform, and extended banking hours through our
interactive teller machines and secure chat solutions.

• Expanding our market presence and capturing business opportunities resulting from changes in the
competitive environment. By delivering high quality, customer-focused products and services, we believe
we can attract additional borrowers and depositors and thus increase our market share and revenue
generation in our market areas. We intend to continue our franchise growth. We expect that community bank
consolidation will continue to take place and may consider acquiring additional individual branches or other
banks. Our primary focus for expansion will be in Western Washington; however, we offer digital delivery
in other markets.

• 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 additional retail bankers, lenders and treasury
management officers who are established in their communities to enhance our market position and add
profitable growth opportunities.

• Improving our digital presence and streamlining the customer experience. By investing in and

improving on the interfaces that connect customers to our products and services, we believe we will be in a
better position to compete and grow in an environment that is becoming increasingly technology driven. We
intend to invest in our online presence and engage in digital strategies that will help us to successfully
compete in an ever-changing digital marketplace. In 2019, the Company committed to fund $3 million in
Canapi Ventures to identify and infuse capital into certain promising fintech companies. This commitment
includes management participation in meetings and events that inform us when making decisions regarding
banking-as-a-service, digital services offerings and customer engagement. We introduced a new online
mortgage application with a leading fintech partner in 2020 and launched new digital deposit application and
consumer loan origination platforms in 2021. In 2022, the Company implemented a customer relationship
management software to improve business and consumer relationships.

• Exploring alternative lending opportunities to improve interest income. 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 have increased our auto loan portfolio
as a result of our partnership involving the purchase of loans made to borrowers purchasing high-end
automobiles and classic cars. We also engaged with Triad Financial Services in 2020 to purchase
manufactured home loans in pools and on a flow basis. We also purchase loans from Banker's Healthcare
Group. We will continue to explore other opportunities such as these as a means to improve net income and
supplement organic loan originations.

- 73 -

• Expanding into digital and fintech markets. Banking-as-a-service offers significant growth opportunities.
The fintech and digital banking markets offer innovation and expansion that First Fed can support through
servicing products offered. We announced our partnership with Splash in January 2022 to collaborate on
developing and deploying consumer loan products and solutions throughout the country. We continue to
explore additional opportunities to partner with fintech and digital banking partners in order to expand this
part of our digital strategy.

• Creating operating leverage. We will continue to look for ways to improve operational efficiency. We

realigned positions in 2022 to better meet organizational objectives, resulting in some workforce reductions.
We believe that recent investments in technology may also provide opportunities to build efficiencies. We
increased our net interest income in 2022, however, we experienced a decrease in non-interest income,
specifically in areas which are impacted by interest rates. We remain focused on improving current
noninterest income product lines, such as SBA and swap fees, and are pursuing new revenue channels
related to payments and banking-as-a-service.

• 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, the further development of treasury
management and our partnership with The Meriwether Group, LLC. For small-to-medium sized businesses,
we believe there are multiple payment opportunities for ACH processing, check processing, 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.

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 Loan Losses. The allowance for loan losses is the amount estimated by management as
necessary to cover losses inherent in the loan portfolio as of the balance sheet date. The allowance is established
through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan
losses necessarily involves a high degree of judgment. Among the material estimates required to establish the
allowance are: the likelihood of default; the loss exposure at default; the amount and timing of future cash flows on
impaired loans; the value of collateral; and the determination of loss factors to be applied to the various elements of
the portfolio. All of these estimates are susceptible to significant change. Management reviews, and the Board of
Directors approves, at least quarterly, the level of the allowance and the provision for loan losses based on past loss
experience, current 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 loan losses, future adjustments to
the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in
making the evaluation. In addition, the FDIC and the DFI, as an integral part of their examination process,
periodically review our allowance for loan losses 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 loan losses to replenish the allowance, which would adversely affect
earnings. See Note 3 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements
and Supplementary Data" of this Form 10-K.

- 74 -

Mortgage Servicing Rights. We record servicing rights on loans originated and subsequently sold into the

secondary market. We stratify our capitalized servicing rights based on the type, term and interest rates of the
underlying loans. Effective January 1, 2022, the Bank elected to measure servicing rights using the fair value
method of accounting. Servicing rights are measured at fair value at each reporting date with the change reported in
earnings. Prior to 2022, the amortization method was applied with servicing rights initially recognized at fair value
and subsequent changes in value amortized over the estimated remaining life of the loans. The value is determined
through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate
assumptions as inputs. All of these assumptions require a significant degree of management judgment. If our
assumptions prove to be incorrect, the value of our mortgage servicing rights could be negatively affected. See
Notes 1, 6 and 14 to the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of this Form 10-K.

Income Taxes. Management makes estimates and judgments to calculate certain tax liabilities and to

determine the recoverability of certain deferred tax assets, which arise from temporary differences between the tax
and financial statement recognition of revenues and expenses. We also estimate a valuation allowance for deferred
tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. In
evaluating the recoverability of deferred tax assets, management considers all available positive and negative
evidence, including past operating results, recent cumulative losses - both capital and operating - and the forecast of
future taxable income, both capital gains and operating. In determining future taxable income, management makes
assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions require judgments about future taxable income and
are consistent with the plans and estimates to manage our business. Any reduction in estimated future taxable
income may require us to record a valuation allowance against deferred tax assets. An increase in the valuation
allowance would result in additional income tax expense in the period and could have a significant impact on future
earnings.

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

New Accounting Pronouncements

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

- 75 -

Comparison of Financial Condition at December 31, 2022 and December 31, 2021

Assets. Total assets increased $121.0 million, or 6.3%, to $2.04 billion at December 31, 2022, from $1.92

billion at December 31, 2021.

Total loans, excluding loans held for sale, increased $177.2 million, or 13.1%, during the year ended

December 31, 2022. Multi-family and commercial real estate loans increased $108.1 million, or 20.2%, consisting
mainly of an increase in multi-family real estate loans of $81.1 million as a result of new originations and $17.6
million of construction loans converting into permanent amortizing loans. The commercial real estate loans increase
was due to new loan originations in addition to $12.2 million from construction loans converting into permanent
amortizing loans. Auto and other consumer loans increased $40.0 million, or 21.9%, with the purchase of a pool of
manufactured home loans as well as purchases of individual manufactured home loans and specialty auto loans.
Commercial business loans decreased $2.8 million due to a decrease in the Northpointe Bank Mortgage
Participation Program of $26.3 million as our participation in the program ended and $14.5 million in payoffs of
SBA Paycheck Protection Program loans, partially offset by purchases of $8.1 million in secured equipment loans
and $6.3 million of unsecured Bankers Healthcare Group loans in addition to advances on new and existing lines of
credit.

One- to four-family residential loans increased $48.9 million, or 16.6%, with $40.5 million in construction
loans converting to permanent amortizing loans during the year. We continue to focus on the origination of one- to
four-family mortgage loans with the intention of retaining certain adjustable-rate loans that may not be readily sold
in the secondary market, while selling the majority of our saleable production to the Federal Home Loan Mortgage
Corporation ("Freddie Mac") and other investors.

Construction and land loans decreased $30.1 million, or 13.4%, with draws on new and existing loans
partially offset by $79.3 million converting into fully amortizing loans. Undisbursed construction commitments
totaled $120.7 million at December 31, 2022 compared to $194.3 million at December 31, 2021. Undisbursed
construction commitments at December 31, 2022 included $68.1 million of mainly custom one- to four-family
residential construction, $38.7 million of multi-family construction, $13.0 million of commercial real estate
construction, and $1.0 million of commercial acquisition-renovation construction. Our construction loans are
geographically disbursed throughout the state of Washington with two commitments for properties in Idaho and one
commitment for a property in Oregon. We manage our construction lending by utilizing a licensed third-party
vendor to assist us in monitoring our construction projects. Internal staff monitor certain projects, which enhances
fee income related to these loans.

During the year ended December 31, 2022, the Company originated $548.3 million of loans, of which

$122.8 million, or 22.4%, were originated in the Olympic Peninsula region; $356.7 million, or 65.1%, in the Puget
Sound region; $46.4 million, or 8.5%, in other areas in Washington; and $22.2 million, or 4.1%, in other states. The
Company also purchased loans totaling $96.1 million with the largest concentration of personal property located in
California.

- 76 -

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

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:

Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses

Total loans receivable, net

December 31, 2022

December 31, 2021

(In thousands)

343,825
253,551
390,246
194,646
1,182,268

52,322
222,794
275,116

76,996

294,965
172,409
363,299
224,709
1,055,382

39,172
182,769
221,941

79,838

1,534,380

1,357,161

2,786
(15,957)
16,116
1,531,435

4,772
(12,995)
15,124
1,350,260

Our allowance for loan losses increased $1.0 million, or 6.6%, during the year ended December 31, 2022,

as a result of loan growth. Asset quality has remained stable year over year despite the uncertain economic
conditions as the Federal Reserve Board has attempted to curb inflation by increasing the Federal Funds Rate.
Management continues to closely monitor these and other economic conditions. The allowance for loan losses as a
percentage of total loans was 1.05% at December 31, 2022 and 1.11% at December 31, 2021. We believe our
allowance for loan losses is adequate to cover inherent losses in the loan portfolio.

Nonperforming loans increased $409,000, or 29.6%, during the year ended December 31, 2022 to $1.8

million. This increase was mainly the result of increases in nonperforming one- to four-family of $463,000 and auto
and other consumer of $60,000, partially offset by a decrease in home equity loans of $88,000. Nonperforming loans
to total loans was 0.12% at December 31, 2022, an increase from 0.10% at December 31, 2021.

At December 31, 2022, substantially all restructured loans were performing in accordance with their

modified payment terms and returned to accrual status. Classified loans, consisting solely of substandard loans,
increased by $4.3 million, or 34.3%, to $16.9 million at December 31, 2022, from $12.6 million at December 31,
2021. The change in classified loans was mainly the result of one $14.0 million commercial multifamily
construction loan being downgraded during the fourth quarter due to additional liens being placed on the property,
and was partially offset by commercial real estate loan upgrades and payoffs. The Bank continued to work with its
borrowers to facilitate satisfactory repayment.

Cash and cash equivalents decreased by $80.4 million, or 63.8%, to $45.6 million as of December 31,

2022, compared to $126.0 million at December 31, 2021, as excess cash was deployed into funding loans.

- 77 -

Total investment securities decreased $17.6 million, or 5.1%, to $326.6 million at December 31, 2022,

from $344.2 million at December 31, 2021. The year-over-year decrease was the result of a decline in the market
value of the portfolio, sales and normal amortization during the year, partially offset by purchases. During 2022, we
purchased $78.7 million of available-for-sale securities. We also took advantage of market opportunities to manage
duration by selling $11.9 million of available-for-sale securities for a total gain of $118,000 during the same period.
The decline in market value of $51.3 million relates mainly to changes in interest rates and market liquidity, not to
changes in credit quality. The estimated average life of the total investment securities portfolio was 8.2 years, and
the average repricing term was approximately 5.7 years as of December 31, 2022, based on the interest rate
environment at that time. We anticipate the investment portfolio will continue to provide additional interest
income and act as a source of liquidity.

Mortgage-backed securities represent the largest portion of our investment portfolio and totaled $169.0

million at December 31, 2022, an increase of $29.0 million, or 20.7% from $140.0 million at December 31, 2021.
Municipal bonds are the second largest segment, totaling $98.1 million at December 31, 2022, a decrease of $15.3
million, or 13.5%, from $113.4 million at December 31, 2021. Other investment securities, including U.S. and
international government agencies and corporate debt securities, were $59.6 million at December 31, 2022, a
decrease of $31.3 million, or 34.5% from $90.9 million at December 31, 2021. At December 31, 2022, the
investment portfolio contained 50.8% of amortizing securities, compared to 49.8% at December 31, 2021. The
projected average life of our securities may vary due to prepayment activity, which, particularly in the mortgage-
backed securities portfolio, is generally affected by changing interest rates. We continue to focus on growing our
loan portfolio and improving our earning asset mix over the long term, as evidenced by net loan growth exceeding
the rate of investments during the year. We may purchase investment securities as a source of additional interest
income and in lieu of carrying higher cash balances at nominal interest rates. 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.

Equity and partnership investments increased $10.7 million to $14.3 million at December 31, 2022,
compared to $3.6 million at December 31, 2021, as we expanded partnership and equity relationships to include the
three Meriwether Group investments and JAM FINTOP. Prepaid expenses and other assets increased $20.2 million
to $42.4 million at December 31, 2022, compared to $22.2 million one year ago. The increase was mainly due to an
increase in deferred tax assets of $11.2 million resulting from the fair market value decrease in the investment
portfolio, an increase in other prepaid expenses of $3.9 million, which includes long-term sponsorship agreements
with two local not-for-profit organizations, and a receivable for a bank-owned life insurance ("BOLI") death benefit
payment related to the passing of a former employee. In December 2022, Quin Ventures sold substantially all of its
assets to Quil Ventures. As part of the sale transaction, the Company received a 5% ownership stake in Quil
Ventures valued at $225,000 and recorded a $1.5 million commitment receivable.

Liabilities. Total liabilities increased $153.2 million, or 8.9%, to $1.88 billion at December 31, 2022, from

$1.73 billion at December 31, 2021, mainly due to an increase in borrowings of $166.1 million, or 139.2%, to
$285.4 million at December 31, 2022, from $119.3 million at December 31, 2021, used to fund loan growth.

Deposit account balances decreased $16.3 million, or 1.0%, to $1.56 billion at December 31, 2022 from
$1.58 billion at December 31, 2021. Money market accounts decreased $124.8 million and transaction accounts
decreased $32.3 million, while savings accounts increased $6.3 million. Certificates of deposit increased $134.4
million, or 54.4%, to $381.7 million at December 31, 2022. Included in certificates of deposit balances at year end
were $133.9 million in brokered certificates of deposit. We believe the current rate environment has contributed to
greater competition for deposits with higher rate products being offered to attract new funds. Additionally, the
significant deposit balance increases in 2020 and 2021 from stimulus payments and PPP loans began to run off in
2022 as business and consumer post-pandemic spending increased, fueled in part by inflation. Our focus will
continue to be on increasing core customer deposits, with an emphasis on small-to-medium sized business
deposits, and maintaining a stable source of funding for our continued growth.

- 78 -

Equity. Total shareholders' equity decreased $29.4 million, or 15.4%, to $161.6 million at December 31,

2022, from $191.0 million at December 31, 2021. The decrease during the year resulted from a $40.8 million change
in accumulated other comprehensive loss related to the change in unrealized market value of available for sale
securities, net of tax. Share repurchases of $5.9 million and $2.8 million in dividends paid in 2022 also contributed
to the decrease in equity. These decreases were partially offset by net income of $15.7 million, an increase of $2.6
million related to share-based compensation plans and $1.9 million related to the issuance of common stock as
consideration for the acquisition of 33% of The Meriwether Group, LLC. During the year ended December 31,
2022, we repurchased 356,343 shares of common stock at an average cost of $15.26 per share, pursuant to the
Company's 2020 stock repurchase plan.

Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021

General. The Company generated a return on average assets of 0.79%, and a return on average equity of

9.09%, for the year ended December 31, 2022, compared to 0.87% and 8.19%, respectively, for the year ended
December 31, 2021. Net income increased $227,000, or 1.5%, compared to 2021. An increase in net interest income
was offset by a decrease in noninterest income and increase in noninterest expense. Noninterest income was down
due to significant declines in gain on sale of loans and gains on partnership investments. Noninterest expense was
higher due to increased compensation, advertising, data processing, and occupancy expenses. The increases in
expense were primarily related to Quin and expansion of the Bank's staffing levels and locations. We
earned $1.71 per common and diluted share for the year ended December 31, 2022, compared to $1.63 per common
and diluted share for the year ended December 31, 2021. The increase in earnings per share was the result of an
increase in net income combined with lower weighted-average common shares outstanding of 9,082,032 in 2022,
compared to 9,133,953 shares for the same period in 2021. The decrease in average shares year-over-year is due to
our share repurchase program and restricted stock award forfeitures offset by restricted stock award grants.

Net Interest Income. Net interest income increased $11.6 million, or 19.8%, to $69.9 million for the year

ended December 31, 2022, from $58.3 million for the year ended December 31, 2021, mainly as the result of
additional interest income related to an increase in the average balances of loans receivable as well higher yields
earned on both loans receivable and investment securities.

The average balance of loans receivable increased $208.9 million, at an average yield of 4.74%, for the

year ended December 31, 2022 compared to an average yield of 4.44%, for the year ended December 31, 2021. The
cost of interest-bearing liabilities increased to 0.73% for the year ended December 31, 2022 compared to 0.43% for
the year ended December 31, 2021. The combination of increased loan receivable balances and higher rates resulted
in a 28 basis point increase in our net interest margin to 3.79% at December 31, 2022, from 3.51% at December 31,
2021, as loans repriced faster than deposit costs.

Net interest income increased $11.6 million during the year ended December 31, 2022 compared to the

year ended December 31, 2021, of which $7.0 million was the result of an increase in volume and $4.6 million due
to changes in yields. As noted above, loans receivable was the main contributor to the increase in net interest income
with $9.3 million due to an increase in average volume and $4.3 million due higher rates. The increase to the cost of
average interest-bearing liabilities for the year ended December 31, 2022 was due primarily to increased average
balances and higher rates paid on advances, certificates of deposit and money market accounts.

Interest Income. Interest income increased $16.7 million, or 26.2%, to $80.4 million for the year ended

December 31, 2022 from $63.7 million for the comparable period in 2021, primarily due to an increase in the
average balance of loans receivable. Interest and fees on loans receivable increased $13.6 million during the year, in
part, as the Bank grew the loan portfolio through single-family, multi-family and commercial real estate lending as
well as purchased auto and manufactured home loans. Loan yields also increased due to higher rates on new
originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices.

- 79 -

Interest income on investment securities increased $2.5 million to $10.9 million for the year ended

December 31, 2022 compared to $8.4 million for the year ended December 31, 2021. The increase in interest
income on investment securities was driven by an increase in the average yield during the year of 81 basis points
due to the repricing of variable rate securities as slowing prepayment activity reduced the amount of premium
amortization during the period.

The following table compares average earning asset balances, associated yields, and resulting changes in

interest income for the periods shown:

Year Ended December 31,

2022

2021

Loans receivable, net
Investment securities
FHLB stock
Interest-earning deposits in banks
Total interest-earning assets

Average
Balance
Outstanding

$ 1,448,777
350,521
8,540
34,807
$ 1,842,645

Average
Balance
Outstanding
(Dollars in thousands)
$ 1,239,919
365,000
4,058
52,242
$ 1,661,219

Yield

4.74%
3.10%
5.88%
1.08%
4.36%

Increase/
(Decrease)
in Interest
Income

13,606
2,497
312
292
16,707

Yield

4.44%
2.29%
4.68%
0.16%
3.83%

Interest Expense. Total interest expense increased $5.1 million, or 95.7%, for the year ended December

31, 2022, compared to the prior year, with increases in borrowing costs of $3.3 million and deposit costs of $1.8
million. Borrowing rates increased 12.4%, or 29 basis points, mainly due to higher rates paid on overnight and short-
term borrowings, combined with an increase of $118.1 million in the average balance outstanding. Deposit costs
increased due to higher rates paid and an increase of $73.9 million, or 6.4%, in the average balance of interest-
bearing deposits, as we utilized brokered certificates of deposits to offset the decline in customer balances. The
average cost of all interest-bearing deposit products increased 13 basis points to 0.42% for the year ended December
31, 2022 from 0.29% for the year ended December 31, 2021. While the average balances of all deposit categories
increased year-over-year, growth in lower costing transaction, savings and money market accounts outpaced higher
costing certificates of deposit accounts.

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

periods shown:

Year Ended December 31,

2022

2021

Average
Balance
Outstanding

193,064
555,038
197,707
282,477
163,198
39,312
$ 1,430,796

Average
Balance
Outstanding
(Dollars in thousands)

Rate

0.07%
0.31%
0.08%
1.13%
2.29%
4.01%
0.73%

175,608
525,986
185,315
267,521
54,033
30,370
$ 1,238,833

Rate

0.02%
0.22%
0.07%
0.77%
1.43%
3.96%
0.43%

Increase/
(Decrease)
in Interest
Expense

94
533
37
1,138
2,966
374
5,142

Interest-bearing transaction
Money market accounts
Savings accounts
Certificates of deposit
Advances
Subordinated debt, net

Total interest-bearing liabilities

- 80 -

Provision for Loan Losses. The provision for loan losses increased during the year ended December 31,

2022, compared to 2021. The higher provision is reflective of loan growth and an increase in net charge-offs. Credit
quality metrics improved slightly resulting in a lower allowance to total gross loans compared to the prior year.

The following table details activity and information related to the allowance for loan losses for the periods

shown:

Provision for loan losses
Charge offs net of recoveries
Allowance for loan losses
Allowance for losses as a percentage of total gross loans receivable at the end

of this period

Total nonaccrual loans
Allowance for loan losses as a percentage of nonaccrual loans at end of period
Nonaccrual and 90 days or more past due loans as a percentage of total loans
Total loans

Year Ended December 31,
2022
2021
(Dollars in thousands)

1,535
(543)
16,116

1.05%

1,790

900%
0.12%

1,350
(73)
15,124

1.11%

1,796

842%
0.13%

1,534,380

1,357,161

Noninterest Income. Noninterest income decreased 34.0% to $10.3 million for the year ended December

31, 2022, from $15.6 million for the year ended December 31, 2021. Decreases compared to the prior year were
primarily due to lower gain on sale of mortgage loans, lower gains on investment security sales, a $1.1 million
decrease to the change in market value of our limited partnership fintech investments included in "other income" and
a decline in the value of the loan servicing rights asset. These decreases were partially offset by additional service
fee income and the BOLI death benefit payment.

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

the periods shown:

Loan and deposit service fees
Sold loan servicing fees
Net gain on sale of loans
Net gain on sale of investment securities
Increase in cash surrender value of bank-owned life

insurance, net

Income from death benefit on bank-owned life

insurance, net

Other income
Total noninterest income

Year Ended December 31,

2022

2021

Increase (Decrease)
Percent

Amount

4,729 $
867
824
118

(Dollars in thousands)
3,860 $
946
5,278
2,410

869
(79)
(4,454)
(2,292)

22.5%
(8.4)
(84.4)
(95.1)

916

965

(49)

(5.1)

1,489
1,384
10,327 $

—
2,179
15,638 $

1,489
(795)
(5,311)

100.0
(36.5)
(34.0)%

Noninterest Expense. Noninterest expense increased to $62.3 million for the year ended December 31,
2022, from $54.4 million for the year ended December 31, 2021. The year-over-year increase reflects higher data
processing and occupancy expenses associated with expanding our footprint with additional branch locations as well
as higher professional fees, including legal and technology consulting fees.

Additional Quin expenses resulted in significant increases to advertising, compensation, depreciation and
data processing expenses during the year ended December 31, 2022, totaling approximately $3.5 million. The full
amount of Quin Ventures activity is reported in noninterest income and noninterest expense under the controlling
interest method of accounting. The proportional noncontrolling interest amount is later subtracted from net income.
This resulted in a noncontrolling interest net loss of $2.1 million being added back to net income for the year ended
December 31, 2022. As of December 31, 2022, future additional expenses related to Quin are expected to be
immaterial.

- 81 -

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)
Percent

2021

Amount
(Dollars in thousands)

Compensation and benefits
Data processing
Occupancy and equipment
Supplies, postage, and telephone
Regulatory assessments and state taxes
Advertising
Professional fees
FDIC insurance premium
Other

Total

2022

35,940 $
7,539
5,398
1,376
1,539
3,288
2,645
888
3,699
62,312 $

33,515 $
6,244
4,312
1,189
1,213
2,040
1,997
752
3,151
54,413 $

2,425
1,295
1,086
187
326
1,248
648
136
548
7,899

7.2%

20.7
25.2
15.7
26.9
61.2
32.4
18.1
17.4
14.5%

Provision for Income Tax. The provision for income tax for the year ended December 31, 2022, was $2.9

million compared to $3.2 million for the year ended December 31, 2021, reflecting differences in pre-tax
income. The effective tax rate decreased over prior periods as a result of the permanent tax exclusion of BOLI
noninterest income, including the BOLI death benefit.

- 82 -

Average Balances, Interest and Average Yields/Cost

The following tables set forth, for the periods indicated, information regarding average balances of assets

and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise
known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-
bearing liabilities. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-
bearing liabilities and the resultant spread at December 31, 2022 and 2021. Income and all average balances are
monthly average balances, which management deems to be not materially different than daily averages.
Nonaccrual loans have been included in the table as loans carrying a zero yield.

At
December
31,
2022

Yield/
Rate

Average
Balance
Outstanding

5.69% $ 1,448,777
350,521
3.22
8,540
6.41
34,807
2.72
1,842,645
5.23
132,588
$ 1,975,233

0.01 $
0.58
0.26
2.19
0.74
3.02
3.93
1.18

193,064
555,038
197,707
282,477
1,228,286
163,198
39,312
1,430,796
335,646
36,666
172,125
$ 1,975,233

4.05

411,849

Year Ended December 31,

2022
Interest
Earned/
Paid

$ 68,635
10,866
502
375
80,378

137
1,698
165
3,198
5,198
3,740
1,577
10,515

Yield/
Rate

Average
Balance
Outstanding

(Dollars in thousands)

4.74% $ 1,239,919
365,000
3.10
4,058
5.88
52,242
1.08
1,661,219
4.36
104,011
$ 1,765,230

0.07
0.31
0.08
1.13
0.42
2.29
4.01
0.73

175,608
525,986
185,315
267,521
1,154,430
54,033
30,370
1,238,833
308,467
39,432
178,498
$ 1,765,230

2021
Interest
Earned/
Paid

$ 55,029
8,369
190
83
63,671

43
1,165
128
2,060
3,396
774
1,203
5,373

$ 69,863

$ 58,298

3.63

3.79

422,386

Yield/
Rate

4.44%
2.29
4.68
0.16
3.83

0.02
0.22
0.07
0.77
0.29
1.43
3.96
0.43

3.40

3.51

Interest-earning assets:
Loans receivable, net (1)
Total investment securities
FHLB dividends
Interest-earning deposits in banks
Total interest-earning assets (2)

Noninterest-earning assets
Total average assets

Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit

Total interest-bearing deposits (3)

Advances
Subordinated debt, net

Total interest-bearing liabilities

Noninterest-bearing deposits (3)
Other noninterest-bearing liabilities
Average equity
Total average liabilities and equity

Net interest income
Net interest rate spread
Net earning assets
Net interest margin (4)
Average interest-earning assets to

average interest-bearing liabilities

128.8%

134.1%

(1) The average loans receivable, net balances include nonaccrual loans.
(2) Includes interest-bearing deposits at other financial institutions.
(3) Cost of all deposits, including noninterest-bearing demand deposits, was 0.33% and 0.23% for the years ended December 31,

2022 and 2021.

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

- 83 -

Rate/Volume Analysis

The following tables present 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 category of interest-earning assets
and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume).
For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to rate.

Interest-earning assets:
Loans receivable
Investment securities
FHLB stock
Other (1)

Total interest-earning assets

Interest-bearing liabilities:
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit
Advances
Subordinated debt

Total interest-bearing liabilities

Net change in interest income

Year Ended
December 31, 2022 vs. 2021

Increase (Decrease) Due to
Volume

Rate
(In thousands)

Total Increase
(Decrease)

9,266 $
(332)
210
(28)
9,116 $

4 $

64
9
115
1,564
354
2,110 $

4,340 $
2,829
102
320
7,591 $

90 $
469
28
1,023
1,402
20
3,032 $

13,606
2,497
312
292
16,707

94
533
37
1,138
2,966
374
5,142

7,006 $

4,559 $

11,565

(1) 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. We utilize the services of
outside firms to assist us in our asset and liability management and our analysis of market risk.

Interest Rate Risk Management. We manage the interest rate sensitivity of interest-earning assets and
interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment.
Deposit accounts may reprice more quickly in response to changes in market interest rates because of their shorter
maturities. Certain adjustable-rate investment securities, home equity lines of credit, and commercial real estate
loans that are tied to the prime rate, the twelve-month constant maturity treasury, the London Interbank Offered Rate
("LIBOR"), or the Term Secured Overnight Financing Rate ("TSOFR") will also reprice higher when market interest
rates increase. Increases in interest rates should beneficially affect our earnings when variable or adjustable interest-
earning assets reprice at higher interest rates faster than it takes for deposit and borrowing costs to reprice higher.
Decreases in interest rates may adversely affect earnings as variable and adjustable assets will reprice lower which
will reduce interest income.

- 84 -

Given the current low cost of funding there is little ability to reduce funding costs to offset the decrease in

interest income. Additionally, lower rates may result in increased prepayments and refinancing associated with loans
and investment securities, particularly consumer and one- to four-family residential loans and MBS securities with
no prepayment restrictions, which are then reinvested into lower yielding assets, further reducing interest income.

We currently do not participate in hedging programs, interest rate swaps or other activities involving the

use of derivative financial instruments to manage interest rate risk.

Interest Rate Sensitivity Analysis. Management uses an interest rate sensitivity analysis to review our

level of interest rate risk. This analysis measures interest rate risk by computing changes in the present value of our
cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market
interest rates. The present value of equity is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive
instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 to 300 basis point
decrease in market interest rates with no effect given to any future steps that management might take to counter the
impact of that interest rate movement. The following table presents the change in the present value of First Fed’s
equity at December 31, 2022, that would occur in the event of an immediate change in interest rates based on
management's assumptions.

December 31, 2022

Economic Value of Equity

Basis Point Change in
Interest Rates

$ Amount

$ Change

% Change

EVE Ratio %

+ 400
+ 300
+ 200
+ 100
0
-100
-200
-300

339,363
353,363
367,228
380,088
395,241
394,065
382,328
366,724

(Dollars in thousands)
(55,878 )
(41,878 )
(28,013 )
(15,153 )

—
(1,176)
(12,913)
(28,517)

(14.1 )%
(10.6 )
(7.1 )
(3.8 )
—
(0.3)
(3.3)
(7.2)

19.2 %
19.5
19.8
20.0
20.3
19.7
18.7
17.5

Using the same assumptions as above, the sensitivity of our projected net interest income over a one-year

period for the year ended December 31, 2022, is as follows:

Basis Point Change
in Interest Rates

$ Amount

December 31, 2022
Projected Net Interest Income
$ Change
(Dollars in thousands)

% Change

+ 400
+ 300
+ 200
+ 100
0
-100
-200
-300

63,944
66,168
68,279
70,206
72,471
71,406
68,949
66,655

- 85 -

(8,527)
(6,303)
(4,192)
(2,265)
—
(1,065)
(3,522)
(5,816)

(11.8)%
(8.7)
(5.8)
(3.1)
—
(1.5)
(4.9)
(8.0)

Assumptions made by management relate to interest rates, loan prepayment rates, deposit decay rates, and

the market values of certain assets under differing interest rate scenarios, among others. As with any method of
measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing
tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may
take longer to adjust to changes in market rates. Additionally, certain assets have features, such as rate caps or
floors, which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.

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 and 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 investments in 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, 2022, cash and cash equivalents totaled $45.6 million, and securities classified as available-for-sale,
which provide additional potential sources of liquidity, had a market value of $326.6 million. We have pledged loan
collateral to support borrowings from the FHLB of $234.0 million. We have also pledged collateral to the Federal
Reserve Bank of San Francisco to secure discount window advances; the Company has performed periodic
borrowing tests, however, no funds were borrowed as of December 31, 2022. First Northwest has a $20.0 million
borrowing arrangement with NexBank which is secured by First Northwest's personal property assets (with certain
exclusions), including all the outstanding shares of First Fed, cash, loans receivable, and limited partnership
investments.

At December 31, 2022, we had $25,000 in loan commitments outstanding and an additional $226.6 million

in undisbursed loans, including undisbursed construction commitments, and standby letters of credit.

Certificates of deposit due within one year of December 31, 2022 totaled $262.2 million, or 68.7% of

certificates of deposit. The large percentage of certificates of deposit that mature within one year reflects customers'
hesitancy to invest their funds for longer periods in this changing rate environment. Management believes that a
significant portion of our certificates of deposit 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 be
required to seek other sources of funds, which may include borrowings and brokered deposits. We also can 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 to our competitors. Depending on market conditions, we may also be required to pay higher rates on
borrowings or brokered deposits than we currently pay on standard certificates of deposit or promotional rate
offerings. We believe that business 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 enough 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.

- 86 -

First Fed has a diversified deposit base with approximately 62% of deposit account balances held by

consumers, 29% held by business and public fund depositors, and 9% in brokered deposits. The average deposit
account balance, excluding brokered and public fund accounts, was $29,000 at December 31, 2022. We estimate that
20-25% of our retail customer deposit balances are over the $250,000 FDIC insurance limit, representing less than
5% of depositors. 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,

and cash received from the issuance of subordinated debt for liquidity to pay its operating expenses and other
financial obligations. At December 31, 2022, the Company (on an unconsolidated basis) had liquid assets of
$1.0 million.

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, 2022, 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, 2022:

Amount of Commitment Expiration
After 3 Years

After 1 Year
Through 3 Years

Within 1 Year

Through 5 Years Beyond 5 Years

Total Amounts
Committed
(In thousands)

Commitments to originate
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

25 $

— $

33,918

14,000

1,168

56,036

105,122

58,673
558

14,129
—

4,984
—

42,928
200

120,714
758

4,268
97,442 $

—
28,129 $

—
6,152 $

—
99,164 $

4,268
230,887

First Northwest Bancorp 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.

- 87 -

First Fed is subject to meeting minimum capital adequacy requirements for common equity Tier 1

("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 11 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 Bancorp and First Fed’s regulatory capital requirements.

In order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary

bonuses based on percentages of eligible retained income that could be utilized for such actions, First Northwest
Bancorp and First Fed must maintain CET1 capital at an amount greater than the required minimum levels plus a
capital conservation buffer. This new capital conservation buffer requirement was phased in starting in January 2016
until fully implemented in the amount of 2.5% of risk-weighted assets in January 2019. As of December 31, 2022,
the conservation buffer was 2.5%.

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, 2022, the Bank and
consolidated Company exceeded all regulatory capital requirements, and the Bank was considered "well capitalized"
under FDIC regulatory capital guidelines.

The following table provides the capital requirements and actual results at December 31, 2022.

Actual

Amount

Ratio

Minimum Capital
Requirements

Amount
(Dollars in thousands)

Ratio

Minimum Required to
be Well-Capitalized
Ratio
Amount

$ 215,037

10.4% $

82,607

4.0% $ 103,259

5.0%

215,037

13.4

72,230

4.5

104,332

215,037

13.4

96,306

6.0

128,408

6.5

8.0

231,405

14.4

128,408

8.0

160,510

10.0

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 United States, 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.

- 88 -

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information contained under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk and Asset and Liability Management" of this Form 10-K is incorporated
herein by reference.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett,

Index to Consolidated Financial Statements

Washington, PCAOB ID: 659)

Consolidated Balance Sheets, December 31, 2022 and 2021
Consolidated Statements of Income For the Years Ended December 31, 2022 and 2021
Consolidated Statements of Comprehensive Income For the Years Ended December 31,

2022 and 2021

Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December

31, 2022 and 2021

Consolidated Statements of Cash Flows For the Years Ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements

Page

90
92
93

95
96
98

- 89 -

Report of Independent Registered Public Accounting Firm

The Shareholders and the Board of Directors of
First Northwest Bancorp and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Northwest Bancorp and
Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements
of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and
the related notes (collectively referred to as the “consolidated financial statements”). In our opinion,
the consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2022 and 2021, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to
obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting
in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.

- 90 -

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the
(consolidated) financial statements that was communicated or required to be communicated to the
audit committee and that (1) relates to accounts or disclosures that are material to the (consolidated)
financial statements and (2) involved our especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not alter in any way our opinion on the
(consolidated) financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or
disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s consolidated
allowance for loan losses balance was $16 million at December 31, 2022. The allowance for loan
losses is maintained to provide for estimated inherent losses based upon the Company’s analysis of
the known and inherent risk factors underlying the loan portfolio. These factors include, among
others, changes in the size and composition of the loan portfolio, actual loan loss experience, current
economic conditions, analysis of individual loans for which full collectability may not be assured, and
determination of the discounted cash flows or determination of the existence and realizable value of
the collateral and guarantees securing the loans.

We identified management’s estimation of qualitative factor adjustments, which are a component of
the allowance for loan losses calculation, as a critical audit matter. Qualitative factor adjustments are
added to the historical loss rates and applied to the loan balances with similar risk characteristics to
calculate the allowance for loan losses. The qualitative factor adjustments are comprised of
subjective risk factor adjustments used to quantify an estimate of losses that are not captured in the
historical loss rates and are based on management’s evaluation of available internal and external
data and involves significant management judgment. In turn, auditing management’s judgments
regarding the determination of the qualitative factor adjustments applied to the allowance for loan
losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

(cid:220) Obtained management’s analysis and supporting documentation related to the qualitative
factor adjustments and tested whether the qualitative factor adjustments used in the
calculation of the allowance for loan losses were supported by the analysis provided by
management, as well as tested source data used in management’s analysis.
Performed an independent sensitivity analysis to evaluate the reasonableness of the
qualitative factor adjustments used by management to account for inherent losses that are
not captured in the allowance for loan losses based on historical loss rates alone.
Tested that the qualitative factor adjustments were applied appropriately in the allowance for
loan losses calculation.

(cid:220)

Everett, Washington
March 17, 2023

We have served as the Company’s auditor since 2002.

- 91 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

December 31, 2022

December 31, 2021

ASSETS

Cash and due from banks
Interest-bearing deposits in banks
Investment securities available for sale, at fair value
Loans held for sale
Loans receivable (net of allowance for loan losses of

$16,116 and $15,124)

Federal Home Loan Bank (FHLB) stock, at cost
Accrued interest receivable
Premises and equipment, net
Servicing rights on sold loans, net
Servicing rights on sold loans, at fair value
Bank-owned life insurance, net
Equity and partnership investments
Goodwill and other intangible assets
Deferred tax asset, net
Prepaid expenses and other assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits
Borrowings
Accrued interest payable
Accrued expenses and other liabilities
Advances from borrowers for taxes and insurance

Total liabilities

Commitments and Contingencies (Note 13)
Shareholders' Equity

Preferred stock, $0.01 par value, authorized 5,000,000

shares, no shares issued or outstanding

Common stock, $0.01 par value, authorized 75,000,000

shares; issued and outstanding 9,703,581 at December
31, 2022; issued and outstanding 9,972,698 at
December 31, 2021
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net of

tax

Unearned employee stock ownership plan (ESOP) shares

Total parent's shareholders' equity
Noncontrolling interest in Quin Ventures, Inc.
Total shareholders' equity

17,104
28,492
326,569
597

1,531,435
11,681
6,743
18,089
—
3,887
39,665
14,289
1,089
14,091
28,339

2,042,070

1,564,255
285,358
455
32,344
1,376

1,883,788

13,868
112,148
344,212
760

1,350,260
5,196
5,289
19,830
3,282
—
39,318
3,571
1,183
1,561
20,603

1,921,081

1,580,580
119,280
393
29,240
1,108

1,730,601

—

97
95,508
114,424

(40,543 )
(7,913 )

161,573

(3,291 )
158,282

100
96,131
103,014

288
(8,572 )

190,961

(481 )
190,480

Total liabilities and shareholders' equity

2,042,070

1,921,081

See accompanying notes to the consolidated financial statements.

- 92 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

For the Year Ended December 31,

2022

2021

INTEREST INCOME

Interest and fees on loans receivable

Interest on investment securities

Interest-bearing deposits and other

FHLB dividends

Total interest income

INTEREST EXPENSE

Deposits

Borrowings

Total interest expense

Net interest income

PROVISION FOR LOAN LOSSES

Net interest income after provision for loan losses

NONINTEREST INCOME

Loan and deposit service fees

Sold loan servicing fees

Net gain on sale of loans

Net gain on sale of investment securities

Increase in cash surrender value of bank-owned life insurance, net

Income from death benefit on bank-owned life insurance, net

Other income

Total noninterest income

NONINTEREST EXPENSE

Compensation and benefits

Data processing

Occupancy and equipment

Supplies, postage, and telephone

Regulatory assessments and state taxes

Advertising

Professional fees

FDIC insurance premium

Other

Total noninterest expense

INCOME BEFORE PROVISION FOR INCOME TAXES

PROVISION FOR INCOME TAXES

NET INCOME
Net loss attributable to noncontrolling interest in Quin Ventures, Inc.

NET INCOME ATTRIBUTABLE TO PARENT

Basic and diluted earnings per common share

68,635

10,866

375

502

80,378

5,198

5,317

10,515

69,863

1,535

68,328

4,729

867

824

118

916

1,489

1,384

10,327

35,940

7,539

5,398

1,376

1,539

3,288

2,645

888

3,699

62,312

16,343

2,847

13,496
2,149

15,645

1.71

55,029

8,369

190

63,671

3,396

1,977

5,373

58,298

1,350

56,948

3,860

946

5,278

2,410

965

—

2,179

15,638

33,515

6,244

4,312

1,189

1,213

2,040

1,997

752

3,151

54,413

18,173

3,194

14,979
439

15,418

1.63

See accompanying notes to the consolidated financial statements.

- 93 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

NET INCOME

Other comprehensive (loss) income:

Unrealized holding (losses) gains on investments available for sale arising

during the period

Income tax benefit (provision) related to unrealized holding (losses) gains
Unrecognized defined benefit ("DB") plan prior service cost
Income tax benefit related to DB plan prior service cost
Amortization of unrecognized DB plan prior service cost
Income tax benefit related to amortization of DB plan prior service cost
Reclassification adjustment for net (gains) losses on sales of securities

realized in income

Income tax benefit related to reclassification adjustment on sales of

securities

Other comprehensive (loss) income, net of tax

COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income attributable to noncontrolling interest

For the Year Ended December 31,

2022

2021

13,496 $

14,979

(51,204)
10,753
—
—
(362)
75

(118)

(1,771)
373
(2,210)
464
(134)
28

(2,410)

506

(40,831)

(5,154)

(27,335)

(2,149)

9,825

(439)

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO PARENT

(25,186) $

10,264

See accompanying notes to the consolidated financial statements.

- 94 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)

Common Stock

Additional
Paid-in

Amount

Capital

Retained

Earnings

Accumulated
Other
Comprehensive
Gain (Loss)

Unearned
ESOP

Noncontrolling

Total
Shareholders'

Net of Tax

Interest

Equity

BALANCE,
December 31, 2020

Net income

Common stock issued
and initial investment
in Quin Ventures

Common stock
repurchased

Restricted stock award
grants net of forfeitures

Restricted stock awards
canceled

Other comprehensive
loss, net of tax

Share-based
compensation

ESOP shares
committed to be
released

Cash dividends
declared and paid
($0.25 per share)

BALANCE,
December 31, 2021

Net income
Common stock issued
Common stock
repurchased

Restricted stock award
grants net of forfeitures

Restricted stock awards
canceled

Other comprehensive
loss, net of tax
Reclassification
resulting from change in
accounting method, net
of tax (See Note 6)
Quin Ventures asset sale
in-substance distribution
Share-based
compensation

ESOP shares
committed to be
released

Cash dividends
declared and paid
($0.28 per share)

BALANCE,
December 31, 2022

10,247,185

102

97,412

92,657

(9,230 ) $

5,442

— $

186,383

15,418

(439 )

14,979

29,719

498

(44 )

(42 )

413

(349,497 )

(4 )

(3,491 )

(2,484 )

64,839

(19,548 )

—

(1 )

(352 )

—

(5,154 )

1,794

271

658

(2,533 )

(5,979 )

—

(352 )

(5,154 )

1,794

929

(2,533 )

9,972,698

100

96,131

$ 103,014

(8,572 ) $

288

(481 ) $

190,480

115,777

1,868

15,645
—

(386,062 )

(4 )

(3,993 )

(1,873 )

22,470

(21,302 )

—

(392 )

—

(40,831 )

—

1,601

293

425

—

659

(2,787 )

(2,149 )

(661 )

13,496
1,869

(5,870 )

—

(392 )

(40,831 )

425

(661 )

1,601

952

(2,787 )

9,703,581

95,508

$ 114,424

(7,913 ) $

(40,543 ) $

(3,291 ) $

158,282

See accompanying notes to the consolidated financial statements.

- 95 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income before noncontrolling interest
Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization
Amortization of core deposit intangible
Amortization and accretion of premiums and discounts on investments, net
Amortization of deferred loan fees and purchased premiums, net
Amortization of debt issuance costs
Change in fair value of sold loan servicing rights
Additions to servicing rights on sold loans
Amortization of servicing rights on sold loans
Net (decrease) increase in the valuation allowance on servicing rights on

sold loans

Provision for loan losses
Deferred federal income taxes, net
Allocation of ESOP shares
Share-based compensation expense
Gain on sale of loans, net
Gain on sale of securities available for sale, net
Increase in cash surrender value of life insurance, net
Income from death benefit on bank-owned life insurance, net
Origination of loans held for sale
Proceeds from loans held for sale
Change in assets and liabilities:

(Increase) decrease in accrued interest receivable
Increase in prepaid expenses and other assets
Increase in accrued interest payable
Increase in accrued expenses and other liabilities

For the Year Ended December 31,

2022

2021

13,496

14,979

1,960
94
1,666
981
78
(13)
(54)
—

—
1,535
(1,529)
673
1,601
(824)
(118)
(916)
(1,489)
(25,926)
26,913

(1,454)
(3,938)
62
3,104

1,432
5
1,753
1,260
57
—
(1,233)
108

(37)
1,350
63
675
2,294
(5,278)
(2,410)
(965)
—
(137,715)
145,986

1,677
(15,404)
340
6,218

Net cash from operating activities

15,902

15,155

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of securities available for sale
Proceeds from maturities, calls, and principal repayments of securities

available for sale

Proceeds from sales of securities available for sale
(Purchase) redemption of FHLB stock
Net increase in loans receivable
Purchase of premises and equipment, net
Capital contributions to equity investments
Capital contributions to low-income housing tax credit partnerships
Capital contributions to historic tax credit partnerships
Net cash acquired from branch acquisition

(78,409)

(152,930)

30,497
12,685
(6,485)
(183,691)
(2,914)
(7,364)
(137)
(1,829)
—

59,663
109,829
781
(210,901)
(6,019)
(584)
(248)
—
63,545

Net cash from investing activities

(237,647)

(136,864)

See accompanying notes to the consolidated financial statements.

- 96 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Year Ended December 31,

2022

2021

CASH FLOWS FROM FINANCING ACTIVITIES

Net (decrease) increase in deposits
Proceeds from long-term FHLB advances
Repayment of long-term FHLB advances
Net increase (decrease) in short-term advances
Proceeds from issuance of subordinated debt, net
Net increase (decrease) in line of credit
Net increase (decrease) in advances from borrowers for taxes and

insurance

Restricted stock awards canceled
Repurchase of common stock
Payment of dividends

Net cash from financing activities

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, beginning of period

CASH AND CASH EQUIVALENTS, end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:

Interest on deposits and borrowings
Income taxes
Prior unrecognized service cost of defined benefit plan transferred to

single-employer plan

NONCASH INVESTING ACTIVITIES

Change in unrealized loss on securities available for sale
Cumulative adjustment to servicing right asset due to election of fair

value option

Investment in low-income housing tax credit partnership and related

funding commitment

Lease liabilities arising from obtaining right-of-use assets
Transfer of bank-owned life insurance proceeds to prepaid expenses and

other assets due to death benefit accrued but not paid at year end
Equity investment in Quil Ventures received through Quin Ventures

asset sale

Investment in partnership acquired through issuance of shares

BUSINESS COMBINATION (See Note 17)

Fair value of assets acquired
Fair value of liabilities assumed

(16,325) $
—
—
154,000
—
12,000

268
(392)
(5,439)
(2,787)

182,196
40,000
(10,000)
(59,977)
39,223
—

(8)
(352)
(5,979)
(2,533)

141,325

182,570

(80,420)

126,016

60,861

65,155

45,596

126,016

10,453
4,446

—

4,550
4,270

2,718

(51,322) $

(4,181)

538

—
—

2,057

225
1,869

—

4,949
4,402

—

—
—

— $
—

1,340
65,947

See accompanying notes to the consolidated financial statements.

- 97 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Nature of operations - 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 were contributed to the Bank upon Conversion.

At the time of Conversion, the Bank established a liquidation account in an amount equal to its total net worth,
approximately $79.7 million, as of June 30, 2014, the latest statement of financial condition appearing in First
Northwest's prospectus. The liquidation account is maintained for the benefit of eligible depositors who continue to
maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent increases will not restore an eligible
holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance is not available for payment of
dividends, and the Bank may not pay dividends if those dividends would reduce equity capital below the required
liquidation account amount.

Pursuant to the Conversion, the Bank’s Board of Directors adopted an ESOP which purchased in the open market
8% of the common stock originally issued for a total of 1,048,029 shares. As of December 15, 2015, 1,048,029
shares, or 100.0% of the total, had been purchased. As of December 31, 2022, First Northwest had
allocated 386,285 shares from the total shares purchased to participants.

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 2022 to Quil Ventures, Inc., 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 Ventures valued at $225,000 and recorded a $1.5 million
commitment receivable. First Northwest continues to maintain a controlling interest in Quin Ventures.

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 non-banking activities that are financial in nature or incidental to financial
activities.

First Northwest, the Bank, and Quin Ventures are collectively referred to as the "Company."

First Northwest's business activities generally are limited to passive investment activities and oversight of its
investments in First Fed and Quin Ventures. Accordingly, the information set forth in this report, including the
consolidated financial statements and related data, relates primarily to the Bank.

- 98 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Bank is a community-oriented financial institution providing commercial and consumer banking services to
individuals and businesses primarily 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.

Use of estimates - The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make assumptions. These assumptions result in
estimates that affect the reported amounts of assets and liabilities, revenues and expenses, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during
the reporting period. 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 loan losses, fair value
of financial instruments, deferred tax assets and liabilities, and the valuation of impaired loans.

Principles of consolidation - The accompanying consolidated financial statements include the accounts of First
Northwest Bancorp and its wholly owned subsidiary, First Fed, and its controlling interest in Quin Ventures, Inc. All
material intercompany accounts and transactions have been eliminated in consolidation. While First Northwest and
POM share equal ownership in Quin Ventures, it has been determined that First Northwest has a controlling interest
for financial reporting purposes under Accounting Standards Codification 810. As a result, 100% of Quin Ventures
balances, excluding intercompany activity, are reported in the consolidated financial statements presented. The Quin
Ventures net loss allocable to POM is shown on the financial statements thorough a noncontrolling interest
adjustment where applicable.

Subsequent events - The Company has evaluated subsequent events for potential recognition and disclosure and
determined there are no such events or transactions requiring recognition or disclosure.

Cash and cash equivalents - Cash and cash equivalents consist of currency on hand, due from banks, and interest-
bearing deposits with financial institutions with an original maturity of three months or less. The amounts on deposit
fluctuate and, at times, exceed the insured limit by the FDIC, which potentially subjects First Fed to credit risk. First
Fed has not experienced any losses due to balances exceeding FDIC insurance limits.

Restricted assets - Federal Reserve Board regulations require maintenance of certain minimum reserve balances on
deposit with the Federal Reserve Bank of San Francisco. The deposit requirement was zero at both December 31,
2022 and 2021. First Fed was in compliance with its reserve requirements at December 31, 2022 and 2021.

Investment securities - Investments in debt securities are classified into one of three categories: (1) held-to-
maturity, (2) available-for-sale, or (3) trading. First Fed had no trading securities at December 31, 2022 and 2021.
Investment securities are categorized as held-to-maturity when First Fed has the positive intent and ability to hold
those securities to maturity. First Fed had no held-to-maturity securities at December 31, 2022 and 2021.

Securities that are held-to-maturity are stated at cost and adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income.

Investment securities categorized as available for sale are generally held for investment purposes (to maturity),
although unanticipated future events may result in the sale of some securities. Available-for-sale securities are
recorded at fair value, with the unrealized holding gain or loss reported in other comprehensive income (OCI), net of
tax, as a separate component of shareholders' equity. Realized gains or losses are determined using the amortized
cost basis of securities sold using the specific identification method and are included in earnings. Dividend and
interest income on investments are recognized when earned. Premiums and discounts on securities without call
features are recognized in interest income using the level yield method over the period to maturity. Premiums on
securities with call features are amortized to the earliest call date.

- 99 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company reviews investment securities for other-than-temporary impairment (OTTI) on a quarterly basis. For
debt securities, the Company considers whether management intends to sell a security or if it is likely that the
Company will be required to sell the security before recovery of the amortized cost basis of the investment, which
may be maturity. For debt securities, if management intends to sell the security or it is likely that the Company will
be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized as
OTTI and charged against earnings. If management does not intend to sell the security and it is not likely that the
Company will be required to sell the security, but management does not expect to recover the entire amortized cost
basis of the security, only the portion of the impairment loss representing credit losses would be recognized in
earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present
value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current
effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining
impairment related to all other factors, i.e., the difference between the present value of the cash flows expected to be
collected and fair value, is recognized as a charge to OCI. Impairment losses related to all other factors are presented
as separate categories within OCI. If there is an indication of additional credit losses, the security is re-evaluated
according to the procedures described above.

Federal Home Loan Bank stock - First Fed’s investment in Federal Home Loan Bank of Des Moines (FHLB)
stock is carried at cost, which approximates fair value. As a member of the FHLB system, First Fed is required to
maintain a minimum investment in FHLB stock based on specific percentages of its outstanding mortgages, total
assets, or FHLB advances. At December 31, 2022 and 2021, First Fed’s minimum investment requirement was
approximately $11.6 million and $5.2 million, respectively. First Fed was in compliance with the FHLB minimum
investment requirement at December 31, 2022 and 2021. First Fed may request redemption at par value of any stock
in excess of the amount First Fed is required to hold. Stock redemptions are granted at the discretion of the FHLB.

Management evaluates FHLB stock for impairment based on its assessment of the ultimate recoverability of cost
rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate
recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB
compared with the capital stock amount for the FHLB and the length of time this situation has persisted, (2)
commitments by the FHLB to make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on
institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB. Based on
its evaluation, First Fed did not recognize an OTTI loss on its FHLB stock at December 31, 2022 and 2021.

Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value. Fair value is determined based upon market prices from third-party purchasers
and brokers. Net unrealized losses, if any, are recognized through a valuation allowance by charges to earnings.
Gains or losses on the sale of loans are recognized at the time of sale and determined by the difference between net
sale proceeds and the net book value of the loan less the estimated fair value of any retained mortgage servicing
rights.

Loans receivable - Loans are stated at the amount of unpaid principal, net of charge-offs, unearned income,
allowance for loan loss (ALLL) and any deferred fees or costs. Interest on loans is calculated using the simple
interest method based on the month end balance of the principal amount outstanding and is credited to income as
earned. The estimated life is adjusted for prepayments.

- 100 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Each loan segment and class inherently contains differing credit risk profiles depending on the unique aspects of that
segment or class of loans. For example, borrowers tend to consider their primary residence and access to
transportation for employment-related purposes as basic requirements; accordingly, many consumers prioritize
making payments on real estate first-mortgage loans and vehicle loans. Conversely, second-mortgage real estate
loans or unsecured loans may not be supported by sufficient collateral; thus, in the event of financial hardship,
borrowers may tend to place less importance on maintaining these loans as current and the Bank may not have
adequate collateral to provide a secondary source of repayment in the event of default. Notwithstanding the various
risk profiles unique to each class of loan, management believes that the credit risk for all loans is similarly
dependent on essentially the same factors, including the financial strength of the borrower, the cash flow available to
service maturing debt obligations, the condition and value of underlying collateral, the financial strength of any
guarantors, and other factors.

Loans are classified as impaired when, based on current information and events, it is probable that First Fed will be
unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the
original loan agreement. The carrying value of impaired loans is based on the present value of expected future cash
flows discounted at each loan’s effective interest rate or, for collateral dependent loans, at fair value of the collateral,
less selling costs. If the measurement of each impaired loan’s value is less than the recorded investment in the loan,
First Fed recognizes this impairment and adjusts the carrying value of the loan to fair value through the allowance
for loan losses. This can be accomplished by charging off the impaired portion of the loan or establishing a specific
component to be provided for in the allowance for loan losses.

The accrual of interest on loans is discontinued at the time the loan is 90 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 but not 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 non-
accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower
demonstrates repayment ability over a period of not less than six months.

Loan fees and purchased premiums - Loan origination fees and certain direct origination costs are deferred and
amortized as an adjustment to the yield of the loan over the contractual life using the effective interest method. In
the event a loan is sold, the remaining deferred loan origination fees and/or costs are recognized as a component of
gains or losses on the sale of loans. We may pay a purchase premium or receive a purchase discount on fully
originated loans that we purchase. Premiums and discounts are capitalized at the time of purchase and amortized as
an adjustment to the yield over the contractual life using the effective interest method.

Allowance for loan losses - First Fed maintains a general allowance for loan losses based on evaluating known and
inherent risks in the loan portfolio, including management’s continuing analysis of the factors underlying the quality
of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss
experience, and current and anticipated economic conditions. When determining the appropriate historical loss and
qualitative factors, management took into consideration the impact of the COVID-19 pandemic on such factors as
the national and state unemployment rates and related trends, the amount of and timing of financial assistance
provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-
19 pandemic, and the Company's COVID-19 loan modification program. Qualitative factors such as economic,
market, industry, and political changes are also considered for calculation of the allowance. The appropriateness of
the allowance for loan losses is estimated based upon these factors and trends identified by management at the time
the consolidated financial statements are prepared. The reserve is an estimate based upon factors and trends
identified by management at the time the financial statements are prepared.

- 101 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The ultimate recovery of loans is susceptible to future market factors beyond First Fed’s control, which may result in
losses or recoveries differing significantly from those provided in the consolidated financial statements. In addition,
various regulatory agencies, as an integral part of their examination processes, periodically review First Fed’s
allowance for loan losses. Such agencies may require First Fed to recognize additional provisions for loan losses
based on their judgment using information available to them at the time of their examination.

Allowances for losses on specific problem loans are charged to income when it is determined that the value of these
loans and properties, in the judgment of management, is impaired. First Fed accounts for impaired loans in
accordance with Accounting Standards Codification (ASC) 310-10-35, Receivables—Overall—Subsequent
Measurement. A loan is considered impaired when, based on current information and events, it is probable that First
Fed will be unable to collect all amounts due according to the contractual terms of the loan agreement.

When a loan has been identified as being impaired, the amount of the impairment is measured by using discounted
cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation
of the underlying collateral. In such cases, impairment is measured at current fair value generally based on a current
appraisal of the collateral, reduced by estimated selling costs. When the measurement of the impaired loan is less
than the recorded investment in the loan (including collected interest that has been applied to principal, net deferred
loan fees or costs, and unamortized premiums or discounts), loan impairment is recognized by establishing or
adjusting an allocation of the allowance for loan losses. Uncollected accrued interest is reversed against interest
income.

If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal
balance. The impairment amount for small balance homogeneous loans is calculated using the adjusted historical
loss rate for the class and risk category related to each loan, unless the loan is subject to a troubled debt restructuring
("TDR").

A TDR is a loan for which First Fed, for reasons related to the borrower’s financial difficulties, grants a concession
to the borrower that First Fed would not otherwise consider. The loan terms that have been modified or restructured
due to the borrower’s financial difficulty include, but are not limited to, a reduction in the stated interest rate; an
extension of the maturity; an interest rate below market; a reduction in the face amount of the debt; a reduction in
the accrued interest; or extension, deferral, renewal, or rewrite of the original loan terms.

The restructured loans may be classified "special mention" or "substandard" depending on the severity of the
modification. Loans that were paid current at the time of modification may be upgraded in their classification after a
sustained period of repayment performance, usually six months or longer, and there is reasonable assurance that
repayment will continue. Loans that are past due at the time of modification are classified "substandard" and placed
on nonaccrual status.

TDR loans may be upgraded in their classification and placed on accrual status once there is a sustained period of
repayment performance, usually six months or longer, and there is a reasonable assurance that repayment will
continue. First Fed allows reclassification of a troubled debt restructuring back into the general loan pool (as a non-
troubled debt restructuring) if the borrower is able to refinance the loan at then-current market rates and meet all of
the underwriting criteria of First Fed required of other borrowers. The refinance must be based on the borrower’s
ability to repay the debt and no special concessions of rate and/or term are granted to the borrower.

- 102 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In March 2020, the Company announced loan modification programs to support and provide relief for its borrowers
during the novel coronavirus of 2019 ("COVID-19") pandemic. The Company followed the loan modification
criteria within the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), which was signed
into law on March 27, 2020, and interagency guidance from the federal banking agencies when determining if a
borrower's modification was subject to a TDR classification. Modifications not meeting the criteria under the
CARES Act or interagency guidance to be excluded from TDR classification were evaluated under the existing TDR
framework. Loans subject to forbearance under the COVID-19 loan modification program were not reported as past
due or placed on non-accrual status during the forbearance time period, and interest income continued to be
recognized over the contractual life of the loans.

Reserve for unfunded commitments - Management maintains a reserve for unfunded commitments to absorb
probable losses associated with off-balance sheet commitments to lend funds such as unused lines of credit and the
undisbursed portion of construction loans. Management determines the adequacy of the reserve based on reviews of
individual exposures, current economic conditions, and other relevant factors. The reserve is based on estimates and
ultimate losses may vary from the current estimates. The reserve is evaluated on a regular basis and necessary
adjustments are reported in earnings during the period in which they become known. The reserve for unfunded
commitments is included in "Accrued expenses and other liabilities" on the consolidated balance sheets.

Real estate owned and repossessed assets - Real estate owned and repossessed assets include real estate and
personal property acquired through foreclosure or repossession and may include in-substance foreclosed properties.
These properties are initially recorded at the fair market value of the property less selling costs. Properties are
subsequently evaluated for impairment. In-substance foreclosed properties are those properties for which the Bank
has taken physical possession, regardless of whether formal foreclosure proceedings have taken place.

Loan servicing rights - Originated servicing rights are recorded when loans are originated and subsequently sold
with the servicing rights retained. Servicing assets are initially capitalized at fair value with the income statement
effect recorded in gains on sales of loans. Management uses a valuation model that calculates the present value of
future cash flows to determine the fair value of servicing rights. Assumptions used in the valuation model include
market discount rates and anticipated prepayment speeds. In addition, estimates of the cost of servicing per loan, an
inflation rate, ancillary income per loan, and default rates are used. For the year ended December 31, 2021, the fair
value of the servicing asset was amortized into noninterest income in proportion to, and over the period of, estimated
future net servicing income. Effective January 1, 2022, the Bank elected to measure servicing rights using the fair
value method of accounting.

Management assesses the fair value of loan servicing rights based on recalculations of the present value of
remaining future cash flows using updated market discount rates and prepayment speeds. Subsequent loan
prepayments and changes in prepayment assumptions in excess of those forecasted can adversely impact the
carrying value of the servicing rights. Impairment is assessed on a stratified basis with any impairment recognized
through a valuation allowance for each impaired stratum. The servicing rights are stratified based on the
predominant risk characteristics of the underlying loans: fixed-rate loans and adjustable-rate loans. The effect of
changes in market interest rates on estimated rates of loan prepayments is the predominant risk characteristic for
loan servicing rights. The valuation model incorporates assumptions that market participants would use in estimating
future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds, and default rates and losses.

- 103 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sold loan servicing income represents fees earned for servicing loans. Fees for servicing sold loans are generally
based upon a percentage of the principal balance of the loans serviced, as well as related ancillary income such as
late charges. Servicing income is recognized as earned unless collection is doubtful. The caption in the consolidated
statement of income "Sold loan servicing fees" includes sold loan servicing income and changes in fair value for the
year ending December 31, 2022. For years prior to 2022, it includes sold loan servicing income, amortization of loan
servicing rights, the effects of sold loan servicing run-off, and impairment, if applicable.

Premises and equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation
is recognized and computed on the straight-line method over the estimated useful lives as follows:

Buildings
Furniture, fixtures, and equipment
Software
Automobiles

Years

37.5 - 50
3 - 10
3
5

Bank-owned life insurance - The carrying amount of life insurance approximates fair value. Fair value of life
insurance is estimated using the cash surrender value, less applicable surrender charges. The change in cash
surrender value is included in noninterest income.

Equity and partnership investments - Equity investments include amounts invested in non-publicly traded stock
and simple agreements for future equity ("SAFE"). Partnership investments include limited partnerships in
investment funds and other business ventures. Investments in non-publicly traded stock and SAFE are measured at
cost, less impairment, plus or minus changes resulting from observable price changes in ordinary transactions for the
identical or similar investment of the same issuer. The recorded balance of these equity investments was $1.7
million and $500,000 at December 31, 2022 and 2021, respectively. Partnership investments that do not result in
consolidation of the investee are accounted for under the equity method of accounting; the recorded balance of these
partnership investments was $12.6 million and $3.1 million at December 31, 2022 and 2021,
respectively. Throughout the year we assess whether impairment indicators exist to trigger the performance of an
impairment analysis. Changes in the fair value of partnership investments are recorded in other noninterest income.

Goodwill - Goodwill is recorded from a business combination as the difference in the purchase price and fair value
of assets acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not amortized. The
Company reviews goodwill for impairment annually, or more frequently if an indication of impairment exists
between annual tests. Any impairment will be recorded as noninterest expense and corresponding reduction in
intangible asset on the consolidated financial statements.

Core deposit intangible - A core deposit intangible ("CDI") asset is recognized from the assumption of core deposit
liabilities in connection with the acquisition of deposits from another financial institution. The asset is valued by a
third party and is amortized into noninterest expense over its estimated useful life. The CDI is evaluated for
impairment annually with any additional decline recorded as noninterest expense on the Consolidated Income
Statement.

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.

- 104 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases - Operating lease right-of-use ("ROU") assets represent the Company's right to use the underlying asset
during the lease term and operating lease liabilities represent the Company's obligation to make lease payments
arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on
the present value of the future lease payments using the Company's incremental borrowing rate. The discount rate
used in determining the present value is the Company's incremental borrowing rate using the FHLB fixed advance
rate based on the remaining lease term as of January 1, 2019, or the commencement date for subsequent leases. The
Company does not capitalize short-term leases, which are leases with terms of twelve months or less. ROU assets
and related operating lease liabilities are remeasured when lease terms are amended, extended, or when management
intends to exercise available extension options. We have lease agreements with lease and non-lease components,
which are generally accounted for separately for real estate leases.

Low-Income Housing Tax Credit Investment - The Company has an equity investment in a Low-Income Housing
Tax Credit Investment ("LIHTC") partnership which is an indirect federal subsidy that finances low-income housing
projects. As a limited liability investor in this partnership, the Company receives a tax benefit in the form of a tax
deduction from partnership operating losses and a federal income tax credit. The federal income tax credit is earned
over a 10-year period as a result of the investment properties meeting certain criteria and is subject to recapture for
noncompliance with such criteria over a 15-year period.

The Company accounts for the LIHTC under the proportional amortization method and amortizes the initial cost of
the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance on the Consolidated Statements of Income as a component of income tax expense. The Company
reports the carrying value of the equity investment in the unconsolidated LIHTC in "Prepaid expenses and other
assets" on the Company’s Consolidated Balance Sheets.

The maximum exposure to loss in the LIHTC is the amount of equity invested and credit extended by the Company.
The Company has evaluated the variable interests held by the Company in the LIHTC investment and determined
that the Company does not have controlling financial interests in such investment and is not the primary beneficiary.

Transfers of financial assets - Transfers of an entire financial asset, a group of financial assets, or a participating
interest in an entire financial asset are accounted for as sales when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from First Fed,
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and (3) First Fed does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity. The mortgage loans that are sold with recourse
provisions are accounted for as sales until such time as the loan defaults.

Periodically, First Fed sells mortgage loans with "life of the loan" recourse provisions, requiring First Fed to
repurchase the loan at any time if it defaults. The remaining balance of such loans at December 31, 2022 and 2021,
was approximately $1.9 million and $2.0 million, respectively. Of these loans, no loans were repurchased during the
years ended December 31, 2022 or 2021. There is an associated allowance of $9,000 and $11,000 at December 31,
2022 and 2021, respectively, included in "accrued expenses and other liabilities" on the consolidated balance sheets
related to these loans.

Off-balance-sheet credit-related financial instruments - In the ordinary course of business, First Fed has entered
into commitments to extend credit, including commitments under lines of credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded when they are funded.

Advertising costs - First Fed expenses advertising costs as they are incurred.

- 105 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Comprehensive income (loss) - Accounting principles generally require that recognized revenue, expenses, and
gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity
section of the consolidated balance sheets, such items, along with net income (loss), are components of
comprehensive income (loss).

Dividend restriction - Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the Bank to the Company or by the Company to shareholders.

Components of noninterest income evaluated under Topic 606 - The Company recognizes revenue as it is earned
and noted no impact to its revenue recognition policies as a result of the adoption of ASU 2014-09. The following is
a discussion of key revenues within the scope of the new revenue guidance.

Deposit fees - The Company earns fees from its deposit customers for account maintenance, transaction-based
activity and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account
fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are
recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are
charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees,
overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are
recognized at the time each specific service is provided to the customer. Deposit fees are included in Service Fees
on the Consolidated Statements of Income.

Debit card interchange income - Debit and Automated Teller Machine ("ATM") interchange income represent
fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit
cardholder transactions through card networks. In addition, the Company earns interchange fees for use of its
ATMs by customers of other banking institutions. Interchange fees are based on purchase volumes and other
factors and are recognized as transactions occur. The performance obligation is satisfied and the fees are earned
when the cost of the transaction is charged to the cardholder's debit card. Certain expenses directly associated with
the credit and debit card are netted against interchange income. Debit card interchange income is included in
Service Fees on the Consolidated Statements of Income.

Third-party credit card interchange income - Third-party credit card interchange income represents fees earned
when a credit card issued by the Bank through a third-party vendor is used. Similar to the debit card interchange,
the Bank earns an interchange fee for each transaction made with a Bank-branded credit card. The performance
obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholder's credit
card. Certain expenses directly related to the third-party credit card interchange contract are netted against
interchange income. Third-party credit card interchange income is included in Service Fees on the Consolidated
Statements of Income.

Investment services revenue - Commissions received on the sale of investment related products is determined by a
percentage of underlying instruments sold and is recognized when the sale is finalized. Investment services
revenue is included in Other Income on the Consolidated Statements of Income.

Gains/losses on the sale of other real estate owned are included in non-interest expense and are generally
recognized when the performance obligation is complete. This is typically at delivery of control over the property
to the buyer at time of each real estate closing.

- 106 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value measurements - Fair values of financial instruments are estimated using relevant market information
and other assumptions (Note 14). 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.

Segment information - 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.

Employee Stock Ownership Plan - The cost of shares issued to the ESOP but not yet allocated to participants is
shown as a reduction of shareholders' equity. Compensation expense is based on the market price of shares as they
are committed to be released to participants' accounts. Dividends on allocated and unallocated ESOP shares reduce
debt and accrued interest.

Earnings per Common Share - Earnings per share ("EPS") is computed using the two-class method. The two-class
method is an earnings allocation formula that determines earnings per share for each class of common stock and
participating security according to dividends declared or accumulated and participation rights in undistributed
earnings. Under the two-class method, basic EPS is computed by dividing earnings allocated to common
shareholders by the weighted average number of common shares outstanding for the period. Earnings allocated to
common shareholders represents net income reduced by earnings allocated to participating securities. ESOP shares
that are committed to be released are outstanding for EPS calculation purposes, while unallocated ESOP shares are
not considered outstanding for basic or diluted EPS calculations. Diluted EPS is computed by dividing net income
by the weighted average common shares outstanding plus the number of additional common shares that would have
been outstanding if unvested restricted stock awards were included unless those additional shares would have been
anti-dilutive. For the diluted EPS computation, the treasury stock method is applied and compared to the two-class
method and whichever method results in a more dilutive impact is utilized to calculate diluted EPS.

Recently adopted accounting pronouncements

In November 2019, the FASB issued Accounting Standards Update ("ASU") 2019-10, Financial Instruments—
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. ASU
2019-10 defers the effective date of the current expected credit loss model (CECL) guidance issued in ASUs 2016-
13, 2019-04, and 2019-05. The effective date for smaller reporting companies was changed from the interim and
annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15,
2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company
adopted this ASU and implemented CECL effective January 1, 2023.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. ASU No. 2021-01
clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting
apply to derivatives that are affected by the discounting transition. ASU No. 2021-01 also amends the expedients
and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the
existing guidance to derivative instruments affected by the discounting transition. This ASU was effective upon
issuance and generally can be applied through December 31, 2022. The adoption of ASU 2021-01 did not have a
material impact on the Company’s financial statements.

- 107 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently issued accounting pronouncements not yet adopted

Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Loss, with subsequent
amendments issued in ASU 2018-19, ASU 2019-04 and ASU 2019-05. This ASU updates the guidance on
recognition and measurement of credit losses for financial assets. The new requirements, known as the current
expected credit loss model (CECL) will require entities to adopt an impairment model based on expected losses
rather than incurred losses. ASU No. 2016-13 is now effective for fiscal years beginning after December 15, 2022,
including interim periods within those fiscal years. Upon adoption, the Company will change processes and
procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider
expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss
model. In addition, the current accounting policy and procedures for other-than-temporary impairment on
investment securities available for sale will be replaced with an allowance approach.

Additional updates were issued in ASU No. 2019-04, Codification Improvements to Topic 326, Financial
Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825), Financial Instruments. This ASU
clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition
and measurement of financial instruments. The amendments provide entities with various measurement alternatives
and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also
able to elect a practical expedient to separately disclose the total amount of accrued interest included in the
amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the
estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables
that were previously written off and expected to be written off. The amendments also allow entities to use
projections of future interest rate environments when using a discounted cash flow method to measure expected
credit losses on variable-rate financial instruments.

In addition, new updates were issued through ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326):
Targeted Transition Relief. This amendment allows entities to elect the fair value option on certain financial
instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-
instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20 except for existing
held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair
value and carrying amount is recognized as a cumulative-effect adjustment.

The Company evaluated the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, to
determine the potential impact on the Company’s consolidated financial statements. We estimate the implementation
of these ASUs will increase the combined balances for the allowance for credit losses and unfunded commitment
liability 15%-30% with a related decrease to equity on the Company's consolidated balance sheet. The Company's
internal project management team reviewed models, worked with our third-party vendor, and implemented changes
to processes and procedures to ensure the Company was fully compliant with the amendments at the adoption
date. Early adoption was permitted for interim and annual periods beginning after December 15, 2018. The
Company adopted this guidance effective January 1, 2023.

- 108 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other ASUs not yet adopted
In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional guidance to ease the
potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for
applying generally accepted accounting principles to contract modifications and hedging relationships, subject to
meeting certain criteria, that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate
expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate
transition period. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. On
December 31, 2022, FASB issued ASU 2022-06 which deferred the sunset date for Topic 848 to December 31,
2024. The Company is implementing a transition plan to identify and modify its loans and other financial
instruments that are either directly or indirectly influenced by LIBOR. The Company continues to evaluate ASU No.
2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments,
with no material expected impact on the Company's financial statements.

In March 2022, FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—
Portfolio Layer Method. This update will allow non-prepayable financial assets to be included in a closed portfolio
hedge using the portfolio method, rather than only prepayable assets. It also allows entities to hedge multiple layers
rather than just a single layer of closed portfolio of financial assets or one or more beneficial interests secured by a
portfolio of financial instruments. This ASU, which is effective for fiscal years beginning after December 15, 2022,
is not expected to have a material impact on the Company's financial statements.

Reclassifications - Certain amounts in prior periods have been reclassified to conform to the current audited
financial statement presentation with no effect on net income or shareholders' equity.

- 109 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-
for-sale at December 31, 2022, are summarized as follows:

Available for Sale
Municipal bonds
U.S. Treasury notes
International agency issued bonds (Agency bonds)
Corporate issued debt securities (Corporate debt)
Mortgage-Backed Securities:

U.S. government agency issued mortgage-

backed securities (MBS agency)

Non-agency issued mortgage-backed securities

(MBS non-agency)

Amortized
Cost

December 31, 2022
Gross
Gross
Unrealized
Unrealized
Gains
Losses

(In thousands)

Estimated
Fair Value

119,990
2,469
1,955
60,700

— $
—
—
—

(21,940) $
(105)
(253)
(5,201)

98,050
2,364
1,702
55,499

88,930

101,139

—

(13,283)

75,648

(7,833)

93,306

Total securities available for sale

375,183

(48,615) $

326,569

The amortized cost, gross unrealized gains and losses, and estimated fair value of securities classified as available-
for-sale at December 31, 2021, are summarized as follows:

Available for Sale
Municipal bonds
Agency bonds
ABS corporate
Corporate debt
SBA
Mortgage-Backed Securities

MBS agency
MBS non-agency

December 31, 2021
Gross
Gross
Unrealized
Unrealized
Gains
Losses

(In thousands)

Estimated
Fair Value

Cost

110,497
1,947
14,556
58,906
14,404

80,877
60,317

3,207
—
—
1,450
276

248
71

(340) $
(27)
(67)
(567)
—

(1,163)
(380)

113,364
1,920
14,489
59,789
14,680

79,962
60,008

Total securities available for sale

341,504

5,252

(2,544) $

344,212

- 110 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table 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, 2022:

Less Than
Twelve Months

Twelve Months
or Longer

Total

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

(In thousands)

(15,749) $
(105)
—
(2,570)

79,129 $
2,364
—
30,555

(6,191) $
—
(253)
(2,631)

18,621 $
—
1,702
24,944

(21,940) $
(105)
(253)
(5,201)

97,750
2,364
1,702
55,499

Available for Sale
Municipal bonds
U.S. Treasury notes
Agency bonds
Corporate debt
Mortgage-Backed Securities

MBS agency
MBS non-agency

Total

(27,459) $ 204,141 $

(21,156) $ 119,642 $

(5,079)
(3,956)

40,099
51,994

(8,204)
(3,877)

33,064
41,311

(13,283)
(7,833)

73,163
93,305
(48,615) $ 323,783

Less Than
Twelve Months

Twelve Months
or Longer

Total

Gross
Unrealized
Losses

Fair Value

Gross
Unrealized
Losses

Fair Value

(In thousands)

Available for Sale
Municipal bonds
Agency bonds
ABS Corporate
Corporate debt
SBA
Mortgage-Backed Securities

MBS agency
MBS non-agency

(306) $
(27)
(67)
(333)
—

23,125 $
1,920
10,976
18,890
—

(713)
(374)

39,029
32,849

Total

(1,820) $ 126,789 $

(34) $
—
—
(234)
—

(450)
(6)
(724) $

1,475 $
—
—
9,752
69

(340) $
(27)
(67)
(567)
—

24,600
1,920
10,976
28,642
69

12,802
5,505
29,603 $

(1,163)
(380)

51,831
38,354
(2,544) $ 156,392

The Company may hold certain investment securities in an unrealized loss position that are not considered OTTI. At
December 31, 2022, there were 182 investment securities with $48.6 million of unrealized losses and a fair value of
approximately $323.8 million. At December 31, 2021, there were 76 investment securities with $2.5 million of
unrealized losses and a fair value of approximately $156.4 million.

- 111 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management believes that the unrealized losses on investment securities relate principally to the general change in
interest rates and poor market liquidity, and not to changes in credit quality, that has occurred since the initial
purchase. These unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the
future. Certain investments in a loss position are guaranteed by government entities or government sponsored
entities. The Company does not intend to sell the securities in an unrealized loss position and believes it is not likely
it will be required to sell these investments prior to a market price recovery or maturity.

There were no OTTI losses during the years ended December 31, 2022 and 2021.

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 may differ 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.

Mortgage-backed securities:

Due within one year
Due after one through five years
Due after five through ten years
Due after ten years

December 31, 2022

December 31, 2021

Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value

(In thousands)

13,762
28,890
13,436
133,981

13,490
27,808
12,165
115,491

7,827
24,347
8,466
100,554

7,832
24,371
8,391
99,376

Total mortgage-backed securities

190,069

168,954

141,194

139,970

All other investment securities:

Due within one year
Due after one through five years
Due after five through ten years
Due after ten years

—
20,700
64,211
100,203

—
18,957
57,523
81,135

—
6,391
79,679
114,240

—
6,289
80,807
117,146

Total all other investment securities

185,114

157,615

200,310

204,242

Total investment securities

375,183

326,569

341,504

344,212

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

Proceeds
Gross gains
Gross losses

For the Year Ended December 31,

2022

2021

(In thousands)

12,685
128
(10 )

109,829
2,827
(417 )

- 112 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Loans Receivable

Loans receivable consist of the following at the dates indicated:

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:

Net deferred loan fees
Premium on purchased loans, net
Allowance for loan losses

December 31, 2022

December 31, 2021

(In thousands)

343,825 $
253,551
390,246
194,646
1,182,268

52,322
222,794
275,116

76,996

294,965
172,409
363,299
224,709
1,055,382

39,172
182,769
221,941

79,838

1,534,380

1,357,161

2,786
(15,957)
16,116

4,772
(12,995)
15,124

Total loans receivable, net

1,531,435 $

1,350,260

- 113 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans, by the earlier of next repricing date or maturity, at the dates indicated:

Adjustable-rate loans

Due within one year
After one but within five years
After five but within ten years
After ten years

Fixed-rate loans

Due within one year
After one but within five years
After five but within ten years
After ten years

Total loans

December 31, 2022

December 31, 2021

(In thousands)

329,516 $
277,353
51,251
866
658,986

3,474 $

190,153
219,437
462,330
875,394
1,534,380 $

302,187
258,094
54,351
19,098
633,730

31,970
148,233
194,245
348,983
723,431
1,357,161

The adjustable-rate loans have interest rate adjustment limitations and are generally indexed to multiple indices.
Future market factors may affect the correlation of adjustable loan interest rates with the rates First Fed pays on the
short-term deposits that have been primarily used to fund such loans.

The following tables summarize changes in the ALLL and the loan portfolio by segment and impairment method at
or for the periods shown:

At or For the Year Ended December 31, 2022

One- to
four-
family

Multi-
family

Commercial
real estate

Construction
and land

Home
equity
(In thousands)

Auto and
other
consumer

Commercial

business Unallocated Total

ALLL:
Beginning balance
Provision for (recapture

of) loan losses

Charge-offs
Recoveries
Ending balance

$ 3,184 $ 1,816 $

3,996 $

2,672 $

407 $

2,221 $

470 $

358 $15,124

45
—
114

652
—
—

$ 3,343 $ 2,468 $

221
—
—
4,217 $

(330)
—
2
2,344 $

112

634
— (1,025)
194
30
2,024 $
549 $

174
—
142
786 $

27
1,535
— (1,025)
482
—
385 $16,116

- 114 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022

One- to
four-
family

Multi-
family

Commercial
real estate

Construction
and land

Auto and
other
consumer

Home
equity
(In thousands)

Commercial

business Unallocated

Total

Total ALLL
General reserve
Specific reserve

3,343 $
3,321
22

2,468 $
2,468
—

4,217 $
4,217
—

2,344 $
2,343
1

549 $
545
4

2,024 $
2,019
5

Total loans
General reserves (1)
Specific reserves (2)

$343,825 $253,551 $
341,171 253,551
—

2,654

390,246 $
390,196
50

(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.

194,646 $52,322 $ 222,794 $
194,630 52,100 222,702
92

222

786 $
786
—

76,996 $
76,996
—

385 $
385
—

16,116
16,084
32

— $1,534,380
— 1,531,346
3,034
—

At or For the Year Ended December 31, 2021

One- to
four-
family

Multi-
family

Commercial
real estate

Construction
and land

Home
equity
(In thousands)

Auto and
other
consumer

Commercial

business Unallocated Total

ALLL:
Beginning balance
(Recapture of)

provision for loan
losses
Charge-offs
Recoveries
Ending balance

$ 3,469 $ 1,764 $

3,420 $

1,461 $

368 $

2,642 $

429 $

294 $13,847

(291)
—
6

52
—
—

$ 3,184 $ 1,816 $

576
—
—
3,996 $

1,203
—
8
2,672 $

(25)
(12)
76
407 $

(270)
(865)
714
2,221 $

41
—
—
470 $

64
—
—

1,350
(877)
804
358 $15,124

At December 31, 2021

One- to
four-
family

Multi-
family

Commercial
real estate

Construction
and land

Auto and
other
consumer

Home
equity
(In thousands)

Commercial

business Unallocated

Total

Total ALLL
General reserve
Specific reserve

3,184 $
3,159
25

1,816 $
1,816
—

3,996 $
3,996
—

2,672 $
2,672
—

407 $
402
5

2,221 $
2,138
83

Total loans
General reserves (1)
Specific reserves (2)

$294,965 $172,409 $
292,708 172,409
—

2,257

363,299 $
363,228
71

(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.

224,709 $39,172 $ 182,769 $
224,687 38,839 182,257
512

333

470 $
470
—

79,838 $
79,838
—

358 $
358
—

15,124
15,011
113

— $1,357,161
— 1,353,966
3,195
—

- 115 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a summary of loans individually evaluated for impairment by portfolio segment
including the average recorded investment in and interest income recognized on impaired loans at or for the periods
shown:

December 31, 2022
Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance
(In thousands)

Year Ended
December 31, 2022
Interest
Income
Recognized

Average
Recorded
Investment

With no allowance recorded:

One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

With an allowance recorded:

One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

Total impaired loans:
One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

666 $
50
—
—
—
716

705 $
149
14
—
2
870

— $
—
—
—
—
—

371 $
60
437
2
184
1,054

1,988
—
16
222
92
2,318

2,129
—
19
224
95
2,467

22
—
1
4
5
32

2,150
5
20
259
91
2,525

2,654
50
16
222
92
3,034 $

2,834
149
33
224
97
3,337 $

22
—
1
4
5
32 $

2,521
65
457
261
275
3,579 $

99
—
1
—
2
102

136
—
2
11
3
152

235
—
3
11
5
254

- 116 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021
Unpaid
Principal
Balance

Recorded
Investment

Related
Allowance
(In thousands)

Year Ended
December 31, 2021
Interest
Income
Recognized

Average
Recorded
Investment

With no allowance recorded:

One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

With an allowance recorded:

One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

Total impaired loans:
One- to four-family
Multi-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total

212 $
—
71
—
26
—
309

247 $
—
177
24
59
77
584

— $
—
—
—
—
—
—

219 $
94
1,016
—
32
29
1,390

2,045
—
22
307
512
2,886

2,245
—
22
329
512
3,108

25
—
—
5
83
113

2,281
121
24
155
653
3,234

2,257
—
71
22
333
512
3,195 $

2,492
—
177
46
388
589
3,692 $

25
—
—
—
5
83
113 $

2,500
94
1,137
24
187
682
4,624 $

12
—
—
—
1
7
20

138
—
1
9
13
161

150
—
—
1
10
20
181

Interest income recognized on a cash basis on impaired loans for the years ended December 31, 2022 and 2021,
was $141,000 and $162,000, respectively.

- 117 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the recorded investment in nonaccrual loans by class of loan at the dates indicated:

One- to four-family
Commercial real estate
Construction and land
Home equity
Auto and other consumer

Total nonaccrual loans

December 31, 2022 December 31, 2021
(In thousands)
957 $
51
16
194
572

494
71
22
282
512

1,790 $

1,381

Past due loans - There were no loans past due 90 days or more and still accruing interest at December 31, 2022 and
2021.

The following table presents the recorded investment of past due loans, by class, as of December 31, 2022:

30-59 Days
Past Due

60-89 Days
Past Due

90 Days or
More Past
Due

Total Past
Due

Current

Total
Loans

(In thousands)

1,461 $
—
—
—
1,461

155 $
—
—
19
174

652 $
—
—
—
652

2,268 $ 341,557 $ 343,825
253,551
253,551
390,246
390,246
194,646
194,627
1,182,268
1,179,981

—
—
19
2,287

151
1,390
1,541

—

—
697
697

—

11
554
565

—

162
2,641
2,803

52,160
220,153
272,313

52,322
222,794
275,116

—

76,996

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

3,002 $

871 $

1,217 $

5,090 $ 1,529,290 $ 1,534,380

- 118 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the recorded investment of past due loans, by class, as of December 31, 2021:

30-59 Days
Past Due

60-89 Days
Past Due

90 Days or
More Past
Due

Total Past
Due

Current

Total
Loans

(In thousands)

786 $
—
—
293
1,079

— $
—
—
—
—

786 $ 294,179 $ 294,965
172,409
—
363,299
—
224,709
293
1,055,382
1,079

172,409
363,299
224,416
1,054,303

83
469
552

—
368
368

—

—
99
99

—

83
936
1,019

39,089
181,833
220,922

39,172
182,769
221,941

79,831

79,838

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

1,638 $

368 $

99 $

2,105 $ 1,355,056 $ 1,357,161

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 ratings 6, 7, and 8 in our 8-point risk rating
system, respectively. An asset is considered substandard if it is inadequately protected by the current net worth and
pay capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the
distinct possibility that First Fed will sustain some loss if the deficiencies are not 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 is not warranted.

When First Fed classifies problem assets as either substandard or doubtful, it may establish a specific allowance to
address the risk specifically or First Fed may allow the loss to be addressed in the general allowance. General
allowances represent loss allowances that have been established to recognize the inherent risk associated with
lending activities but that, unlike specific allowances, have not been specifically allocated to particular problem
assets. 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 do not 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 ratings 4 and 5 in our risk rating system, respectively. Loans not otherwise classified are
considered pass graded loans and are rated 1-3 in our risk rating system.

Additionally, First Fed categorizes loans as performing or nonperforming based on payment activity. Loans that are
more than 90 days past due and nonaccrual loans are considered nonperforming.

- 119 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table represents the internally assigned grade as of December 31, 2022, by class of loans:

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

Pass

Watch

Special
Mention
(In thousands)

Substandard

Total

$ 340,046 $
237,873
351,258
180,123
1,109,300

2,255 $
15,678
25,659
521
44,113

27 $
—
12,195
—
12,222

1,497 $ 343,825
253,551
390,246
194,646
1,182,268

—
1,134
14,002
16,633

51,744
222,413
274,157

370
215
585

14
75
89

194
91
285

—

52,322
222,794
275,116

76,996

Commercial business loans

66,140

2,378

8,478

Total loans

$ 1,449,597 $

47,076 $

20,789 $

16,918 $ 1,534,380

The following table represents the internally assigned grade as of December 31, 2021, by class of loans:

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

Pass

Watch

Special
Mention
(In thousands)

Substandard

Total

$ 291,421 $
153,704
326,444
215,262
986,831

2,727 $
18,705
22,850
295
44,577

53 $
—
3,057
9,130
12,240

764 $ 294,965
172,409
—
363,299
10,948
224,709
22
1,055,382
11,734

38,739
181,356
220,095

79,616

83
835
918

222

—
65
65

—

350
513
863

—

39,172
182,769
221,941

79,838

Total loans

$ 1,286,542 $

45,717 $

12,305 $

12,597 $ 1,357,161

- 120 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table represents the credit risk profile based on payment activity as of December 31, 2022, by class of
loans:

Real Estate:

One- to four-family
Multi-family
Commercial real estate
Construction and land

Consumer:

Home equity
Auto and other consumer

Commercial business loans

Nonperforming

Performing
(In thousands)

Total

957 $
—
51
16

342,868 $
253,551
390,195
194,630

343,825
253,551
390,246
194,646

194
572

—

52,128
222,222

52,322
222,794

76,996

Total loans

1,790 $

1,532,590 $

1,534,380

The following table represents the credit risk profile based on payment activity as of December 31, 2021, by class of
loans:

Real Estate:

One- to four-family
Multi-family
Commercial real estate
Construction and land

Consumer:

Home equity
Auto and other consumer

Commercial business loans

Nonperforming

Performing
(In thousands)

Total

494 $
—
71
22

294,471 $
172,409
363,228
224,687

294,965
172,409
363,299
224,709

282
512

—

38,890
182,257

39,172
182,769

79,838

Total loans

1,381 $

1,355,780 $

1,357,161

- 121 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of information pertaining to TDR loans included in impaired loans at the dates
indicated:

Total TDR loans
Allowance for loan losses related to TDR loans
Total nonaccrual TDR loans

December 31, 2022

December 31, 2021

(In thousands)
1,753 $
18
29

1,843
21
29

There were no newly restructured and renewals or modifications of existing TDR loans that occurred during the
years ended December 31, 2022 and 2021.

There were no TDR loans that incurred a payment default within 12 months of the restructure date during the year
ended December 31, 2022.

The following is a summary of TDR loans that incurred a payment default within 12 months of the restructure date
during the year ended December 31, 2021.

TDR loans that subsequently defaulted

One- to four-family

Number
of
Contracts

Rate
Modification

Term
Modification

Combination
Modification

Total
Modifications

(Dollars in thousands)

1 $

29 $

— $

No additional funds are committed to be advanced in connection with TDR loans at December 31, 2022.

The following table presents TDR loans by class at the dates indicated by accrual and nonaccrual status.

December 31, 2022

December 31, 2021

Accrual

Nonaccrual

Total

Accrual

Nonaccrual

Total

One- to four-family
Home equity

1,697
27

29
—

(In thousands)
1,726
27

1,763
51

29
—

1,792
51

Total TDR loans

1,724

1,753

1,814

1,843

- 122 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Premises and Equipment

Premises and equipment consist of the following as of:

Land
Buildings
Building improvements
Furniture, fixtures, and equipment
Software
Automobiles
Construction in progress

Less accumulated depreciation and amortization

December 31, 2022

December 31, 2021

(In thousands)
2,907
6,697
16,747
7,082
598
66
663

34,760
(16,671 )

18,089

2,907
6,697
14,492
7,512
599
66
3,361

35,634
(15,804 )

19,830

Depreciation expense was $2.0 million and $1.4 million for the years ended December 31, 2022 and 2021,
respectively.

Note 5 - Leases

The Bank has lease agreements with unaffiliated parties for eight locations, including five full-service branches, two
business centers, and a parking easement. Lease expirations range from one to twenty years, with additional renewal
options on certain leases ranging from two to ten 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 December 31, 2022, the Company's ROU assets included in other assets and lease liabilities included in
other liabilities were $6.7 million and $6.9 million, respectively.

Total costs incurred by the Company, as a lessee, were $1.2 million and $868,000 for the years ended December 31,
2022 and 2021, respectively, and principally related to contractual lease payments on operating leases. The
Company's leases do not 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 for the years
ended:

Operating cash flows from operating leases
Right of use assets obtained in exchange for new

operating lease liabilities

December 31, 2022

December 31, 2021

(In Thousands)
1,194

—

868

4,364

- 123 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

December 31, 2022

December 31, 2021

Weighted-average remaining lease term of operating

leases (in years)

Weighted-average discount rate of operating leases

10.0

2.4 %

10.8

2.4 %

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 of one year or more through
the initial lease term are as follows:

Twelve-month period ending:

2023
2024
2025
2026
2027
Thereafter

Total minimum payments required
Less imputed interest
Present value of lease liabilities

Note 6 - Servicing Rights on Sold Loans

December 31, 2022
(In Thousands)

819
852
890
885
892
3,934
8,272
1,359
6,913

Mortgage loans serviced for FHLB, Fannie Mae, and Freddie Mac are not included in the accompanying
consolidated balance sheets. Selected commercial loan balances have also been sold in whole or in part to various
participants, including the Main Street Lending Program, with servicing retained by First Fed and are not included in
the accompanying consolidated balance sheets. The unpaid principal balances of serviced loans, primarily mortgage
loans, were $418.7 million and $454.4 million at December 31, 2022 and 2021, respectively.

Loan servicing rights for the periods shown are as follows:

Balance at beginning of period
One-time adjustment for fair value reporting election
Additions
Change in fair value
Amortization
Valuation allowance net (impairment) recovery
Balance at end of period

For the Year Ended December 31,

2022

2021

(In thousands)
3,282 $
538
54
13
—
—
3,887 $

2,120
—
1,234
—
(109)
37
3,282

- 124 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The aggregate change in valuation allowance for loan servicing rights for the period shown is as follows:

For the Year Ended December 31,
2021
(In thousands)

Balance at beginning of period
Impairments
Recoveries
Balance at end of period

(37)
—
37
—

The key economic assumptions used in determining the fair value of loan servicing rights for the periods shown are
as follows:

Constant prepayment rate
Weighted-average life (years)
Yield to maturity discount

For the Year Ended December 31,

2022

2021

8.3%
6.0
13.3%

9.3%
5.4
10.3%

The fair values of loan servicing rights were approximately $3.9 million and $3.8 million at December 31, 2022 and
2021, respectively. See Note 14 Fair Value Measurement for additional information.

The following represents servicing and late fees earned in connection with loan servicing rights and is included in
the accompanying consolidated financial statements as a component of noninterest income for the periods shown:

Servicing fees
Late fees

For the Year Ended December 31,

2022

2021

(In thousands)
972 $
12

1,013
9

The following table represents the hypothetical effect on the fair value of the Company's loan servicing rights using
an unfavorable shock analysis of certain key valuation assumptions as of December 31, 2022 and 2021. This
analysis is presented for hypothetical purposes only. As the amounts indicate, changes in fair value based on
changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to
the change in fair value may not be linear.

For the Year Ended December 31,

Servicing right fair value

Constant prepayment rate assumption (weighted-average)
Impact on fair value with a 10% adverse change in prepayment speed
Impact on fair value with a 20% adverse change in prepayment speed

Yield to maturity discount assumption (weighted-average)
Impact on fair value with a 10% adverse change in discount rate
Impact on fair value with a 20% adverse change in discount rate

2021
2022
(Dollars in thousands)

3,887

3,820

8.3%
(264) $
(416) $

13.3%
(194) $
(287) $

9.3%

(160)
(278)

10.3%
(163)
(277)

$
$

- 125 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Deposits

The aggregate amount of time deposits that meet or exceed the FDIC insured limit, currently $250,000, at December
31, 2022 and 2021, was $96.6 million and $75.1 million, respectively. Deposits and weighted-average interest rates
at the dates indicated are as follows:

December 31, 2022

December 31, 2021

Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Certificates of deposit

Amount

315,083
193,558
473,009
200,920
381,685
$ 1,564,255

Weighted- Average
Interest Rate

Amount
(Dollars in thousands)

—%
0.01%
0.58%
0.26%
2.19%
0.74%

343,932
196,970
597,815
194,620
247,243
$ 1,580,580

—%
0.01%
0.21%
0.05%
0.62%
0.19%

Maturities of certificates at the dates indicated are as follows:

Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years

December 31, 2022
(In thousands)

262,189
69,967
37,032
7,409
5,088
381,685

Brokered certificates of deposits of $133.9 million and $65.7 million are included in the December 31, 2022 and
2021 certificate of deposits totals above, respectively.

Deposits at December 31, 2022 and 2021, include $93.3 million and $134.1 million, respectively, in public fund
deposits. Investment securities with a carrying value of $57.0 million and $67.9 million were pledged as collateral
for these deposits at December 31, 2022 and 2021, respectively. This exceeds the minimum collateral requirements
established by the Washington Public Deposit Protection Commission.

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

Demand deposits
Money market accounts
Savings accounts
Certificates of deposit

For the Year Ended December 31,

2022

2021

(In thousands)
137 $

1,698
165
3,198
5,198 $

43
1,165
128
2,060
3,396

- 126 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Borrowings

First Fed is a member of the FHLB. As a member, First Fed has a committed line of credit of up to 40% of total
assets, subject to the amount of FHLB stock ownership and certain collateral requirements.

First Fed has entered into borrowing arrangements with the FHLB to borrow funds under long-term, fixed-rate
advance agreements; overnight borrowings through FHLB which renew daily until paid; and, as an alternative
source of funds, fixed-rate advances maturing in less than one year. All borrowings are secured by collateral
consisting of single-family, home equity, commercial real estate, and multi-family loans receivable in the amounts
of $753.6 million and $699.5 million at December 31, 2022 and 2021, respectively.

First Fed also has an established borrowing arrangement with the Federal Reserve Board of San Francisco
("FRB") to utilize the discount window for short-term borrowing. No funds have been borrowed to date. Investment
securities with a carrying value of $8.9 million were pledged to the FRB at December 31, 2022.

On March 25, 2021, the Company completed a private placement of $40.0 million of 3.75% fixed-to-floating rate
subordinated notes due 2031 (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 Tier 2
capital for the Company for regulatory capital purposes. The Company intends to use the net proceeds of the
offering for general corporate purposes.

On May 20, 2022, First Northwest entered into 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 19, 2023, with the option for two 364-day extensions.

FHLB advances, line of credit, and subordinated debt outstanding by type of advance were as follows:

Long-term advances
Short-term fixed-rate advances
Overnight variable-rate advances
Line of Credit
Subordinated debt, net

December 31,
2022

December 31,
2021

(In thousands)
80,000 $
10,000
144,000
12,000
39,358

80,000
—
—
—
39,280

The maximum and average outstanding balances and average interest rates on FHLB overnight variable-rate
advances were as follows:

Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average daily interest rates

Annual
Period End

Interest expense during the period

- 127 -

For the Year Ended December 31,

2021
2022
(Dollars in thousands)

206,000
90,983

40,000
5,207

2.83%
4.30%
1,845

0.30%
0.31%
6

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The maximum and average outstanding balances and average interest rates on FHLB short-term, fixed-rate advances
were as follows:

Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average daily interest rates

Annual
Period End

Interest expense during the period

For the Year Ended December 31,

2022
2021
(Dollars in thousands)

42,500
15,208

1.82%
2.12%
246

—
—

—%
—%
—

The maximum and average outstanding balances and average interest rates on FHLB long-term, fixed-rate advances
were as follows:

Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates

Annual
Period End

Interest expense during the period

For the Year Ended December 31,

2022
2021
(Dollars in thousands)

80,000
80,000

80,000
52,500

1.52%
1.52%
1,260

1.46%
1.52%
768

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

Within one year or less
After one year through two years
After two years through three years
After three years through four years
After four years through five years
After five years

December 31, 2022

December 31, 2021

Amount

Weighted- Average
Interest Rate

Amount

Weighted- Average
Interest Rate

(Dollars in thousands)

15,000
15,000
25,000
15,000
10,000
—
80,000

1.54%
1.47%
1.42%
1.55%
1.76%
—%
1.52%

—
15,000
15,000
25,000
15,000
10,000
80,000

—%
1.54%
1.47%
1.42%
1.55%
1.76%
1.52%

The maximum and average outstanding balances and average interest rates on the line of credit were as follows:

Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates

Annual
Period End

Interest expense during the period

- 128 -

For the Year Ended December 31,

2022
2021
(Dollars in thousands)

12,000
5,770

6.76%
8.00%
389

—
—

—%
—%
—

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The maximum and average outstanding balances and average interest rates on subordinated debt were as follows:

Maximum outstanding at any month-end
Monthly average outstanding
Weighted-average interest rates

Annual
Period End

Interest expense during the period

Note 9 - Federal Taxes on Income

For the Year Ended December 31,

2022

2021

(Dollars in thousands)

39,358
39,312

4.01%
4.01%
1,577

39,310
30,370

3.96%
3.06%
1,203

The provision for income taxes for the periods shown is summarized as follows:

Current
Deferred

For the Year Ended December 31,

2022

2021

(In thousands)
4,376
(1,529 )

2,847

3,131
63

3,194

A reconciliation of the tax provision (benefit) based on statutory corporate tax rates, estimated to be 21% for the
year ended December 31, 2022, on pre-tax income and the provision (benefit) shown in the accompanying
consolidated statements of income for the periods shown is summarized as follows:

Income taxes computed at statutory rates
Tax-exempt income
Bank-owned life insurance income
Other, net

For the Year Ended December 31,

2022

2021

(In thousands)
3,432
(183 )
(505 )
103

2,847

3,909
(218 )
(203 )
(294 )

3,194

As a result of the bad debt deductions taken in years prior to 1988, retained earnings include accumulated earnings
of approximately $6.4 million, on which federal income taxes have not been provided. If, in the future, this portion
of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through
foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The Company does not
contemplate that such amounts will be used for any purpose that would create a federal income tax liability;
therefore, no provision has been made.

- 129 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

As of December 31, 2022, the Company, through its investment in Quin Ventures, has a net operating loss
carryforward of $5.2 million that originated post December 31, 2017, that is not subject to expiration and is able to
offset 80% of future taxable income. There were no federal tax loss carryforwards at December 31, 2021.

The Company applies the provisions of FASB ASC 740 that require the application of a more-likely-than-not
recognition criterion for the reporting of uncertain tax positions on its financial statements. The Company had no
unrecognized tax assets at December 31, 2022 and 2021. Interest and penalties are recognized in income tax
expense. The Company recognized a small amount of interest and no penalties during the year ended December 31,
2022, and no interest or penalties during the year ended December 31, 2021. The Company files income tax returns
in the U.S. federal jurisdiction and is no longer subject to U.S. federal income tax examinations by tax authorities for
years ending before December 31, 2019.

The components of net deferred tax assets and liabilities at the periods shown are summarized as follows:

December 31, 2022

December 31, 2021

(In thousands)

Deferred tax assets

Allowance for loan losses
Unrealized loss on securities available for sale
Accrued compensation
Nonaccrual loans
ESOP timing differences
Restricted stock awards
Deferred lease liabilities
Net operating loss carryforward
Retention credit benefit

Total deferred tax assets

Deferred tax liabilities
Deferred loan fees
Unrealized gain on securities available for sale
FHLB stock dividends
Accumulated depreciation
Deferred investment gain
Defined benefit plan
Right of use assets
Other, net

Total deferred tax liabilities

3,528
10,432
368
—
160
319
1,507
1,111
1,168
18,593

1,126
—
374
864
424
42
1,435
237
4,502

Deferred tax asset, net

14,091

- 130 -

3,255
—
461
1
173
312
1,654
—
—
5,856

702
569
417
609
341
59
1,595
3
4,295

1,561

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Benefit Plans

Single-employer Pension Plan

Effective March 23, 2021, the Company withdrew from the Pentegra Defined Benefit Plan for Financial Institutions
("Pentegra DB Plan") and established the First Federal Defined Benefit Plan ("Bank DB Plan"), a single-employer
plan. On March 23, 2021, all assets and liabilities were transferred from the Pentegra DB Plan to the newly
established Bank DB Plan.

The Bank DB Plan is a defined benefit pension plan covering current and former employees. Benefits available
under the plan are frozen. The plan provides defined benefits based on years of service and final average salary prior
to the freeze. The Company uses December 31 as the measurement date for this plan. The initial measurement
period was March 23, 2021 – December 31, 2021.

The fair value of plan assets and projected benefit obligation as of the March 23, 2021, Bank DB Plan adoption date
were $14.7 million and $14.2 million, respectively. A $2.7 million cash contribution was made to the Pentegra DB
Plan in March 2021 prior to the transition. A prior service cost of $1.6 million and $1.7 million, net of tax, was
included in accumulated other comprehensive loss on the Company's balance sheet at December 31, 2022 and 2021,
respectively. The prior service cost is expected to be amortized over 15 years.

The following table summarizes the changes in benefit obligations and plan assets for the periods shown:

December 31, 2022

December 31, 2021

(Dollars in thousands)

Change in fair value of plan assets
Fair value at beginning of period
Actual return on plan assets
Benefits paid
Settlements and curtailments
Fair value at end of period

Change in projected benefit obligation
Projected benefit obligation at beginning of period
Interest cost
Actuarial loss
Benefits paid
Settlements and curtailments
Projected benefit obligation at end of period

Funded status at period end

Amounts recognized on Consolidated Balance Sheet
Other assets
Accumulated other comprehensive income
Net amount recognized

Other changes recognized in other comprehensive income
Net (gain) loss
Amortization of prior service (cost) credit
Amount recognized due to settlement
Net periodic benefit cost

Weighted-average assumptions used to determine projected obligation
Discount rate
Rate of compensation increase

- 131 -

15,821
(3,680)
(462)
(866)
10,813

15,328
374
(3,756)
(462)
(866)
10,618

195

195
(2,138)
2,333

535
(147)
(26)
362

5.10%
N/A

14,705
1,618
(502)
—
15,821

14,197
304
1,329
(502)
—
15,328

493

493
(1,852)
2,345

249
(114)
—
135

2.65%
N/A

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company does not expect to make a contribution to the Bank DB Plan in 2023. It is the policy of the Company
to fund no less than the minimum funding amount required by ERISA. The following table sets forth the
components of net periodic benefit cost and other amounts recognized in accumulated other comprehensive income
(loss) for the periods shown:

Components of net periodic benefit income
Interest cost
Expected return on plan assets
Amortization of prior service cost
Settlements and curtailments
Net periodic benefit income

Weighted-average assumptions used to determine net cost
Discount rate
Expected return on plan assets
Rate of compensation increase

For the Year Ended December 31,

2021
2022
(Dollars in thousands)

374
(611)
147
26
(64) $

2.65%
5.30%
N/A

304
(538)
114
—
(120)

2.95%
5.75%
N/A

The expected long-term return on plan assets assumption was developed as a weighted average rate based on the
target asset allocation of the plan and the Long-Term Capital Market Assumptions for the corresponding fiscal year
end. Gains and losses are recognized in accordance with the standard amortization provisions of the applicable
accounting guidance. The Company's net periodic benefit income recognized for the Bank DB Plan is sensitive to
the discount rate and expected return on plan assets.

From initial funding in the first quarter of 2021 through December 31, 2022, the Bank DB Plan assets have been
invested primarily in fixed income and large U.S. equity funds, with additional investments in international equity,
real estate, and small/mid-range U.S. equity funds. The target allocations for 2023 by asset category are presented in
the table below.

Asset Category
Fixed Income
U.S. Equities
Non-U.S. Equities
Real Assets

80% - 100%
0% - 30%
0% - 20%
0% - 10%

- 132 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Benefit payments projected to be made from the Bank DB Plan are as follows:

Estimated future benefit payments

2023
2024
2025
2026
2027
Years 2028 - 2032
Thereafter

Projected benefit obligation

December 31, 2022
(Dollars in thousands)

1,930
970
750
630
670
3,500
2,168
10,618

Fair value measurements, including descriptions of Level 1, 2, and 3 of the fair value hierarchy and the valuation
methods employed by the Company are provided in Note 14 - Fair Value Measurements. Plan investment assets
measured at fair value by level and in total are as follows:

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

December 31, 2022

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

903
236
9,674
10,813

(In thousands)

— $
—
—
— $

December 31, 2021

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

(In thousands)

4,848
781
1,389
7,769
1,034
15,821

— $
—
—
—
—
— $

Total

903
236
9,674
10,813

— $
—
—
— $

Total

4,848
781
1,389
7,769
1,034
15,821

— $
—
—
—
—
— $

Large U.S. Equity
International Equity
Fixed Income

Large U.S. Equity
Small/Mid U.S. Equity
International Equity
Fixed Income
Other

Nonqualified Deferred Compensation Plan

First Fed also sponsors a nonqualified Deferred Compensation Plan for members of the Board of Directors and
eligible officer-level employees. This plan, approved by the Board on February 1, 2012, allows eligible participants
to defer and invest a portion of their earnings in a selection of investment options identified in the plan at no expense
to First Fed. All deferrals are remitted to Principal, the Plan Administrator, and held in a trust. The aggregate
balance held in trust at December 31, 2022, was $1.1 million.

The Company also has agreements with certain key officers that provide for potential payments upon retirement,
disability, termination, change in control and death.

- 133 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

401(k) Plan

First Fed maintains a single-employer 401(k) plan. Employees may contribute up to 100% of their pre-tax
compensation to the 401(k) plan, subject to regulatory limits. First Fed provides matching funds of 50% limited to
the first 6% of salary contributed. First Fed's contributions were $634,000 and $569,000 during the years ended
December 31, 2022 and December 31, 2021, respectively.

Employee Stock Ownership Plan

In connection with the mutual to stock conversion, the Company established an ESOP for eligible employees of the
Company and the Bank. Employees of the Company 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 in the open market 8% of the common stock originally issued in the
mutual to stock conversion. As of December 31, 2022, 1,048,029 shares, or 100% of the total, have been purchased
in the open market at an average price of $12.45 per share 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%.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and allocated to ESOP
participants on a pro rata basis as principal and interest payments are made by the ESOP to the Company. 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. Annual principal and interest payments of
$835,000 were made by the ESOP during the years ended December 31, 2022 and 2021.

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 and unallocated ESOP shares
will be recorded as a reduction of debt and accrued interest.

Compensation expense related to the ESOP for the years ended December 31, 2022 and 2021, was $673,000 and
$675,000, respectively.

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

Allocated shares
Committed-to-be-released shares
Unallocated shares

December 31, 2022 December 31, 2021
(Dollars in thousands)

386,285
26,442
635,302

333,396
26,442
688,191

Total ESOP shares issued

1,048,029

Fair value of unallocated shares

9,758

13,901

- 134 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock-based Compensation

On November 16, 2015, the Company's shareholders approved the First Northwest Bancorp 2015 Equity Incentive
Plan (the "2015 EIP"), which provided for the grant of incentive stock options, non-qualified stock options,
restricted stock and restricted stock units to eligible participants. The cost of awards under the 2015 EIP generally is
based on the fair value of the awards on their grant date. Shares of common stock issued under the EIP may be
authorized but unissued shares or repurchased shares. During the year ended June 30, 2017, the Company purchased
and retired 523,014 shares of common stock to be used for future stock awards.

In May 2020, the Company's shareholders approved the First Northwest Bancorp 2020 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 the 2020 EIP generally is based on the fair value of the awards on their grant date.
The maximum number of shares that may be utilized for awards under the 2020 EIP is 520,000. At December 31,
2022, there were 307,967 total shares available for grant under the 2020 EIP, all of which are available to be granted
as restricted shares. Following adoption of the 2020 EIP, no additional awards may be made under the 2015 EIP. At
December 31, 2022, 50,920 restricted shares are outstanding under the 2015 EIP that are expected to vest subject to
the 2015 EIP plan provisions.

During the years ended December 31, 2022 and 2021, restricted awards of 59,443 and 102,033 shares were awarded,
respectively, and no stock options were granted. Restricted shares vest ratably over periods of up to five years from
the date of grant provided the eligible participant remains in service to the Company. The Company recognizes
compensation expense for the restricted awards based on the fair value of the shares at the grant date amortized over
the stated period.

For the years ended December 31, 2022 and 2021, total compensation expense for the 2015 and 2020 EIPs was $1.6
million and $1.8 million, respectively.

Included in the above compensation expense for the years ended December 31, 2022 and 2021, was directors'
compensation of $239,000 and $368,000, respectively.

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

Non-vested at January 1, 2022
Granted
Vested
Canceled (1)
Forfeited

Non-vested at December 31, 2022

For the Year Ended
December 31, 2022

Weighted-Average Grant
Date Fair Value

236,432
59,443
(70,761 )
(21,302 )
(36,973 )

166,839

16.19
20.87
16.09
16.09
16.79

17.78

(1) A surrender of vested stock awards by a participant surrendering the number of shares valued at the current stock
price at the vesting date to cover the participant's tax obligation of the vested shares. The surrendered shares are
canceled and are unavailable for reissue.

- 135 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2022, there was $2.1 million of total unrecognized compensation cost related to non-vested
restricted shares. The cost is expected to be recognized over the remaining weighted-average vesting period of
approximately 1.71 years.

Note 11 - Regulatory Capital Requirements

Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion
depositors. The Company is a financial holding company under the supervision of the Federal Reserve Bank of San
Francisco. Financial holding companies are subject to capital adequacy requirements of the Federal Reserve Board
under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board. The
Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC.
The Federal Reserve Board capital requirements generally parallel the FDIC requirements. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to financial holding companies.

The minimum requirements are a ratio of common equity Tier 1 capital ("CET1 capital") to total risk-weighted
assets the ("CET1 risk-based ratio") of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0%, and a
leverage ratio of 4.0%. In addition to the minimum regulatory capital ratios, First Northwest Bancorp and First
Fed must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-
weighted assets in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses based on percentages of retained income that could be utilized for such actions. At December
31, 2022, the Bank's CETI capital exceeded the required capital conservation buffer.

At periodic intervals, banking regulators routinely examine First Northwest and First Fed as part of their legally
prescribed oversight of the banking industry. A future examination could include a review of certain transactions or
other amounts reported in the Company's consolidated financial statements. Based on these examinations, the
regulators can direct that the Company's consolidated financial statements be adjusted in accordance with their
findings. In view of the uncertain regulatory environment in which First Northwest and First Fed operate, the extent,
if any, to which a forthcoming regulatory examination may ultimately result in adjustments to the accompanying
consolidated financial statements cannot presently be determined.

At December 31, 2022, First Fed exceeded all regulatory capital requirements. As of December 31, 2022, the most
recent regulatory notifications categorized First Fed as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, CET1
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed First Fed’s category.

- 136 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Actual and required capital amounts and ratios are presented for First Fed in the following table:

Actual

Amount

Ratio

For Capital Adequacy
Purposes

Amount
(Dollars in thousands)

Ratio

To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action Provision
Ratio

Amount

As of December 31, 2022
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital

As of December 31, 2021
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital

$ 215,037
215,037
231,405
215,037

$ 196,319
196,319
211,828
196,319

13.40% $
13.40
14.42
10.41

72,230
96,306
128,408
82,607

4.50% $ 104,332
128,408
6.00
160,510
8.00
103,259
4.00

13.79% $
13.79
14.88
10.56

64,081
85,442
113,923
74,362

4.50% $
6.00
8.00
4.00

92,562
113,923
142,403
92,953

6.50%
8.00
10.00
5.00

Note 12 - Related Party Transactions

Certain directors and executive officers are also customers who transact business with First Fed. All loans and
commitments included in such transactions were made in compliance with applicable laws on substantially the same
terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other
persons and do not involve more than the normal risk of collectability or present any other unfavorable features.

The following table presents the activity in loans to directors and executive officers for the periods shown:

Beginning balance
Loan advances
Loan repayments
Reclassifications (1)
Ending balance

For the Year Ended December 31,

2022

2021

(In thousands)
— $
64
—
—
64 $

143
1
(11)
(133)
—

(1) Represents loans that were once considered related party but are no longer considered related party or loans that

were not related party that subsequently became related party loans.

Deposits and certificates from related parties totaled $2.2 million and $3.2 million at December 31, 2022 and 2021,
respectively.

- 137 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Commitments and Contingencies

First Fed is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments generally represent a commitment to extend credit in
the form of loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated balance sheets.

First Fed’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, is represented by the contractual notional amount of those instruments. First Fed uses
the same credit policies in making commitments as it does for on-balance-sheet instruments. Management does not
anticipate any material loss as a result of these transactions.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established by the contract. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. First Fed evaluates each
customer’s creditworthiness on a case-by-case basis. First Fed did not incur any significant losses on its
commitments for the years ended December 31, 2022, and 2021.

The following financial instruments were outstanding whose contract amounts represent credit risk at:

Commitments to grant loans
Standby letters of credit
Unfunded commitments under lines of credit or existing loans

December 31, 2022 December 31, 2021
(In thousands)
25 $
758
225,836

2,720
212
270,273

Low-Income Housing Tax Credit Investments - The carrying value of the unconsolidated LIHTC
investment was $4.9 million at both December 31, 2022 and 2021. During the year ended December 31, 2022, the
Company recognized a $77,000 tax benefit and $66,000 of proportional amortization. No tax benefit or proportional
amortization was recognized during the year ended December 31, 2021.

Total unfunded contingent commitments related to the Company’s LIHTC investment totaled $4.7 million at
both December 31, 2022 and 2021. The Company expects to fund LIHTC commitments of $1.2 million during the
year ending December 31, 2023 and $3.4 million during the year ending December 31, 2024, with the remaining
commitments of $87,000 funded by December 31, 2035. There were no impairment losses on the Company’s
LIHTC investment during the years ended December 31, 2022 and 2021.

Legal contingencies - Various legal claims may arise from time to time in the normal course of business, which, in
the opinion of management, have no current material effect on First Fed’s consolidated financial statements.

Significant group concentrations of credit risk - Concentration of credit risk is the risk associated with a lack of
diversification, such as having substantial loan concentrations in a specific type of loan within First Fed’s loan
portfolio, thereby exposing First Fed to greater risks resulting from adverse economic, political, regulatory,
geographic, industrial, or credit developments. Loans to one borrower are subject to the state banking regulations
general limitation of 20 percent of First Fed’s equity, excluding accumulated other comprehensive income. At
December 31, 2022 and 2021, First Fed’s most significant concentration of credit risk was in loans secured by real
estate. These loans totaled approximately $1.24 billion and $1.12 billion, or 80.5% and 82.5%, of First Fed’s total
loan portfolio at December 31, 2022 and 2021, respectively. Real estate construction, including land acquisition and
land development, commercial real estate, multi-family, home equity, and one- to four-family residential loans, are
included in the total loans secured by real estate for purposes of this calculation.

- 138 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2022 and 2021, First Fed’s most significant investment portfolio exposure was from municipal
bonds totaling $98.1 million and $113.4 million, or 29.0% and 32.4%, of the total investment portfolio.
At December 31, 2022 and 2021, First Fed's second most significant investment concentration of credit risk was
with the U.S. Government, its agencies, and Government-Sponsored Enterprises (GSEs). First Fed’s exposure,
which results from positions in securities issued by the U.S. Government, its agencies, and securities guaranteed by
GSEs, was $87.3 million and $99.8 million, or 25.8% and 28.6%, of First Fed’s total investment portfolio (including
FHLB stock) at December 31, 2022 and 2021, respectively.

Note 14 - 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 or third-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.

A three-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 the three levels of the hierarchy
are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 - 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.

Level 3 - Unobservable inputs.

The hierarchy gives the highest ranking to Level 1 inputs and the lowest ranking to Level 3 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
Level 1. Level 1 instruments include highly liquid government bonds, securities issued by the U.S. Treasury,
and exchange-traded equity securities. If quoted prices are not available, management determines fair value
using pricing models, quoted prices of similar securities, which are considered Level 2, 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 Level 3.

Partnership investments: Management determines fair value using quoted prices of similar investments or
discounted cash flows, which are considered Level 2, when available. 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 Level 3.

- 139 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Level 3 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 Topic 820 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.

Assets and liabilities measured at fair value on a recurring basis - Assets and liabilities are considered to be fair
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:

December 31, 2022

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

(In thousands)

93,137
—
1,702
50,173
75,648
63,707
—
—

4,913
2,364
—
5,326
—
—
—
—

— $
—
—
—
—
29,599
3,887
12,563

98,050
2,364
1,702
55,499
75,648
93,306
3,887
12,563

12,603

284,367

46,049

$ 343,019

Securities available for sale

Municipal bonds
U.S. Treasury notes
Agency bonds
Corporate debt
MBS agency
MBS non-agency

Sold loan servicing rights
Partnership investments

- 140 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

(In thousands)

Securities available for sale

Municipal bonds
Agency bonds
ABS corporate
SBA
Corporate debt
MBS agency
MBS non-agency
Partnership investments

5,902
—
—
—
6,061
—
—
—

107,462
1,920
14,489
14,680
53,728
79,962
60,008
3,071

11,963

335,320

— $
—
—
—
—
—
—
—

— $

Total

113,364
1,920
14,489
14,680
59,789
79,962
60,008
3,071

347,283

The following table provides a description of the valuation technique, unobservable input, and qualitative
information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and
measured at fair value on a recurring basis at the date indicated:

December 31, 2022

(In thousands) Valuation Technique

Unobservable Input

Fair Value

Sold loan servicing
rights

MBS non-agency

Discounted cash
flow

3,887

29,599 Consensus pricing

Constant prepayment
rate
Discount rate

Offered quotes
Comparability
adjustments (%)

Range (a)
(Weighted Average)

6.06% - 18.55%
(8.33%)
11.88% - 15.88%
(13.27%)
94 - 100

-4.4% - +1.5%

(a) Unobservable inputs were weighted by the relative fair value of the instruments.

- 141 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables summarize the changes in Level 3 assets measured at fair value on a recurring basis at the dates
indicated:

As of or For the Year Ended December 31, 2022

Servicing
rights that
result from
transfers and
sale of
financial assets

Changes in fair
value due to
changes in
model inputs
or assumptions
(1)

Balance at
January 1,
2022

Balance at
December 31,
2022

Sold loan servicing rights

3,820 $

(In thousands)
54 $

13 $

3,887

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

As of or For the Year Ended December 31, 2022

Balance at
January 1,
2022

Transfers Into
Level 3 (1)

Purchases
(In thousands)

Unrealized
Gains

Balance at
December 31,
2022

Securities available for sale

MBS non-agency
Partnership investments

— $
—

29,599 $
12,490

— $
—

— $
73

29,599
12,563

(1) Transferred from Level 2 to Level 3 because of a lack of observable market data, resulting from little to no

market activity for the investments.

As of or For the Year Ended December 31, 2021

Balance at
January 1,
2021

Transfers Out
of Level 3 (1)

Purchases

(In thousands)

Unrealized
Gains

Balance at
December 31,
2021

2,540
6,372

8,912

(2,540 ) $
(6,372 )

(8,912 ) $

— $
—

— $

— $
—

— $

—
—

—

Securities available for
sale

Corporate debt
MBS non-agency

(1) Transferred from Level 3 to Level 2 after obtaining observable market data.

- 142 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Assets measured at fair value on a nonrecurring basis - Assets are considered to be fair valued on a nonrecurring
basis if the fair value measurement of the instrument does not 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:

Impaired loans

Level 1

December 31, 2022
Level 3
Level 2

Total

— $

(In thousands)
— $

3,034 $

3,034

Level 1

December 31, 2021
Level 3
Level 2

Total

— $

(In thousands)
— $

3,195 $

3,195

At December 31, 2022 and 2021, there were no impaired loans with discounts to appraisal disposition value.

- 143 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2022

Carrying
Amount

Estimated
Fair
Value

Fair Value Measurements Using:
Level 3
Level 2

Level 1
(In thousands)

Financial assets

Cash and cash equivalents
Investment securities available for sale
Loans held for sale
Loans receivable, net
FHLB stock
Accrued interest receivable
Servicing rights on sold loans, at fair value
Partnership investments

45,596 $

326,569
597
1,531,435
11,681
6,743
3,887
12,563

326,569
597
1,461,470
11,681
6,743
3,887
12,563

45,596 $
12,603
—
—
—
—
—
—

— $

—
29,599
284,367
597
—
— 1,461,470
—
—
3,887
12,563

11,681
6,743
—
—

Financial liabilities
Demand deposits
Time deposits
FHLB borrowings
Line of credit
Subordinated debt, net
Accrued interest payable

Financial assets

Financial liabilities
Demand deposits
Time deposits
FHLB Borrowings
Subordinated debt, net
Accrued interest payable

$ 1,182,570 $ 1,182,570 $ 1,182,570 $
372,865
229,103
12,034
38,841
455

381,685
234,000
12,000
39,358
455

—
—
—
—
—

— $
—
—
—
—
455

—
372,865
229,103
12,034
38,841
—

December 31, 2021

Carrying
Amount

Estimated
Fair
Value

Fair Value Measurements Using:
Level 3
Level 2

Level 1
(In thousands)

$ 126,016 $ 126,016 $ 126,016 $
344,212
760
1,328,589
5,196
5,289
3,820
3,071

344,212
760
1,350,260
5,196
5,289
3,282
3,071

11,963
—
—
—
—
—
—

— $

—
—
332,249
760
—
— 1,328,589
—
—
3,820
—

5,196
5,289
—
3,071

$ 1,333,337 $ 1,333,337 $ 1,333,337 $
247,217
80,192
39,280
393

247,243
80,000
39,280
393

—
—
—
—

— $
—
—
—
393

—
247,217
80,192
39,280
—

- 144 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15 - Earnings per Common Share

The two-class method is used for computing basic and diluted earnings per share. Under the two-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.

Net income attributable to parent:

Net income available to common shareholders
Earnings allocated to participating securities

Earnings allocated to common shareholders

Basic:

Weighted average common shares outstanding
Weighted average unvested restricted stock awards
Weighted average unallocated ESOP shares

Total basic weighted average common shares outstanding

Diluted:

Basic weighted average common shares outstanding
Dilutive restricted stock awards

Total diluted weighted average common shares outstanding

Basic earnings per common share

Diluted earnings per common share

For the Year Ended December 31,

2022

2021

(In thousands, except share data)

15,645 $
(141)
15,504 $

15,418
(505)
14,913

9,956,823
(219,776)
(655,015)
9,082,032

10,151,946
(310,088)
(707,905)
9,133,953

9,082,032
61,583
9,143,615

9,133,953
94,787
9,228,740

1.71 $

1.63

Potentially dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. For the years
ended December 31, 2022 and 2021, anti-dilutive shares as calculated under the treasury stock method totaled 3,460
and 115, respectively.

- 145 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Parent Company Only Financial Statements

Presented below are the condensed balance sheet, statement of operations, and statement of cash flows for First
Northwest Bancorp.

FIRST NORTHWEST BANCORP
Condensed Balance Sheets
(In thousands)

ASSETS

Cash and due from banks
Investment in bank
Equity and partnership investments
ESOP loan receivable
Commercial business loans receivable, net
Accrued interest receivable
Prepaid expenses and other assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Subordinated debt, net
Line of credit
Interest payable
Payable to subsidiary
Other liabilities

Total liabilities

Shareholders' equity

December 31,
2022

December 31,
2021

1,028 $

176,297
10,371
8,972
14,912
678
1,214

14,087
198,660
2,588
9,576
5,000
300
525

213,472 $

230,736

39,358 $
12,000
375
96
70

51,899

39,280
—
375
96
24

39,775

161,573

190,961

Total liabilities and shareholders' equity

213,472 $

230,736

- 146 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRST NORTHWEST BANCORP
Condensed Statements of Income
(In thousands)

Operating income:
Interest and fees on loans receivable
Unrealized (loss) gain on equity and partnership investments
Dividends from Bank

Total operating income

Operating expenses:
Interest paid on subordinated debt, net
Interest paid on line of credit
Provision for loan losses
Other expenses

Total operating expenses

Income (loss) before provision (benefit) for income taxes and equity in

undistributed earnings of subsidiary

Provision (benefit) for income taxes
Income (loss) before equity in undistributed earnings of subsidiary
Equity in undistributed earnings of subsidiary

For the Year Ended December 31,

2022

2021

954 $
(513)
3,000
3,441

1,578
388
73
1,221
3,260

181
26
155
18,490

420
788
1,000
2,208

1,203
—
—
1,759
2,962

(754)
(368)
(386)
16,804

Net income

18,645 $

16,418

- 147 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRST NORTHWEST BANCORP
Condensed Statement of Cash Flows
(In thousands)

Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:

Equity in undistributed earnings of subsidiary
Amortization of deferred loan fees
Amortization of debt issuance costs
Provision for loan losses
Share-based compensation
Change in payable to subsidiary
Change in other assets
Change in other liabilities

For the Year Ended December 31,

2022

2021

18,645 $

16,418

(18,490)
15
78
73
—
—
(51)
46

(16,804)
—
57
—
500
24
(421)
295

Net cash from operating activities

316

Cash flows from investing activities:

Dividend paid to subsidiary
Loan originations, net of repayments
ESOP loan repayment
Investment in equity and partnership securities, net of distributions

Net cash from investing activities

Cash flows from financing activities:

Proceeds from issuance of subordinated debt, net
Net increase in line of credit
Repurchase of common stock
Payment of dividends

Net cash from financing activities

Net (decrease) increase in cash

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for income taxes
Cash paid during the year for interest on borrowings

NONCASH INVESTING ACTIVITIES

Equity investment in Quil Ventures received through Quin Ventures asset sale
Investment in partnership acquired through issuance of shares

—
(10,000)
604
(7,364)

(20,000)
(5,000)
588
(584)

(16,760)

(24,996)

—
12,000
(5,828)
(2,787)

3,385

(13,059)

14,087

39,223
—
(6,331)
(2,533)

30,359

5,432

8,655

1,028 $

14,087

(824) $
1,500

225 $

1,869

(987)
771

—
—

- 148 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17 - Business Combination

On July 23, 2021, the Bank acquired certain assets and assumed liabilities of the Sterling Bank and Trust of
Southfield, Michigan ("Sterling") upon purchasing their sole branch located in Washington State. As a result of the
Sterling transaction, the Bank has established a presence in Bellevue, Washington, and expanded its deposit base.
Total consideration paid under the Sterling transaction consisted of $63.5 million in cash. There were no transfers of
common stock or other equity instruments in connection with the transaction, and the Bank did not obtain any equity
interests in Sterling.

The acquired assets and assumed liabilities were recorded in the Company's consolidated balance sheets at their
estimated fair value as of the July 23, 2021, transaction date. The excess of the consideration transferred over the
fair value of the identifiable net assets acquired was recorded as goodwill. The goodwill arising from the transaction
consists largely of a premium paid for the deposit accounts.

In most instances, determining the estimated fair values of the acquired assets and assumed liabilities required the
Bank to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at
the appropriate rate of interest. Differences may arise between contractually required payments and the expected
cash flows at the acquisition date due to items such as prepayments or early withdrawals, and other factors.
Goodwill is expected to be fully deductible for income tax purposes as, under the terms of the transaction, the Bank
purchased certain assets and assumed certain liabilities of Sterling but did not acquire any equity or other ownership
interests.

The following table summarizes the fair value of consideration transferred, the estimated fair values of assets
acquired and liabilities assumed as of the acquisition date, and the resulting goodwill relating to the transaction (in
thousands):

Book Value

At July 23, 2021
Fair Value
Adjustment
(In thousands)

Estimated Fair
Value

63,545

— $
459
755
1,214

65,096 $
1,080
66,176
(64,962)

126 $
—
—
126

(229) $
—
(229)
355

126
459
755
1,340

64,867
1,080
65,947
(64,607)
1,062

Cash consideration received

Recognized amounts of identifiable assets acquired and

liabilities assumed
Identifiable assets acquired

Core deposit intangible ("CDI")
Premises and equipment
Accrued interest receivable and other assets

Total identifiable assets acquired

Liabilities assumed

Deposits
Accrued expenses and other liabilities

Total liabilities assumed
Total identifiable net liabilities assumed
Goodwill recognized

- 149 -

FIRST NORTHWEST BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CDI represents the value assigned to demand, interest checking, money market and savings accounts acquired as
part of an acquisition. CDI represents the future economic benefit of the potential cost savings from acquiring core
deposits as part of an acquisition compared to the cost of alternative funding sources. CDI is amortized to non-
interest expense using an accelerated method based on an estimated runoff of related deposits over a period of ten
years. CDI is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively
over the revised remaining life.

Note 18 - Change in Accumulated Other Comprehensive Income ("AOCI")

AOCI includes unrealized gain (loss) on available-for-sale securities and an unrecognized defined benefit plan prior
service cost. The following table presents changes to accumulated other comprehensive income after-tax for the
periods shown:

Unrealized
Gains and
Losses on
Available-for-
Sale Securities

Unrecognized
Defined
Benefit Plan
Prior Service
Cost, Net of
Amortization
(In thousands)

BALANCE, December 31, 2020
Other comprehensive loss before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net other comprehensive loss
BALANCE, December 31, 2021

BALANCE, December 31, 2021
Other comprehensive loss before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net other comprehensive loss
BALANCE, December 31, 2022

5,442 $
(1,398)

(1,904)
(3,302)
2,140 $

2,140 $

(40,451)

(93)
(40,544)
(38,404) $

— $

(1,746)

(106)
(1,852)
(1,852) $

(1,852) $
(287)

—
(287)
(2,139) $

Total

5,442
(3,144)

(2,010)
(5,154)
288

288
(40,738)

(93)
(40,831)
(40,543)

- 150 -

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure controls and procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Section 13a-15(e) of the
Securities Exchange Act of 1934 (the "Act") was carried out under the supervision and with the participation of the
Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior
management as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures in effect as of December 31,
2022 were effective in ensuring that the information required to be disclosed by the Company in the reports it files
or submits under the Act was (i) accumulated and communicated to the Company’s management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms.

Management's report on internal control over financial reporting. First Northwest Bancorp's

management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) of the Act. The Company's internal control system is designed to provide reasonable
assurance to our management and the board of directors regarding the preparation and fair presentation of published
financial statements for external purposes in accordance with generally accepted accounting principles.

This process includes policies and procedures that: (i) pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial statements. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally,
in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating
the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls
and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a
result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may
become inadequate because of changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial

reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework
(2013 Framework). Based on that assessment, the Company's management believes that, as of December 31, 2022,
First Northwest Bancorp's internal control over financial reporting is effective based on those criteria.

- 151 -

Moss Adams LLP, an independent registered public accounting firm, has audited the Company's
consolidated financial statements as of December 31, 2022, which is included in Item 8. Financial Statements and
Supplementary Data.

Changes in Internal Controls. There have been no changes in the Company’s internal control over financial

reporting for the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

Not applicable.

Item 9C. Disclosures Regarding Foreign Jurisdictions that Prevent Inspections

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information regarding the Company's directors contained under the section captioned "Proposal 1 –

Election of Directors" in the Company’s proxy statement, a copy of which will be filed with the SEC no later than
120 days after December 31, 2022, (the "Proxy Statement"), is incorporated herein by reference.

For information regarding the executive officers of the Company and the Bank, see the information

contained under the section captioned "Item 1. Business - Information About Our Executive Officers," which is
incorporated by reference.

The Company has an audit committee. The members of the Audit Committee are directors Sherilyn

Anderson (Chairperson), Stephen Oliver, Dana Behar, Cindy Finnie, Lynn Terwoerds and Jennifer Zaccardo. Each
member of the Audit Committee is "independent" as defined in the Nasdaq Stock Market listing standards. The
Board of Directors has determined that Ms. Zaccardo meets the definition of "audit committee financial expert," as
defined by the SEC.

The Board of Directors has adopted a Code of Ethics for the Company’s officers (including its principal
executive officer and senior financial officers), directors and employees. The Company’s Code of Ethics is posted
on the Investor Relations section of our website at www.ourfirstfed.com.

There have been no material changes to the procedures by which shareholders may recommend nominees

to the Company's Board of Directors.

Item 11. Executive Compensation

The information contained in the sections captioned "Executive Compensation" and

"Director Compensation" in the Proxy Statement is incorporated herein by reference.

- 152 -

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

The information contained in the sections captioned "Principal Shareholders" and "Beneficial Ownership

by Directors and Named Executive Officers" in the Proxy Statement is incorporated herein by reference.

The following table summarizes share and exercise price information about First Northwest Bancorp's

equity compensation plans as of December 31, 2022.

Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights

Weighted-average
exercise price of
outstanding options,
warrants, and rights

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))

(a)

(b)

(c)

—

N/A

—

N/A

—

307,967

N/A

307,967

Plan category

Equity compensation plans approved by security
holders:

First Northwest Bancorp 2020 Equity
Incentive Plan (1)

Equity compensation plans not approved by
security holders

Total

(1) Shareholders approved the First Northwest Bancorp 2020 Equity Incentive Plan (the "2020 Plan") on May 5, 2020. As of
December 31, 2022, 115,919 restricted shares were outstanding under the 2020 Plan and no stock options have been
awarded. The restricted shares will vest in equal annual installments over periods of up to three years. All of the shares
shown in column (c) may be granted under the 2020 Plan in the form of restricted shares, as well as other types of awards.
No additional awards may be made under the First Northwest Bancorp 2015 Equity Incentive Plan (the "2015 Plan"),
which was approved by shareholders on November 16, 2015. As of December 31, 2022, 50,920 restricted shares and no
options remained outstanding under the 2015 Plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information contained in the sections captioned "Corporate Governance and Board Matters – Transactions

with Related Persons" and "Corporate Governance and Board Matters – Director Independence" in the Proxy
Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

The information contained under the section captioned "Proposal 3 – Ratification of Appointment of

Independent Auditor" in the Proxy Statement is incorporated herein by reference.

Item 15. Exhibits, Financial Statement Schedules

PART IV

(a)

1. Financial Statements.

For a list of the financial statements filed as part of this report see Part II – Item 8.

- 153 -

2. Financial Statement Schedules.

All schedules have been omitted as the required information is either inapplicable or contained in the

Consolidated Financial Statements or related Notes contained in Part II, Item 8, "Financial Statements and
Supplementary Data," of this Form 10-K.

3. Exhibits required by Item 601 of Regulation S-K:

Exhibit No.
3.1

3.2

4.1

4.2
10.1*
10.2*

10.3*

10.4*

10.5*
10.6*

10.7*
10.8*
10.9

10.10

10.11

10.12*

21
23
31.1

31.2

101

104

Exhibit Description

Filed
Herewith

Form

Original
Exhibit
No.

Filing
Date

3.1

3.2

8-K

10.2

10.1

10-Q

10-K

10-Q

10.4
10.4

12/9/2021

3/15/2021

8/12/2022

10-K
10-Q

4.1
4.1
10.1

8-K
10-Q
10-K

3/25/2021
8/12/2022
3/15/2019

Articles of Incorporation of First Northwest Bancorp, as amended
June 3, 2022
Bylaws of First Northwest Bancorp as amended effective June 3,
2022
Indenture, Including Forms of 3.75% Fixed-to-Floating Rate
Subordinated Notes due 2031
Description of Common Stock
First Northwest Bancorp 2015 Equity Incentive Plan
Form of First Northwest Bancorp 2015 Equity Incentive Plan
Restricted Stock Award Agreement as amended effective November
23, 2020
Employment Agreement with Matthew P. Deines dated December 7,
2021
Form of Executive Employment Agreement with Terry A. Anderson,
Derek J. Brown, Geraldine L. Bullard, Kelly A. Liske,
and Christopher J. Riffle
First Northwest Bancorp 2020 Equity Incentive Plan
Form of First Northwest Bancorp 2020 Equity Incentive Plan
Restricted Share Award Agreement
First Federal Fiscal 2022 Cash Incentive Plan
Non-Employee Director Compensation Policy
Loan Agreement, dated as of May 20, 2022, by and Between First
Northwest Bancorp and NexBank
Security Agreement, dated as of May 20, 2022, by and between First
Northwest Bancorp and NexBank
Revolving Credit Note dated May 20, 2022, of First Northwest
Bancorp
Severance and Release Agreement with Kelly A. Liske, effective
June 30, 2022
Subsidiaries of First Northwest Bancorp
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act
The following materials from First Northwest Bancorp's Annual Report on Form 10-K for the year ended December
31, 2022, formatted in Inline Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets;
(2) Consolidated Statements of Income; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated
Statements of Changes in Shareholders' Equity; (5) Consolidated Statements of Cash Flows; and (6) Notes to
Consolidated Financial Statements
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101
* Denotes a management contract or compensatory plan or arrangement.

8/10/2020
5/13/2022

3/15/2019
5/11/2020

10-Q
10-Q

8/19/2022

5/27/2022

10.1
10.1

10.3

10.2

10.1

X
X

8-K

Item 16. Form 10-K Summary

None.

- 154 -

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

March 17, 2023

FIRST NORTHWEST BANCORP

By:

/s/Matthew P. Deines
Matthew P. Deines
President, Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:

/s/Matthew P. Deines
Matthew P. Deines
President, Chief Executive Officer and Director
(Principal Executive Officer)

/s/Geraldine L. Bullard
Geraldine L. Bullard
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/Cindy H. Finnie
Cindy H. Finnie
Chair of the Board and Director

/s/Sherilyn G. Anderson
Sherilyn G. Anderson
Director

/s/Dana D. Behar
Dana D. Behar
Director

/s/Craig A. Curtis
Craig A. Curtis
Director

/s/ Gabriel S. Galanda
Gabriel Galanda
Director

March 17, 2023

- 155 -

By:

/s/ Stephen E. Oliver
Stephen E. Oliver
Director

/s/ Lynn Terwoerds
Lynn Terwoerds
Director

/s/Norman J. Tonina, Jr.
Norman J. Tonina, Jr.
Director

/s/Jennifer Zaccardo
Jennifer Zaccardo
Director

March 17, 2023

- 156 -

Corporate Information

FIRST NORTHWEST BANCORP OFFICERS
Matthew P. Deines - President and Chief Executive Officer
Geraldine L. Bullard - Executive Vice President,
Chief Financial Officer and Treasurer
Christopher J. Riffle - Executive Vice President,
Chief Operations Officer / Chief Digital Officer /
General Counsel
Allison R. Mahaney - Senior Vice President,
General Counsel and Corporate Secretary

FIRST FED OFFICERS
Matthew P. Deines - President and Chief Executive Officer
Terry A. Anderson - Executive Vice President,
Chief Credit Officer
Derek J. Brown - Executive Vice President,
Chief of Human Resources and Marketing Officer
Geraldine L. Bullard - Executive Vice President,
Chief Financial Officer and Treasurer
Christopher W. Neros - Executive Vice President,
Chief Lending Officer
Christopher J. Riffle - Executive Vice President,
Chief Operations Officer / Chief Digital Officer /
General Counsel

BOARD OF DIRECTORS
Cindy H. Finnie - Chairperson
Sherilyn G. Anderson
Dana D. Behar
Craig A. Curtis
Matthew P. Deines
Gabriel S. Galanda
Stephen E. Oliver
Lynn A. Terwoerds
Norman J. Tonina, Jr.
Jennifer Zaccardo

ANNUAL MEETING
The annual meeting of shareholders will be held on
May 23, 2023, at 4:00 p.m. PT
7 Cedars Hotel, 270756 Highway 101
Sequim, Washington 98382
Materials Available at www.proxydocs.com/FNWB

LEGAL COUNSEL
Miller Nash LLP
Pier 70, 2801 Alaskan Way, Suite 300
Seattle, WA 98121

20 22 ANNUAL REPORT

INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Moss Adams LLP
2707 Colby Avenue, Suite 801

Everett, WA 98201

TRANSFER AGENT
Computershare
P.O. Box 505000

Louisville, KY 40233

(866) 289-7521

WEBSITE ADDRESS
www.ourfirstfed.com

MARKET INFORMATION
First Northwest Bancorp is traded on the NASDAQ
Global Select Market under the symbol FNWB.

CORPORATE PROFILE
First Northwest Bancorp, a Washington corporation, is the

financial holding company for First Fed Bank. First Fed is a

community-oriented financial institution serving Western

Washington with offices in Clallam, Jefferson, King, Kitsap,

and Whatcom counties. First Fed has twelve full-service

branches and four business centers.

CUSTOMER CONTACT CENTER
(360) 417-3204 / (800) 800-1577 toll-free
Hours:

M-F 7:00 am - 7:00 pm

Sat 9:00 am - 1:00 pm

FINANCIAL INFORMATION
Requests for free copies of our Form 10-K and Forms 10-Q

filed with the Securities and Exchange Commission should be

directed in writing to:

Geraldine L. Bullard, Executive Vice President

Chief Financial Officer and Treasurer

First Northwest Bancorp

P.O. Box 351

Port Angeles, WA 98362

FIRST N ORTHWEST BANCORP

100th Anniversary

2023

Our Centennial Celebra(cid:2)on will
be held on September 3, 2023.
The free community event will
take place in our hometown of
Port Angeles in the area around
Field Hall.

“While we have expanded
signiﬁcantly since 1923, our
commitment to our customers
and communi(cid:2)es has only grown
stronger over the last 100 years,”
said Ma(cid:3) Deines, CEO of
First Fed.

Everyone is invited to enjoy
the fes(cid:2)vi(cid:2)es which will
include ﬁreworks, food trucks,
beer garden, family ac(cid:2)vi(cid:2)es,
community corner, and live music
performed by PNW bands.

1997

Debit Cards
hit the scene

1984

1st ATMs
Introduced

1973

Founded
1923

PHOTO BY:

MARLO DESSER -

DREAMY SUNSET AT

HURRICANE RIDGE

50 years and coun(cid:2)ng

First Northwest Bancorp
105 W. Eighth Street

Port Angeles, Washington | 98362