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

FORM 10-Q

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

	For the quarterly period ended March 31, ~~2021~~2022

or
	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: 001-33652


FIRST FINANCIAL NORTHWEST, INC.
(Exact name of registrant as specified in its charter)

Washington		26-0610707
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

201 Wells Avenue South, Renton, Washington		98057
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:		(425) 255-4400

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

FFNW

The Nasdaq Stock Market, LLC

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 X No

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 X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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. _____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of May ~~7, 2021, 9,692,339~~ 9, 2022, 9,103,727 shares of the issuer’s common stock, $0.01 par value per share, were outstanding.

FIRST FINANCIAL NORTHWEST, INC.

FORM 10-Q

TABLE OF CONTENTS


			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3334
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5350
	Item 4.	Controls and Procedures	5654
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	5754
	Item 1A.	Risk Factors	5754
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5754 5754
	Item 3.	Defaults upon Senior Securities	5755
	Item 4.	Mine Safety Disclosures	5755
	Item 5.	Other Information	5755
	Item 6.	Exhibits	5856
SIGNATURES			5957

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

Part 1. Financial Information

Item 1. Financial Statements


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Assets	Assets					Assets
		(Unaudited)					(Unaudited)
Cash on hand and in banks	Cash on hand and in banks	$	7,211	$	7,995	Cash on hand and in banks	$	7,979	$	7,246
Interest-earning deposits		75,023		72,494
Interest-earning deposits with banks						Interest-earning deposits with banks	19,633		66,145
Investments available-for-sale, at fair value	Investments available-for-sale, at fair value	168,042		127,551		Investments available-for-sale, at fair value	180,212		168,948
Investments held-to-maturity, at amortized cost	Investments held-to-maturity, at amortized cost	2,413		2,418		Investments held-to-maturity, at amortized cost	2,426		2,432
Loans receivable, net of allowance of $15,502 and $15,174		1,098,832		1,100,582
Loans receivable, net of allowance of $15,159, and $15,657						Loans receivable, net of allowance of $15,159, and $15,657	1,121,382		1,103,461
Federal Home Loan Bank ("FHLB") stock, at cost	Federal Home Loan Bank ("FHLB") stock, at cost	6,465		6,410		Federal Home Loan Bank ("FHLB") stock, at cost	5,512		5,465
Accrued interest receivable	Accrued interest receivable	5,702		5,508		Accrued interest receivable	5,590		5,285
Deferred tax assets, net	Deferred tax assets, net	1,163		1,641		Deferred tax assets, net	1,069		850
Other real estate owned ("OREO")		454		454

Premises and equipment, net	Premises and equipment, net	22,512		22,579		Premises and equipment, net	22,254		22,440
Bank owned life insurance ("BOLI"), net	Bank owned life insurance ("BOLI"), net	33,357		33,034		Bank owned life insurance ("BOLI"), net	35,552		35,210
Prepaid expenses and other assets	Prepaid expenses and other assets	3,398		1,643		Prepaid expenses and other assets	8,451		3,628
Right of use asset (“ROU”), net	Right of use asset (“ROU”), net	3,976		3,647		Right of use asset (“ROU”), net	3,455		3,646
Goodwill	Goodwill	889		889		Goodwill	889		889
Core deposit intangible, net	Core deposit intangible, net	789		824		Core deposit intangible, net	650		684
Total assets	Total assets	$	1,430,226	$	1,387,669	Total assets	$	1,415,054	$	1,426,329

Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity					Liabilities and Stockholders' Equity
Deposits:	Deposits:					Deposits:
Noninterest-bearing deposits	Noninterest-bearing deposits	$	114,437	$	91,285	Noninterest-bearing deposits	$	130,596	$	117,751
Interest-bearing deposits	Interest-bearing deposits	1,019,218		1,002,348		Interest-bearing deposits	1,009,505		1,039,723
Total deposits	Total deposits	1,133,655		1,093,633		Total deposits	1,140,101		1,157,474
FHLB advances	FHLB advances	120,000		120,000		FHLB advances	95,000		95,000
Advance payments from borrowers for taxes and insurance	Advance payments from borrowers for taxes and insurance	4,813		2,498		Advance payments from borrowers for taxes and insurance	5,299		2,909
Lease liability, net	Lease liability, net	4,123		3,783		Lease liability, net	3,617		3,805
Accrued interest payable	Accrued interest payable	197		211		Accrued interest payable	112		112

Other liabilities	Other liabilities	8,995		11,242		Other liabilities	13,168		9,150
Total liabilities	Total liabilities	1,271,783		1,231,367		Total liabilities	1,257,297		1,268,450

Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies
Stockholders' Equity	Stockholders' Equity					Stockholders' Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares; 0 shares issued or outstanding		0		0
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,692,610 shares at March 31, 2021, and 9,736,875 shares at December 31, 2020		97		97
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding						Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding	—		—
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,107,977 shares at March 31, 2022, and 9,125,759 shares at December 31, 2021						Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,107,977 shares at March 31, 2022, and 9,125,759 shares at December 31, 2021	91		91
Additional paid-in capital	Additional paid-in capital	81,099		82,095		Additional paid-in capital	71,780		72,298
Retained earnings	Retained earnings	79,455		78,003		Retained earnings	88,339		86,162
Accumulated other comprehensive loss, net of tax		(515)		(1,918)
Accumulated other comprehensive (loss) income, net of tax						Accumulated other comprehensive (loss) income, net of tax	(1,889)		174
Unearned Employee Stock Ownership Plan ("ESOP") shares	Unearned Employee Stock Ownership Plan ("ESOP") shares	(1,693)		(1,975)		Unearned Employee Stock Ownership Plan ("ESOP") shares	(564)		(846)
Total stockholders' equity	Total stockholders' equity	158,443		156,302		Total stockholders' equity	157,757		157,879
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	1,430,226	$	1,387,669	Total liabilities and stockholders' equity	$	1,415,054	$	1,426,329

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Income Statements

(Dollars in thousands, except per share data)

Unaudited)


		Three Months Ended March 31,			Three Months Ended March 31,
			2021			2020			2022		2021
Interest income	Interest income							Interest income
Loans, including fees	Loans, including fees		$	12,624		$	13,474	Loans, including fees	$	12,001	$	12,624
Investments available-for-sale			735			919
Investments held-to-maturity			13			0
Interest-earning deposits			12			31
Investment securities								Investment securities	831		748
Interest-earning deposits with banks								Interest-earning deposits with banks	19		12
Dividends on FHLB stock	Dividends on FHLB stock		79			76		Dividends on FHLB stock	74		79
Total interest income	Total interest income		13,463			14,500		Total interest income	12,925		13,463
Interest expense	Interest expense							Interest expense
Deposits	Deposits		2,299			4,366		Deposits	1,257		2,299
Borrowings			418			470
FHLB advances and other borrowings								FHLB advances and other borrowings	300		418
Total interest expense	Total interest expense		2,717			4,836		Total interest expense	1,557		2,717
Net interest income	Net interest income		10,746			9,664		Net interest income	11,368		10,746
Provision for loan losses			300			300
Net interest income after provision for loan losses			10,446			9,364
(Recapture of provision) provision for loan losses								(Recapture of provision) provision for loan losses	(500)		300
Net interest income after (recapture of provision) provision for loan losses								Net interest income after (recapture of provision) provision for loan losses	11,868		10,446
Noninterest income	Noninterest income							Noninterest income

BOLI income	BOLI income		269			254		BOLI income	288		269
Wealth management revenue			160			165
Wealth management revenue, net								Wealth management revenue, net	82		160
Deposit related fees	Deposit related fees		200			176		Deposit related fees	215		200
Loan related fees	Loan related fees		132			392		Loan related fees	199		132
Other	Other		3			3		Other	5		3
Total noninterest income	Total noninterest income		764			990		Total noninterest income	789		764
Noninterest expense	Noninterest expense							Noninterest expense
Salaries and employee benefits	Salaries and employee benefits		4,945			5,212		Salaries and employee benefits	5,261		4,945
Occupancy and equipment	Occupancy and equipment		1,100			1,071		Occupancy and equipment	1,228		1,100
Professional fees	Professional fees		532			430		Professional fees	452		532
Data processing	Data processing		697			694		Data processing	677		697
OREO related expenses, net			1			1

Regulatory assessments	Regulatory assessments		121			144		Regulatory assessments	101		121
Insurance and bond premiums	Insurance and bond premiums		124			120		Insurance and bond premiums	129		124
Marketing	Marketing		29			64		Marketing	37		29
Other general and administrative	Other general and administrative		580			532		Other general and administrative	741		581
Total noninterest expense	Total noninterest expense		8,129			8,268		Total noninterest expense	8,626		8,129
Income before federal income tax provision	Income before federal income tax provision		3,081			2,086		Income before federal income tax provision	4,031		3,081
Federal income tax provision	Federal income tax provision		584			402		Federal income tax provision	771		584
Net income	Net income		$	2,497		$	1,684	Net income	$	3,260	$	2,497
Basic earnings per common share	Basic earnings per common share		$	0.26		$	0.17	Basic earnings per common share	$	0.36	$	0.26
Diluted earnings per common share	Diluted earnings per common share		$	0.26		$	0.17	Diluted earnings per common share	$	0.36	$	0.26
Basic weighted average number of common shares outstanding	Basic weighted average number of common shares outstanding		9,490,058			9,896,234		Basic weighted average number of common shares outstanding	8,987,482		9,490,058
Diluted weighted average number of common shares outstanding	Diluted weighted average number of common shares outstanding		9,566,671			9,978,060		Diluted weighted average number of common shares outstanding	9,117,432		9,566,671

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive ~~(Loss)~~ Income

(In thousands)

(Unaudited)


		Three Months Ended March 31,			Three Months Ended March 31,
			2021			2020			2022		2021
Net income	Net income		$	2,497		$	1,684	Net income	$	3,260	$	2,497
Other comprehensive income (loss), before tax:
Other comprehensive (loss) income, before tax:								Other comprehensive (loss) income, before tax:
Unrealized holding losses on investments available-for-sale	Unrealized holding losses on investments available-for-sale		(1,952)			(327)		Unrealized holding losses on investments available-for-sale	(7,082)		(1,952)
Tax effect	Tax effect		410			68		Tax effect	1,487		410

Gains (losses) on cash flow hedges			3,728			(3,713)
Gains on cash flow hedges								Gains on cash flow hedges	4,471		3,728
Tax effect	Tax effect		(783)			780		Tax effect	(939)		(783)
Other comprehensive income (loss), net of tax			1,403			(3,192)
Total comprehensive income (loss)			$	3,900		$	(1,508)
Other comprehensive (loss) income, net of tax								Other comprehensive (loss) income, net of tax	(2,063)		1,403
Total comprehensive income								Total comprehensive income	$	1,197	$	3,900

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except share data)

(Unaudited)

Three Months Ended March 31, 2020
Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss,
net of tax Unearned
ESOP
Shares Total Stockholders’ Equity
Balances at December 31, 2019 10,252,953 $ 103 $ 87,370 $ 73,321 $ (1,371) $ (3,104) $ 156,319
Net income — — — 1,684 — — 1,684
Other comprehensive loss, net of tax — — — — (3,192) — (3,192)
Issuance of common stock - restricted stock awards, net 16,228 — (73) — — — (73)
Compensation related to stock options and restricted stock awards — — 80 — — — 80
Allocation of 28,214 ESOP shares — — 99 — — 283 382
Repurchase and retirement of common stock (79,395) (1) (1,119) — — — (1,120)
Canceled common stock - restricted stock awards (5,375) — — — — — 0
Cash dividend declared and paid ($0.10 per share) — — — (988) — — (988)
Balances at March 31, 2020 10,184,411 $ 102 $ 86,357 $ 74,017 $ (4,563) $ (2,821) $ 153,092

Three Months Ended March 31, 2021
Shares Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss,
net of tax Unearned
ESOP
Shares Total Stockholders’ Equity
Balances at December 31, 2020 9,736,875 $ 97 $ 82,095 $ 78,003 $ (1,918) $ (1,975) $ 156,302
Net income — — — 2,497 — — 2,497
Other comprehensive income, net of tax — — — — 1,403 — 1,403
Exercise of stock options 2,000 — 21 21
Issuance of common stock - restricted stock awards, net 45,593 1 (39) — — — (38)
Compensation related to stock options and restricted stock awards — — 96 — — — 96
Allocation of 28,213 ESOP shares — — 89 — — 282 371
Repurchase and retirement of common stock (89,019) (1) (1,163) — — — (1,164)
Canceled common stock - restricted stock awards (2,839) — — — — — 0
Cash dividend declared and paid ($0.11 per share) — — — (1,045) — — (1,045)
Balances at March 31, 2021 9,692,610 $ 97 $ 81,099 $ 79,455 $ (515) $ (1,693) $ 158,443


	Three Months Ended March 31, 2021
	Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at December 31, 2020	9,736,875	$	97	$	82,095	$	78,003	$	(1,918)	$	(1,975)	$	156,302
Net income	—	—		—		2,497		—		—		2,497
Other comprehensive income, net of tax	—	—		—		—		1,403		—		1,403
Exercise of stock options	2,000	—		21		—		—		—		21
Issuance of common stock - restricted stock awards, net	45,593	1		—		—		—		—		1
Compensation related to stock options and restricted stock awards	—	—		96		—		—		—		96
Allocation of 28,213 ESOP shares	—	—		89		—		—		282		371
Repurchase and retirement of common stock	(89,019)	(1)		(1,163)		—		—		—		(1,164)
Canceled common stock - restricted stock awards	(2,839)	—		(39)		—		—		—		(39)
Cash dividend declared and paid ($0.11 per share)	—	—		—		(1,045)		—		—		(1,045)
Balances at March 31, 2021	9,692,610	$	97	$	81,099	$	79,455	$	(515)	$	(1,693)	$	158,443


	Three Months Ended March 31, 2022
	Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at December 31, 2021	9,125,759	$	91	$	72,298	$	86,162	$	174	$	(846)	$	157,879
Net income	—	—		—		3,260		—		—		3,260
Other comprehensive loss, net of tax	—	—		—		—		(2,063)		—		(2,063)
Exercise of stock options	2,000	—		21		—		—		—		21
Issuance of common stock - restricted stock awards, net	34,210	—		—		—		—		—		—
Compensation related to stock options and restricted stock awards	—	—		188		—		—		—		188
Allocation of 28,213 ESOP shares	—	—		193		—		—		282		475
Repurchase and retirement of common stock	(40,784)	—		(694)		—		—		—		(694)
Canceled common stock - restricted stock awards	(13,208)	—		(226)		—		—		—		(226)
Cash dividend declared and paid ($0.12 per share)	—	—		—		(1,083)		—		—		(1,083)
Balances at March 31, 2022	9,107,977	$	91	$	71,780	$	88,339	$	(1,889)	$	(564)	$	157,757

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	2,497	$	1,684	Net income	$	3,260	$	2,497
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		300		300
(Recapture of provision) provision for loan losses						(Recapture of provision) provision for loan losses	(500)		300

Net amortization of premiums and discounts on investments	Net amortization of premiums and discounts on investments	257		235		Net amortization of premiums and discounts on investments	258		257

Depreciation of premises and equipment	Depreciation of premises and equipment	531		538		Depreciation of premises and equipment	555		531

Deferred federal income taxes	Deferred federal income taxes	105		122		Deferred federal income taxes	329		105
Allocation of ESOP shares	Allocation of ESOP shares	371		382		Allocation of ESOP shares	475		371
Stock compensation expense	Stock compensation expense	96		80		Stock compensation expense	188		96
BOLI income	BOLI income	(269)		(254)		BOLI income	(288)		(269)
Annuity income	Annuity income	(13)		0		Annuity income	(1)		(13)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets	Increase in prepaid expenses and other assets	(817)		(72)		Increase in prepaid expenses and other assets	(318)		(817)
Decrease (increase) in ROU		190		(237)
Decrease in ROU						Decrease in ROU	191		190
Increase in advance payments from borrowers for taxes and insurance	Increase in advance payments from borrowers for taxes and insurance	2,315		2,039		Increase in advance payments from borrowers for taxes and insurance	2,390		2,315
Increase in accrued interest receivable	Increase in accrued interest receivable	(194)		(164)		Increase in accrued interest receivable	(305)		(194)
(Decrease) increase in lease liability		(179)		259
Decrease in lease liability						Decrease in lease liability	(188)		(179)
Decrease in accrued interest payable	Decrease in accrued interest payable	(14)		(49)		Decrease in accrued interest payable	—		(14)
Increase (decrease) in other liabilities		596		(1,731)
Increase in other liabilities						Increase in other liabilities	4,025		596
Net cash provided by operating activities	Net cash provided by operating activities	5,772		3,132		Net cash provided by operating activities	10,071		5,772
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:

Proceeds from calls of investments available-for-sale		2,000		0
Proceeds from sales of OREO properties						Proceeds from sales of OREO properties	—		—
Proceeds from calls and maturities of investments available-for-sale						Proceeds from calls and maturities of investments available-for-sale	2,382		2,000

Principal repayments on investments available-for-sale	Principal repayments on investments available-for-sale	4,722		3,880		Principal repayments on investments available-for-sale	4,868		4,722
Purchases of investments available-for-sale	Purchases of investments available-for-sale	(49,422)		(2,371)		Purchases of investments available-for-sale	(25,854)		(49,422)

Net decrease in loans receivable		1,450		16,034
Purchase of investments held-to-maturity						Purchase of investments held-to-maturity	—		—
Net (increase) decrease in loans receivable						Net (increase) decrease in loans receivable	(17,421)		1,450
Purchase of FHLB stock	Purchase of FHLB stock	(55)		(1,001)		Purchase of FHLB stock	(47)		(55)
Purchase of premises and equipment	Purchase of premises and equipment	(464)		(663)		Purchase of premises and equipment	(369)		(464)

Purchase of BOLI	Purchase of BOLI	(54)		(54)		Purchase of BOLI	(54)		(54)

Net cash (used) provided by investing activities		(41,823)		15,825
Cash flows from financing activities:
Net increase (decrease) in deposits		$	40,022	$	(33,550)
Advances from the FHLB		0		199,000
Repayments of advances from the FHLB		0		(176,700)
Proceeds from stock options exercises		21		0
Net share settlement of stock awards		(38)		(73)
Repurchase and retirement of common stock		(1,164)		(1,120)
Dividends paid		(1,045)		(988)
Net cash provided (used) by financing activities		37,796		(13,431)
Net cash used by investing activities						Net cash used by investing activities	(36,495)		(41,823)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
Net increase in cash and cash equivalents		1,745		5,526
Cash flows from financing activities:						Cash flows from financing activities:
Net (decrease) increase in deposits						Net (decrease) increase in deposits	$	(17,373)	$	40,022

Proceeds from stock options exercises						Proceeds from stock options exercises	21		21
Net share settlement of stock awards						Net share settlement of stock awards	(226)		(38)
Repurchase and retirement of common stock						Repurchase and retirement of common stock	(694)		(1,164)
Dividends paid						Dividends paid	(1,083)		(1,045)
Net cash (used by) provided by financing activities						Net cash (used by) provided by financing activities	(19,355)		37,796

Net (decrease) increase in cash and cash equivalents						Net (decrease) increase in cash and cash equivalents	(45,779)		1,745
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	80,489		22,990		Cash and cash equivalents at beginning of period	73,391		80,489
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	82,234	$	28,516	Cash and cash equivalents at end of period	$	27,612	$	82,234

Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest paid	Interest paid	$	2,731	$	4,884	Interest paid	$	1,557	$	2,731

Noncash items:	Noncash items:					Noncash items:

Change in unrealized loss on investments available-for-sale	Change in unrealized loss on investments available-for-sale	$	(1,952)	$	(327)	Change in unrealized loss on investments available-for-sale	$	(7,082)	$	(1,952)
Change in unrealized gain (loss) on cash flow hedge		3,728		(3,713)
Change in unrealized gain on cash flow hedge						Change in unrealized gain on cash flow hedge	4,471		3,728

Initial recognition of ROU	Initial recognition of ROU	519		403		Initial recognition of ROU	—		519
Initial recognition of lease liability	Initial recognition of lease liability	519		403		Initial recognition of lease liability	—		519

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Description of Business

First Financial Northwest, Inc. (“First Financial Northwest”), a Washington corporation, was formed on June 1, 2007 for the purpose of becoming the holding company for First Financial Northwest Bank (the “Bank”) in connection with the conversion from a mutual holding company structure to a stock holding company structure completed on October 9, 2007. First Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in First Financial Northwest Bank. Accordingly, the information presented in the consolidated financial statements and accompanying data, relates primarily to First Financial Northwest Bank. First Financial Northwest is a bank holding company, having converted from a savings and loan holding company on March 31, 2015, and as a bank holding company is subject to regulation by the Federal Reserve Bank of San Francisco. First Financial Northwest Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“DFI”).

At March 31, ~~2021,~~2022, First Financial Northwest Bank operated in fifteen locations in Washington with the headquarters and seven retail branch locations in King County, five retail branch locations in Snohomish County and two retail branches in Pierce County. The Bank’s primary market area consists of King, Snohomish, Pierce and Kitsap counties, Washington.

The Bank is a portfolio lender, originating and purchasing one-to-four family residential, multifamily, commercial real estate, construction/land development, business, and consumer loans. Loans are primarily funded by deposits from the general public, supplemented by borrowings from the FHLB and deposits raised in the national brokered deposit market.

As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to First Financial Northwest, Inc. and its consolidated subsidiary First Financial Northwest Bank, unless the context otherwise requires.

Note 2 - Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as filed with the SEC (“~~2020~~2021 Form 10-K”). In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the unaudited interim consolidated financial statements in accordance with GAAP have been included. All significant intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the three months ended March 31, ~~2021,~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. In preparing the unaudited consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the allowance for loan and lease losses (“ALLL”), the valuation of other real estate owned (“OREO”) and the underlying collateral of impaired loans, deferred tax assets, the right-of-use asset and lease liability on our operating leases, and the fair value of financial instruments.

The Company’s activities are considered to be a single industry segment for financial reporting purposes. The Company is engaged in the business of attracting deposits from the general public and originating and purchasing loans for its portfolio. Substantially all income is derived from a diverse base of commercial, multifamily, and residential real estate loans, consumer lending activities, and investments.

Certain amounts in the unaudited interim consolidated financial statements for prior periods have been reclassified to conform to the current unaudited financial statement presentation with no effect on consolidated net income or stockholders’ equity.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 - Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements ~~Adopted in 2021~~

~~In December 2019, the FASB issued ASU No. 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12).~~ This ASU simplifies the accounting for income taxes by removing (i) the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (ii) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and (iii) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The Company adopted this ASU in January 2021 with no material impact on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The Company adopted this ASU in January 2021 with no material impact on its consolidated financial statements.

~~Recent Accounting Pronouncements~~

~~ASU~~Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued in June 2016. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. This ASU is effective for smaller reporting companies, such as the Company, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and procedures to calculate the ALLL, 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. A valuation adjustment to the ALLL or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings. ASU 2019-05 issued in April 2019 further provides that entities that have certain financial instruments measured at amortized cost that has credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. This ASU is effective upon adoption of ASU 2016-13, and should be applied on a modified-retrospective basis as a cumulative-effect adjustment to the opening balance of retained earnings in the statement of financial condition as of the adoption date. The Company is in the process of compiling historical and industry data that will be used to calculate expected credit losses on the loan portfolio to ensure that it is fully compliant with the ASU at the adoption date and is evaluating the potential impact adoption of this ASU will have on its consolidated financial statements. The Company intends to adopt ASU 2016-13 in the first quarter of 2023, and as a result, the ALLL may increase. Until the evaluation is complete, however, the magnitude of the increase will not be known.

In January 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate that will be modified by reference rate reform. This ASU provides implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to derivative instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12, 2020, or on a prospective basis to new modifications from any date subsequent to the date of issuance. As of December 31, 2021, the Company’s derivative instruments continued to use LIBOR as the basis for interest-rate swap calculations. The Company is evaluating the optional election of this ASU for the transition from LIBOR to a new reference rate.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write offs by year of origination for financing receivables and net investments in leases. This ASU is effective upon adoption of ASU 2016-13.

~~Note 4 - Investments~~

~~Investments available-for-sale are summarized as follows at the dates indicated:~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2021
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 15,556 $ 325 $ (133) $ 15,748
   Freddie Mac 13,173 166 (488) 12,851
   Ginnie Mae 24,896 278 (84) 25,090
   Other 10,388 137 (21) 10,504
Municipal bonds 31,399 546 (507) 31,438
U.S. Government agencies 50,715 90 (449) 50,356
Corporate bonds 22,002 280 (227) 22,055
Total $ 168,129 $ 1,822 $ (1,909) $ 168,042
Note 4 - Investments

December 31, 2020
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 12,797 $ 491 $ 0 $ 13,288
   Freddie Mac 4,116 200 0 4,316
   Ginnie Mae 16,513 617 (3) 17,127
   Other 10,691 100 (62) 10,729
Municipal bonds 16,483 963 0 17,446
U.S. Government agencies 41,084 88 (537) 40,635
Corporate bonds 24,001 221 (212) 24,010
Total $ 125,685 $ 2,680 $ (814) $ 127,551

Investments available-for-sale are summarized as follows at the dates indicated:


	March 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	13,409	$	21	$	(755)	$	12,675
Freddie Mac	13,953		31		(903)		13,081
Ginnie Mae	21,454		1		(726)		20,729
Other	11,583		4		(191)		11,396
Municipal bonds	35,979		84		(3,020)		33,043
U.S. Government agencies	59,721		10		(776)		58,955
Corporate bonds	30,997		85		(749)		30,333
Total	$	187,096	$	236	$	(7,120)	$	180,212


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	12,920	$	146	$	(88)	$	12,978
Freddie Mac	13,039		115		(330)		12,824
Ginnie Mae	23,728		105		(146)		23,687
Other	11,278		47		(61)		11,264
Municipal bonds	36,078		677		(289)		36,466
U.S. Government agencies	41,711		61		(338)		41,434
Corporate bonds	29,997		505		(207)		30,295
Total	$	168,751	$	1,656	$	(1,459)	$	168,948

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2022 and December 31, 2021.

The tables below summarize the aggregate fair value and gross unrealized loss by length of time those investment securities have been continuously in an unrealized loss position at the dates indicated:

March 31, 2021
Less Than 12 Months 12 Months or Longer Total
Fair Value Gross Unrealized
Loss Fair Value Gross Unrealized
Loss Fair Value Gross Unrealized
Loss
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 3,884 $ (133) $ 0 $ 0 $ 3,884 $ (133)
   Freddie Mac 7,838 (488) 0 0 7,838 (488)
   Ginnie Mae 10,649 (84) 0 0 10,649 (84)
   Other 0 0 5,981 (21) 5,981 (21)
Municipal bonds 18,074 (507) 0 0 18,074 (507)
U.S. Government agencies 9,490 (16) 28,191 (433) 37,681 (449)
Corporate bonds 2,468 (32) 5,811 (195) 8,279 (227)
Total $ 52,403 $ (1,260) $ 39,983 $ (649) $ 92,386 $ (1,909)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		December 31, 2020													March 31, 2022
		Less Than 12 Months				12 Months or Longer				Total					Less Than 12 Months				12 Months or Longer				Total
		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
		(In thousands)													(In thousands)
Mortgage-backed investments:	Mortgage-backed investments:													Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	0	$	0	$	0	$	0	$	0	$	0	Fannie Mae	$	9,082	$	(755)	$	—	$	—	$	9,082	$	(755)
Freddie Mac	Freddie Mac	0		0		0		0		0		0		Freddie Mac	3,951		(75)		7,359		(828)		11,310		(903)
Ginnie Mae	Ginnie Mae	0		0		1,311		(3)		1,311		(3)		Ginnie Mae	14,999		(607)		5,618		(119)		20,617		(726)
Other	Other	0		0		5,942		(62)		5,942		(62)		Other	6,130		(191)		—		—		6,130		(191)
Municipal bonds	Municipal bonds	0		0		0		0		0		0		Municipal bonds	18,830		(1,896)		9,424		(1,124)		28,254		(3,020)
U.S. Government agencies	U.S. Government agencies	1,716		(11)		30,991		(526)		32,707		(537)		U.S. Government agencies	33,165		(431)		19,737		(345)		52,902		(776)
Corporate bonds	Corporate bonds	0		0		5,794		(212)		5,794		(212)		Corporate bonds	17,441		(558)		3,809		(191)		21,250		(749)
Total	Total	$	1,716	$	(11)	$	44,038	$	(803)	$	45,754	$	(814)	Total	$	103,598	$	(4,513)	$	45,947	$	(2,607)	$	149,545	$	(7,120)


	December 31, 2021
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	6,279	$	(88)	$	—	$	—	$	6,279	$	(88)
Freddie Mac	4,709		(233)		3,214		(97)		7,923		(330)
Ginnie Mae	18,539		(146)		—		—		18,539		(146)
Other	4,815		(61)		—		—		4,815		(61)
Municipal bonds	18,805		(264)		1,059		(25)		19,864		(289)
U.S. Government agencies	10,123		(34)		21,682		(304)		31,805		(338)
Corporate bonds	985		(15)		3,809		(192)		4,794		(207)
Total	$	64,255	$	(841)	$	29,764	$	(618)	$	94,019	$	(1,459)

On a quarterly basis, management makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell the debt security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the debt security and it is not likely that it will be required to sell the debt security but does not expect to recover the entire amortized cost basis of the debt security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a debt 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 debt security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. The Company had 4488 securities and 2051 securities in an unrealized loss position, respectively, with 1525 and 1814 of these securities in an unrealized loss position for 12 months or more, at both March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively. Management does not believe that any individual unrealized loss as of March 31, ~~2021,~~2022, or December 31, ~~2020,~~2021, represented OTTI. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads subsequent to their purchase. Management also reviewed the financial condition of the entities issuing

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

municipal or corporate bonds at March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, and determined that an OTTI charge was not warranted.

The amortized cost and estimated fair value of investments available-for-sale at March 31, ~~2021,~~2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.

March 31, 2021
Amortized Cost Fair Value
(In thousands)
Due after one year through five years $ 8,908 $ 8,946
Due after five years through ten years 16,134 16,232
Due after ten years 79,074 78,671
104,116 103,849
Mortgage-backed investments 64,013 64,193
Total $ 168,129 $ 168,042

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


	March 31, 2022
	Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	399	$	401
Due after one year through five years	28,387		28,240
Due after five years through ten years	27,231		26,420
Due after ten years	70,680		67,270
	126,697		122,331
Mortgage-backed investments	60,399		57,881
Total	$	187,096	$	180,212

Under Washington state law, in order to participate in the public funds program the Company is required to pledge eligible securities as collateral in an amount equal to 50% of the public deposits held less the FDIC insured amount. Investment securities with market values of ~~$24.2~~$22.7 million and ~~$23.4~~$23.1 million were pledged as collateral for public deposits at March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

For the three months ended March 31, 2022, there was a $30,000 call on one investment security with no gain or loss generated and no sales of investment securities. For the three months ended March 31, 2021, there was a $2.0 million call on one investment security ~~that did 0t generate a~~with no gain or ~~loss. For the three months ended March 31, 2020, there were 0 calls,~~loss generated and no sales ~~or maturities on~~of investment securities.

In January 2020, the Bank purchased three annuity contracts, totaling $2.4 million, to be held long-term to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements. At March 31, ~~2021,~~2022, the annuities were reported as investments held-to-maturity at an amortized cost of $2.4 million on the Company’s Consolidated Balance ~~Sheet.~~Sheets. The amortized cost is considered the fair value of the investment.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Loans Receivable

Loans receivable are disclosed net of loans in process (“LIP”) and are summarized as follows at the dates indicated:


		March 31, 2021		December 31, 2020			March 31, 2022		December 31, 2021
		(In thousands)					(In thousands)
One-to-four family residential:	One-to-four family residential:					One-to-four family residential:
Permanent owner occupied	Permanent owner occupied	$	199,845	$	206,323	Permanent owner occupied	$	197,447	$	185,320
Permanent non-owner occupied	Permanent non-owner occupied	179,401		175,637		Permanent non-owner occupied	214,784		199,796
		379,246		381,960			412,231		385,116

Multifamily	Multifamily	140,068		136,694		Multifamily	152,855		130,146

Commercial real estate	Commercial real estate	385,470		385,265		Commercial real estate	416,988		419,417

Construction/land:	Construction/land:					Construction/land:
One-to-four family residential	One-to-four family residential	27,817		33,396		One-to-four family residential	35,953		34,677
Multifamily	Multifamily	58,718		51,215		Multifamily	17,196		37,194
Commercial	Commercial	5,837		5,783		Commercial	6,189		6,189
Land	Land	2,173		1,813		Land	15,359		15,395
		94,545		92,207			74,697		93,455

Business	Business	78,294		80,663		Business	30,546		46,590
Consumer	Consumer	38,768		40,621		Consumer	49,431		44,812
Total loans	Total loans	1,116,391		1,117,410		Total loans	1,136,748		1,119,536

Less:	Less:					Less:
Deferred loan fees, net	Deferred loan fees, net	2,057		1,654		Deferred loan fees, net	207		418
ALLL	ALLL	15,502		15,174		ALLL	15,159		15,657
Loans receivable, net	Loans receivable, net	$	1,098,832	$	1,100,582	Loans receivable, net	$	1,121,382	$	1,103,461

At March 31, ~~2021,~~2022, loans totaling ~~$496.2~~$518.9 million were pledged to secure borrowings from the FHLB compared to ~~$523.8~~$561.4 million at December 31, ~~2020.~~2021. In addition, loans totaling ~~$127.4~~$120.8 million and ~~$127.1~~$120.0 million were pledged to the Federal Reserve Bank of San Francisco to secure a line of credit at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Credit Quality Indicators. The Company assigns a risk rating to all credit exposures based on a risk rating system designed to define the basic characteristics and identified risk elements of each credit extension. The Company utilizes a nine point risk rating system. A description of the general characteristics of the risk grades is as follows:

•Grades 1 through 5: These grades are considered to be “pass” credits. These include assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future.

•Grade 6: These credits, classified as “special mention”, possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. If left uncorrected, these potential weaknesses may result in deterioration in the Company’s credit position at a future date.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•Grade 7: These credits, classified as “substandard”, present a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These credits have well defined weaknesses which jeopardize the orderly liquidation of the debt and are inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

•Grade 8: These credits are classified as “doubtful” and possess well defined weaknesses which make the full collection or liquidation of the loan highly questionable and improbable. This classification is used where significant risk exposures are perceived but the exact amount of the loss cannot yet be determined due to pending events.

•Grade 9: Assets classified as “loss” are considered uncollectible and cannot be justified as a viable asset for the Company. There is little or no prospect of near term recovery and no realistic strengthening action of significance is pending.

~~Loan~~The grades for watch and special mention loans are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. ~~The grades for watch and special mention~~These are ~~assigned to~~ loans which have been criticized based upon known characteristics such as periodic payment delinquency, failure to comply with contractual terms of the loan or stale financial information from the borrower and/or guarantors. Loans identified as criticized (watch and special mention) or classified (substandard, doubtful or loss) are subject to problem loan reporting every three months.

As of March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at March 31, ~~2021,~~2022, and December 31, ~~2020~~2021 by type and risk category:


		March 31, 2021															March 31, 2022
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
		(In thousands)															(In thousands)
Risk Rating:	Risk Rating:															Risk Rating:
Pass, grade 1-4	Pass, grade 1-4	$	374,330	$	135,685	$	317,968	$	92,294	$	77,851	$	38,731	$	1,036,859	Pass, grade 1-4	$	409,798	$	148,877	$	349,724	$	72,444	$	30,546	$	49,005	$	1,060,394
Pass, grade 5 (watch)	Pass, grade 5 (watch)	3,969		2,347		41,193		2,251		443		37		50,240		Pass, grade 5 (watch)	1,696		2,318		16,094		2,253		—		31		22,392
Special mention	Special mention	422		0		26,309		0		0		0		26,731		Special mention	737		—		10,997		—		—		216		11,950
Substandard	Substandard	525		2,036		0		0		0		0		2,561		Substandard	—		1,660		40,173		—		—		179		42,012
Total loans	Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391	Total loans	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,431	$	1,136,748


		December 31, 2020															December 31, 2021
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
		(In thousands)															(In thousands)
Risk Rating:	Risk Rating:															Risk Rating:
Pass, grade 1-4	Pass, grade 1-4	$	376,918	$	132,243	$	316,955	$	89,957	$	80,208	$	40,477	$	1,036,758	Pass, grade 1-4	$	383,276	$	126,149	$	351,241	$	91,202	$	46,590	$	44,379	$	1,042,837
Pass, grade 5 (watch)	Pass, grade 5 (watch)	3,914		2,347		52,375		2,250		455		144		61,485		Pass, grade 5 (watch)	911		3,997		23,019		2,253		—		33		30,213
Special mention	Special mention	601		0		15,935		0		0		0		16,536		Special mention	929		—		11,127		—		—		221		12,277
Substandard	Substandard	527		2,104		0		0		0		0		2,631		Substandard	—		—		34,030		—		—		179		34,209
Total loans	Total loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410	Total loans	$	385,116	$	130,146	$	419,417	$	93,455	$	46,590	$	44,812	$	1,119,536

ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations, or identifies a loan where it is uncertain if the Bank will be able to collect all amounts due according to the contractual terms of the loan, it may establish a specific ~~reserve~~allowance in an amount deemed prudent to address the risk specifically. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to the particular problem assets. When an insured institution classifies problem assets as a loss, pursuant to Federal regulations, it is required to charge-off such assets in the period in which they are deemed uncollectible. The determination as to the classification of the Company’s assets and the

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional allowances for loan losses. In February 2021, the Company received notification that $5.4 million in commercial real estate participation loans had been downgraded by the lead bank to special mention. To date, the Company has not received sufficient information to make a final determination, and accordingly, the risk rating on these loans have not been further downgraded. At March 31, 2021, these loans that are secured by nursing home/rehabilitation facilities were current on their payments.

At March 31, ~~2021,~~2022, total loans receivable included $~~45.2~~5.2 million of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). ~~PPP loans are 100% guaranteed by the SBA.~~ Although these loans were included in the population of loans collectively evaluated for impairment, no general ~~reserve~~allowance was allocated to them as these loans are 100% guaranteed by the SBA.

The following tables summarize changes in the ALLL and loan portfolio by loan type and impairment method at the dates and for the periods shown:


		At or For the Three Months Ended March 31, 2021															At or For the Three Months Ended March 31, 2022
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
		(In thousands)															(In thousands)
ALLL:	ALLL:															ALLL:
Beginning balance	Beginning balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174	Beginning balance	$	3,214	$	1,279	$	6,615	$	2,064	$	1,112	$	1,373	$	15,657

Recoveries	Recoveries	28		0		0		0		0		0		28		Recoveries	2		—		—		—		—		—		2
(Recapture) provision		(158)		(34)		765		4		(216)		(61)		300
Provision (recapture)																Provision (recapture)	259		176		(300)		(422)		(331)		118		(500)
Ending balance	Ending balance	$	3,051	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,502	Ending balance	$	3,475	$	1,455	$	6,315	$	1,642	$	781	$	1,491	$	15,159

ALLL by category:	ALLL by category:															ALLL by category:
General reserve		$	3,046	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,497
Specific reserve		5		0		0		0		0		0		5
General allowance																General allowance	$	3,457	$	1,455	$	6,315	$	1,642	$	781	$	1,491	$	15,141
Specific allowance																Specific allowance	18		—		—		—		—		—		18

Loans:	Loans:															Loans:
Total loans	Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391	Total loans	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,431	$	1,136,748
Loans collectively evaluated for impairment	Loans collectively evaluated for impairment	376,722		138,032		368,911		94,545		78,294		38,768		1,095,272		Loans collectively evaluated for impairment	410,136		151,195		376,815		74,697		30,546		49,431		1,092,820
Loans individually evaluated for impairment	Loans individually evaluated for impairment	2,524		2,036		16,559		0		0		0		21,119		Loans individually evaluated for impairment	2,095		1,660		40,173		—		—		—		43,928

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SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		At or For the Three Months Ended March 31, 2020															At or For the Three Months Ended March 31, 2021
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
		(In thousands)															(In thousands)
ALLL:	ALLL:															ALLL:
Beginning balance	Beginning balance	$	3,034	$	1,607	$	4,559	$	2,222	$	1,140	$	656	$	13,218	Beginning balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174

Recoveries	Recoveries	12		0		0		0		0		0		12		Recoveries	28		—		—		—		—		—		28
Provision (recapture)		9		51		134		(79)		(66)		251		300
(Recapture) provision																(Recapture) provision	(158)		(34)		765		4		(216)		(61)		300
Ending balance	Ending balance	$	3,055	$	1,658	$	4,693	$	2,143	$	1,074	$	907	$	13,530	Ending balance	$	3,051	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,502

ALLL by category:	ALLL by category:															ALLL by category:
General reserve		$	3,026	$	1,658	$	4,693	$	2,143	$	1,074	$	907	$	13,501
Specific reserve		29		0		0		0		0		0		29
General allowance																General allowance	$	3,046	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,497
Specific allowance																Specific allowance	5		—		—		—		—		—		5

Loans:	Loans:															Loans:
Total loans	Total loans	$	371,253	$	169,468	$	385,910	$	107,401	$	34,702	$	37,225	$	1,105,959	Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391
Loans collectively evaluated for impairment	Loans collectively evaluated for impairment	367,395		167,364		384,653		91,751		34,702		37,225		1,083,090		Loans collectively evaluated for impairment	376,722		138,032		368,911		94,545		78,294		38,768		1,095,272
Loans individually evaluated for impairment	Loans individually evaluated for impairment	3,858		2,104		1,257		15,650		0		0		22,869		Loans individually evaluated for impairment	2,524		2,036		16,559		—		—		—		21,119

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Past Due Loans. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At March 31, ~~2021,~~2022, total past due loans were ~~0.21%~~$208,000, representing 0.02% of total loans receivable, ~~as compared to 0.24%~~and at December 31, ~~2020.~~2021, were $255,000, representing 0.02% of total loans receivable. The following tables represent a summary of the aging of loans by type at the dates indicated:


		Loans Past Due as of March 31, 2021													Loans Past Due as of March 31, 2022
		30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)			30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
		(In thousands)													(In thousands)
Real estate:	Real estate:													Real estate:
One-to-four family residential:	One-to-four family residential:													One-to-four family residential:
Owner occupied	Owner occupied	$	0	$	0	$	0	$	0	$	199,845	$	199,845	Owner occupied	$	—	$	—	$	—	$	—	$	197,447	$	197,447
Non-owner occupied	Non-owner occupied	0		0		0		0		179,401		179,401		Non-owner occupied	29		—		—		29		214,755		214,784
Multifamily	Multifamily	0		0		2,036		2,036		138,032		140,068		Multifamily	—		—		—		—		152,855		152,855
Commercial real estate	Commercial real estate	0		0		0		0		385,470		385,470		Commercial real estate	—		—		—		—		416,988		416,988
Construction/land	Construction/land	0		0		0		0		94,545		94,545		Construction/land	—		0		—		—		74,697		74,697
Total real estate	Total real estate	0		0		2,036		2,036		997,293		999,329		Total real estate	29		—		—		29		1,056,742		1,056,771
Business	Business	264		0		0		264		78,030		78,294		Business	—		—		—		—		30,546		30,546
Consumer	Consumer	37		0		0		37		38,731		38,768		Consumer	—		—		179		179		49,252		49,431
Total loans	Total loans	$	301	$	0	$	2,036	$	2,337	$	1,114,054	$	1,116,391	Total loans	$	29	$	—	$	179	$	208	$	1,136,540	$	1,136,748

________________

(1) There were 0no loans 90 days and greater past due and still accruing interest at March 31, ~~2021.~~2022.

Loans Past Due as of December 31, 2020
30-59 Days 60-89 Days 90 Days and
Greater Total Past
Due Current
Total (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ 77 $ 0 $ 0 $ 77 $ 206,246 $ 206,323
Non-owner occupied 159 0 0 159 175,478 175,637
Multifamily 0 0 2,104 2,104 134,590 136,694
Commercial real estate 0 0 0 0 385,265 385,265
Construction/land 0 0 0 0 92,207 92,207
Total real estate 236 0 2,104 2,340 993,786 996,126
Business 275 0 0 275 80,388 80,663
Consumer 38 0 0 38 40,583 40,621
Total loans $ 549 $ 0 $ 2,104 $ 2,653 $ 1,114,757 $ 1,117,410

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(Unaudited)


	Loans Past Due as of December 31, 2021
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	—	$	—	$	—	$	—	$	185,320	$	185,320
Non-owner occupied	—		—		—		—		199,796		199,796
Multifamily	—		—		—		—		130,146		130,146
Commercial real estate	—		—		—		—		419,417		419,417
Construction/land	—		—		—		—		93,455		93,455
Total real estate	—		—		—		—		1,028,134		1,028,134
Business	76		—		—		76		46,514		46,590
Consumer	179		—		—		179		44,633		44,812
Total loans	$	255	$	—	$	—	$	255	$	1,119,281	$	1,119,536

_________________

(1) There were 0no loans 90 days and greater past due and still accruing interest at December 31, ~~2020.~~2021.

Nonperforming Loans. When a loan becomes 90 days past due, the Bank generally places the loan on nonaccrual status. Loans may be placed on nonaccrual status prior to being 90 days past due if there is an identified problem that indicates the borrower is unable to meet their scheduled payment obligations. The following table is a summary of nonaccrual loans by loan type at the dates indicated:


	March 31, 2022		December 31, 2021
	(In thousands)




Consumer	179		—
Total nonaccrual loans	$	179	$	—

Nonaccrual loans at March 31, 2022, consisted of one secured consumer loan. The Bank has initiated repossession of the collateralized vehicle and does not expect to incur a loss on the loan.

The following tables summarize the loan portfolio by type and payment status at the dates indicated:


	March 31, 2022
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing (1)	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,252	$	1,136,569
Nonperforming	—		—		—		—		—		179		179
Total loans	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,431	$	1,136,748

_____________

(1) There were $197.4 million of owner-occupied one-to-four family residential loans and $214.8 million of non-owner occupied one-to-four family residential loans classified as performing.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2021 December 31, 2020
(In thousands)
Multifamily $ 2,036 $ 2,104
Total nonaccrual loans $ 2,036 $ 2,104

Nonaccrual loans at both March 31, 2021, and December 31, 2020, consisted of one multifamily loan that was in the foreclosure process at those dates. Interest income that would have been recognized had the nonaccrual loan been performing in accordance with its original terms was $24,000 and $14,000 for the three months ended March 31, 2021, and 2020, respectively.

~~The following tables summarize the loan portfolio by type and payment status at the dates indicated:~~

March 31, 2021
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
Performing (1)
$ 379,246 $ 138,032 $ 385,470 $ 94,545 $ 78,294 $ 38,768 $ 1,114,355
Nonperforming 0 2,036 0 0 0 0 2,036
Total loans $ 379,246 $ 140,068 $ 385,470 $ 94,545 $ 78,294 $ 38,768 $ 1,116,391

~~_____________~~

~~(1)~~ ~~There were $199.8 million of owner-occupied one-to-four family residential loans and $179.4 million of non-owner occupied one-to-four family residential loans classified as performing.~~


		December 31, 2020															December 31, 2021
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
		(In thousands)															(In thousands)
Performing (1)	Performing (1)	$	381,960	$	134,590	$	385,265	$	92,207	$	80,663	$	40,621	$	1,115,306	Performing (1)	$	385,116	$	130,146	$	419,417	$	93,455	$	46,590	$	44,812	$	1,119,536
Nonperforming ~~(2)~~	Nonperforming ~~(2)~~	0		2,104		0		0		0		0		2,104		Nonperforming ~~(2)~~	—		—		—		—		—		—		—
Total loans	Total loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410	Total loans	$	385,116	$	130,146	$	419,417	$	93,455	$	46,590	$	44,812	$	1,119,536

_____________

(1) There were ~~$206.3~~$185.3 million of owner-occupied one-to-four family residential loans and ~~$175.6~~$199.8 million of non-owner occupied one-to-four family residential loans classified as performing.

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the original loan document or the borrower failing to comply with contractual terms of the loan. At March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, there were 0no commitments to advance funds related to impaired loans.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present a summary of loans individually evaluated for impairment by loan type at the dates indicated:


		March 31, 2021							March 31, 2022
		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance			Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
		(In thousands)							(In thousands)
Loans with no related allowance:	Loans with no related allowance:							Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	$	271	$	359	$	—	Owner occupied	$	177	$	183	$	—
Non-owner occupied	Non-owner occupied	936		936		—		Non-owner occupied	908		908		—
Multifamily	Multifamily	2,036		2,098		—		Multifamily	1,660		1,660		—
Commercial real estate	Commercial real estate	16,559		16,559		—		Commercial real estate	40,173		40,173		—

Total	Total	19,802		19,952		—		Total	42,918		42,924		—

Loans with an allowance:	Loans with an allowance:							Loans with an allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	500		547		4		Owner occupied	492		539		18
Non-owner occupied	Non-owner occupied	817		817		1		Non-owner occupied	518		518		—

Total	Total	1,317		1,364		5		Total	1,010		1,057		18

Total impaired loans:	Total impaired loans:							Total impaired loans:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	771		906		4		Owner occupied	669		722		18
Non-owner occupied	Non-owner occupied	1,753		1,753		1		Non-owner occupied	1,426		1,426		—
Multifamily	Multifamily	2,036		2,098		0		Multifamily	1,660		1,660		—
Commercial real estate	Commercial real estate	16,559		16,559		0		Commercial real estate	40,173		40,173		—

Total	Total	$	21,119	$	21,316	$	5	Total	$	43,928	$	43,981	$	18

_________________

(1) Represents the loan balance less charge-offs.

(2) Contractual loan principal balance.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		December 31, 2020							December 31, 2021
		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance			Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
		(In thousands)							(In thousands)
Loans with no related allowance:	Loans with no related allowance:							Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	$	274	$	365	$	—	Owner occupied	$	178	$	185	$	—
Non-owner occupied	Non-owner occupied	1,031		1,031		—		Non-owner occupied	915		915		—
Multifamily		2,104		2,104		—

Commercial real estate	Commercial real estate	16,669		16,669		—		Commercial real estate	34,030		34,030		—

Total	Total	20,078		20,169		—		Total	35,123		35,130		—

Loans with an allowance:	Loans with an allowance:							Loans with an allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	502		549		6		Owner occupied	494		541		19
Non-owner occupied	Non-owner occupied	820		820		2		Non-owner occupied	520		520		1

Total	Total	1,322		1,369		8		Total	1,014		1,061		20

Total impaired loans:	Total impaired loans:							Total impaired loans:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	776		914		6		Owner occupied	672		726		19
Non-owner occupied	Non-owner occupied	1,851		1,851		2		Non-owner occupied	1,435		1,435		1
Multifamily		2,104		2,104		0

Commercial real estate	Commercial real estate	16,669		16,669		0		Commercial real estate	34,030		34,030		—

Total	Total	$	21,400	$	21,538	$	8	Total	$	36,137	$	36,191	$	20

_________________

(1) Represents the loan balance less charge-offs.

(2) Contractual loan principal balance.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three months ended March 31, ~~2021~~2022 and ~~2020:~~2021:


		Three Months Ended March 31, 2021				Three Months Ended March 31, 2020					Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
		(In thousands)									(In thousands)
Loans with no related allowance:	Loans with no related allowance:									Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	$	273	$	5	$	433	$	9	Owner occupied	$	178	$	3	$	273	$	5
Non-owner occupied	Non-owner occupied	984		16		1,388		21		Non-owner occupied	912		15		984		16
Multifamily	Multifamily	2,070		46		2,105		46		Multifamily	830		17		2,070		46
Commercial real estate	Commercial real estate	16,614		161		1,262		22		Commercial real estate	37,102		410		16,614		161
Construction/land		0		0		14,087		150

Total	Total	19,941		228		19,275		248		Total	39,022		445		19,941		228

Loans with an allowance:	Loans with an allowance:									Loans with an allowance:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	501		8		504		9		Owner occupied	493		7		501		8
Non-owner occupied	Non-owner occupied	819		13		1,642		23		Non-owner occupied	519		9		819		13

Total	Total	1,320		21		2,146		32		Total	1,012		16		1,320		21

Total impaired loans:	Total impaired loans:									Total impaired loans:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	774		13		937		18		Owner occupied	671		10		774		13
Non-owner occupied	Non-owner occupied	1,803		29		3,030		44		Non-owner occupied	1,431		24		1,803		29
Multifamily	Multifamily	2,070		46		2,105		46		Multifamily	830		17		2,070		46
Commercial real estate	Commercial real estate	16,614		161		1,262		22		Commercial real estate	37,102		410		16,614		161
Construction/land		0		0		14,087		150

Total	Total	$	21,261	$	249	$	21,421	$	280	Total	$	40,034	$	461	$	21,261	$	249

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Troubled Debt Restructurings. Certain loan modifications are accounted for as ~~troubled debt restructured loans (“TDRs”).~~TDR. At both March 31, 2022, and December 31, 2021, TDRs totaled $2.1 million. At March 31, ~~2021, the TDR portfolio totaled $3.8 million. At December 31, 2020, the TDR portfolio totaled $3.9 million. At both dates, all TDRs were performing according to their modified repayment terms.~~

~~At March 31, 2021,~~2022, the Company had 0no commitments to extend additional credit to borrowers whose loan terms have been modified ~~in TDRs.~~as a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment as part of the calculation of the ALLL. ~~NaN~~No loans accounted for as TDRs were charged-off to the ALLL for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021.

~~The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), signed into law on March 27, 2020, provided guidance around~~There were no TDR modifications during the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. generally up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) January 1, 2022. Atthree months ended March 31, 2021, total loans receivable included $56.7 million of loans that were on active short-term deferrals under the CARES Act and related regulatory guidance. Loan modifications in accordance with the CARES Act are still subject to an impairment evaluation.

2022. The following table presents TDR modifications during the three months ended March 31, 2021, and the recorded investment prior to and after the modification. ~~There were no TDR modifications for the three months ended March 31, 2020.~~


		Three Months Ended March 31, 2021							Three Months Ended March 31, 2021
		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment					Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
		(Dollars in thousands)						(Dollars in thousands)

Commercial real estate
Commercial real estate:										Commercial real estate:
Advancement of maturity date	Advancement of maturity date	1		$	1,241	$	1,241			Advancement of maturity date	1	$	1,241	$	1,241
Total	Total	$	1	$	1,241	$	1,241			Total	1	$	1,241	$	1,241

TDRs that default after they have been modified are typically evaluated individually on a collateral basis. Any additional impairment is charged to the ALLL. For the three months ended March 31, ~~2021,~~2022, and March 31, ~~2020, 0~~2021, no loans that had been modified in the previous 12 months defaulted.

Note 6 - Other Real Estate Owned

OREO includes properties acquired by the Company through foreclosure and deed in lieu of foreclosure. The following table is a summary of OREO activity during the periods shown:


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020			2022		2021
		(In thousands)					(In thousands)
Balance at beginning of period	Balance at beginning of period	$	454	$	454	Balance at beginning of period	$	—	$	454

Market value adjustments	Market value adjustments	0		0		Market value adjustments	—		—
Balance at end of period	Balance at end of period	$	454	$	454	Balance at end of period	$	—	$	454

For the three months ended March 31, ~~2021, and 2020,~~2022, there were 0no remaining OREO properties, as the commercial real estate properties held in OREO at March 31, 2021, were sold ~~and 0 market value adjustments taken on the properties~~ in ~~OREO.~~August 2021. At March 31, ~~2021, OREO consisted of $454,000 in commercial real estate properties. At March 31, 2021,~~2022, there ~~was the $2.0 million multifamily loan discussed above and 0~~were no one-to-four family residential loans for which formal foreclosure proceedings were in process.

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Note 7 - Fair Value

The Company measures the fair value of financial instruments for reporting in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. Fair values of assets or liabilities are based on estimates of the exit price, which is the price that would be received to sell an asset or paid to transfer a liability. When available, observable market transactions or market information is used. The fair value estimate of loans receivable was based on similar techniques, with the addition of current origination spreads, liquidity premiums, or credit adjustments. The fair value of nonperforming loans is based on the underlying value of the collateral.

The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect its estimate for market assumptions.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.

All inputs, whether observable or unobservable, are ranked in accordance with a prescribed fair value hierarchy:

•Level 1 - Quoted prices for identical instruments in active markets.

•Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

•Level 3 - Instruments whose significant value drivers are unobservable.

The Company used the following methods to measure fair value on a recurring or nonrecurring basis:

•Investments available-for-sale: The fair value of all investments, excluding FHLB stock, was based upon quoted market prices for similar investments in active markets, identical or similar investments in markets that are not active, and model-derived valuations whose inputs are observable.

•Impaired loans: The fair value of impaired loans is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate. When the sole source of repayment of the loan is the operation or liquidation of the collateral, the fair value is determined using the observable market price less certain completion ~~costs and completion~~ costs.

•OREO: The fair value of OREO properties is measured at the lower of the carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. in cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

•Derivatives: The fair value of derivatives is based on pricing models utilizing observable market data and discounted cash flow methodologies for which the determination of fair value may require significant management judgment or estimation.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements) at March 31, ~~2021~~2022 and December 31, ~~2020:~~2021:


		Fair Value Measurements at March 31, 2021									Fair Value Measurements at March 31, 2022
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Investments available-for-sale:	Investments available-for-sale:									Investments available-for-sale:
Mortgage-backed investments:	Mortgage-backed investments:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	15,748	$	0	$	15,748	$	0	Fannie Mae	$	12,675	$	—	$	12,675	$	—
Freddie Mac	Freddie Mac	12,851		0		12,851		0		Freddie Mac	13,081		742		12,339		—
Ginnie Mae	Ginnie Mae	25,090		0		25,090		0		Ginnie Mae	20,729		—		20,729		—
Other	Other	10,504		0		10,504		0		Other	11,396		3,792		7,604		—
Municipal bonds	Municipal bonds	31,438		0		31,438		0		Municipal bonds	33,043		—		33,043		—
U.S. Government agencies	U.S. Government agencies	50,356		0		50,356		0		U.S. Government agencies	58,955		19,801		39,154		—
Corporate bonds	Corporate bonds	22,055		0		22,055		0		Corporate bonds	30,333		—		30,333		—
Total available-for-sale investments	Total available-for-sale investments	168,042		0		168,042		0		Total available-for-sale investments	180,212		24,335		155,877		—
Derivative fair value asset	Derivative fair value asset	903		0		903		0		Derivative fair value asset	5,961		—		5,961		—
Total										Total	$	186,173	$	24,335	$	161,838	$	—
		$	168,945	$	0	$	168,945	$	0


		Fair Value Measurements at December 31, 2020									Fair Value Measurements at December 31, 2021
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Assets:	Assets:									Assets:
Investments available-for-sale:	Investments available-for-sale:									Investments available-for-sale:
Mortgage-backed investments:	Mortgage-backed investments:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	13,288	$	0	$	13,288	$	0	Fannie Mae	$	12,978	$	—	$	12,978	$	—
Freddie Mac	Freddie Mac	4,316		0		4,316		0		Freddie Mac	12,824		744		12,080		—
Ginnie Mae	Ginnie Mae	17,127		0		17,127		0		Ginnie Mae	23,687		—		23,687		—
Other	Other	10,729		0		10,729		0		Other	11,264		3,023		8,241		—
Municipal bonds	Municipal bonds	17,446		0		17,446		0		Municipal bonds	36,466		—		36,466		—
U.S. Government agencies	U.S. Government agencies	40,635		0		40,635		0		U.S. Government agencies	41,434		—		41,434		—
Corporate bonds	Corporate bonds	24,010		0		24,010		0		Corporate bonds	30,295		—		30,295		—
Total available-for-sale investments	Total available-for-sale investments	127,551		0		127,551		0		Total available-for-sale investments	168,948		3,767		165,181		—

Liabilities:
Derivative fair value liability		$	2,825	$	0	$	2,825	$	0
Derivative fair value asset										Derivative fair value asset	1,491		—		1,491		—
Total										Total	$	170,439	$	3,767	$	166,672	$	—

The estimated fair value of Level 2 investments is based on quoted prices for similar investments in active markets, identical or similar investments in markets that are not active and model-derived valuations whose inputs are observable.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The tables below present the balances of assets measured at fair value on a nonrecurring basis at March 31, ~~2021,~~2022, and December 31, ~~2020:~~2021:


		Fair Value Measurements at March 31, 2021									Fair Value Measurements at March 31, 2022
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net) (1)	Impaired loans (included in loans receivable, net) (1)	$	21,114	$	0	$	0	$	21,114	Impaired loans (included in loans receivable, net) (1)	$	43,910	$	—	$	—	$	43,910
OREO		454		0		0		454

Total	Total	$	21,568	$	0	$	0	$	21,568	Total	$	43,910	$	—	$	—	$	43,910

_____________

(1) Total fair value of impaired loans is net of ~~$5,000~~$18,000 of specific ~~reserves~~allowances on performing TDRs.


		Fair Value Measurements at December 31, 2020									Fair Value Measurements at December 31, 2021
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net) (1)	Impaired loans (included in loans receivable, net) (1)	$	21,392	$	0	$	0	$	21,392	Impaired loans (included in loans receivable, net) (1)	$	36,118	$	—	$	—	$	36,118
OREO		454		0		0		454

Total	Total	$	21,846	$	0	$	0	$	21,846	Total	$	36,118	$	—	$	—	$	36,118

_____________

(1) Total fair value of impaired loans is net of ~~$8,000~~$20,000 of specific ~~reserves~~allowances on performing TDRs.

The fair value of impaired loans reflects the exit price and is calculated using the collateral value method or on a discounted cash flow basis. Inputs used in the collateral value method include appraised values, less estimated costs to sell. Some of these inputs may not be observable in the marketplace. Appraised values may be discounted based on management’s knowledge of the marketplace, subsequent changes in market conditions, or management’s knowledge of the borrower.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at March 31, ~~2021~~2022 and December 31, ~~2020:~~2021:

March 31, 2022

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

43,910

Market approach

Appraised value discounted by market or borrower conditions

0.0% -10.7%

(2.9%)

OREO

—

Market approach

Appraised value less selling costs

0.0%

(0.0%)

December 31, 2021

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

~~21,114~~36,118

Market approach

~~Expected values of future cash flows~~Appraised value discounted by market or borrower conditions

0.0%

(0.0%)

OREO

~~454~~—

Market approach

~~Estimated selling price~~Appraised value less selling costs

0.0%

(0.0%)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~December 31, 2020~~

~~Fair Value~~

~~Valuation Technique~~

~~Unobservable Input(s)~~

~~Range (Weighted Average)~~

~~(Dollars in thousands)~~

~~Impaired Loans~~

~~21,392~~

~~Market approach~~

~~Expected values of future cash flows~~

~~0.0%~~

~~(0.0%)~~

~~OREO~~

~~454~~

~~Market approach~~

~~Estimated selling price less selling costs~~

~~0.0%~~

~~(0.0%)~~

The carrying amounts and estimated fair values of financial instruments were as follows at the dates indicated:


		March 31, 2021											March 31, 2022
				Estimated		Fair Value Measurements Using:									Estimated		Fair Value Measurements Using:
		Carrying Value		Fair Value		Level 1		Level 2		Level 3			Carrying Value		Fair Value		Level 1		Level 2		Level 3
		(In thousands)											(In thousands)
Financial Assets:	Financial Assets:											Financial Assets:
Cash on hand and in banks	Cash on hand and in banks	$	7,211	$	7,211	$	7,211	$	0	$	0	Cash on hand and in banks	$	7,979	$	7,979	$	7,979	$	—	$	—
Interest-earning deposits with banks	Interest-earning deposits with banks	75,023		75,023		75,023		0		0		Interest-earning deposits with banks	19,633		19,633		19,633		—		—
Investments available-for-sale	Investments available-for-sale	168,042		168,042		0		168,042		0		Investments available-for-sale	180,212		180,212		24,335		155,877		—
Investments held-to-maturity	Investments held-to-maturity	2,413		2,413		0		2,413		0		Investments held-to-maturity	2,426		2,426		—		2,426		—
Loans receivable, net	Loans receivable, net	1,098,832		1,100,621		0		0		1,100,621		Loans receivable, net	1,121,382		1,116,071		—		—		1,116,071
FHLB stock	FHLB stock	6,465		6,465		0		6,465		0		FHLB stock	5,512		5,512		—		5,512		—
Accrued interest receivable	Accrued interest receivable	5,702		5,702		0		5,702		0		Accrued interest receivable	5,590		5,590		—		5,590		—
Derivative fair value asset	Derivative fair value asset	903		903		0		903		0		Derivative fair value asset	5,961		5,961		—		5,961		—

Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Deposits	Deposits	749,624		749,624		749,624		0		0		Deposits	862,911		862,911		862,911		—		—
Certificates of deposit, retail	Certificates of deposit, retail	384,031		389,971		0		389,971		0		Certificates of deposit, retail	277,190		274,351		—		274,351		—

Advances from the FHLB	Advances from the FHLB	120,000		120,006		0		120,006		0		Advances from the FHLB	95,000		94,997		—		94,997		—
Accrued interest payable	Accrued interest payable	197		197		0		197		0		Accrued interest payable	112		112		—		112		—

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


		December 31, 2020											December 31, 2021
				Estimated		Fair Value Measurements Using:									Estimated		Fair Value Measurements Using:
		Carrying Value		Fair Value		Level 1		Level 2		Level 3			Carrying Value		Fair Value		Level 1		Level 2		Level 3
		(In thousands)											(In thousands)
Financial Assets:	Financial Assets:											Financial Assets:
Cash on hand and in banks	Cash on hand and in banks	$	7,995	$	7,995	$	7,995	$	0	$	0	Cash on hand and in banks	$	7,246	$	7,246	$	7,246	$	—	$	—
Interest-earning deposits with banks	Interest-earning deposits with banks	72,494		72,494		72,494		0		0		Interest-earning deposits with banks	66,145		66,145		66,145		—		—
Investments available-for-sale	Investments available-for-sale	127,551		127,551		0		127,551		0		Investments available-for-sale	168,948		168,948		3,767		165,181		—
Investments held-to-maturity	Investments held-to-maturity	2,418		2,418		0		2,418		0		Investments held-to-maturity	2,432		2,432		—		2,432		—
Loans receivable, net	Loans receivable, net	1,100,582		1,101,559		0		0		1,101,559		Loans receivable, net	1,103,461		1,109,887		—		—		1,109,887
FHLB stock	FHLB stock	6,410		6,410		0		6,410		0		FHLB stock	5,465		5,465		—		5,465		—
Accrued interest receivable	Accrued interest receivable	5,508		5,508		0		5,508		0		Accrued interest receivable	5,285		5,285		—		5,285		—

Derivative fair value asset												Derivative fair value asset	1,491		1,491		—		1,491		—

Financial Liabilities:	Financial Liabilities:											Financial Liabilities:
Deposits	Deposits	684,057		684,057		684,057		0		0		Deposits	863,347		863,347		863,347		—		—
Certificates of deposit, retail	Certificates of deposit, retail	409,576		418,118		0		418,118		0		Certificates of deposit, retail	294,127		295,929		—		295,929		—

Advances from the FHLB	Advances from the FHLB	120,000		120,006		0		120,006		0		Advances from the FHLB	95,000		95,003		—		95,003		—
Accrued interest payable	Accrued interest payable	211		211		0		211		0		Accrued interest payable	112		112		—		112		—
Derivative fair value liability		2,825		2,825		0		2,825		0

Note 8 - Leases

The Company follows ASC Topic 842, Leases, recognizing a ROU and related lease liabilities on the Company’s ~~consolidated balance sheets.~~Consolidated Balance Sheets. At March 31, ~~2021,~~2022, the Company had 13 operating leases for retail branch locations. The remaining lease terms range from ~~three months~~0.8 years to ~~9.8~~8.8 years, with most leases carrying optional extensions of ~~3-5~~three to five years. The Company will include optional lease term extensions in the ROU and lease liabilities when management believes it is

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

reasonably certain that the term extension will be exercised, and will be determined based on indicators that the Company would have an economic incentive to extend the lease. The Company has elected to not apply ASU 2016-02 to short term leases, which are those that have a term of one year or less. To calculate the present value of lease payments not yet paid, the Company uses the incremental borrowing rate, which is equal to the FHLB advance rate for the remaining term of the lease at the time of the lease inception, or at January 1, 2019, for leases in place at that date.

The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At March 31, ~~2021,~~2022, the Company was committed to paying ~~$68,000~~$70,000 per month in minimum monthly lease payments. The minimum monthly lease payment over the initial lease term, including any free rent period, was used to calculate the ROU and lease liability. The Company’s current leases do not include any non-lease components.

Total lease expense included inon the Company’s Consolidated Income Statements includes the amortized lease expense under ASC Topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the individual lease agreements. The following table includes details on these items at and for the three months ended March 31, ~~2021,~~2022, and ~~2020.~~2021.

March 31, 2021 March 31, 2020
(dollars in thousands)
Lease expense $ 256 $ 225
Right-of-use asset 3,976 2,446
Lease liability 4,123 2,538
Weighted average remaining term (in years) 6.84 6.64
Weighted average discount rate 1.97 % 2.84 %

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~


	At or for the three months ended
	March 31, 2022			March 31, 2021
	(dollars in thousands)
Lease expense, quarter-to-date	$	268		$	256

ROU	3,455			3,976
Lease liability	3,617			4,123

Weighted average remaining term, years	6.4 years			6.8 years
Weighted average discount rate	1.90		%	1.97		%

The following table provides a reconciliation between the undiscounted minimum lease payments at March 31, ~~2021~~2022 and the discounted lease liability at that date:


	March 31, ~~2021~~2022
	(in thousands)
Due through one year	$	~~791~~830
Due after one year through two years	~~782~~693
Due after two years through three years	~~645~~598
Due after three years through four years	~~565~~489
Due after four years through five years	~~420~~302
Due after five years	~~1,216~~931
Total minimum lease payments	~~4,419~~3,843
Less: present value discount	~~(296)~~226
Lease liability	$	~~4,123~~3,617

~~The Company extended the existing lease in March 2021 at the branch located in Edmonds,Washington. The extended lease term is 60 months and the minimum rent due is $8,000, with a 3% annual increase.~~

Note 9 - Derivatives

The Company uses derivative financial instruments, in particular, interest rate swaps, which ~~qualify~~are designated as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At March 31, ~~2021,~~2022, the ~~Company held six interest rate swap agreements with initial terms of~~ ~~four~~ ~~to eight years, and total notional amount of $120.0 million. In addition, at that date, the Company held two forward-starting interest rate swap agreements with terms of~~ ~~seven~~ ~~and eight years and~~cash flow hedges have a total notional amount of ~~$25.0 million. Under~~$95.0 million and consist of rolling one-month or three-month FHLB advances that are renewed at the ~~current agreements, the Company pays a weighted-average~~ fixed interest rate at each renewal date. These hedging instruments have four to eight year terms, with remaining terms ranging from 1.6 years to 7.5 years, a weighted average remaining term of ~~1.22% monthly~~56 months, and ~~in exchange receives variable rate amounts from~~stipulate that the counterparty will pay the Company interest ~~rate swap counter party based on~~at one-month or three-month LIBOR ~~based on the swap agreement’s stated rate reset date. On the forward-starting agreements,~~and the Company will pay a ~~weighted average~~weighted-average fixed ~~rate~~interest of ~~0.80% and in exchange receives variable rate amounts from the interest rate swap counter party based~~1.05% on ~~three-month LIBOR. Concurrent with each interest rate swap start dates, the Company secured fixed rate FHLB advances, for~~ the notional amount ~~of the swap, that reset at one-month or three-month cycles based on the rate reset dates of the interest rate swap agreement.~~ranging from $10.0 million to $15.0 million. The Company pays or receives the

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

net interest ~~to the counter party~~ amount monthly or quarterly based on the respective hedge agreement, and includes this amount as part of its interest expense on the Company’s Consolidated Income Statement.

Quarterly, the effectiveness evaluation is based upon the fluctuation of the fixed rate interest the Company pays to the FHLB for the ~~debt utilized to fund the interest rate swap as~~period compared to the one-month or three-month LIBOR interest received from the counterparty. At March 31, ~~2021,~~2022, a ~~$903,000~~$6.0 million net fair value ~~asset~~gain of the cash flow hedges was reported with other ~~assets.~~assets on the Company’s Consolidated Balance Sheet. The tax effected amount of ~~$713,000~~$4.7 million was included in accumulated other comprehensive ~~income.~~income on the Company’s Consolidated Balance Sheet. There were 0no amounts recorded inon the Consolidated Income Statements for the quarters ended March 31, ~~2021~~2022 or ~~2020,~~2021, related to ineffectiveness.

Fair value for these derivative instruments, which generally changes as a result of changes in the level of market interest rates, is estimated based on dealer quotes and secondary market sources.

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table presents the fair value of these derivative instruments as of March 31, ~~2021~~2022 and December 31, ~~2020:~~2021:

Balance Sheet Location Fair Value at
March 31, 2021 Fair Value at
December 31, 2020
(In thousands)
Interest rate swaps on FHLB debt
designated as a cash flow hedge Other Assets
(Other liabilities) $ 903 $ (2,825)


	Balance Sheet Location	Fair Value at March 31, 2022		Fair Value at December 31, 2021
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	Other Assets/(Other Liabilities)	$	5,961	$	1,491

The following table presents the net unrealized gains and losses, net of tax, from these derivative instruments included on the Consolidated Statements of Comprehensive Income at the dates indicated:

Amount Recognized in OCI for the
three months ended
March 31, 2021 Amount Recognized in OCI for the
three months ended
March 31, 2020
(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge $ 2,945 $ (2,933)


	Amount Recognized in OCI for the three months ended March 31, 2022		Amount Recognized in OCI for the three months ended March 31, 2021
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	$	3,532	$	2,945

Note 10 - Stock-Based Compensation

In June 2016, First Financial Northwest’s shareholders approved the First Financial Northwest, Inc. 2016 Equity Incentive Plan (“2016 Plan”). This plan provides for the granting of incentive stock options (“ISO”), non-qualified stock options (“NQSO”), restricted stock and restricted stock units until June 2026. The 2016 Plan established 1,400,000 shares available to grant with a maximum of 400,000 of these shares available to grant as restricted stock awards. Each share issued as a restricted stock award counts as two shares towards the total shares available to award.

Under the 2016 Plan, the vesting date for each option award or restricted stock award is determined by an award committee and specified in the award agreement. In the case of restricted stock awards granted in lieu of cash payments of directors’ fees, the grant date is used as the vesting date unless the award agreement provides otherwise.

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen and no additional awards will be made. At March 31, ~~2021,~~2022, there were ~~311,000 stock options from the 2008 Plan vested and available for exercise at March 31, 2021, subject to the 2008 Plan provisions. At March 31, 2021, there were 1,081,082~~992,502 total shares available for grant under the 2016 Plan, including ~~240,541~~196,251 shares available to be granted as restricted stock.

For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, total compensation expense for ~~both~~ the ~~2008 Plan and~~ 2016 Plan was ~~$96,000~~$188,000 and ~~$80,000,~~$96,000, respectively, and the related income tax benefit was $39,000 and $20,000, ~~and $17,000,~~ respectively. The final compensation expense for the 2008 plan was recognized in 2020.

Stock Options

Under the 2008 Plan, stock option awards were granted with an exercise price equal to the market price of First Financial Northwest’s common stock at the grant date. These option awards have a vesting period of five years, with 20% vesting on the anniversary date of each grant date, and a contractual life of ten years. Any unexercised stock options expire ten

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

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(Unaudited)

years after the grant date, or sooner in the event of the award recipient’s death, disability or termination of service with the Company and the Bank. At March 31, 2022, there were 270,000 stock options from the 2008 Plan vested and available for exercise, subject to the 2008 Plan provisions.

Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the grant date. Any unexercised stock option will expire 10 years after the award date or sooner in the event of the award recipient’s death, disability, retirement, or termination of service. At March 31, 2022, there were no stock options issued from the 2016 Plan.

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the following assumptions. The dividend yield is based on the current quarterly dividend in effect at the time of the grant. Historical employment data is used to estimate the forfeiture rate. The historical volatility of the Company’s stock price over a specified period of time is used for the expected volatility assumption. First Financial Northwest bases the risk-free interest rate on the U.S. Treasury Constant Maturity Indices in effect on the date of the grant. First Financial Northwest elected to use the “Share-Based Payments” method permitted by the SEC to calculate the expected term. This method uses the vesting term of an option along with the contractual term, setting the expected life at the midpoint.

Under certain conditions, a cashless exercise of vested stock options may occur by the option holder surrendering the number of options valued at the current stock price at the time of exercise to cover the total cost to exercise. The surrendered options are canceled and are unavailable for reissue.

A summary of the Company’s stock option plan awards and activity for the three months ended March 31, ~~2021,~~2022, follows:

For the Three Months Ended March 31, 2021
Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2021 313,000 $ 10.34 $ 397,890 $ 3.69
Exercised (2,000) 10.77 5,920 4.16
Outstanding at March 31, 2021 311,000 10.34 2.73 1,217,380 3.69
Expected to vest assuming a 3% forfeiture rate over the vesting term 311,000 10.34 2.73 1,217,380 3.69
Exercisable at March 31, 2021 311,000 10.34 2.73 1,217,380 3.69


	For the Three Months Ended March 31, 2022
	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value		Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2022	272,000	$	10.63		$	1,507,300	$	3.82

Exercised	(2,000)	10.77			12,000		4.16


Outstanding at March 31, 2022	270,000	10.63		1.88	1,750,300		3.82
Vested and expected to vest assuming a 3% forfeiture rate over the vesting term	270,000	10.63		1.88	1,750,300		3.82
Exercisable at March 31, 2022	270,000	10.63		1.88	1,750,300		3.82

As of March 31, ~~2021,~~2022, there was 0no unrecognized compensation cost related to nonvested stock options. There were 0no stock options granted during the three months ended March 31, ~~2021.~~2022.

Restricted Stock Awards

The 2016 Plan authorizes the grant of restricted stock awards subject to vesting periods or terms as defined by the award committee and specified in the award agreement. Restricted stock awards granted in lieu of cash payments for directors’ fees are subject to immediate vesting on the grant date unless the award agreement provides otherwise.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of changes in nonvested restricted stock awards for the three months ended March 31, ~~2021,~~2022, follows:


		For the Three Months Ended March 31, 2021				For the Three Months Ended March 31, 2022
		Shares	Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2021		16,228	$	13.61
Non-vested at January 1, 2022					Non-vested at January 1, 2022	44,426	$	13.78
Granted	Granted	45,593	13.78		Granted	34,210	16.93
Vested	Vested	(17,395)	13.62		Vested	(45,366)	13.85

Nonvested at March 31, 2021		44,426	13.78
Nonvested at March 31, 2022					Nonvested at March 31, 2022	33,270	16.93
Expected to vest assuming a 3% forfeiture rate over the vesting term	Expected to vest assuming a 3% forfeiture rate over the vesting term	43,093	13.78		Expected to vest assuming a 3% forfeiture rate over the vesting term	32,272	16.93

As of March 31, ~~2021,~~2022, there was ~~$556,000~~$501,000 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining eleven month vesting period.

31Note 11 - Accumulated Other Comprehensive Income

~~FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES~~The table below presents the changes in accumulated OCI after-tax for the three months ended March 31, 2022 and 2021.

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~


	Unrealized Gains and Losses on Available-for-Sale Securities		Gains and Losses on Cash Flow Hedges		Total
	(In thousands)
Balance December 31, 2021	$	(1,004)	$	1,178	$	174
Other comprehensive (loss) income before reclassifications	(5,595)		3,532		(2,063)
Amounts reclassified from accumulated other comprehensive income	—		—		—
Net other comprehensive (loss) income	(5,595)		3,532		(2,063)
Balance March 31, 2022	$	(6,599)	$	4,710	$	(1,889)

Balance December 31, 2020	$	314	$	(2,232)	$	(1,918)
Other comprehensive (loss) income before reclassifications	(1,542)		2,945		1,403
Amounts reclassified from accumulated other comprehensive income	—		—		—
Net other comprehensive (loss) income	(1,542)		2,945		1,403
Balance March 31, 2021	$	(1,228)	$	713	$	(515)

~~(Unaudited)~~

Note 1112 - Earnings Per Share

Per the provisions of FASB ASC 260, Earnings Per Share, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS pursuant to 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. Certain of the Company’s nonvested restricted stock awards qualify as participating securities.

Net income is allocated between the common stock and participating securities pursuant to the two-class method, based on their rights to receive dividends, participate in earnings, or absorb losses. Basic earnings per common shares is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


		Three Months Ended March 31,					Three Months Ended March 31,
		2021		2020					2022		2021
		(Dollars in thousands, except share data)				(Dollars in thousands, except share data)
Net income	Net income	$	2,497	$	1,684			Net income	$	3,260	$	2,497
Less: Earnings allocated to participating securities	Less: Earnings allocated to participating securities	(11)		(3)				Less: Earnings allocated to participating securities	(12)		(11)
Earnings allocated to common shareholders	Earnings allocated to common shareholders	$	2,486	$	1,681			Earnings allocated to common shareholders	$	3,248	$	2,486

Basic weighted average common shares outstanding	Basic weighted average common shares outstanding	9,490,058		9,896,234				Basic weighted average common shares outstanding	8,987,482		9,490,058
Dilutive stock options	Dilutive stock options	67,068		72,120				Dilutive stock options	100,246		67,068
Dilutive restricted stock grants	Dilutive restricted stock grants	9,545		9,706				Dilutive restricted stock grants	29,704		9,545
Diluted weighted average common shares outstanding	Diluted weighted average common shares outstanding	9,566,671		9,978,060				Diluted weighted average common shares outstanding	9,117,432		9,566,671

Basic earnings per share	Basic earnings per share	$	0.26	$	0.17			Basic earnings per share	$	0.36	$	0.26
Diluted earnings per share	Diluted earnings per share	$	0.26	$	0.17			Diluted earnings per share	$	0.36	$	0.26

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three months ended March 31, 2022, and 2021, there were 0no options to purchase shares of common stock that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. ~~For the three months ended March 31, 2020, there were 40,000 anti-dilutive shares of common stock omitted from the computation.~~

Note 1213 - Revenue Recognition

In accordance with Topic 606, revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Company expects to be entitled to receive. To determine the appropriate recognition of revenue for transactions within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations in the contract; and (v) recognize revenue when the entity satisfies a performance obligation. A contract may not exist if there are doubts as to collectability of the amounts the Company is entitled to in exchange for the goods or services transferred. If a contract is determined to be within the scope of Topic 606, the Company recognizes revenue as it satisfies a performance obligation. The largest portion of the Company’s revenue is from net interest income which is not within the scope of Topic 606.

Disaggregation of Revenue

The following table includes the Company’s noninterest income disaggregated by type of service for the three months ended March 31, 2022 and 2021:


	Three Months Ended
	March 31, 2022		March 31, 2021
	(In thousands)

BOLI income (1)	$	288	$	269
Wealth management revenue	82		160
Deposit related fees	73		66
Debit card and ATM fees	142		134
Loan related fees	199		132

Other	5		3
Total noninterest income	$	789	$	764

_______________

(1) Not within scope of Topic 606

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The following table includes the Company’s noninterest income disaggregated by type of service for the three months ended March 31, 2021 and 2020:~~

Three Months Ended
March 31, 2021 March 31, 2020
(In thousands)
BOLI change in cash surrender value (1)
$ 269 $ 254
Wealth management revenue 160 165
Deposit related fees 66 68
Debit card and ATM fees 134 108
Loan related fees 132 392
Other 3 3
Total noninterest income $ 764 $ 990

~~_______________~~

~~(1)~~ ~~Not within scope of Topic 606~~

For the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, substantially all of the Company’s revenues under the scope of Topic 606 are for performance obligations satisfied at a specified date.

Revenues recognized within scope of Topic 606

Wealth management revenue: Our wealth management revenue consists of commissions received on the investment portfolio managed by Bank personnel but held by a third party. Commissions are earned on brokerage services and advisory services based on contract terms at the onset of a new customer’s investment agreement or quarterly for ongoing services. Commissions are paid by the third party to the Bank when the performance obligation has been completed by both entities.

Deposit related fees: Fees are earned on our deposit accounts for various products or services performed for our customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box, and others. These fees are recognized on a daily or monthly basis, depending on the type of service.

Debit card and ATM fees: Fees are earned when a debit card issued by the Bank is used or when other bank’s customers use our ATM services. Revenue is recognized at the time the fees are collected from the customer’s account or remitted by the VISA interchange network.

Loan related fees: Noninterest fee income is earned on our loans for servicing or annual fees on certain loan types. Fees are also earned on the prepayment of certain loans, and are recognized at the time the loan is paid off.

Other: Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle.

Contract Balances

At March 31, ~~2021,~~2022, the Company had 0no contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had 0no material performance obligations as of this date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,”

~~“forecasts,~~ “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to:

•potential adverse impacts to economic conditions in our local market areas, other markets where the ~~effect~~Company has lending relationships, or other aspects of the ~~COVID-19 pandemic, including on our credit quality and~~Company’s business operations ~~as well as its impact on general economic and~~or financial ~~market conditions and other uncertainties~~markets, generally, resulting from the ~~COVID-19 pandemic, such as the extent~~ongoing novel coronavirus of 2019 (COVID-19) and ~~duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;~~any governmental or societal responses thereto;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our ~~reserves;~~allowance for loan and lease losses;

•changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;

•uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the ~~potential~~ transition away from LIBOR toward new interest rate benchmarks;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our ~~reserve~~allowance for loan and lease losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

•our ability to pay dividends on our common stock;

•our ability to attract and retain deposits; ~~increases in premiums for deposit insurance;~~

•our ability to control operating costs and expenses;

•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•difficulties in reducing risk associated with the loans on our balance sheet;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

•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;

•our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments;

•our ability to implement a branch expansion strategy;

•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

•our ability to manage loan delinquency rates;

•costs and effects of litigation, including settlements and judgments;

•increased competitive pressures among financial services companies;

•changes in consumer spending, borrowing and savings habits;

•legislative or regulatory changes that adversely affect our business ~~including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including~~ as a result of ~~Basel III;~~COVID-19;

•the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the implementing regulations;

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•adverse changes in the securities markets;

•inability of key third-party providers to perform their obligations to us;

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; ~~including as a result of the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated Appropriations Act, 2021 (“CAA, 2021”);~~

•~~the economic impact of war or any terrorist activities;~~ and

•other economic, competitive, governmental, regulatory, and technological factors affecting our ~~operations;~~operations, pricing, products and services, ~~including as a result of the CARES Act, the CAA, 2021 and recent COVID-19 vaccination efforts,~~ and other risks detailed in our Form 10-K for the year ended December 31, ~~2020~~2021 (“~~2020~~2021 Form 10-K”) and our other ~~filings~~reports filed with the U.S. Securities and Exchange Commission (“SEC”).

Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

As used throughout this report, the terms “Company”, “we”, “our”, or “us” refer to First Financial Northwest, Inc. and its consolidated subsidiaries, including First Financial Northwest Bank and First Financial Diversified Corporation.

Overview

First Financial Northwest Bank (“the Bank”) is a wholly-owned subsidiary of First Financial Northwest, Inc. (“the Company”) and, as such, comprises substantially all of the activity for the Company. First Financial Northwest Bank was a community-based savings bank until February 4, 2016, when the Bank converted to a Washington chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsap counties, Washington, through its full-service banking office and headquarters in Renton, Washington, as well as seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington. ~~The Bank opened its newest branch in Issaquah, Washington, located in King County, in March 2021.~~

The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the FHLB and raising funds in the wholesale market ~~(including~~(which may include brokered deposits), then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. The Bank’s strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in ~~six~~12 to ~~eighteen~~24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans and consumer classic car loans that are outside of our primary market area. Through our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 4243 other states and the District of Columbia, ~~including~~with the largest concentrations at March 31, 2022, in California, ~~Utah,~~ Oregon, ~~Georgia~~Texas, Florida and ~~Florida~~Alabama of ~~$33.0~~$35.8 million, ~~$11.9~~$15.3 million, ~~$11.4~~$11.2 million, ~~$8.4~~$10.1 million and ~~$7.9~~$8.1 million, respectively.

~~The Bank’s strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities with our current risk tolerance levels and asset/liability objectives.~~ The Bank has also created an SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans or equipment ~~financing, and a focus on industry specific loans, such as green energy~~ financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between

interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income. First Financial Northwest Bank is ~~generally~~currently slightly asset-sensitive, meaning our interest-earning assets reprice at a faster rate than our interest-bearing liabilities. ~~Despite the significant 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, and the low interest rate environment, the~~The Bank had a modest improvement in the net interest margin over the last year. The cost of funds has declined substantially due to the higher levels of noninterest-bearing deposits and the repricing of retail certificates of deposit at much lower ~~rates, and the payoff of all brokered certificates of deposit. Our net interest margin has been adversely impacted by decreasing loan yields, partially mitigated during~~market rates. During the quarter ended March 31, ~~2021, by~~2022, loan yields decreased compared to the same quarter last year, primarily due to the decrease in recognition of unamortized deferred fee income on ~~forgiven~~ Paycheck Protection Program (“PPP”) ~~loans. The Company expects~~loans forgiven and repaid by the ongoing low interest rate environment will continue to put downward pressure on loan yields and the yields on other floating rate interest earning assets as well. Further, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, until the pandemic subsides, the Company expects its net interest income and net interest margin may be adversely affected in the near term, if not longer.SBA.

An offset to net interest income is the provision for loan losses, ~~which~~or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for ~~potential~~probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth or an increase in probable loan losses.

Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of BOLI, and revenue earned on our wealth management ~~brokerage~~ services. This income is increased or partially offset by any net gain or loss on sales of investment securities.

Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits. Professional fees include legal services, auditing and accounting services, computer support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease expenses, real estate taxes, depreciation expenses, maintenance, and costs of utilities. Also included in noninterest expense is the change to the Company’s unfunded commitment reserve which is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.

COVID-19 Related Information

~~In response~~The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank ~~is committed~~running effectively to ~~providing assistance to~~serve its customers. Under the CARES Act, the Bank is providing certain short-term loan modifications. In addition, the Bank is participating in the PPP as a lender. Some of the PPP loans we originated were for our existing customers, however we also provided PPP loans to those in our community who have not had a banking relationship with us in the past. The initial deadline for PPP loan applications to the SBA was August 8, 2020. Under this program, we funded 462 applications totaling $52.1 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020. As of March 31, 2021, 374 PPP loans totaling $29.4 million had received loan forgiveness and were repaid under the PPP loan program. The CAA, 2021 renewed and extended the PPP until March 31, 2021, by authorizing an additional $284.5 billion for the program. The deadline for this second round of PPP was recently extended to May 31, 2021. During the current quarter, the2022, all Bank ~~originated 236 PPP loans~~branches are open with an aggregate balance of $23.5 million. As of March 31, 2021, there were 324 PPP loans outstanding totaling $45.2 million as compared to 372 PPP loans totaling $41.3 million at December 31, 2020. The SBA has recently released a simplified forgiveness process for PPP loans of $150,000 or less. At March 31, 2021, 234 PPP loans have an outstanding balance of $150,000 or less, totaling $11.4 million, or 25.2% of PPP loans outstanding. Of these PPP loans, 145 loans totaling $3.3 million have an outstanding balance of $50,000 or less.

The CARES Act and related bank regulatory guidance provided that short-term modifications of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications (e.g. generally up to 6 months) such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2)

executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) January 1, 2022. The primary method of relief granted by the Company is to allow the borrower to defer their loan payments for three to six months. Certain borrowers are allowed to pay interest only or have payment deferrals for periods longer than six months depending upon their specific circumstances. Deferred principal and interest amounts are added as a balloon payment due at the original maturity date or payoff of the loan.

As of March 31, 2021, total loans with modifications granted under the CARES Act were $56.7 million, or 5.1% of total loans outstanding, an increase from $45.2 million, or 4.0% of total loans outstanding at December 31, 2020. At March 31, 2021, $71.9 million of total loans receivable that previously received a loan modification had resumed making normal scheduled loan payments. The increase in the quarter ended March 31, 2021, was primarily due to new modifications granted on loans related to an office building and a private tennis club. As of March 31, 2021, $49.1 million in loans had been granted modifications of greater than six months, of which $30.9 million were for loans in the hotel/motel category. The 14 loans with deferrals greater than six months had been granted a second, third, or fourth payment deferral period.

~~The following table shows the current balance of loans in a COVID-19 pandemic relief modification in accordance with the CARES Act:~~

As of March 31, 2021
Balance of loans deferred
4 - 6 months Balance of loans deferred more than 6 months Total deferrals Total loans
March 31,
2021 % of loans on deferral as of March 31,
2021
(Dollars in thousands)
One-to-four family residential $ 462 $ 1,589 $ 2,051 $ 379,246 0.5 %
Multifamily — 2,347 2,347 140,068 1.7
Commercial real estate:
Office 7,153 — 7,153 83,176 8.6
Retail — 7,811 7,811 110,843 7.0
Mobile home park — — — 29,708 —
Hotel/motel — 30,869 30,869 65,475 47.1
Nursing home — 6,368 6,368 12,852 49.5
Warehouse — — — 17,435 —
Storage — — — 33,498 —
Other non-residential — — — 32,483 —
Total Commercial real estate 7,153 45,048 52,201 385,470 13.5
Construction/land — — — 94,545 —
Business:
Aircraft — — — 9,512 —
SBA — — — 906 —
PPP — — — 45,220 —
Other business — — — 22,656 —
Total business — — — 78,294 —
Consumer:
Classic/collectible auto — 85 85 26,488 0.3
Other consumer — — — 12,280 —
Total consumer — 85 85 38,768 0.2
Total loans with COVID-19 pandemic modifications $ 7,615 $ 49,069 $ 56,684 $ 1,116,391 5.1 %

~~Prior to their modifications, the loans included in the above table were current on their loan payments.~~hours. The Bank ~~is monitoring its loan portfolio for delinquencies of loans that have not requested modifications under the CARES Act.~~will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Critical Accounting Policies

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern the ALLL, the valuation of OREO, and the calculation of deferred taxes, the right-of-use asset and lease liability on our operating leases, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies in the ~~2020~~2021 Form 10-K. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosure contained in the ~~2020~~2021 Form 10-K.

Comparison of Financial Condition at March 31, ~~2021~~2022 and December 31, ~~2020~~2021

Total assets were ~~$1.43~~$1.42 billion at March 31, ~~2021, an increase~~2022, a decrease of ~~3.1%~~0.8%, from ~~$1.39~~$1.43 billion at December 31, ~~2020.~~2021. The following table details the ~~$42.6~~$11.3 million net change in the composition of our assets at March 31, ~~2021~~2022 from December 31, ~~2020.~~2021.


		Balance at March 31, 2021		Change from December 31, 2020		Percent Change			Balance at March 31, 2022		Balance at December 31, 2021		Change from December 31, 2021		Percent Change
		(Dollars in thousands)							(Dollars in thousands)
Cash on hand and in banks	Cash on hand and in banks	$	7,211	$	(784)	(9.8)	%	Cash on hand and in banks	$	7,979	$	7,246	$	733	10.1	%
Interest-earning deposits with banks		75,023		2,529		3.5
Interest-earning deposits								Interest-earning deposits	19,633		66,145		(46,512)		(70.3)
Investments available-for-sale, at fair value	Investments available-for-sale, at fair value	168,042		40,491		31.7		Investments available-for-sale, at fair value	180,212		168,948		11,264		6.7
Investment held-to-maturity		2,413		(5)		(0.2)
Investments held-to-maturity, at amortized cost								Investments held-to-maturity, at amortized cost	2,426		2,432		(6)		(0.2)
Loans receivable, net	Loans receivable, net	1,098,832		(1,750)		(0.2)		Loans receivable, net	1,121,382		1,103,461		17,921		1.6
FHLB stock, at cost	FHLB stock, at cost	6,465		55		0.9		FHLB stock, at cost	5,512		5,465		47		0.9
Accrued interest receivable	Accrued interest receivable	5,702		194		3.5		Accrued interest receivable	5,590		5,285		305		5.8
Deferred tax assets, net	Deferred tax assets, net	1,163		(478)		(29.1)		Deferred tax assets, net	1,069		850		219		25.8
OREO		454		—		—

Premises and equipment, net	Premises and equipment, net	22,512		(67)		(0.3)		Premises and equipment, net	22,254		22,440		(186)		(0.8)
BOLI		33,357		323		1.0
BOLI, net								BOLI, net	35,552		35,210		342		1.0
Prepaid expenses and other assets	Prepaid expenses and other assets	3,398		1,755		106.8		Prepaid expenses and other assets	8,451		3,628		4,823		132.9
ROU		3,976		329		9.0
ROU, net								ROU, net	3,455		3,646		(191)		(5.2)
Goodwill	Goodwill	889		—		—		Goodwill	889		889		—		—
Core deposit intangible		789		(35)		(4.2)
Core deposit intangible, net								Core deposit intangible, net	650		684		(34)		(5.0)
Total assets	Total assets	$	1,430,226	$	42,557	3.1	%	Total assets	$	1,415,054	$	1,426,329	$	(11,275)	(0.8)	%

Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco (“FRB”), ~~increased~~decreased by ~~$2.5~~$46.5 million during the three months ended March 31, ~~2021. Deposit growth of $40.0 million outpaced the growth~~2022. Growth in both loans receivable ~~providing excess funds invested in~~and investments available-for-sale was achieved by investing idle cash into these ~~deposits.~~higher yielding assets.

Investments available-for-sale. Our investments available-for-sale portfolio increased by ~~$40.5~~$11.3 million during the three months ended March 31, ~~2021.~~2022. During this period, the Bank ~~invested excess cash into higher yielding assets by purchasing 25 available-for sale~~purchased available-for-sale investment securities that included ~~$22.2~~$20.0 million of fixed rate U.S. Treasury bonds. In addition, the Bank purchased $4.0 million of fixed rate mortgage backed securities and ~~$24.1~~$2.0 million ofin variable rate ~~securities. The purchases included $21.7 million in mortgage-backed securities, $13.0 million of municipal bonds and $11.7 million of U.S. Government agency securities.~~bonds. These purchases have an expected weighted average yield of ~~0.99%~~2.20%. During the three months ended March 31, ~~2021, the Bank did not sell any~~2022, $30,000 of investments ~~available-for-sale, however, $2.0 million of securities~~ were called or paid-off ~~early.~~early and one $2.4 million investment matured.

The effective duration of the investments available-for-sale at March 31, ~~2021,~~2022, was ~~3.09%~~3.65% as compared to ~~2.55%~~3.54% at December 31, ~~2020.~~2021. Effective duration measures the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change.

Loans receivable. ~~Total~~Net loans receivable ~~remained virtually unchanged at $1.1 billion at both March 31, 2021, and December 31, 2020. During~~increased $17.9 million during the three months ended March 31, ~~2021,~~2022, primarily due to growth in one-to-four family residential loans, ~~business~~multifamily loans, and consumer loans ~~decreased by $2.7~~of $27.1 million, ~~$2.4~~$22.7 million, and ~~$1.9~~$4.6 million, respectively. Partially offsetting these ~~decreases, multifamily~~increases, business loans decreased $16.0 million due to a $5.7 million decrease in PPP loans, an $8.9 million reduction in other business loans, and a $1.4 million decrease in aircraft loans. In addition, construction/land loans decreased $18.8 million, of which $20.7 million converted to permanent multi-family loans, and commercial real estate loans decreased $2.4 million.

3937

~~loans, construction/land development loans~~At March 31, 2022 and ~~commercial real estate loans increased by $3.4 million, $2.3 million and $205,000, respectively. During the three months ended March~~December 31, 2021, the ~~Bank originated $60.6 million of~~Bank’s construction/land loans ~~which included $23.5 million of PPP loans.~~

total
ed 51.9%

~~At March 31, 2021~~ and ~~December 31, 2020, the Bank’s construction loans totaled 64.0% and 61.6%~~59.7% of total capital plus surplus, respectively, and total non-owner occupied commercial real estate was ~~391.8%~~ 379.6% and ~~390.1%~~384.0% of total capital plus surplus, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and ~~construction~~construction/land loans, should not exceed 550% of total ~~risk-based capital.~~capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total ~~risk-based capital.~~capital plus surplus. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review.

The following table presents a breakdown of our multifamily, commercial and construction loans by collateral type at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. Total commercial real estate loans and construction/land loans are net of ~~$47.6 million~~$5,000 and ~~$59.8~~$39.0 million of LIP, respectively, at March 31, ~~2021~~2022, as compared to $89,000 and $43.3 million LIP, respectively, at December 31, ~~2020, respectively.~~2021.


		March 31, 2021		December 31, 2020			March 31, 2022				December 31, 2021
		(In thousands)					Amount		% of Total in Portfolio		Amount		% of Total in Portfolio
Multifamily residential:
Micro-unit apartments		$	11,708	$	11,366
Other multifamily		128,360		125,328
Total multifamily residential		140,068		136,694
							(In thousands)
Multifamily residential						Multifamily residential	$	152,855	100.0	%	$	130,146	100.0	%

Non-residential:	Non-residential:					Non-residential:
Retail						Retail	142,725		34.2	%	138,463		33.0	%
Office	Office	83,176		84,311		Office	87,394		21.0		90,727		21.6
Retail		110,843		114,117
Hotel / motel						Hotel / motel	58,406		14.0		64,854		15.5
Storage						Storage	34,442		8.3		32,990		7.9
Mobile home park	Mobile home park	29,708		28,094		Mobile home park	20,409		4.9		20,636		4.9
Hotel / motel		65,475		69,304
Warehouse						Warehouse	21,103		5.0		17,724		4.2
Nursing home	Nursing home	12,852		12,868		Nursing home	12,622		3.0		12,713		3.0
Warehouse		17,435		17,484
Storage		33,498		33,671
Other non-residential	Other non-residential	32,483		25,416		Other non-residential	39,887		9.6		41,310		9.9
Total non-residential	Total non-residential	385,470		385,265		Total non-residential	416,988		100.0	%	419,417		100.0	%

Construction/land:	Construction/land:					Construction/land:
One-to-four family residential	One-to-four family residential	27,817		33,396		One-to-four family residential	35,953		48.1	%	34,677		37.1	%
Multifamily	Multifamily	58,718		51,215		Multifamily	17,196		23.0		37,194		39.8
Commercial	Commercial	5,837		5,783		Commercial	6,189		8.3		6,189		6.6
Land	Land	2,173		1,813		Land	15,359		20.6		15,395		16.5
Total construction/land	Total construction/land	94,545		92,207		Total construction/land	74,697		100.0	%	93,455		100.0	%
Total multifamily residential, non-residential and construction/land loans	Total multifamily residential, non-residential and construction/land loans	$	620,083	$	614,166	Total multifamily residential, non-residential and construction/land loans	$	644,540			$	643,018

Included in total construction/land loans at March 31, ~~2021,~~2022, are ~~$58.7~~$17.2 million of multifamily loans and ~~$5.8~~$6.2 million of commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan. At December 31, ~~2020,~~2021, construction/land loans included ~~$51.2~~$37.2 million of

multifamily loans and ~~$5.8~~$6.2 million of commercial real estate loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan.

To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank ~~will originate~~originates and ~~purchase~~purchases loans and utilize loan participations with the underlying collateral located within areas of Washington State outside our primary market area or in other states. The Bank’s goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank’s underwriting ~~standards.~~and risk guidelines. During the three months ended March 31, ~~2021,~~2022, the Bank purchased ~~$9.9~~$9.5 million of loans and loan participations to borrowers located in Washington and other states, including ~~$2.4~~$3.7 million of commercial real estate loans and $5.8 million of consumer loans secured by classic/collectible automobiles.

The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas of Washington, in California, and in other states. At March 31, ~~2021,~~2022, total loans secured by collateral located in California represented ~~3.0%~~3.1% of our total loans, and total loans secured by collateral located outside the states of California and Washington represented ~~8.9%~~9.7% of our total loans. The following table details geographic concentrations in our loan portfolio:


		At March 31, 2021															At March 31, 2022
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total
		(In thousands)															(In thousands)
King County	King County	$	292,631	$	78,201	$	224,925	$	85,216	$	48,241	$	10,204	$	739,418	King County	$	316,638	$	84,630	$	254,176	$	70,961	$	18,418	$	10,145	$	754,968
Pierce County	Pierce County	35,300		6,998		25,770		6,106		2,135		396		76,705		Pierce County	37,655		13,239		28,159		—		293		576		79,922
Snohomish County	Snohomish County	29,776		8,599		14,217		972		16,558		1,127		71,249		Snohomish County	31,936		8,454		14,740		849		6,205		1,325		63,509
Kitsap County	Kitsap County	7,220		5		294		2,251		717		—		10,487		Kitsap County	4,718		5		740		2,253		209		—		7,925
Other Washington Counties	Other Washington Counties	11,275		23,269		50,582		—		1,062		118		86,306		Other Washington Counties	16,014		31,324		35,879		634		417		563		84,831
California	California	2,608		9,825		13,634		—		818		6,094		32,979		California	—		9,639		18,209		—		187		7,752		35,787
Outside Washington and California (1)	Outside Washington and California (1)	436		13,171		56,048		—		8,763		20,829		99,247		Outside Washington and California (1)	5,270		5,564		65,085		—		4,817		29,070		109,806
Total loans	Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391	Total loans	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,431	$	1,136,748

_______________

(1) Includes ~~loans~~loans in ~~Utah,~~ Oregon, ~~Georgia~~Texas, Florida and ~~Florida~~Alabama of ~~$11.9~~$15.3 million, ~~$11.4~~$11.2 million, ~~$8.4~~$10.1 million and ~~$7.9~~$8.1 million, respectively, and loans in 3738 other states and the District of Columbia.

~~Our five largest borrowing relationships, which represent 8.6% of our net loans,~~The ALLL decreased ~~by $557,000~~ to ~~$95.7~~$15.2 million at March 31, ~~2021,~~2022, from ~~$96.3~~$15.7 million at December 31, ~~2020. The total number of loans represented by this group of borrowers remained steady at 13 loans at both March 31,~~ 2021, and December 31, 2020. At March 31, 2021, all five borrowers were current on their loan payments. We monitor the performance of these borrowing relationships very closely due to their concentration risk in relation to the entire loan portfolio.

~~The following table details our five largest lending relationships at March 31, 2021:~~

Borrower (1)
Number
of Loans
One-to-Four Family
Residential (2)
Multifamily Commercial
Real Estate Aggregate
Balance of
Loans
(Dollars in thousands)
Real estate investor 2 $ — $ 12,185 $ 14,424 $ 26,609
Real estate investor 6 418 — 20,611 21,029
Real estate investor 2 — — 18,274 18,274
Real estate investor 1 — — 15,326 15,326
Real estate investor 2 — — 14,468 14,468
Total 13 $ 418 $ 12,185 $ 83,103 $ 95,706

~~________~~

~~(1)~~ ~~The composition of borrowers~~ represented ~~in the table may change between periods.~~

~~(2)~~ ~~The one-to-four family residential loan is an owner occupied property. The commercial real estate loans are for non-owner occupied properties.~~

~~The ALLL increased to $15.5 million at March 31, 2021, from $15.2 million at December 31, 2020,~~1.33% and ~~represented 1.39% and 1.36%~~1.40% of total loans receivable at March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively. The ALLL consists of two components, the general allowance and the specific ~~reserves.~~allowance. The ~~increase in the~~ ALLL general allowance decreased as a partial result of $8.1 million of loans downgraded to substandard, where the individual analysis on these loans indicated no additional specific reserve was ~~primarily~~needed and these loans were omitted from the general allowance calculations used to calculate the ALLL and provision for loan losses. The downgrades included a $6.4 million participation interest in commercial loans secured by medical rehabilitation facilities that were impacted unfavorably by the limitations on elective medical procedures during the COVID-19 pandemic. In addition, a $1.7 million multifamily property loan was downgraded to substandard subsequent to an overall financial analysis on one of our borrowing relationships with multiple other loans that were previously downgraded to substandard. Further, balances of lower risk one-to-four family loans and multifamily residential loans increased and balances of higher risk construction/land loans and business loans decreased, thereby reducing the related general allowance. Partially offsetting these decreases in the general allowance, a $6.3 million participation interest in a loan secured by a nursing home facility was downgraded to special mention due to continued reduced occupancy as a result of the downgrade of $10.5 million of commercial real estate loans partially offset by improvements in the forecasted risk factors for all loan categories due to the improving economy. With the improved economic outlook as of March 31, 2021, and the expanding availability of the COVID-19 ~~vaccine, the expected economic impact of the pandemic to the credit quality of our loan portfolio has diminished.~~pandemic. The ~~$45.2~~$5.2 million balance of PPP loans was omitted from the ALLL calculation at March 31, ~~2021,~~2022, as these loans are fully guaranteed by the SBA. Management expects that the ~~great~~ majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven. ~~Impaired loans decreased $281,000 during the three months ended~~

At March 31, ~~2021. The~~2022, total specific ~~reserves~~ allowances decreased by ~~$3,000~~$2,000 since December 31, 2021 as a result of amortization of the ~~additional allowance set aside~~concession previously granted on ~~loans with modifications and loan payoffs.~~an existing TDR. For additional information, see “Comparison of Operating Results for the Three Months Ended March 31, ~~2021,~~2022, and ~~2020~~2021 - Provision for Loan Losses” discussed below.

We believe that the ALLL at March 31, ~~2021,~~2022, was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss ~~reserves~~allowances or the charge-off of specific loans against established loss ~~reserves~~allowances based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Part 1, Item 1A of our ~~2020~~2021 Form 10-K.

As we work with our borrowers that face difficult financial circumstances, we explore various options available to minimize our risk of loss. At times, the best option for our customers and the Bank is to modify the loan for a period of time, usually one year or less. Certain loan modifications are accounted for as TDRs. These modifications have included a reduction in interest rate on the loan for a period of time, advancing the maturity date of the loan, or allowing interest-only payments for a specific time frame. These modifications are granted only when there is a reasonable and attainable restructured loan plan that has been agreed to by the borrower and is considered to be in the Bank’s best interest. ~~As discussed above, loans modified in accordance with the CARES Act and related bank regulatory guidance are not considered TDRs.~~

The following table presents a breakdown of our TDRs at the dates indicated, all of which were performing and on accrual status:


		March 31, 2021			December 31, 2020			Three Month Change			March 31, 2022			December 31, 2021			Three Month Change
		(Dollars in thousands)									(Dollars in thousands)

Performing TDRs:	Performing TDRs:									Performing TDRs:
One-to-four family residential	One-to-four family residential	$	2,525		$	2,627		$	(102)	One-to-four family residential	$	2,095		$	2,107		$	(12)

Commercial real estate		1,232			1,242			(10)

Total TDRs	Total TDRs	$	3,757		$	3,869		$	(112)	Total TDRs	$	2,095		$	2,107		$	(12)
% TDRs classified as performing	% TDRs classified as performing	100.0		%	100.0		%			% TDRs classified as performing	100.0		%	100.0		%

Our ~~TDRs~~TDRs decreased ~~$112,000~~$12,000 at March 31, ~~2021,~~2022, compared to December 31, ~~2020,~~2021 as a result of principal repayments. ~~In addition, at~~At March 31, ~~2021,~~2022, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at March 31, ~~2021,~~2022, totaled ~~$1.2 million~~$907,000 and was secured by ~~a commercial property~~non-owner occupied one-to-four family properties located in ~~King~~Pierce County.

Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At March 31, ~~2021,~~2022, total past due loans were ~~$2.3 million,~~$208,000, representing ~~0.21%~~0.02% of total loans ~~receivable. At~~receivable, and at December 31, ~~2020, total past due loans~~2021, were ~~$2.7 million,~~255,000, representing ~~0.24%~~0.02% of total loans receivable.

~~Nonperforming assets decreased by $68,000 during the first three months of 2021. The following table presents detailed information on our nonperforming assets at the dates indicated:~~

March 31, 2021 December 31, 2020 Three Month Change
(Dollars in thousands)
Nonaccrual loans:
Multifamily $ 2,036 $ 2,104 $ (68)
Total nonaccrual loans 2,036 2,104 (68)
OREO 454 454 —
Total nonperforming assets (1)
$ 2,490 $ 2,558 $ (68)
Nonperforming assets as a
percent of total assets 0.17 % 0.18 %

~~____________~~

~~(1)~~ The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all TDRs as nonperforming loans, although 100.0% of our TDRs were performing in accordance with their restructured terms at March 31, 2021.

Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. ~~Our only nonaccrual loan at both~~ At March 31, ~~2021, and~~2022, the Bank had a $179,000 classic car loan on nonaccrual status. There were no nonaccrual loans at December 31, ~~2020, was a $2.0 million multifamily loan secured by a non-owner occupied multifamily residence located in King County, which is currently in foreclosure. During~~2021. The Bank has initiated repossession of the three months ended March 31, 2021, $74,000 in rents previously held in receivership were released to the Company and applied towards outstanding payments and late fees owed on the loan. The receiver on the underlying collateralcollateralized vehicle on this loan ~~has multiple offers on the property~~ and ~~the Company expects the matter~~does not expect to ~~be resolved in the second quarter of 2021 without incurring~~incur a loss.

We continue to focus our efforts on working with borrowers to bring their past due loans ~~current or converting nonaccrual loans to OREO and subsequently selling the properties.~~current. By taking ownership of ~~these properties,~~the underlying collateral if needed, we can generally convert non-earning assets into earning assets on a more timely basis than which may otherwise be the case. Our success in this area is reflected by ~~the~~continued low ~~ratio~~balance of ~~our~~ nonperforming ~~assets as a percent of total assets of 0.17% at March 31, 2021, and 0.18% at December 31, 2020, as well as the minimal amount of OREO held at March 31, 2021.~~assets.

OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At ~~both~~ March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Bank had no OREO ~~was $454,000,~~properties and ~~consisted of two undeveloped commercial lots located~~no real estate secured loans in ~~Pierce County, Washington.~~the foreclosure process.

Intangible assets. The balance of goodwill was $889,000 at both March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. Goodwill was calculated as the excess purchase price of the branches acquired in August 2017 (the “Branch Acquisition”) over the fair value of the assets acquired and liabilities assumed.

The core deposit intangible (“CDI”) recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing demand, interest-bearing demand, savings, and money market accounts. The CDI balance ~~was $789,000~~was $650,000 at March 31, ~~2021~~2022 and ~~$824,000~~$684,000 at December 31, ~~2020.~~2021. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. ~~This amount~~The CDI amortizes into noninterest expense on an accelerated basis over ten years.

Deposits. During the first three months of ~~2021,~~2022, deposits ~~increased $40.0~~decreased $17.4 million to ~~$1.13~~$1.14 billion at March 31, ~~2021,~~2022, compared to ~~$1.09~~$1.16 billion at December 31, ~~2020.~~2021. Deposit accounts consisted of the following:


		March 31, 2021		Change from December 31, 2020		Percent Change			Balance at March 31, 2022		Balance at December 31, 2021		Change from December 31, 2021		Percent Change
		(Dollars in thousands)							(Dollars in thousands)
Noninterest-bearing demand		$	114,437	$	23,152	25.4	%
Noninterest-bearing								Noninterest-bearing	$	130,596	$	117,751	$	12,845	10.9	%
Interest-bearing demand	Interest-bearing demand	114,098		5,916		5.5		Interest-bearing demand	99,794		97,907		1,887		1.9
Statement savings		20,470		1,249		6.5
Savings								Savings	23,441		23,146		295		1.3
Money market	Money market	500,619		35,250		7.6		Money market	609,080		624,543		(15,463)		(2.5)
Certificates of deposit, retail	Certificates of deposit, retail	384,031		(25,545)		(6.2)		Certificates of deposit, retail	277,190		294,127		(16,937)		(5.8)

		$	1,133,655	$	40,022	3.7			$	1,140,101	$	1,157,474	$	(17,373)	(1.5)

~~Our retail deposits increased by $40.0 million during the three months ended March 31, 2021. Money~~Decreases in money market accounts ~~increased~~and retail certificates of deposit of $15.5 million and $16.9 million, respectively, were partially offset by ~~$35.3 million as the Bank continued to competitively price these products to increase these funding sources. In addition,~~increases in noninterest-bearing demand accounts and interest-bearing demand accounts ~~increased by $23.2~~of $12.8 million and ~~$5.9~~$1.9 million, respectively. ~~Partially offsetting these increases, retail certificates of~~The Bank continued its strategy to shift the deposit ~~decreased $25.5 million as management elected~~composition to ~~utilize liquidity gained from~~ lower cost ~~deposits to reduce its balances of higher cost certificates of deposit in a managed runoff of these funds.~~transaction accounts.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, we held ~~$60.9~~$58.5 million and ~~$59.2~~$60.6 million in public funds, respectively, primarily in retail certificates of deposit and money market accounts.

Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, to leverage our balance sheet and to supplement our deposits. Total FHLB advances were ~~$120.0~~$95.0 million at both March 31, ~~2021,~~2022, and December 31, ~~2020.~~2021. At March 31, ~~2021,~~2022, the Bank’s advances included ~~$60.0~~$35.0 million of fixed-rate three-month advances that renew quarterly, and $60.0 million of fixed-rate one-month advances that renew monthly, all of which are utilized in cash flow hedge agreements, as described below. At March 31, ~~2021,~~2022, all of our FHLB advances were due to reprice in less than two months. At that date, there were no FHLB Fed Funds short-term borrowings.

Cash Flow Hedge. To assist in our interest rate risk management efforts, the Bank has entered into multiple interest rate swap agreements with qualified institutions. Each interest rate swap agreement qualifies as a cash flow hedge of the variability of future interest payments attributable to the changes in one-month or three-month LIBOR rates. The objective of the cash flow hedge is to offset the variability of cash flows due to the rollover of the Bank’s FHLB, or other fixed rate advances, for one-month or three-months, respectively, for the term of the agreement. The agreements allow for a substitute index to be used if LIBOR is unavailable.

The following table presents details of the Bank’s interest rate swap agreements as of March 31, ~~2021.~~2022. For each interest rate swap agreement listed, the Bank has secured a fixed-rate FHLB advance for the notional amount that reprices at the same frequency as the corresponding ~~interest-rate~~interest rate swap. The Bank pays a fixed interest rate to the counterparty and in return, receives a floating interest rate based on the index noted in the below table. The original term of these interest rate swap agreements range from four to eight years.

4441

Notional amount Start Date Maturity Date Fixed rate paid to counterparty Index rate received from counterparty Repricing Frequency
(Dollars in thousands)
$ 50,000 10/25/2016 10/25/2021 1.340 % 3-month LIBOR quarterly
15,000 9/27/2019 9/27/2024 1.440 1-month LIBOR monthly
10,000 11/19/2019 11/20/2023 1.585 3-month LIBOR quarterly
15,000 3/2/2020 3/2/2026 0.911 1-month LIBOR monthly
15,000 3/2/2020 3/2/2027 0.937 1-month LIBOR monthly
15,000 3/2/2020 3/2/2028 0.984 1-month LIBOR monthly
15,000 10/25/2021 10/25/2028 0.793 3-month LIBOR quarterly
10,000 10/25/2021 10/25/2029 0.800 3-month LIBOR quarterly

Interest rate swap agreements in the above table with start dates in 2021 are forward-starting contracts. The Bank intends to secure two three-month fixed-rate FHLB advances on October 25, 2021 for $15.0 million and $10.0 million, which will reprice quarterly. These forward-starting contracts are intended to partially replace the $50.0 million notional interest rate swap that will mature on October 25, 2021.

Notional amount

Start Date

Maturity Date

Fixed rate paid to counterparty

Index rate received from counterparty

Repricing Frequency

(Dollars in thousands)

15,000

9/27/2019

9/27/2024

1.440

1-month LIBOR

monthly

10,000

11/20/2019

11/20/2023

1.585

3-month LIBOR

quarterly

15,000

3/2/2020

3/2/2026

0.911

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2027

0.937

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2028

0.984

1-month LIBOR

monthly

15,000

10/25/2021

10/25/2028

0.793

3-month LIBOR

quarterly

10,000

10/25/2021

10/25/2029

0.800

3-month LIBOR

quarterly

A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At March 31, 2022 and December 31, 2021, we recognized ~~a $903,000 net~~ fair value ~~asset~~assets of $6.0 million and $1.5 million, respectively, as a result of the increase in ~~the~~ market value of ~~these~~the interest rate swap agreements. ~~In comparison, at December 31,~~

The Bank has confirmed our adherence to the International Swaps and Derivatives Association (“ISDA”) 2020 ~~our cash flow hedges were in~~LIBOR Fallbacks Protocol (“Protocol”) to prepare for the cessation of LIBOR by June 30, 2023. The Protocol provides a ~~fair value loss position and~~mechanism for parties to bilaterally amend their existing derivative transaction to incorporate ISDA’s fallback terms, providing for a ~~$2.8 million net fair value liability was recognized.~~clear transition from LIBOR to SOFR.

Stockholders’ Equity. Total stockholders’ equity ~~increased $2.1 million~~had a slight decrease of $122,000 during the first three months of ~~2021,~~2022, to ~~$158.4~~$157.8 million at March 31, ~~2021,~~2022, from ~~$156.3~~$157.9 million at December 31, ~~2020. Increases to stockholders’~~2021. Stockholders’ equity ~~included $2.5~~decreased $2.1 million, ~~net income, $467,000 from stock-based compensation and $1.4 million in other comprehensive income,~~ net of tax, ~~as a result of improved~~following an increase in market interest rates during the ~~market values of our derivatives partially offset by a decline in~~quarter which negatively impacted the fair value of our available-for-sale investments, ~~available-for-sale. Partially offsetting these increases,~~outpacing the improvement in market values of our cash flow hedges. In addition, stockholders’ equity decreased by ~~$1.2 million~~$694,000 from the repurchase of ~~89,019~~40,784 shares of common stock, ~~and $1.0~~$1.1 million in cash dividends ~~paid.~~paid, and $226,000 from canceled restricted stock awards. As part of the strategy to increase shareholder value, the Company’s Board of Directors authorized a stock repurchase plan that began on August 16, 2021, for the repurchase of up to 476,000 shares of the Company’s stock. At this repurchase plan’s expiration on February ~~1, 2021,~~15, 2022, the Company had repurchased 459,732 shares at an average price of $16.83 per share. The Board of Directors has authorized another stock repurchase plan that began on February 18, 2022, and which expires on August ~~13, 2021. The~~17, 2022. This plan authorizes the repurchase of up to ~~486,000 shares of the Company’s stock.~~455,000 shares. At March 31, ~~2021,~~2022, the Company had repurchased ~~89,019~~17,716 shares under this repurchase plan at an average price of ~~$13.03~~$17.00 per share. At that date, 437,284 shares were available for purchase under this repurchase plan. These decreases to stockholders’ equity were partially offset by a $763,000 increase in net income and $663,000 increase in stock based compensation.

The following table shows cash dividends paid per share and the related dividend payout ratio for the periods indicated:


		Three Months Ended March 31,						Three Months Ended March 31,
		2021			2020					2022			2021

Dividend declared per common share	Dividend declared per common share	$	0.11		$	0.10			Dividend declared per common share	$	0.12		$	0.11
Dividend payout ratio (1)	Dividend payout ratio (1)	42.3		%	58.8		%		Dividend payout ratio (1)	33.2		%	42.3		%

______________

(1) Dividends paid per common share divided by basic earnings per common share.

Comparison of Operating Results for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

General. Net income for the three months ended March 31, ~~2021,~~2022, was ~~$2.5 million,~~ $3.3 million, or ~~$0.26~~$0.36 per diluted share compared to ~~$1.7~~$2.5 million, or ~~$0.17~~$0.26 per diluted share for the three months ended March 31, ~~2020. The $813,000~~2021. Contributing to the $763,000 increase in net income during the three months ended March 31, ~~2021,~~2022, was ~~primarily~~ a ~~result of the $2.1~~$1.2 million decrease in interest expense that more ~~than offset a $1.0 million decrease in interest income, partially offset by a $226,000 decrease in noninterest income.~~

4542

than offset a $538,000 decrease in interest income. In addition, a $500,000 recapture of provision for loan losses was recognized for the three months ended March 31, 2022, as compared to a $300,000 provision for loan losses for the three months ended March 31, 2021. Partially offsetting these improvements, noninterest expense increased $497,000.

Net Interest Income. Net interest income for the three months ended March 31, ~~2021,~~2022, increased ~~$1.1 million~~$622,000 to ~~$10.7~~$11.4 million from ~~$9.7~~$10.7 million for the three months ended March 31, ~~2020, as a result of a~~2021, due to the decrease in interest expense outpacing the decrease in interest income.

Interest income decreased by ~~$1.0 million~~$538,000 for the three months ended March 31, 2022, as compared to the same period in 2021, primarily as a result of a $623,000 decrease in loan interest income due to a reduction in average loan yields partially offset by an increase in the average loan balance. Our average loan yield declined to 4.36% for the three months ended March 31, 2022, from 4.66% for the three months ended March 31, 2021. The average loan yield for the three months ended March 31, 2021, was favorably impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling $718,000 as compared to $172,000 in the quarter ended March 31, 2022. The average balance of loans receivable increased $16.1 million to $1.1 billion for the three months ended March 31, 2022.

Interest income from investment securities increased $83,000, as a combined result of a $13.5 million combined increase in the average balance of taxable and non-taxable investment securities. The yield of taxable securities increased five basis points to 1.96% while the yield on non-taxable securities decreased three basis points to 1.96% for the three months ended March 31, 2022, as compared to the same period in 2020, primarily as a result of the ongoing low interest rate environment following the March 2020 150 basis point decrease in the targeted federal funds rate putting downward pressure on resetting adjustable rate instruments combined with the impact of repayments on loans and securities being replaced by lower yielding assets in the lower rate environment. Loan interest income decreased $850,000 for the three months ended March 31, 2021, as compared to the same period in 2020, primarily due to a decrease in yield to 4.66% for the three months ended March 31, 2021, from 4.94% for the three months ended March 31, 2020. The average balance of loans receivable increased slightly by $3.3 million for the three months ended March 31, 2021, as compared to the same period in 2020. During the past twelve months, a total of $75.6 million PPP loans were originated. We began receiving forgiveness payoffs from the SBA in the fourth quarter of 2020, resulting in a $45.2 million balance of PPP loans at March 31, 2021. While these loans carry a low 1% interest rate, recognition of the remaining net deferred fee income on PPP loans at the time of payoff resulted in $718,000 of fee income included in interest income for the three months ended March 31, 2021. This favorable impact to our loan yields is expected to continue during periods where PPP loans are forgiven and/or paid down at levels that result in material recognition of the remaining deferred loan fees.

Interest income from investments available-for-sale decreased $184,000, primarily due to a decrease in yield to 1.91% for the three months ended March 31, 2021, from 2.72% for the three months ended March 31, 2020. Partially offsetting this decrease, the average balance of our investments available-for-sale increased by $20.0 million during the three months ended March 31, 2021, as compared to the same period in 2020, as the Company invested excess liquidity into higher yielding assets.

Interest income from interest-earning deposits ~~decreased $19,000~~remained relatively unchanged with a $7,000 increase for the three months ended March 31, ~~2021,~~2022, as compared to the three months ended March 31, ~~2020, as a result of a decrease in yield to 0.09% from 1.18% for~~2021. During these comparative periods, ~~partially offset by~~the average yield increased to 0.15% for the three months ended March 31, 2022, from 0.09% for the three months ended March 31, 2021. Excess cash was invested in higher earning assets, resulting in a ~~$41.8~~$2.5 million ~~increase~~decrease in the average balance of ~~these funds.~~interest-earning deposits for the three months ended March 31, 2022, as compared to the same period in 2021.

The decrease in interest income was more than offset by a ~~$2.1~~$1.0 million decrease in deposit interest expense for the three months ended March 31, ~~2021,~~2022, as compared to the three months ended March 31, ~~2020. Interest expense~~2021. The average rate paid on interest-bearing deposits decreased ~~87 basis points~~to 0.50% for the ~~comparative periods,~~three months ended March 31, 2022, as ~~a combined result of the declining interest rate environment and an increase in lower-cost deposits. Growth in our branch network allowed us~~compared to ~~redeem our higher cost brokered deposits last year, resulting in a $374,000 decrease in interest expense for brokered certificates of deposit to none~~0.94% for the three months ended March 31, 2021. ~~Our cost~~Although the average balance of ~~funds was also impacted favorably by a decrease in the cost of money market accounts to 0.33%~~interest-bearing deposits increased $31.2 million for the three months ended March 31, 2022, as compared to the same period in 2021, a $107.7 million decrease in the average balance of higher cost retail certificates of deposit was replaced by a $138.7 million increase in lower cost money market accounts, resulting in a net decrease in cost.

Interest expense from ~~1.48%~~borrowings decreased $118,000 as a combined result of a $25.0 million decrease in the average balance and a 13 basis point decrease in cost for the three months ended March 31, 2020, partially offset by a $87.8 million increase in the average balance of these deposits for the comparative periods. As we continue to grow our lower cost deposits, maturing retail certificates of deposit were allowed to runoff, resulting in a $621,000 reduction in interest expense for these deposits for the three months ended March 31, 2021,2022, as compared to the same period in ~~2020, reflecting~~2021. Our borrowings are comprised of FHLB advances matched to fixed-rate interest rate swap agreements. Reductions in both ~~a 42 basis point decrease in~~ the ~~cost of these deposits~~average balance and ~~a $33.4 million decrease in their average balance.~~

~~Further contributing to the decrease in interest expense, our~~ cost of borrowings ~~decreased by $52,000 for~~was the ~~three months ended March 31, 2021, as compared to~~result of the same period in 2020. The increase in our deposits met our funding needs, allowing us to eliminate our need for short-term borrowings from the FHLB. For the three months ended March 31, 2021, the Company maintained $120.0repayment of $25.0 million in FHLB advances ~~tied~~due to a $50.0 million maturing interest rate swap ~~agreements. In comparison, for~~agreement, and the ~~three months ended March 31, 2020, the Company had an average balance~~$25.0 million of ~~$127.7 million in~~fixed rate FHLB advances ~~that included~~secured at lower rates upon the ~~FHLB advances tied to~~onset of $25.0 million of previously contracted forward-starting interest rate swap agreements ~~and FHLB Fed Funds short-term borrowings. Our cost of these borrowings decreased to 1.41% for the three months ended March 31, 2021, from 1.48% for the three months ended March 31, 2020.~~in October 2021.

The Company’s net interest margin increased to 3.43% for the three months ended March 31, 2022, from 3.31% for the three months ended March 31, ~~2021, from 3.11% for the three months ended March 31, 2020.~~2021. This increase was primarily due to the 43 basis point reduction in our average cost of interest bearing liabilities outpacing the 25 basis point reduction in our average yield on interest earning assets between periods. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this report.

4643

The following table ~~details~~presents the ~~change in~~effects of changing rates and volumes on our net interest income ~~due~~during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in ~~yield or cost, or~~volume (changes in volume multiplied by prior rate); and (2) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume are allocated proportionately to the ~~average balance of the related asset or liability:~~changes in rate and volume.


		Three Months Ended March 31, 2021 Compared to March 31, 2020 Net Change in Interest							Three Months Ended March 31, 2022 Compared to March 31, 2021 Net Change in Interest
		Rate		Volume		Total			Rate		Volume		Total
		(In thousands)							(In thousands)
Interest-earning assets:	Interest-earning assets:							Interest-earning assets:
Loans receivable, net	Loans receivable, net	$	(890)	$	40	$	(850)	Loans receivable, net	$	(807)	$	184	$	(623)
Investments available-for-sale		(320)		136		(184)
Investments held-to-maturity		13		—		13
Investment securities, taxable								Investment securities, taxable	21		37		58
Investment securities, non-taxable								Investment securities, non-taxable	(2)		27		25
Interest-earning deposits with banks	Interest-earning deposits with banks	(142)		123		(19)		Interest-earning deposits with banks	8		(1)		7
FHLB stock	FHLB stock	5		(2)		3		FHLB stock	7		(12)		(5)
Total net change in income on interest-earning assets	Total net change in income on interest-earning assets	(1,334)		297		(1,037)		Total net change in income on interest-earning assets	(773)		235		(538)

Interest-bearing liabilities:	Interest-bearing liabilities:							Interest-bearing liabilities:
Interest-bearing demand	Interest-bearing demand	(64)		35		(29)		Interest-bearing demand	(8)		(1)		(9)
Statement savings	Statement savings	(4)		1		(3)		Statement savings	—		—		—
Money market	Money market	(1,362)		322		(1,040)		Money market	(127)		114		(13)
Certificates of deposit, retail	Certificates of deposit, retail	(426)		(195)		(621)		Certificates of deposit, retail	(508)		(512)		(1,020)
Certificates of deposit, brokered		—		(374)		(374)

Borrowings	Borrowings	(24)		(28)		(52)		Borrowings	(31)		(87)		(118)
Total net change in expense on interest-bearing liabilities	Total net change in expense on interest-bearing liabilities	(1,880)		(239)		(2,119)		Total net change in expense on interest-bearing liabilities	(674)		(486)		(1,160)
Total net change in net interest income	Total net change in net interest income	$	546	$	536	$	1,082	Total net change in net interest income	$	(99)	$	721	$	622

4744

The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.


		Three Months Ended March 31,													Three Months Ended March 31,
		2021						2020							2022						2021
		Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost			Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost
		(Dollars in thousands)													(Dollars in thousands)
Assets	Assets													Assets
Loans receivable, net	Loans receivable, net	$	1,099,364	$	12,624	4.66	%	$	1,096,091	$	13,474	4.94	%	Loans receivable, net	$	1,115,428	$	12,001	4.36	%	$	1,099,364	$	12,624	4.66	%
Investments available-for-sale		155,795		735		1.91		135,765		919		2.72
Investments held-to-maturity		2,413		13		2.18		2,061		—		—
Investment securities, taxable														Investment securities, taxable	147,048		712		1.96		139,086		654		1.91
Investment securities, non-taxable														Investment securities, non-taxable	24,637		119		1.96		19,122		94		1.99
Interest-earning deposits with banks	Interest-earning deposits with banks	52,336		12		0.09		10,555		31		1.18		Interest-earning deposits with banks	49,857		19		0.15		52,336		12		0.09
FHLB stock	FHLB stock	6,412		79		5.00		6,615		76		4.62		FHLB stock	5,467		74		5.49		6,412		79		5.00
Total interest-earning assets	Total interest-earning assets	1,316,320		13,463		4.15		1,251,087		14,500		4.66		Total interest-earning assets	1,342,437		12,925		3.90		1,316,320		13,463		4.15
Noninterest earning assets	Noninterest earning assets	77,893						73,758						Noninterest earning assets	81,617						77,893
Total average assets	Total average assets	$	1,394,213					$	1,324,845					Total average assets	$	1,424,054					$	1,394,213

Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity													Liabilities and Stockholders' Equity
Interest-bearing demand	Interest-bearing demand	$	103,540	$	27	0.11	%	$	63,413	$	56	0.36	%	Interest-bearing demand	$	99,862	$	18	0.07	%	$	103,540	$	27	0.11	%
Statement savings	Statement savings	19,754		2		0.04		17,089		5		0.12		Statement savings	23,699		2		0.03		19,754		2		0.04
Money market	Money market	477,710		391		0.33		389,886		1,431		1.48		Money market	616,401		378		0.25		477,710		391		0.33
Certificates of deposit, retail	Certificates of deposit, retail	395,291		1,879		1.93		428,695		2,500		2.35		Certificates of deposit, retail	287,545		859		1.21		395,291		1,879		1.93
Certificates of deposit, brokered		—		—		—		70,979		374		2.12

Total interest-bearing deposits	Total interest-bearing deposits	996,295		2,299		0.94		970,062		4,366		1.81		Total interest-bearing deposits	1,027,507		1,257		0.50		996,295		2,299		0.94
Borrowings	Borrowings	120,000		418		1.41		127,707		470		1.48		Borrowings	95,000		300		1.28		120,000		418		1.41
Total interest-bearing liabilities	Total interest-bearing liabilities	1,116,295		2,717		0.99		1,097,769		4,836		1.77		Total interest-bearing liabilities	1,122,507		1,557		0.56		1,116,295		2,717		0.99
Noninterest bearing liabilities	Noninterest bearing liabilities	120,062						69,584						Noninterest bearing liabilities	142,791						120,062
Average equity	Average equity	157,856						157,492						Average equity	158,756						157,856
Total average liabilities and equity	Total average liabilities and equity	$	1,394,213					$	1,324,845					Total average liabilities and equity	$	1,424,054					$	1,394,213
Net interest income	Net interest income			$	10,746					$	9,664			Net interest income			$	11,368					$	10,746
Net interest margin	Net interest margin					3.31	%					3.11	%	Net interest margin					3.43	%					3.31	%

Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL consists of two components: general and specific ~~reserves.~~allowances. The general ~~reserve~~allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, ~~the prevailing economy, the regulatory environment, competition, geographic and loan type concentrations,~~ policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, ~~managements’~~management’s experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and ~~the level of problem loans~~loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. ~~The specific reserve component is created~~Specific allowances result when management performs an impairment analysis on a loan when management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this impairment analysis, if the ~~collectability of a specific~~recorded investment in the loan ~~has been impaired and a loss~~ is ~~probable or a concession is granted that reduces~~less than the market value of the collateral less costs to sell (“market value”), a specific allowance is established in the ALLL for the loan. The amount of the specific ~~reserves are~~allowance is computed using ~~discounted cash flows,~~ current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This ~~evaluation~~analysis is inherently

subjective as it ~~requires~~relies on estimates that are susceptible to significant revision as more information becomes available or ifas future events differ from ~~current estimates.~~predictions. Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Loans classified as a TDR due to the borrower being granted a rate concession are analyzed by discounted cash flow analysis. The amount of the specific allowance on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the recorded investment in the loan.

During the three months ended March 31, ~~2021,~~2022, management evaluated the adequacy of the ALLL and concluded that a ~~$300,000~~$500,000 recapture of provision for loan losses was appropriate. This ~~provision~~recapture was primarily attributed to the ~~downgrades on $10.5~~downgrade to substandard and impaired status of a $6.4 million ~~of $12.2~~participation interest in a commercial loan secured by medical rehabilitation facilities and a $1.7 million ~~in total loans made~~multifamily loan subsequent to an overall financial analysis of a single ~~lending~~borrowing relationship with multiple other loans that were previously downgraded to substandard and impaired status. These downgrades removed the loans from the calculation of the general allowance to an individual analysis for a specific allowance, however, the analysis concluded that no losses are anticipated from these loans. By omitting these loans from the general allowance calculations, the general allowance was reduced, contributing to the recapture. Partially offsetting these decreases in the general allowance, a $6.3 million participation interest in a loan secured by a ~~bowling alley, roller skating and restaurant location, and~~nursing home facility was downgraded to special mention due to continued reduced occupancy as a ~~separate hostel business that continue to be adversely impacted by~~result of the COVID-19 pandemic. ~~The impact~~In addition, changes in the composition of ~~these downgrades was partially offset by improvements~~our loan portfolio, with growth in lower risk one-to-four family residential and multifamily loans, and reduced balances in higher risk construction/land development and business loans contributed to ~~qualitative economic factors utilized to calculate our general reserves~~the recapture of provision for the ~~ALLL related to the COVID-19 pandemic based upon the improving financial conditions and economic outlook that existed as of~~three months ended March 31, ~~2021.~~2022. In comparison, a $300,000 provision for loan losses was recognized for the three months ended March 31, ~~2020,~~2021, primarily ~~due to COVID-19 related deterioration~~the result of downgrades on $10.5 million of loans to the qualitative economic factors considered in calculating the general reserves for the ALLL. As previously disclosed, the Bank is evaluating the possible downgrade of $5.4 million in commercial real estate participationsingle lending relationship discussed above. These loans, ~~that~~secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were ~~downgraded~~adversely impacted by the ~~lead bank. If the Bank determines a downgrade is appropriate, it may increase our ALLL and provision related to the general allowance by $400,000 to $500,000 in subsequent quarters.~~COVID-19 pandemic. For more information, see Note 5 - Loans Receivable--ALLL.

The following table ~~summarizes selected financial data related to our ALLL~~shows certain credit ratios at and ~~loan portfolio.~~for the periods indicated and each component of the ratio’s calculations.


	At or For the Three Months Ended March 31,
	2022			2021
	(Dollars in thousands)
ALLL as a percent of total loans	1.33		%	1.39		%
ALLL at period end	$	15,159		$	15,502
Total loans outstanding	1,136,748			1,116,391

Non-accrual loans as a percentage of total loans outstanding at period end	0.02		%	0.18		%
Total non-accrual loans	$	179		$	2,036
Total loans outstanding	1,136,748			1,116,391

ALLL as a percent of non-accrual loans at period end	8,468.72		%	761.39		%
ALLL at period end	$	15,159		$	15,502
Total non-accrual loans	179			2,036

Net recoveries during period to average loans outstanding:
One-to-four family residential:	—		%	0.01		%
Net recoveries during period	$	2		$	28
Average loans receivable, net (1)	390,236			374,851
Multifamily:	—		%	—		%
Net recoveries during period	$	—		$	—
Average loans receivable, net (1)	131,373			137,419
Commercial:	—		%	—		%
Net recoveries during period	$	—		$	—
Average loans receivable, net (1)	415,173			383,399
Construction/land development:	—		%	—		%
Net recoveries during period	$	—		$	—
Average loans receivable, net (1)	94,387			90,409
Business:	—		%	—		%
Net recoveries during period	$	—		$	—
Average loans receivable, net (1)	37,786			73,604
Consumer:	—		%	—		%
Net recoveries during period	$	—		$	—
Average loans receivable, net (1)	46,473			39,682
Total loans:	—		%	—		%
Net recoveries during period	$	2		$	28
Average loans receivable, net (1)	1,115,428			1,099,364

_______________

(1) The average loans receivable, net balances, include nonaccruing loans and deferred fees.

At or For the Three Months Ended March 31,
2021 2020
(Dollars in thousands)
Total loans receivable, end of period $ 1,116,391 $ 1,105,959
Average loans receivable during period 1,099,364 1,096,091
ALLL balance at beginning of period 15,174 13,218
Provision for loan losses 300 300
Charge-offs:
Total charge-offs — —
Recoveries:
One-to-four family 28 12
Total recoveries 28 12
Net recovery 28 12
ALLL balance at end of period $ 15,502 $ 13,530
ALLL as a percent of total loans 1.39 % 1.22 %
Ratio of net recoveries to average net loans receivable, annualized 0.01 —

Noninterest Income. Noninterest income ~~decreased $226,000~~increased $25,000 to ~~$764,000~~$789,000 for the quarter ended March 31, ~~2021,~~2022, as compared to the quarter ended March 31, ~~2020.~~2021.

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


		Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2020		Percent Change			Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2021		Percent Change
		(Dollars in thousands)							(Dollars in thousands)

BOLI change in cash surrender value		$	269	$	15	5.9	%
BOLI income								BOLI income	$	288	$	269	$	19	7.1	%
Wealth management revenue	Wealth management revenue	160		(5)		(3.0)		Wealth management revenue	82		160		(78)		(48.8)
Deposit related fees	Deposit related fees	200		24		13.6		Deposit related fees	215		200		15		7.5
Loan related fees	Loan related fees	132		(260)		(66.3)		Loan related fees	199		132		67		50.8
Other	Other	3		—		—		Other	5		3		2		66.7
Total noninterest income	Total noninterest income	$	764	$	(226)	(22.8)		Total noninterest income	$	789	$	764	$	25	3.3

During the three months ended March 31, ~~2021,~~2022, as compared to the three months ended March 31, ~~2020,~~2021, loan related ~~fees decreased $260,000,~~fee income increased $67,000, primarily due to a $60,000 increase in loan prepayment fees. BOLI income increased $19,000 as a result of ~~a reduction~~additional policies purchased in ~~prepayment fees collected on certain loans paid off prior to~~

~~maturity. Partially offsetting this decrease, deposit related fees increased $24,000 for~~2021. Wealth management revenue decreased $78,000 during the three months ended March 31, ~~2021,~~2022, as compared to the same period in ~~2020,~~2021, primarily asdue to a ~~result of increased debit card activity. In addition, BOLI noninterest income increased $15,000 for the comparative periods as a result of annual premiums and dividends on certain BOLI policies.~~reduction in sales personnel.

Noninterest Expense. Noninterest expense ~~decreased $139,000~~increased $497,000 to $8.6 million for the three months ended March 31, 2022, from $8.1 million for the three months ended March 31, ~~2021, from $8.3 million for the comparable period in 2020.~~2021.

The following table provides a detailed analysis of the changes in the components of noninterest expense:


		Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2020		Percent Change			Three Months Ended March 31, 2022		Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2021		Percent Change
		(Dollars in thousands)							(Dollars in thousands)
Salaries and employee benefits	Salaries and employee benefits	$	4,945	$	(267)	(5.1)	%	Salaries and employee benefits	$	5,261	$	4,945	$	316	6.4	%
Occupancy and equipment	Occupancy and equipment	1,100		29		2.7		Occupancy and equipment	1,228		1,100		128		11.6
Professional fees	Professional fees	532		102		23.7		Professional fees	452		532		(80)		(15.0)
Data processing	Data processing	697		3		0.4		Data processing	677		697		(20)		(2.9)
OREO related expenses, net		1		—		—

Regulatory assessments	Regulatory assessments	121		(23)		(16.0)		Regulatory assessments	101		121		(20)		(16.5)
Insurance and bond premiums	Insurance and bond premiums	124		4		3.3		Insurance and bond premiums	129		124		5		4.0
Marketing	Marketing	29		(35)		(54.7)		Marketing	37		29		8		27.6
Other general and administrative	Other general and administrative	580		48		9.0		Other general and administrative	741		581		160		27.5
Total noninterest expense	Total noninterest expense	$	8,129	$	(139)	(1.7)		Total noninterest expense	$	8,626	$	8,129	$	497	6.1

~~Salary~~During the three months ended March 31, 2022, salaries and employee benefits ~~expense decreased $267,000 for~~increased $316,000 as compared to the three months ended March 31, 2021, as a combined result of decrease in the cost of certain retirement benefit plans and a reduction in the use of temporary labor. In addition, the impact of annual salary increases to the Company was mitigated by a reduction of eight staff positions during the three months ended March 31, 2021. Marketing expense decreased by $35,000 for the three months ended March 31, 2021, as compared to the same period in 2020, primarily due to higher than normal vacancies in staffing in the year ago quarter. In addition, occupancy and equipment expense increased $128,000 as a ~~reduction~~result of the opening of our fifteenth branch in ~~sponsored events~~March 2021. Other general and administrative expenses increased $160,000, primarily due to ~~continued COVID-19 restrictions.~~conference attendance and business entertainment related expenses as business generating opportunities increased this quarter. Partially offsetting these ~~decreases,~~increases, professional fees ~~increased $102,000 as a combined result of outsourced information technology services~~decreased $80,000, and ~~employee recruiting services.~~data processing and regulatory assessments each decreased by $20,000.

Federal Income Tax Expense. The federal income tax provision increased ~~by $182,000~~ to ~~$584,000~~$771,000 for the three months ended March 31, ~~2021,~~2022, as compared to ~~$402,000~~$584,000 for the same period in ~~2020,~~2021, primarily due to a ~~$995,000~~$950,000 increase in income before federal income taxes. ~~The effective tax rate for the three months ended March 31, 2021, and 2020, was 19.0% and 19.3%, respectively.~~

Liquidity and Capital Resources

We are required to have enough cash flow in order to maintain sufficient liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained.

Our primary sources of funds are customer deposits, ~~cash flow from the~~scheduled loan and investment ~~portfolios,~~repayments, including interest payments, maturing loans and investment securities, and advances from the ~~FHLB, and brokered certificates of deposit.~~FHLB. These funds, together with equity, are used to ~~make~~fund loans, acquire investment securities and other assets, and fund continuing operations. At March 31, 2021, retail certificates of deposit of $219.9 million were scheduled to mature in one year or less. Management’s practice is to maintain deposit rates at levels that are competitive with other local financial institutions. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or agency or mortgage-backed securities. On a longer term basis, we maintain a strategy of investing in various lending products. At March 31, 2022, the undisbursed portion of construction LIP totaled $39.0 million and unused lines of credit were also $39.0 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. Certificates of deposit scheduled to mature in one year or less at March 31, 2022, totaled $142.0 million. Management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial Northwest Bank. As further funding sources, we had the ability at March 31, 2022 to borrow an additional $297.5 million from the FHLB, based on our collateral capacity, $97.9 million from the FRB, and $75.0 million from unused lines of credit with other financial institutions to meet commitments and for liquidity purposes. See the Consolidated Statements of Cash Flows in Item 1 of this report for further details on our cash flow activities.

We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements.

~~The COVID-19 pandemic may impact cash flow due to payment deferrals granted to borrowers who have been negatively impacted by the pandemic. To support the origination~~Our primary source of PPP loans, the Board of Governors of the Federal Reserve System authorized the Paycheck Protection Program Lending Facility (“PPPLF”) to supply liquidity to participating financial institutions through term financing on a non-recourse basis at a rate of 35 basis points, with PPP loans as collateral at face value. The maturity date of this extension of credit will equal the maturity date of the pledged PPP loan. While we currently do not intend to use the PPPLF, as we held a substantial cash and cash equivalent position as a result of PPP disbursed funds ~~remaining unused in borrower deposit accounts and due to organic deposit growth, and we have additional borrowings available to us from the FHLB and FRB.~~

is our retail deposits. When retail deposits are not ~~readily available and/or cost effective~~sufficient to provide the funds for our assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources include, but are not limited ~~to:~~to, advances from the FHLB, ~~or the FRB, which are collateral dependent,~~ wholesale funding, ~~national certificates of deposit listing services,~~ brokered deposits, federal funds purchased, and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs. The balance of our investments available-for-sale increased $40.4 million to $168.0 million at March 31, 2021, from $127.6 million at December 31, 2020, and represents a ready source of cash if needed. The balance of our interest-earning deposits with banks increased by $2.5 million to $75.0 million at March 31, 2021, from $72.5 million at December 31, 2020, as a result of increased retail deposits. At March 31, 2021, the Bank maintained credit facilities with the FHLB totaling $624.5 million, subject to qualifying collateral limits that reduced our pledged collateral capacity to $496.2 million, with an outstanding balance of $120.0 million. As further funding sources, we also had the ability to borrow $79.6 million from the FRB from loan programs other than the PPPLF, and $75.0 million from lines of credit with other financial institutions, with no balance outstanding from these sources at March 31, 2021. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

To assist in our funds acquisition and interest rate risk management efforts, management utilizes from time to time the national brokered deposit market. Due to adequate funding from other sources, at March 31, 2021, the Bank did not hold any brokered certificates of deposit. In contrast to most retail certificate of deposit offerings which provide the depositor with an option to withdraw their funds prior to maturity, subject to an early withdrawal penalty, certificates of deposit acquired in the brokered market limits the depositor ability to withdraw the funds before the end of the term (except in the case of death or adjudication of incompetence of a depositor) which greatly reduces early redemption risk compared to retail deposits. This callable option available on certain brokered certificates of deposit to redeem the deposit after six months is a favorable distinction compared to retail certificate of deposit terms that are offered in our local market. With these redemption limitations and call features, the cost of these brokered deposits is generally higher than our retail certificate of deposit offerings. Consequently, if we increase our brokered deposits, our cost of funds may increase.

First Financial Northwest is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. First Financial Northwest's primary sources of funds consist of dividends from the Bank, although there are regulatory requirements related to the ability of the Bank to pay dividends. At March 31, 2021, the Company (on an unconsolidated basis) had liquid assets of $13.7 million and short-term liabilities of $219,000.

On a monthly basis we estimate our ~~future~~ liquidity sources and ~~needs.~~needs for the next twelve months. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability Management Committee ~~(“ALCO”)~~ in forecasting funding needs and investing opportunities. ~~We believe that our current liquidity position and our expected operating results are sufficient to fund all of our existing commitments.~~

~~Commitments and Off-Balance Sheet Arrangements~~

We ~~are~~incur capital expenditures on an ongoing basis to expand and improve our product offerings , enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a ~~party to financial instruments with off-balance sheet risk in the normal course~~variety of ~~business to meet the financing needs~~factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our ~~customers. These financial instruments include commitments to extend credit~~services and ~~the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit~~products, cash flow generated by operating activities, cash required for other purposes and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At March 31, 2021 and December 31, 2020, we had no commitments to originate loans for sale.regulatory considerations.

~~Commitments~~Based on our current capital allocation objectives, during the remainder of fiscal 2022 we expect cash expenditures of $1.3 million for capital investment in property, plant and equipment. In addition, we currently expect to ~~extend credit are agreements~~continue our current practice of paying quarterly cash dividends on our common stock subject to ~~lend~~our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12 per share, as approved by our Board of Directors, which we believe is a ~~customer as long as there is no violation~~dividend rate per share which enables us to balance our multiple objectives of ~~any condition established~~managing and investing in the ~~loan agreement. Commitments generally have fixed expiration dates or other termination clauses~~Bank, and ~~may require~~returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of ~~a fee. Since many~~$0.12 per share, our average total dividend paid each quarter would be approximately $1.1 million, based on the number of ~~the commitments are expected to expire without being drawn upon, the total~~our current outstanding shares (which assumes no

5149

~~commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount~~increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

At March 31, 2022, we project that our fixed commitments for the remainder of the ~~collateral obtained, if deemed necessary by us upon~~fiscal year ending December 31, 2022, will include (i) $627,000 of operating lease payments and (ii) other future obligations and accrued expenses of $18.2 million. At March 31, 2022, our $95.0 million in FHLB borrowings are all short-term and tied to interest rate swap agreements and are expected to be renewed as they mature during 2022. We believe that our liquid assets combined with the ~~extension of credit, is based on our credit evaluation of the customer. The amount and type of collateral required varies but may include real estate and income-producing commercial properties.~~

~~The following table summarizes our outstanding commitments to originate loans, advance additional amounts pursuant to outstanding~~available lines of credit ~~and to disburse funds related to our construction loans or certain commercial loans at March 31, 2021:~~

Amount of Commitment Expiration
Total Amounts Committed Through One Year After One Through Three Years After Three Through Five Years After Five Years
(In thousands)
Commitments to originate loans $ 3,308 $ 3,308 $ — $ — $ —
Unused portion of lines of credit 37,760 15,813 3,441 1,746 16,760
Undisbursed portion of construction and commercial loans 47,621 31,617 16,004 — —
Total commitments $ 88,689 $ 50,738 $ 19,445 $ 1,746 $ 16,760

~~We anticipate that we will continue to have sufficient funds and alternative funding sources~~provide adequate liquidity to meet our current ~~commitments.~~financial obligations for at least the next 12 months.

~~As of~~ Our total stockholders’ equity was $157.8 million at March 31, 2021, the Bank had thirteen operating leases with remaining terms of three months to 9.8 years which carry minimum lease payments of $68,000 per month. All of the lease agreements offer extension periods.

First Financial Northwest and its subsidiaries from time to time are involved in various claims and legal actions arising in the ordinary course of business. There are currently no claims and legal actions that in the opinion of management would have a material adverse effect on First Financial Northwest’s consolidated financial position, results of operation, or liquidity.

~~Capital~~

At March 31, 2021, stockholders’ equity totaled $158.4 million, or 11.1% of total assets. Our book value per share of common stock was $16.35 at March 31, 2021, compared to $16.05 at December 31, 2020.2022. Consistent with our goal to operate a sound and profitable financial organization we will actively seek to maintain the Bank as a ~~“well-capitalized” status~~“well capitalized” institution in accordance with regulatory standards.

As of March 31, ~~2021, the~~2022, First Financial Northwest Bank exceeded all ~~regulatory~~regulatory capital ~~requirements and~~requirements. Regulatory capital ratios for First Financial Northwest Bank were as follows as of March 31, 2022: Total capital to risk-weighted assets was ~~considered “well capitalized” under regulatory capital guidelines of the FDIC. The following table provides the Bank’s capital requirements and actual results.~~

At March 31, 2021
Actual For Minimum Capital Adequacy Purposes To be Categorized as “Well Capitalized”
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tier I leverage capital (to average assets) $ 141,282 10.15 % $ 55,661 4.00 % $ 69,576 5.00 %
Common equity tier I ("CET1") (to risk-
   weighted assets) 141,282 14.36 44,270 4.50 63,946 6.50
Tier I risk-based capital (to risk-weighted
    assets) 141,282 14.36 59,027 6.00 78,703 8.00
Total risk-based capital (to risk-weighted
    assets) 153,623 15.62 78,703 8.00 98,379 10.00

~~In addition to the minimum CET1,~~15.33%; Tier ~~I total~~1 capital and ~~leverage~~Common equity tier 1 capital to risk-weighted assets was 14.08%; and Tier 1 capital to total assets was 10.51%. At March 31, 2022, First Financial Northwest Bank met the financial ratios to be considered well-capitalized under the regulatory guidelines. In addition, the Bank is required to maintain a capital conservation buffer consisting of additional ~~CET1~~Common equity Tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum regulatory capital levels 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. At March 31, ~~2021,~~2022, the Bank’s capital conservation buffer was ~~7.62%~~7.33%. See Item 1. “Business – How We Are Regulated – Regulation and Supervision of First Financial Northwest Bank – Capital Requirements” included in the 2021 Form 10-K for additional information regarding regulatory capital requirements for the Bank.

The Accumulated Other Comprehensive Income (“AOCI”) component of capital includes a variety of items, including the value of our available-for-sale investment securities portfolio and the value of our derivative instruments, net of tax. We model various interest rate scenarios that could impact these elements of AOCI and believe that we have sufficient capital to withstand the estimated potential fluctuations in a variety of interest rate environments.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

General. Our Board of Directors has approved an asset/liability management policy to guide management in maximizing interest rate spread by managing the differences in terms between interest-earning assets and interest-bearing liabilities while maintaining acceptable levels of liquidity, capital adequacy, interest rate risk, credit risk, and profitability. The policy established an Investment, Asset/Liability Committee (“ALCO,”) comprised of certain members of senior management and the Board of Directors. The Committee’s purpose is to communicate, coordinate and manage our asset/liability position consistent with our business plan and Board-approved policies. The ALCO meets quarterly to review various areas including:

•economic conditions;

•interest rate outlook;

•asset/liability mix;

•interest rate risk sensitivity;

•current market opportunities to promote specific products;

•historical financial results;

•projected financial results; and

•capital position.

The Committee also reviews current and projected liquidity needs. As part of its procedures, the Committee regularly reviews interest rate risk by forecasting the impact that changes in interest rates may have on net interest income and the market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments and evaluating such impacts against the maximum potential change in the market value of portfolio equity that is authorized by the Board of Directors.

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by

changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

We have utilized the following strategies in our efforts to manage interest rate risk:

•we are originating shorter term higher yielding loans, whenever possible;

•we have attempted, where possible, to ~~extend the maturities~~increase balances of ~~our~~non-maturity deposits ~~which typically fund our long- term assets;~~that are less interest rate sensitive;

•we have invested in securities with relatively short average lives, generally less than eight years;

•we have added adjustable-rate loans to our loan portfolio;

•we may utilize brokered certificates of deposit with a call option as a funding source; and

•we have utilized interest rate swaps to effectively fix the rate on certain FHLB advances.

We have evaluated the use of derivative instruments to limit the impact of interest rate changes on earnings and cash flows and to lower our cost of borrowing while taking into account various elements of interest rate risk. We are using interest rate swaps which qualify as a cash flow hedge as a tool to lower the cost of certain FHLB advances as compared to the fixed rates offered by the FHLB for its longer term advances. At March 31, ~~2021,~~2022, the Bank held ~~six~~seven interest rate swap agreements with a total notional amount of ~~$120.0~~$95.0 million, ~~and~~ a weighted-average fixed interest rate of ~~1.22%.~~1.05%, and weighted average remaining maturity of 56 months. Under the interest rate agreements, the Bank pays a fixed interest rate, and receives a floating rate based on 1-month or 3-month LIBOR rates to coincide with each agreement’s reset frequency for an original term of four to eight years. Concurrently at the onset of each interest rate agreement, the Bank secured a fixed rate FHLB advance that resets to market rate on the same cycle as the corresponding interest rate swap agreement. ~~In addition, the Bank has entered into two, forward starting interest rate swap~~

agreements with a start date of October 25, 2021, a total notional amount of $25.0 million, and a weighted-average interest rate of 0.80%. These interest rate agreements are intended to partially replace the $50.0 million notional amount interest rate swap that matures on that date. Entering into these agreements has allowed the Bank to secure fixed rate funding at a lower cost than a traditional five-year fixed rate FHLB advance. We will continue to review similar instruments and may continue to utilize them for interest rate risk management in the future.

Interest rate contracts, however, may expose us to the risk of loss associated with variations in the spread between the interest rate contract and the hedged item. In addition, these contracts carry volatility risk that the expected uncertainty relating to the price of the underlying asset differs from what is anticipated. If any interest rate swap we enter into proves ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.

Brokered Deposits. Management utilizes the national brokered deposit market from time to time as an additional source of funds and to assist efforts in managing interest rate risk. Utilizing brokered deposits might result in increased regulatory scrutiny, as such deposits are not viewed as favorably as core retail deposits and there can be no assurance that the Bank will be allowed to include brokered deposits in its deposit mix in the future. While management will attempt to weigh the benefits of brokered deposits against the costs and risks, there can be no assurance that its conclusions will necessarily be aligned with those of the Bank’s regulators.

How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis by measuring the impact of changes to net interest income in multiple rate environments. Management retains the services of a ~~third party~~third-party consultant with ~~nearly 40~~over 30 years of experience in asset-liability management to assist in its interest rate risk and asset-liability management. Management uses various assumptions to evaluate the sensitivity of ~~the market value of~~ our ~~assets and liabilities~~operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. 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 of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not ~~adjust in conjunction with market rates.~~adjust. Approximately ~~52.3%~~58.7% of our ~~total~~net loans were adjustable-rate loans at March 31, ~~2021.~~2022. At that date, ~~$371.1~~$454.4 million, or ~~63.6%~~68.1%, of these loans ~~were at their floor,~~ with a weighted-average interest rate of ~~4.47%.~~4.23% were at their floor interest rate. A portion of these loans are set to reprice at defined time intervals. Adjustable rate loans that are based on prime rate plus a specified margin recalculate each time the prime rate changes. When the floor rate is above a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an

increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At March 31, ~~2021,~~2022, the Bank’s net loans receivable included ~~$105.5~~$128.9 million of prime based loans, of which ~~$92.1~~$93.9 million were at a floor rate that exceeded their fully indexed rate.

The following table shows the rate increase that would need to occur on these loans before the Bank receives the benefit of a floating rate:


	March 31, ~~2021~~2022
Increase in prime rate:	(Dollars in thousands)
0 - 25 bps	$	~~5,287~~18,916
26 - 50 bps	~~3,394~~15,036
51 - 75 bps	~~8,682~~32,857
76 - 100 bps	~~33,282~~16,326
101 - 150 bps	~~26,244~~7,607
151 - 200 bps	~~8,011~~3,154
~~> 200 bps~~	~~7,245~~
	$	~~92,145~~93,896

The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risk that borrowers may refinance these loans during periods of declining interest rates. However, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of

funds during periods of increasing interest rates. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.

The assumptions we use to monitor interest rate risk are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, loan prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans, investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposit rates can be maintained with rate adjustments proportionate to the change in market interest rates, based upon our historical deposit decay rates, which are substantially lower than market decay rates. We have observed in the past that our deposit accounts during changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base, competitive factors and historical experience. In the event of a significant change in interest rates, however, prepayment and early withdrawal levels would likely deviate from those assumed.

Our income simulation model examines changes in net interest income in which interest rates were assumed to remain at their base level, instantaneously increase by 100, 200 and 300 basis points or decline immediately by 100 basis points. A decline by 200 or 300 basis points were not reported as the current targeted federal funds rate is between ~~0.00%~~0.25% and ~~0.25%~~0.50%.

The following table illustrates the estimated change in our net interest income over the next 12 months from March 31, ~~2021,~~2022, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that the Bank might take to counter the effect of that interest rate movement.

Net Interest Income Change at March 31, 2021
Basis Point Change in Rates Net Interest Income % Change
(Dollars in thousands)
+300 $45,158 6.33%
+200 44,018 3.65
+100 43,013 1.28
Base 42,468 —
(100) 41,953 (1.21)


Net Interest Income Change at March 31, 2022
Basis Point Change in Rates	Net Interest Income	% Change
(Dollars in thousands)
+300	$46,912	(1.53)%
+200	47,039	(1.26)
+100	47,216	(0.89)
Base	47,641	—
(100)	46,411	(2.58)

The following table illustrates the change in our net portfolio value (“NPV”) at March 31, ~~2021,~~2022, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.


Basis Point	Basis Point							Net Portfolio as % of				Market		Basis Point							Net Portfolio as % of				Market
Change in	Change in	Net Portfolio Value (1)						Portfolio Value of Assets				Value of		Change in	Net Portfolio Value (1)						Portfolio Value of Assets				Value of
Rates	Rates	Amount		$ Change (2)		% Change		NPV Ratio (3)		% Change (4)		Assets (5)		Rates	Amount		$ Change (2)		% Change		NPV Ratio (3)		% Change (4)		Assets (5)
		(Dollars in thousands)													(Dollars in thousands)
+300	+300	$	186,999	$	(15,850)	(7.81)	%	13.84	%	(1.10)	%	$	1,350,707	+300	$	219,516	$	(34,144)	(13.46)	%	16.62	%	(2.41)	%	$	1,320,905
+200	+200	191,937		(10,912)		(5.38)		13.93		(0.76)		1,378,145		+200	230,831		(22,829)		(9.00)		17.08		(1.61)		1,351,825
+100	+100	199,013		(3,836)		(1.89)		14.12		(0.27)		1,409,169		+100	242,747		(10,913)		(4.30)		17.53		(0.77)		1,384,561
Base	Base	202,849		—		—		14.10		—		1,438,533		Base	253,660		—		—		17.89		—		1,417,620
(100)	(100)	194,352		(8,497)		(4.19)		13.34		(0.59)		1,456,826		(100)	251,011		(2,649)		(1.04)		17.31		(0.19)		1,450,230

_____________

(1) The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for

determining, on a market value basis, how the market value of equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.

(2) The increase or decrease in net portfolio value at the indicated interest rates compared to the net portfolio value assuming no change in interest rates.

(3) Net portfolio value divided by the market value of assets.

(4) The increase or decrease in the net portfolio value divided by the market value of assets.

(5) The market value of assets represents the value of assets under the various interest rate scenarios and reflects the sensitivity of those assets to interest rate changes.

The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as set forth above. Also, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause changes to the net portfolio value and net interest income other than those indicated above.

At March 31, ~~2021,~~2022, other than the interest rate swap agreements we have entered into, we did not have any derivative financial instruments or trading accounts for any class of financial instruments, nor have we engaged in any other hedging activities or purchased off-balance sheet derivative instruments. However, we continue to review such instruments and may utilize them for interest rate risk management in the future. Interest rate risk continues to be one of our primary risks, as other types of risks, such as foreign currency exchange risk and commodity pricing risk do not arise in the normal course of our business activities and operations.

Item 4. Controls and Procedures

The management of First Financial Northwest, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (“Exchange Act”). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives 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.

(a)Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and several other members of our senior management as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, ~~2021,~~2022, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our 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.

(b)Changes in Internal Controls: In the quarter ended March 31, ~~2021,~~2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

From time to time, we are engaged in various legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on our financial position or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors that were previously disclosed in Part 1, Item 1A of ~~our 2020~~the 2021 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) The following table summarizes First Financial Northwest’s common stock repurchases during the three months ended March 31, ~~2021:~~2022:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Repurchased Under the Plan
January 1 - January 31, 2021 — $ — — 486,000
February 1 - February 28, 2021 73,920 12.92 73,920 412,080
March 1 - March 31, 2021 15,099 13.55 15,099 396,981
89,019 13.03 89,019 396,981


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet Be Repurchased Under the Plan
January 1 - January 31, 2022	—	$	—	—	39,336
February 1 - February 28, 2022	27,107	16.98		27,107	450,961
March 1 - March 31, 2022	13,677	17.03		13,677	437,284
	40,784	17.00		40,784	437,284

On ~~February 1,~~August 16, 2021, ~~the Company began repurchasing shares of common stock under the repurchase plan approved by~~ the Company’s Board of Directors ~~on December 21, 2020. The~~approved a repurchase plan ~~authorized~~authorizing the repurchase of up to ~~486,000 shares of the Company’s common stock,~~476,000, or approximately 5% of the Company’s outstanding shares on the open market or in privately negotiated transactions, in accordance with Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. This repurchase plan commenced August 16, 2021, and expired on February 15, 2022. At ~~March 31, 2021,~~ the ~~Company~~expiration of the plan, 459,732 shares had ~~repurchased 89,019 shares authorized for repurchase~~been purchased at an average price of ~~$13.03~~$16.83 per share. ~~The~~On February 11 2022, the Company’s Board of Directors approved a repurchase plan authorizing the repurchase of up to 455,000, or approximately 5% of the Company’s outstanding shares on the open market or in privately negotiated transactions in accordance with Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. This repurchase plan commenced on February 18, 2022, and will expire no later than August ~~13, 2021.~~17, 2022. At March 31, 2022, the Company had repurchased 17,716 shares under this repurchase plan at an average price of $17.00 per share under the plan.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

5755

Item 6. Exhibits and Financial Statement Schedules

(a) Exhibits


3.1						Articles of Incorporation of First Financial Northwest (1)
3.2						Amended and Restated Bylaws of First Financial Northwest (2)
4.1						Form of stock certificate of First Financial Northwest (1)
10.1						Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (3)
10.2						Form of Change in Control Severance Agreement for Executive Officers (4)
10.3						Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (5)
10.4						2008 Equity Incentive Plan (6)
10.5						2016 Equity Incentive Plan (7)
10.6						Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan (8)
10.7						Form of restricted stock award agreement under the 2008 Equity Incentive Plan (8)
10.8						Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (2)
10.9						Form of restricted stock award agreement under the 2016 Equity Incentive Plan (9)
10.10						Form of incentive stock option award agreement under the 2016 Equity Incentive Plan (10)
10.11						Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan (10)
10.12						Form of restricted stock award agreement under the 2016 Equity Incentive Plan (11)
~~10.16~~10.13						Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III ~~(12)~~(5)
~~10.17~~10.14						Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson ~~(13)~~(5)
10.15						F orm of Change in Control Severance Agreement (Amended and Restated) by and between First Financial Northwest Bank and Simon Soh, Dalen D. Harrison, and Ronnie J. Clariza.(12)
31.1						Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2						Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32						Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101						The following materials from First Financial Northwest’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021,~~2022, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements.

_____________

(1)Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-1 on June 6, 2007 (333-143539)

(2)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated May 15, 2020.

(3)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 5, 2013.

(4)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 9, 2014.

(5)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.

(6)Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.

(7)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated June 15, 2016.

(8)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.

(9)Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for March 31, 2018 filed on May 8, 2018.

(10)Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-8 on June 15, 2016 (333-212029)

(11)Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for September 30, 2018 filed November 7, 2018.

(12)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated ~~January 15, 2020.~~

~~(13)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15,~~December 21, 2020.

5856

SIGNATURES

Pursuant to the requirements 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.


	FIRST FINANCIAL NORTHWEST, INC.

Date: May 12, ~~2021~~2022	By:	/s/Joseph W. Kiley III
		Joseph W. Kiley III
		President and Chief Executive Officer (Principal Executive Officer)


Date: May 12, ~~2021~~2022	By:	/s/Richard P. Jacobson
		Richard P. Jacobson
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May 12, ~~2021~~2022	By:	/s/Christine A. Huestis
		Christine A. Huestis
			~~First Vice President and Controller (Principal~~(Principal Accounting Officer)

5957


	Loans Past Due as of December 31, 2020
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	77	$	0	$	0	$	77	$	206,246	$	206,323
Non-owner occupied	159		0		0		159		175,478		175,637
Multifamily	0		0		2,104		2,104		134,590		136,694
Commercial real estate	0		0		0		0		385,265		385,265
Construction/land	0		0		0		0		92,207		92,207
Total real estate	236		0		2,104		2,340		993,786		996,126
Business	275		0		0		275		80,388		80,663
Consumer	38		0		0		38		40,583		40,621
Total loans	$	549	$	0	$	2,104	$	2,653	$	1,114,757	$	1,117,410


	March 31, 2021			March 31, 2020
	(dollars in thousands)
Lease expense	$	256		$	225
Right-of-use asset	3,976			2,446
Lease liability	4,123			2,538

Weighted average remaining term (in years)	6.84			6.64
Weighted average discount rate	1.97		%	2.84		%


	Balance Sheet Location	Fair Value at March 31, 2021		Fair Value at December 31, 2020
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	Other Assets (Other liabilities)	$	903	$	(2,825)


	As of March 31, 2021
	Balance of loans deferred 4 - 6 months		Balance of loans deferred more than 6 months		Total deferrals		Total loans March 31, 2021		% of loans on deferral as of March 31, 2021
	(Dollars in thousands)
One-to-four family residential	$	462	$	1,589	$	2,051	$	379,246	0.5	%
Multifamily	—		2,347		2,347		140,068		1.7
Commercial real estate:
Office	7,153		—		7,153		83,176		8.6
Retail	—		7,811		7,811		110,843		7.0
Mobile home park	—		—		—		29,708		—
Hotel/motel	—		30,869		30,869		65,475		47.1
Nursing home	—		6,368		6,368		12,852		49.5
Warehouse	—		—		—		17,435		—
Storage	—		—		—		33,498		—
Other non-residential	—		—		—		32,483		—
Total Commercial real estate	7,153		45,048		52,201		385,470		13.5
Construction/land	—		—		—		94,545		—
Business:
Aircraft	—		—		—		9,512		—
SBA	—		—		—		906		—
PPP	—		—		—		45,220		—
Other business	—		—		—		22,656		—
Total business	—		—		—		78,294		—
Consumer:
Classic/collectible auto	—		85		85		26,488		0.3
Other consumer	—		—		—		12,280		—
Total consumer	—		85		85		38,768		0.2
Total loans with COVID-19 pandemic modifications	$	7,615	$	49,069	$	56,684	$	1,116,391	5.1	%


Borrower (1)	Number of Loans	One-to-Four Family Residential (2)		Multifamily		Commercial Real Estate		Aggregate Balance of Loans
	(Dollars in thousands)
Real estate investor	2	$	—	$	12,185	$	14,424	$	26,609
Real estate investor	6	418		—		20,611		21,029
Real estate investor	2	—		—		18,274		18,274
Real estate investor	1	—		—		15,326		15,326
Real estate investor	2	—		—		14,468		14,468
Total	13	$	418	$	12,185	$	83,103	$	95,706


			Amount of Commitment Expiration
	Total Amounts Committed		Through One Year		After One Through Three Years		After Three Through Five Years		After Five Years
	(In thousands)
Commitments to originate loans	$	3,308	$	3,308	$	—	$	—	$	—
Unused portion of lines of credit	37,760		15,813		3,441		1,746		16,760
Undisbursed portion of construction and commercial loans	47,621		31,617		16,004		—		—
Total commitments	$	88,689	$	50,738	$	19,445	$	1,746	$	16,760


	At March 31, 2021
	Actual				For Minimum Capital Adequacy Purposes				To be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Tier I leverage capital (to average assets)	$	141,282	10.15	%	$	55,661	4.00	%	$	69,576	5.00	%
Common equity tier I ("CET1") (to risk- weighted assets)	141,282		14.36		44,270		4.50		63,946		6.50
Tier I risk-based capital (to risk-weighted assets)	141,282		14.36		59,027		6.00		78,703		8.00
Total risk-based capital (to risk-weighted assets)	153,623		15.62		78,703		8.00		98,379		10.00