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,September 30, 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)
 
Washington26-0610707
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareFFNWThe 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 filerAccelerated filer  Non-accelerated filerX
Smaller reporting companyXEmerging 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 November 8, 2022, 9,127,595May 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
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
 Item 4.Controls and Procedures
   PART II - OTHER INFORMATION
Item 1.Legal Proceedings
 Item 1A.Risk Factors
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds


 Item 3.Defaults upon Senior Securities
 Item 4.Mine Safety Disclosures
 Item 5.Other Information
 Item 6.Exhibits
SIGNATURES
 
 

2

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, 2022December 31, 2021 September 30, 2022December 31, 2021
AssetsAssetsAssets
(Unaudited)(Unaudited)
Cash on hand and in banksCash on hand and in banks$7,979 $7,246 Cash on hand and in banks$9,684 $7,246 
Interest-earning deposits with banksInterest-earning deposits with banks19,633 66,145 Interest-earning deposits with banks15,227 66,145 
Investments available-for-sale, at fair valueInvestments available-for-sale, at fair value180,212 168,948 Investments available-for-sale, at fair value221,278 168,948 
Investments held-to-maturity, at amortized costInvestments held-to-maturity, at amortized cost2,426 2,432 Investments held-to-maturity, at amortized cost2,438 2,432 
Loans receivable, net of allowance of $15,159, and $15,6571,121,382 1,103,461 
Loans receivable, net of allowance of $14,726, and $15,657Loans receivable, net of allowance of $14,726, and $15,6571,143,348 1,103,461 
Federal Home Loan Bank ("FHLB") stock, at costFederal Home Loan Bank ("FHLB") stock, at cost5,512 5,465 Federal Home Loan Bank ("FHLB") stock, at cost7,712 5,465 
Accrued interest receivableAccrued interest receivable5,590 5,285 Accrued interest receivable6,261 5,285 
Deferred tax assets, netDeferred tax assets, net1,069 850 Deferred tax assets, net2,355 850 
Premises and equipment, netPremises and equipment, net22,254 22,440 Premises and equipment, net21,608 22,440 
Bank owned life insurance ("BOLI"), netBank owned life insurance ("BOLI"), net35,552 35,210 Bank owned life insurance ("BOLI"), net36,064 35,210 
Prepaid expenses and other assetsPrepaid expenses and other assets8,451 3,628 Prepaid expenses and other assets13,605 3,628 
Right of use asset (“ROU”), netRight of use asset (“ROU”), net3,455 3,646 Right of use asset (“ROU”), net3,260 3,646 
GoodwillGoodwill889 889 Goodwill889 889 
Core deposit intangible, netCore deposit intangible, net650 684 Core deposit intangible, net582 684 
Total assetsTotal assets$1,415,054 $1,426,329 Total assets$1,484,311 $1,426,329 
Liabilities and Stockholders' EquityLiabilities and Stockholders' Equity Liabilities and Stockholders' Equity 
Deposits:Deposits:Deposits:
Noninterest-bearing depositsNoninterest-bearing deposits$130,596 $117,751 Noninterest-bearing deposits$118,842 $117,751 
Interest-bearing depositsInterest-bearing deposits1,009,505 1,039,723 Interest-bearing deposits1,030,594 1,039,723 
Total depositsTotal deposits1,140,101 1,157,474 Total deposits1,149,436 1,157,474 
FHLB advancesFHLB advances95,000 95,000 FHLB advances150,000 95,000 
Advance payments from borrowers for taxes and insuranceAdvance payments from borrowers for taxes and insurance5,299 2,909 Advance payments from borrowers for taxes and insurance5,033 2,909 
Lease liability, netLease liability, net3,617 3,805 Lease liability, net3,441 3,805 
Accrued interest payableAccrued interest payable112 112 Accrued interest payable185 112 
Other liabilitiesOther liabilities13,168 9,150 Other liabilities18,326 9,150 
Total liabilitiesTotal liabilities1,257,297 1,268,450 Total liabilities1,326,421 1,268,450 
  
Commitments and contingenciesCommitments and contingenciesCommitments and contingencies
Stockholders' EquityStockholders' Equity Stockholders' Equity 
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
— — 
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
91 91 
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and
outstanding 9,127,595 shares at September 30, 2022, and 9,125,759 shares at December 31, 2021
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and
outstanding 9,127,595 shares at September 30, 2022, and 9,125,759 shares at December 31, 2021
91 91 
Additional paid-in capitalAdditional paid-in capital71,780 72,298 Additional paid-in capital72,295 72,298 
Retained earningsRetained earnings88,339 86,162 Retained earnings92,928 86,162 
Accumulated other comprehensive (loss) income, net of taxAccumulated other comprehensive (loss) income, net of tax(1,889)174 Accumulated other comprehensive (loss) income, net of tax(7,424)174 
Unearned Employee Stock Ownership Plan ("ESOP") sharesUnearned Employee Stock Ownership Plan ("ESOP") shares(564)(846)Unearned Employee Stock Ownership Plan ("ESOP") shares— (846)
Total stockholders' equityTotal stockholders' equity157,757 157,879 Total stockholders' equity157,890 157,879 
Total liabilities and stockholders' equityTotal liabilities and stockholders' equity$1,415,054 $1,426,329 Total liabilities and stockholders' equity$1,484,311 $1,426,329 

See accompanying selected notes to consolidated financial statements.
3


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except per share data)
Unaudited)(Unaudited)
Three Months Ended March 31, Three Months Ended September 30,Nine Months Ended September 30,
20222021 2022202120222021
Interest incomeInterest incomeInterest income  
Loans, including feesLoans, including fees$12,001 $12,624 Loans, including fees$13,618 $12,508 $37,893 $37,772 
Investment securitiesInvestment securities831 748 Investment securities1,609 818 3,595 2,420 
Interest-earning deposits with banksInterest-earning deposits with banks19 12 Interest-earning deposits with banks125 24 181 53 
Dividends on FHLB stockDividends on FHLB stock74 79 Dividends on FHLB stock83 84 228 247 
Total interest incomeTotal interest income12,925 13,463 Total interest income15,435 13,434 41,897 40,492 
Interest expenseInterest expense  Interest expense    
DepositsDeposits1,257 2,299 Deposits2,326 1,612 4,982 5,826 
FHLB advances and other borrowingsFHLB advances and other borrowings300 418 FHLB advances and other borrowings392 431 1,006 1,263 
Total interest expenseTotal interest expense1,557 2,717 Total interest expense2,718 2,043 5,988 7,089 
Net interest incomeNet interest income11,368 10,746 Net interest income12,717 11,391 35,909 33,403 
(Recapture of provision) provision for loan losses(Recapture of provision) provision for loan losses(500)300 (Recapture of provision) provision for loan losses(400)100 (900)(300)
Net interest income after (recapture of provision) provision for loan lossesNet interest income after (recapture of provision) provision for loan losses11,868 10,446 Net interest income after (recapture of provision) provision for loan losses13,117 11,291 36,809 33,703 
Noninterest incomeNoninterest income  Noninterest income    
BOLI incomeBOLI income288 269 BOLI income243 377 782 891 
Wealth management revenue, netWealth management revenue, net82 160 Wealth management revenue, net89 64 276 391 
Deposit related feesDeposit related fees215 200 Deposit related fees245 228 705 654 
Loan related feesLoan related fees199 132 Loan related fees195 300 748 714 
OtherOtherOther30 17 86 
Total noninterest incomeTotal noninterest income789 764 Total noninterest income778 999 2,528 2,736 
Noninterest expenseNoninterest expenseNoninterest expense  
Salaries and employee benefitsSalaries and employee benefits5,261 4,945 Salaries and employee benefits5,417 4,856 16,156 14,863 
Occupancy and equipmentOccupancy and equipment1,228 1,100 Occupancy and equipment1,188 1,116 3,621 3,403 
Professional feesProfessional fees452 532 Professional fees549 502 1,732 1,423 
Data processingData processing677 697 Data processing675 626 2,044 2,003 
Regulatory assessmentsRegulatory assessments101 121 Regulatory assessments105 121 295 356 
Insurance and bond premiumsInsurance and bond premiums129 124 Insurance and bond premiums112 106 354 341 
MarketingMarketing37 29 Marketing92 64 226 116 
Other general and administrativeOther general and administrative741 581 Other general and administrative876 942 2,497 2,146 
Total noninterest expenseTotal noninterest expense8,626 8,129 Total noninterest expense9,014 8,333 26,925 24,651 
Income before federal income tax provisionIncome before federal income tax provision4,031 3,081 Income before federal income tax provision4,881 3,957 12,412 11,788 
Federal income tax provisionFederal income tax provision771 584 Federal income tax provision935 758 2,398 2,281 
Net incomeNet income$3,260 $2,497 Net income$3,946 $3,199 $10,014 $9,507 
Basic earnings per common shareBasic earnings per common share$0.36 $0.26 Basic earnings per common share$0.44 $0.34 $1.11 $1.01 
Diluted earnings per common shareDiluted earnings per common share$0.36 $0.26 Diluted earnings per common share$0.43 $0.34 $1.10 $0.99 
Basic weighted average number of common shares outstandingBasic weighted average number of common shares outstanding8,987,482 9,490,058 Basic weighted average number of common shares outstanding8,981,037 9,314,456 8,983,806 9,412,196 
Diluted weighted average number of common shares outstandingDiluted weighted average number of common shares outstanding9,117,432 9,566,671 Diluted weighted average number of common shares outstanding9,068,541 9,446,702 9,088,206 9,514,165 

See accompanying selected notes to consolidated financial statements.
4


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)

Three Months Ended March 31,Three Months Ended September 30,Nine Months Ended September 30,
202220212022202120222021
Net incomeNet income$3,260 $2,497 Net income$3,946 $3,199 $10,014 $9,507 
Other comprehensive (loss) income, before tax:Other comprehensive (loss) income, before tax:Other comprehensive (loss) income, before tax:
Unrealized holding losses on investments available-for-saleUnrealized holding losses on investments available-for-sale(7,082)(1,952)Unrealized holding losses on investments available-for-sale(6,486)(761)(19,187)(1,192)
Tax effectTax effect1,487 410 Tax effect1,362 160 4,029 251 
Gains on cash flow hedgesGains on cash flow hedges4,471 3,728 Gains on cash flow hedges3,182 553 9,569 3,337 
Tax effectTax effect(939)(783)Tax effect(668)(116)(2,009)(701)
Other comprehensive (loss) income, net of taxOther comprehensive (loss) income, net of tax(2,063)1,403 Other comprehensive (loss) income, net of tax(2,610)(164)(7,598)1,695 
Total comprehensive incomeTotal comprehensive income$1,197 $3,900 Total comprehensive income$1,336 $3,035 $2,416 $11,202 

See accompanying selected notes to consolidated financial statements.

5


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except share data)
(Unaudited)
Three Months Ended March 31, 2021
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at December 31, 20209,736,875 $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 options2,000 — 21 — — — 21 
Issuance of common stock - restricted stock awards, net45,593 — — — — 
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, 20219,692,610 $97 $81,099 $79,455 $(515)$(1,693)$158,443 
Three Months Ended March 31, 2022
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at December 31, 20219,125,759 $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 options2,000 — 21 — — — 21 
Issuance of common stock - restricted stock awards, net34,210 — — — — — — 
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, 20229,107,977 $91 $71,780 $88,339 $(1,889)$(564)$157,757 
Three Months Ended September 30, 2021
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at June 30, 20219,651,180 $97 $80,770 $82,224 $(59)$(1,411)$161,621 
Net income— — — 3,199 — — 3,199 
Other comprehensive loss, net of tax— — — — (164)— (164)
Exercise of stock options2,000 — 22 — — — 22 
Issuance of common stock - restricted stock awards, net10,080 — — — — — — 
Compensation related to stock options and restricted stock awards— — 315 — — — 315 
Allocation of 28,213 ESOP shares— — 171 — — 282 453 
Repurchase and retirement of common stock(180,179)(2)(2,967)— — — (2,969)
Cash dividend declared and paid ($0.11 per share)— — — (1,021)— — (1,021)
Balances at September 30, 20219,483,081 $95 $78,311 $84,402 $(223)$(1,129)$161,456 
Nine Months Ended September 30, 2021
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at December 31, 20209,736,875 $97 $82,095 $78,003 $(1,918)$(1,975)$156,302 
Net income— — — 9,507 — — 9,507 
Other comprehensive income, net of tax— — — — 1,695 — 1,695 
Exercise of stock options6,000 — 64 — — — 64 
Issuance of common stock - restricted stock awards, net55,673 (39)— — — (38)
Compensation related to stock options and restricted stock awards— — 558 — — — 558 
Allocation of 84,639 ESOP shares— — 381 — — 846 1,227 
Repurchase and retirement of common stock(312,628)(3)(4,748)— — — (4,751)
Canceled common stock - restricted stock awards(2,839)— — — — — — 
Cash dividend declared and paid ($0.33 per share)— — — (3,108)— — (3,108)
Balances at September 30, 20219,483,081 $95 $78,311 $84,402 $(223)$(1,129)$161,456 

6


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands except share data)
(Unaudited)
Three Months Ended September 30, 2022
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at June 30, 20229,091,533 $91 $71,835 $90,066 $(4,814)$(282)$156,896 
Net income— — — 3,946 — — 3,946 
Other comprehensive loss, net of tax— — — — (2,610)— (2,610)
Exercise of stock options50,000 — 407 — — — 407 
Issuance of common stock - restricted stock awards, net(1)
13,332 — — — — — — 
Compensation related to stock options and restricted stock awards— — 327 — — — 327 
Allocation of 28,214 ESOP shares— — 148 — — 282 430 
Repurchase and retirement of common stock(27,270)— (422)— — — (422)
Cash dividend declared and paid ($0.12 per share)— — — (1,084)— — (1,084)
Balances at September 30, 20229,127,595 $91 $72,295 $92,928 $(7,424)$— $157,890 
(1) These shares were forfeited.
Nine Months Ended September 30, 2022
 SharesCommon StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Loss,
 net of tax
Unearned
ESOP
Shares
Total Stockholders’ Equity
Balances at December 31, 20219,125,759 $91 $72,298 $86,162 $174 $(846)$157,879 
Net income— — — 10,014 — — 10,014 
Other comprehensive loss, net of tax— — — — (7,598)— (7,598)
Exercise of stock options54,481 (1)455 — — — 454 
Issuance of common stock - restricted stock awards, net45,544 — — — — — — 
Compensation related to stock options and restricted stock awards— — 641 — — — 641 
Allocation of 84,640 ESOP shares— — 526 — — 846 1,372 
Repurchase and retirement of common stock(84,981)(1,399)— — — (1,398)
Canceled common stock - restricted stock awards(13,208)— (226)— — — (226)
Cash dividend declared and paid ($0.36 per share)— — — (3,248)— — (3,248)
Balances at September 30, 20229,127,595 $91 $72,295 $92,928 $(7,424)$— $157,890 
See accompanying selected notes to consolidated financial statements.
67


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31, Nine Months Ended September 30,
20222021 20222021
Cash flows from operating activities:Cash flows from operating activities:  Cash flows from operating activities:  
Net incomeNet income$3,260 $2,497 Net income$10,014 $9,507 
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:
(Recapture of provision) provision for loan losses(500)300 
Recapture of provision for loan lossesRecapture of provision for loan losses(900)(300)
Loss on sale of OREO property, netLoss on sale of OREO property, net— 207 
Net amortization of premiums and discounts on investmentsNet amortization of premiums and discounts on investments258 257 Net amortization of premiums and discounts on investments593 807 
Depreciation of premises and equipmentDepreciation of premises and equipment555 531 Depreciation of premises and equipment1,642 1,607 
Loss on disposal of premises and equipmentLoss on disposal of premises and equipment— 
Deferred federal income taxesDeferred federal income taxes329 105 Deferred federal income taxes515 445 
Allocation of ESOP sharesAllocation of ESOP shares475 371 Allocation of ESOP shares1,372 1,227 
Stock compensation expenseStock compensation expense188 96 Stock compensation expense641 558 
BOLI incomeBOLI income(288)(269)BOLI income(782)(891)
Annuity incomeAnnuity income(1)(13)Annuity income(6)(20)
Changes in operating assets and liabilities:Changes in operating assets and liabilities:Changes in operating assets and liabilities:
Increase in prepaid expenses and other assetsIncrease in prepaid expenses and other assets(318)(817)Increase in prepaid expenses and other assets(306)(715)
Decrease in ROUDecrease in ROU191 190 Decrease in ROU542 567 
Increase in advance payments from borrowers for taxes and insuranceIncrease in advance payments from borrowers for taxes and insurance2,390 2,315 Increase in advance payments from borrowers for taxes and insurance2,124 2,577 
Increase in accrued interest receivableIncrease in accrued interest receivable(305)(194)Increase in accrued interest receivable(976)(173)
Decrease in lease liabilityDecrease in lease liability(188)(179)Decrease in lease liability(520)(547)
Decrease in accrued interest payable— (14)
Increase in other liabilities4,025 596 
Increase (decrease) in accrued interest payableIncrease (decrease) in accrued interest payable73 (5)
Increase (decrease) in other liabilitiesIncrease (decrease) in other liabilities9,176 (669)
Net cash provided by operating activitiesNet cash provided by operating activities10,071 5,772 Net cash provided by operating activities23,202 14,183 
Cash flows from investing activities:Cash flows from investing activities:  Cash flows from investing activities:  
Proceeds from sales of OREO propertiesProceeds from sales of OREO properties— — Proceeds from sales of OREO properties— 247 
Proceeds from calls and maturities of investments available-for-saleProceeds from calls and maturities of investments available-for-sale2,382 2,000 Proceeds from calls and maturities of investments available-for-sale3,781 10,000 
Principal repayments on investments available-for-salePrincipal repayments on investments available-for-sale4,868 4,722 Principal repayments on investments available-for-sale13,796 13,621 
Purchases of investments available-for-salePurchases of investments available-for-sale(25,854)(49,422)Purchases of investments available-for-sale(89,687)(76,130)
Purchase of investments held-to-maturity— — 
Net (increase) decrease in loans receivable(17,421)1,450 
Net increase in loans receivableNet increase in loans receivable(38,987)(787)
Purchase of FHLB stockPurchase of FHLB stock(47)(55)Purchase of FHLB stock(2,247)(55)
Purchase of premises and equipmentPurchase of premises and equipment(369)(464)Purchase of premises and equipment(810)(1,657)
Proceeds from BOLI death benefit settlementProceeds from BOLI death benefit settlement— 1,086 
Purchase of BOLIPurchase of BOLI(54)(54)Purchase of BOLI(72)(2,155)
Net cash used by investing activitiesNet cash used by investing activities(36,495)(41,823)Net cash used by investing activities(114,226)(55,830)
78


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31,Nine Months Ended September 30,
2022202120222021
Cash flows from financing activities:Cash flows from financing activities:  Cash flows from financing activities:  
Net (decrease) increase in depositsNet (decrease) increase in deposits$(17,373)$40,022 Net (decrease) increase in deposits$(8,038)$48,103 
Advances from the FHLBAdvances from the FHLB105,000 — 
Repayments of advances from the FHLBRepayments of advances from the FHLB(50,000)— 
Proceeds from stock options exercisesProceeds from stock options exercises21 21 Proceeds from stock options exercises454 64 
Net share settlement of stock awardsNet share settlement of stock awards(226)(38)Net share settlement of stock awards(226)(38)
Repurchase and retirement of common stockRepurchase and retirement of common stock(694)(1,164)Repurchase and retirement of common stock(1,398)(4,751)
Dividends paidDividends paid(1,083)(1,045)Dividends paid(3,248)(3,108)
Net cash (used by) provided by financing activities(19,355)37,796 
Net cash provided by financing activitiesNet cash provided by financing activities42,544 40,270 
Net (decrease) increase in cash and cash equivalents(45,779)1,745 
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents(48,480)(1,377)
Cash and cash equivalents at beginning of periodCash and cash equivalents at beginning of period73,391 80,489 Cash and cash equivalents at beginning of period73,391 80,489 
Cash and cash equivalents at end of periodCash and cash equivalents at end of period$27,612 $82,234 Cash and cash equivalents at end of period$24,911 $79,112 
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 paidInterest paid$1,557 $2,731 Interest paid$5,915 $7,094 
Federal income taxes paidFederal income taxes paid2,000 2,445 
Noncash items:Noncash items:Noncash items:
Change in unrealized loss on investments available-for-saleChange in unrealized loss on investments available-for-sale$(7,082)$(1,952)Change in unrealized loss on investments available-for-sale$(19,187)$(1,192)
Change in unrealized gain on cash flow hedgeChange in unrealized gain on cash flow hedge4,471 3,728 Change in unrealized gain on cash flow hedge9,569 3,337 
Initial recognition of ROUInitial recognition of ROU— 519 Initial recognition of ROU156 758 
Initial recognition of lease liabilityInitial recognition of lease liability— 519 Initial recognition of lease liability156 758 

See accompanying selected notes to consolidated financial statements.

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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,September 30, 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, 2021, as filed with the SEC (“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 threenine months ended March 31,September 30, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 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.


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SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 3 - Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements

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 by the Financial Accounting Standards Board (“FASB”) 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”)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. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol (“Protocol”) as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally, effective January 1, 2022, the Bank was no longer initiating or renewing loans using LIBOR as an index. As of December 31, 2021,September 30, 2022, the Company’s derivative instruments continued to use LIBOR as the basis for interest-rate swap calculations. The Company is evaluating the optional election ofdoes not expect this ASU for the transition from LIBOR to have a new reference rate.material impact on its business operations and Consolidated Financial Statements.

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.



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SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 4 - Investments

    Investments available-for-sale are summarized as follows at the dates indicated:
March 31, 2022 September 30, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair ValueAmortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
(In thousands)(In thousands)
Mortgage-backed investments:Mortgage-backed investments:   Mortgage-backed investments:   
Fannie Mae Fannie Mae$13,409 $21 $(755)$12,675  Fannie Mae$13,158 $— $(1,928)$11,230 
Freddie Mac Freddie Mac13,953 31 (903)13,081  Freddie Mac13,753 — (1,806)11,947 
Ginnie Mae Ginnie Mae21,454 (726)20,729  Ginnie Mae29,843 — (1,660)28,183 
Other Other11,583 (191)11,396  Other35,051 — (1,735)33,316 
Municipal bondsMunicipal bonds35,979 84 (3,020)33,043 Municipal bonds37,065 — (7,272)29,793 
U.S. Government agenciesU.S. Government agencies59,721 10 (776)58,955 U.S. Government agencies78,400 10 (2,175)76,235 
Corporate bondsCorporate bonds30,997 85 (749)30,333 Corporate bonds32,998 — (2,424)30,574 
TotalTotal$187,096 $236 $(7,120)$180,212 Total$240,268 $10 $(19,000)$221,278 
 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 Mac13,039 115 (330)12,824 
   Ginnie Mae23,728 105 (146)23,687 
   Other11,278 47 (61)11,264 
Municipal bonds36,078 677 (289)36,466 
U.S. Government agencies41,711 61 (338)41,434 
Corporate bonds29,997 505 (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. governmentGovernment and its agencies, in an amount greater than 10% of stockholders’ equity at March 31,September 30, 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:

11
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


March 31, 2022 September 30, 2022
Less Than 12 Months12 Months or LongerTotal Less Than 12 Months12 Months or LongerTotal
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
(In thousands)(In thousands)
Mortgage-backed investments:Mortgage-backed investments:Mortgage-backed investments:
Fannie Mae Fannie Mae$9,082 $(755)$— $— $9,082 $(755) Fannie Mae$8,045 $(1,091)$3,177 $(837)$11,222 $(1,928)
Freddie Mac Freddie Mac3,951 (75)7,359 (828)11,310 (903) Freddie Mac4,701 (272)6,508 (1,534)11,209 (1,806)
Ginnie Mae Ginnie Mae14,999 (607)5,618 (119)20,617 (726) Ginnie Mae17,141 (804)11,042 (856)28,183 (1,660)
Other Other6,130 (191)— — 6,130 (191) Other26,398 (1,504)4,007 (231)30,405 (1,735)
Municipal bondsMunicipal bonds18,830 (1,896)9,424 (1,124)28,254 (3,020)Municipal bonds15,740 (2,803)14,053 (4,469)29,793 (7,272)
U.S. Government agenciesU.S. Government agencies33,165 (431)19,737 (345)52,902 (776)U.S. Government agencies54,528 (1,732)21,003 (443)75,531 (2,175)
Corporate bondsCorporate bonds17,441 (558)3,809 (191)21,250 (749)Corporate bonds25,861 (2,138)4,713 (286)30,574 (2,424)
TotalTotal$103,598 $(4,513)$45,947 $(2,607)$149,545 $(7,120)Total$152,414 $(10,344)$64,503 $(8,656)$216,917 $(19,000)

 December 31, 2021
 Less Than 12 Months12 Months or LongerTotal
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
Fair ValueGross Unrealized
Loss
(In thousands)
Mortgage-backed investments:
   Fannie Mae$6,279 $(88)$— $— $6,279 $(88)
   Freddie Mac4,709 (233)3,214 (97)7,923 (330)
   Ginnie Mae18,539 (146)— — 18,539 (146)
   Other4,815 (61)— — 4,815 (61)
Municipal bonds18,805 (264)1,059 (25)19,864 (289)
U.S. Government agencies10,123 (34)21,682 (304)31,805 (338)
Corporate bonds985 (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 88131 securities and 51 securities in an unrealized loss position, respectively, with 2538 and 14 of these securities in an unrealized loss position for 12 months or more, at both March 31,September 30, 2022, and December 31, 2021, respectively. Management does not believe that any individual unrealized loss as of March 31,September 30, 2022, or December 31, 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 municipal or corporate bonds at September 30, 2022, and December 31, 2021, and determined that an OTTI charge was not warranted.
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SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


municipal or corporate bonds at March 31, 2022, and December 31, 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,September 30, 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, 2022 September 30, 2022
Amortized CostFair Value Amortized CostFair Value
(In thousands) (In thousands)
Due within one yearDue within one year$399 $401 Due within one year$5,998 $5,927 
Due after one year through five yearsDue after one year through five years28,387 28,240 Due after one year through five years44,023 42,702 
Due after five years through ten yearsDue after five years through ten years27,231 26,420 Due after five years through ten years28,857 26,173 
Due after ten yearsDue after ten years70,680 67,270 Due after ten years69,585 61,800 
126,697 122,331  148,463 136,602 
Mortgage-backed investmentsMortgage-backed investments60,399 57,881 Mortgage-backed investments91,805 84,676 
TotalTotal$187,096 $180,212 Total$240,268 $221,278 

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 $22.7$21.3 million and $23.1 million were pledged as collateral for public deposits at March 31,September 30, 2022, and December 31, 2021, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

    For the three and nine months ended March 31,September 30, 2022, there was a $30,000 callwere $399,000 and $3.8 million, respectively, in calls and maturities on one investment securitysecurities with no gain or loss generated andgenerated. For the three months ended September 30, 2021, there were no salescalls or maturities of investment securities. For the threenine months ended March 31,September 30, 2021, there was a $2.0were $10.0 million callin calls and maturities on one investment securitysecurities with no gain or loss generated andgenerated. There were no sales of investment securities.securities during the three and nine months ended September 30, 2022 and 2021.

    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,September 30, 2022, the annuities were reported as investments held-to-maturity at an amortized cost of $2.4 million on the Company’s Consolidated Balance Sheets. The amortized cost is considered the fair value of the investment.


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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, 2022December 31, 2021 September 30, 2022December 31, 2021
(In thousands) (In thousands)
One-to-four family residential:One-to-four family residential:  One-to-four family residential:  
Permanent owner occupiedPermanent owner occupied$197,447 $185,320 Permanent owner occupied$221,212 $185,320 
Permanent non-owner occupiedPermanent non-owner occupied214,784 199,796 Permanent non-owner occupied228,223 199,796 
412,231 385,116 449,435 385,116 
MultifamilyMultifamily152,855 130,146 Multifamily132,755 130,146 
Commercial real estateCommercial real estate416,988 419,417 Commercial real estate413,486 419,417 
Construction/land:Construction/land: Construction/land: 
One-to-four family residentialOne-to-four family residential35,953 34,677 One-to-four family residential41,606 34,677 
MultifamilyMultifamily17,196 37,194 Multifamily15,500 37,194 
CommercialCommercial6,189 6,189 Commercial— 6,189 
LandLand15,359 15,395 Land15,518 15,395 
74,697 93,455  72,624 93,455 
BusinessBusiness30,546 46,590 Business32,054 46,590 
ConsumerConsumer49,431 44,812 Consumer57,619 44,812 
Total loansTotal loans1,136,748 1,119,536 Total loans1,157,973 1,119,536 
Less:Less: Less: 
Deferred loan fees, net207 418 
Deferred loan (costs) fees, netDeferred loan (costs) fees, net(101)418 
ALLLALLL15,159 15,657 ALLL14,726 15,657 
Loans receivable, netLoans receivable, net$1,121,382 $1,103,461 Loans receivable, net$1,143,348 $1,103,461 

    At March 31,September 30, 2022, loans totaling $518.9$558.3 million were pledged to secure borrowings from the FHLB compared to $561.4 million at December 31, 2021. In addition, loans totaling $120.8$93.7 million and $120.0 million were pledged to the Federal Reserve Bank of San Francisco to secure a line of credit at March 31,September 30, 2022 and December 31, 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.
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Gradethe Company’s credit position at a future date.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.

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. These are 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,September 30, 2022, and December 31, 2021, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at March 31,September 30, 2022, and December 31, 2021 by type and risk category:
March 31, 2022 September 30, 2022
One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/ 
Land
BusinessConsumerTotal One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/ 
Land
BusinessConsumerTotal
(In thousands) (In thousands)
Risk Rating:Risk Rating:       Risk Rating:     
Pass, grade 1-4Pass, grade 1-4$409,798 $148,877 $349,724 $72,444 $30,546 $49,005 $1,060,394 Pass, grade 1-4$446,999 $128,813 $348,049 $72,624 $32,054 $57,083 $1,085,622 
Pass, grade 5 (watch)Pass, grade 5 (watch)1,696 2,318 16,094 2,253 — 31 22,392 Pass, grade 5 (watch)1,669 2,300 14,947 — — 135 19,051 
Special mention Special mention737 — 10,997 — — 216 11,950  Special mention728 — 4,677 — — 208 5,613 
Substandard Substandard— 1,660 40,173 — — 179 42,012  Substandard39 1,642 45,813 — — 193 47,687 
Total loansTotal loans$412,231 $152,855 $416,988 $74,697 $30,546 $49,431 $1,136,748 Total loans$449,435 $132,755 $413,486 $72,624 $32,054 $57,619 $1,157,973 
 December 31, 2021
 One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/
Land
BusinessConsumerTotal
 (In thousands)
Risk Rating:       
   Pass, grade 1-4$383,276 $126,149 $351,241 $91,202 $46,590 $44,379 $1,042,837 
Pass, grade 5 (watch)911 3,997 23,019 2,253 — 33 30,213 
   Special mention929 — 11,127 — — 221 12,277 
   Substandard— — 34,030 — — 179 34,209 
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 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
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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.

At March 31,September 30, 2022, total loans receivable included $5.21.2 million of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). as compared to $22.4 million at September 30, 2021. Although these loans were included in the population of loans collectively evaluated for impairment, no general 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, 2022At or For the Three Months Ended September 30, 2022
One-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotalOne-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotal
(In thousands)(In thousands)
ALLL:ALLL:ALLL:
Beginning balanceBeginning balance$3,214 $1,279 $6,615 $2,064 $1,112 $1,373 $15,657 Beginning balance$3,692 $1,296 $6,187 $1,357 $998 $1,595 $15,125 
RecoveriesRecoveries— — — — — 
Provision (recapture)Provision (recapture)109 (30)(789)176 (41)175 (400)
Ending balanceEnding balance$3,802 $1,266 $5,398 $1,533 $957 $1,770 $14,726 
At or For the Nine Months Ended September 30, 2022
One-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotal
(In thousands)
ALLL:ALLL:
Beginning balanceBeginning balance$3,214 $1,279 $6,615 $2,064 $1,112 $1,373 $15,657 
Charge-offs Charge-offs— — — — — (37)(37)
Recoveries Recoveries— — — — —  Recoveries— — — — — 
Provision (recapture)Provision (recapture)259 176 (300)(422)(331)118 (500)Provision (recapture)582 (13)(1,217)(531)(155)434 (900)
Ending balanceEnding balance$3,475 $1,455 $6,315 $1,642 $781 $1,491 $15,159 Ending balance$3,802 $1,266 $5,398 $1,533 $957 $1,770 $14,726 
ALLL by category:ALLL by category:ALLL by category:
General allowanceGeneral allowance$3,457 $1,455 $6,315 $1,642 $781 $1,491 $15,141 General allowance$3,787 $1,266 $5,398 $1,533 $957 $1,770 $14,711 
Specific allowanceSpecific allowance18 — — — — — 18 Specific allowance15 — — — — — 15 
Loans:Loans: Loans: 
Total loansTotal loans$412,231 $152,855 $416,988 $74,697 $30,546 $49,431 $1,136,748 Total loans$449,435 $132,755 $413,486 $72,624 $32,054 $57,619 $1,157,973 
Loans collectively evaluated for impairmentLoans collectively evaluated for impairment410,136 151,195 376,815 74,697 30,546 49,431 1,092,820 Loans collectively evaluated for impairment447,571 131,113 367,673 72,624 32,054 57,619 1,108,654 
Loans individually evaluated for impairmentLoans individually evaluated for impairment2,095 1,660 40,173 — — — 43,928 Loans individually evaluated for impairment1,864 1,642 45,813 — — — 49,319 




1617


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At or For the Three Months Ended September 30, 2021
One-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotal
(In thousands)
ALLL:ALLL:
Beginning balanceBeginning balance$2,992 $1,377 $5,914 $2,385 $1,133 $1,077 $14,878 
RecoveriesRecoveries79 — — — — — 79 
Provision (Recapture)Provision (Recapture)99 127 (128)(135)128 100 
Ending balanceEnding balance$3,170 $1,386 $6,041 $2,257 $998 $1,205 $15,057 
At or For the Three Months Ended March 31, 2021 At or For the Nine Months Ended September 30, 2021
One-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotal One-to-Four
Family
Residential
MultifamilyCommercial Real EstateConstruction/
Land
BusinessConsumerTotal
(In thousands)(In thousands)
ALLL:ALLL:ALLL:
Beginning balanceBeginning balance$3,181 $1,366 $6,127 $2,189 $1,242 $1,069 $15,174 Beginning balance$3,181 $1,366 $6,127 $2,189 $1,242 $1,069 $15,174 
Recoveries Recoveries28 — — — — — 28  Recoveries183 — — — — — 183 
(Recapture) provision (Recapture) provision(158)(34)765 (216)(61)300  (Recapture) provision(194)20 (86)68 (244)136 (300)
Ending balanceEnding balance$3,051 $1,332 $6,892 $2,193 $1,026 $1,008 $15,502 Ending balance$3,170 $1,386 $6,041 $2,257 $998 $1,205 $15,057 
ALLL by category:ALLL by category:ALLL by category:
General allowanceGeneral allowance$3,046 $1,332 $6,892 $2,193 $1,026 $1,008 $15,497 General allowance$3,148 $1,386 $6,041 $2,257 $998 $1,205 $15,035 
Specific allowanceSpecific allowance— — — — — Specific allowance22 — — — — — 22 
Loans:Loans: Loans: 
Total loansTotal loans$379,246 $140,068 $385,470 $94,545 $78,294 $38,768 $1,116,391 Total loans$382,676 $143,806 $392,356 $101,288 $54,748 $42,484 $1,117,358 
Loans collectively evaluated for impairmentLoans collectively evaluated for impairment376,722 138,032 368,911 94,545 78,294 38,768 1,095,272 Loans collectively evaluated for impairment380,268 143,806 366,640 101,288 54,748 42,484 1,089,234 
Loans individually evaluated for impairmentLoans individually evaluated for impairment2,524 2,036 16,559 — — — 21,119 Loans individually evaluated for impairment2,408 — 25,716 — — — 28,124 


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,September 30, 2022, totalloans past due loans were $208,000,$406,000, representing 0.02%0.04% of total loans receivable, and atreceivable. At December 31, 2021, wereloans past due totaled $255,000, representing 0.02% of total loans receivable. The following tables represent a summary of the aging of loans by type at the dates indicated:
 Loans Past Due as of March 31, 2022  
 30-59 Days60-89 Days90 Days and
Greater
Total Past
Due
Current
Total (1)
 (In thousands)
Real estate:      
One-to-four family residential:    
Owner occupied$— $— $— $— $197,447 $197,447 
Non-owner occupied29 — — 29 214,755 214,784 
Multifamily— — — — 152,855 152,855 
Commercial real estate— — — — 416,988 416,988 
Construction/land— 0— — 74,697 74,697 
Total real estate29 — — 29 1,056,742 1,056,771 
Business— — — — 30,546 30,546 
Consumer— — 179 179 49,252 49,431 
Total loans$29 $— $179 $208 $1,136,540 $1,136,748 


18


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Loans Past Due as of September 30, 2022  
 30-59 Days60-89 Days90 Days and
Greater
Total Past
Due
Current
Total (1)
 (In thousands)
Real estate:      
One-to-four family residential:    
Owner occupied$44 $— $39 $83 $221,129 $221,212 
Non-owner occupied— — — 228,223 228,223 
Multifamily— — — — 132,755 132,755 
Commercial real estate— — — — 413,486 413,486 
Construction/land— — — 72,624 72,624 
Total real estate44 — 39 83 1,068,217 1,068,300 
Business— — — — 32,054 32,054 
Consumer130 — 193 323 57,296 57,619 
Total loans$174 $— $232 $406 $1,157,567 $1,157,973 
 ________________ 

(1) There were no loans 90 days and greater past due and still accruing interest at March 31,September 30, 2022.
17


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Loans Past Due as of December 31, 2021  
 30-59 Days60-89 Days90 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 
Business76 — — 76 46,514 46,590 
Consumer179 — — 179 44,633 44,812 
Total loans$255 $— $— $255 $1,119,281 $1,119,536 
_________________ 

(1) There were no loans 90 days and greater past due and still accruing interest at December 31, 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. At The following table is a summary ofSeptember 30, 2022 nonaccrual loans bytotaled $232,000, comprised of a $193,000 consumer loan typeand a $39,000 one-to-four family residential loan. There were no nonaccrual loans at the dates indicated:December 31, 2021.


March 31, 2022December 31, 2021
(In thousands)
Consumer179 — 
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.



19


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables summarize the loan portfolio by type and payment status at the dates indicated:
 March 31, 2022
 One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/
Land
BusinessConsumerTotal
 (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 

 September 30, 2022
 One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/
Land
BusinessConsumerTotal
 (In thousands)
Performing (1)
$449,396 $132,755 $413,486 $72,624 $32,054 $57,426 $1,157,741 
Nonperforming39 — — — — 193 232 
Total loans$449,435 $132,755 $413,486 $72,624 $32,054 $57,619 $1,157,973 
_____________

(1) There were $197.4$221.2 million of owner-occupied one-to-four family residential loans and $214.8$228.2 million of non-owner occupied one-to-four family residential loans classified as performing.
18


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 December 31, 2021
 One-to-Four
Family
Residential
MultifamilyCommercial
Real Estate
Construction/
Land
BusinessConsumerTotal
 (In thousands)
Performing (1)
$385,116 $130,146 $419,417 $93,455 $46,590 $44,812 $1,119,536 
Nonperforming— — — — — — — 
Total loans$385,116 $130,146 $419,417 $93,455 $46,590 $44,812 $1,119,536 
_____________

(1) There were $185.3 million of owner-occupied one-to-four family residential loans and $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,September 30, 2022, and December 31, 2021, there were no commitments to advance funds related to impaired loans.

1920


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, 2022
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
 (In thousands)
Loans with no related allowance:   
  One-to-four family residential:
      Owner occupied$177 $183 $— 
      Non-owner occupied908 908 — 
  Multifamily1,660 1,660 — 
   Commercial real estate40,173 40,173 — 
Total42,918 42,924 — 
Loans with an allowance:
  One-to-four family residential:
      Owner occupied492 539 18 
      Non-owner occupied518 518 — 
Total1,010 1,057 18 
Total impaired loans:
  One-to-four family residential:
      Owner occupied669 722 18 
      Non-owner occupied1,426 1,426 — 
   Multifamily1,660 1,660 — 
   Commercial real estate40,173 40,173 — 
Total$43,928 $43,981 $18 

September 30, 2022
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
 (In thousands)
Loans with no related allowance:   
  One-to-four family residential:
      Owner occupied$214 $216 $— 
      Non-owner occupied648 648 — 
  Multifamily1,642 1,642 — 
   Commercial real estate45,813 45,813 — 
Total48,317 48,319 — 
Loans with an allowance:
  One-to-four family residential:
      Owner occupied488 535 
      Non-owner occupied514 514 14 
Total1,002 1,049 15 
Total impaired loans:
  One-to-four family residential:
      Owner occupied702 751 
      Non-owner occupied1,162 1,162 14 
   Multifamily1,642 1,642 — 
   Commercial real estate45,813 45,813 — 
Total$49,319 $49,368 $15 
_________________ 
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.


2021


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 December 31, 2021
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
 (In thousands)
Loans with no related allowance:   
  One-to-four family residential:   
      Owner occupied$178 $185 $— 
      Non-owner occupied915 915 — 
   Commercial real estate34,030 34,030 — 
Total35,123 35,130 — 
Loans with an allowance:
  One-to-four family residential:
      Owner occupied494 541 19 
      Non-owner occupied520 520 
Total1,014 1,061 20 
Total impaired loans:
  One-to-four family residential:
      Owner occupied672 726 19 
      Non-owner occupied1,435 1,435 
   Commercial real estate34,030 34,030 — 
Total$36,137 $36,191 $20 
_________________ 

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


2122


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 and nine months ended March 31,September 30, 2022 and 2021:
Three Months Ended March 31, 2022Three Months Ended March 31, 2021Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest 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$178 $$273 $ Owner occupied$195 $$186 $10 
Non-owner occupied Non-owner occupied912 15 984 16  Non-owner occupied774 11 843 33 
MultifamilyMultifamily830 17 2,070 46 Multifamily1,647 17 1,238 52 
Commercial real estateCommercial real estate37,102 410 16,614 161 Commercial real estate42,882 513 39,992 1,471 
TotalTotal39,022 445 19,941 228 Total45,498 544 42,259 1,566 
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 occupied493 501  Owner occupied489 491 21 
Non-owner occupied Non-owner occupied519 819 13  Non-owner occupied515 517 27 
TotalTotal1,012 16 1,320 21 Total1,004 16 1,008 48 
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 occupied671 10 774 13  Owner occupied684 10 677 31 
Non-owner occupied Non-owner occupied1,431 24 1,803 29  Non-owner occupied1,289 20 1,360 60 
MultifamilyMultifamily830 17 2,070 46 Multifamily1,647 17 1,238 52 
Commercial real estateCommercial real estate37,102 410 16,614 161 Commercial real estate42,882 513 39,992 1,471 
TotalTotal$40,034 $461 $21,261 $249 Total$46,502 $560 $43,267 $1,614 
23


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended September 30, 2021Nine Months Ended September 30, 2021
Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
(In thousands)
Loans with no related allowance:
   One-to-four family residential:
      Owner occupied$181 $$227 $
      Non-owner occupied926 16 955 47 
Multifamily— — 1,035 — 
Commercial real estate26,356 192 21,485 662 
Total27,463 211 23,702 718 
Loans with an allowance:
   One-to-four family residential:
      Owner occupied497 499 24 
      Non-owner occupied812 13 815 39 
Total1,309 20 1,314 63 
Total impaired loans:
   One-to-four family residential:
      Owner occupied678 10 726 33 
      Non-owner occupied1,738 29 1,770 86 
Multifamily— — 1,035 — 
Commercial real estate26,356 192 21,485 662 
Total$28,772 $231 $25,016 $781 

2224


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Troubled Debt Restructurings. Certain loan modifications are accounted for as TDR.TDRs. At both March 31,September 30, 2022, and December 31, 2021, TDRs totaled $1.8 million and $2.1 million.million, respectively. At March 31,September 30, 2022, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified 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. No loans accounted for as TDRs were charged-off to the ALLL forduring the three and nine months ended March 31,September 30, 2022 and 2021.

There were no TDR modifications during the threenine months ended March 31,September 30, 2022. The following table presents TDR modifications during the threenine months ended March 31,September 30, 2021, and the recorded investment prior to and after the modification.

Three Months Ended March 31, 2021Nine Months Ended September 30, 2021
Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentNumber of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
(Dollars in thousands)(Dollars in thousands)
One-to-four family residentialOne-to-four family residential
Advancement of maturity dateAdvancement of maturity date1,355 1,355 
Commercial real estate:Commercial real estate:Commercial real estate:
Advancement of maturity dateAdvancement of maturity date$1,241 $1,241 Advancement of maturity date1$1,241 $1,241 
TotalTotal1$1,241 $1,241 Total4$2,596 $2,596 

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 and nine months ended March 31,September 30, 2022, and March 31,September 30, 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 summaryAs of both September 30, 2022, and 2021, the Bank had no OREO activity during the periods shown: 
 Three Months Ended March 31,
 20222021
 (In thousands)
Balance at beginning of period$— $454 
Market value adjustments— — 
Balance at end of period$— $454 
For the three months ended March 31, 2022, there were no remaining OREO properties, as the commercial real estate properties held in OREO at March 31, 2021, were sold in August 2021. At March 31, 2022, there were no one-to-four family residential loans for which formal foreclosure proceedings were in process.properties.

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
23


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.
        

25


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
    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, wasis 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.

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. inIn 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.methodologies. 

2426


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,September 30, 2022 and December 31, 2021:
Fair Value Measurements at March 31, 2022 Fair Value Measurements at September 30, 2022
Fair Value MeasurementsQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3) Fair Value MeasurementsQuoted 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 MaeFannie Mae$12,675 $— $12,675 $— Fannie Mae$11,230 $— $11,230 $— 
Freddie MacFreddie Mac13,081 742 12,339 — Freddie Mac11,947 738 11,209 — 
Ginnie MaeGinnie Mae20,729 — 20,729 — Ginnie Mae28,183 — 28,183 — 
OtherOther11,396 3,792 7,604 — Other33,316 2,911 30,405 — 
Municipal bondsMunicipal bonds33,043 — 33,043 — Municipal bonds29,793 — 29,793 — 
U.S. Government agenciesU.S. Government agencies58,955 19,801 39,154 — U.S. Government agencies76,235 38,366 37,869 — 
Corporate bondsCorporate bonds30,333 — 30,333 — Corporate bonds30,574 — 30,574 — 
Total available-for-sale investmentsTotal available-for-sale investments180,212 24,335 155,877 — Total available-for-sale investments221,278 42,015 179,263 — 
Derivative fair value assetDerivative fair value asset5,961 — 5,961 — Derivative fair value asset11,059 — 11,059 — 
TotalTotal$186,173 $24,335 $161,838 $— Total$232,337 $42,015 $190,322 $— 

 Fair Value Measurements at December 31, 2021
 Fair Value MeasurementsQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
(In thousands)
Assets:
Investments available-for-sale:
Mortgage-backed investments:    
Fannie Mae$12,978 $— $12,978 $— 
Freddie Mac12,824 744 12,080 — 
Ginnie Mae23,687 — 23,687 — 
Other11,264 3,023 8,241 — 
Municipal bonds36,466 — 36,466 — 
U.S. Government agencies41,434 — 41,434 — 
Corporate bonds30,295 — 30,295 — 
Total available-for-sale investments168,948 3,767 165,181 — 
Derivative fair value asset1,491 — 1,491 — 
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.    

    
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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,September 30, 2022, and December 31, 2021: 
Fair Value Measurements at March 31, 2022 Fair Value Measurements at September 30, 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)
$43,910 $— $— $43,910 
Impaired loans (included in loans receivable, net) (1)
$49,304 $— $— $49,304 
TotalTotal$43,910 $— $— $43,910 Total$49,304 $— $— $49,304 
_____________
(1) Total fair value of impaired loans is net of $18,000$15,000 of specific allowances on performing TDRs.

 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)
 (In thousands)
Impaired loans (included in loans receivable, net) (1)
$36,118 $— $— $36,118 
Total$36,118 $— $— $36,118 
_____________
(1) Total fair value of impaired loans is net of $20,000 of specific 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 instrumentsassets measured at fair value on a nonrecurring basis at March 31,September 30, 2022 and December 31, 2021:
March 31,September 30, 2022
Fair ValueValuation TechniqueUnobservable Input(s)Range (Weighted Average)
(Dollars in thousands)
Impaired Loans$43,91049,304 Market approachAppraised value discounted by market or borrower conditions
0.0% -10.7%
(2.9%(0.0%)
OREO$— Market approachAppraised value less selling costs
0.0%
(0.0%)

December 31, 2021
Fair ValueValuation TechniqueUnobservable Input(s)Range (Weighted Average)
(Dollars in thousands)
Impaired Loans$36,118 Market approachAppraised value discounted by market or borrower conditions
0.0%
(0.0%)
OREO$— Market approachAppraised value less selling costs
0.0%
 (0.0%)



26
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The carrying amounts and estimated fair values of financial instruments were as follows at the dates indicated: 
March 31, 2022September 30, 2022
EstimatedFair Value Measurements Using: EstimatedFair Value Measurements Using:
Carrying ValueFair ValueLevel 1Level 2Level 3 Carrying ValueFair ValueLevel 1Level 2Level 3
(In thousands) (In thousands)
Financial Assets:Financial Assets:    Financial Assets:    
Cash on hand and in banksCash on hand and in banks$7,979 $7,979 $7,979 $— $— Cash on hand and in banks$9,684 $9,684 $9,684 $— $— 
Interest-earning deposits with banksInterest-earning deposits with banks19,633 19,633 19,633 — — Interest-earning deposits with banks15,227 15,227 15,227 — — 
Investments available-for-saleInvestments available-for-sale180,212 180,212 24,335 155,877 — Investments available-for-sale221,276 221,276 42,015 179,261 — 
Investments held-to-maturityInvestments held-to-maturity2,426 2,426 — 2,426 — Investments held-to-maturity2,438 2,438 — 2,438 — 
Loans receivable, netLoans receivable, net1,121,382 1,116,071 — — 1,116,071 Loans receivable, net1,143,347 1,111,768 — — 1,111,768 
FHLB stockFHLB stock5,512 5,512 — 5,512 — FHLB stock7,712 7,712 — 7,712 — 
Accrued interest receivableAccrued interest receivable5,590 5,590 — 5,590 — Accrued interest receivable6,261 6,261 — 6,261 — 
Derivative fair value assetDerivative fair value asset5,961 5,961 — 5,961 — Derivative fair value asset11,059 11,059 — 11,059 — 
Financial Liabilities:Financial Liabilities:  Financial Liabilities:  
DepositsDeposits862,911 862,911 862,911 — — Deposits811,371 811,371 811,371 — — 
Certificates of deposit, retailCertificates of deposit, retail277,190 274,351 — 274,351 — Certificates of deposit, retail264,454 255,741 — 255,741 — 
Brokered depositsBrokered deposits73,611 73,486 — 73,486 — 
Advances from the FHLBAdvances from the FHLB95,000 94,997 — 94,997 — Advances from the FHLB150,000 149,986 — 149,986 — 
Accrued interest payableAccrued interest payable112 112 — 112 — Accrued interest payable185 185 — 185 — 

December 31, 2021
 EstimatedFair Value Measurements Using:
 Carrying ValueFair ValueLevel 1Level 2Level 3
 (In thousands)
Financial Assets:    
Cash on hand and in banks$7,246 $7,246 $7,246 $— $— 
Interest-earning deposits with banks66,145 66,145 66,145 — — 
Investments available-for-sale168,948 168,948 3,767 165,181 — 
Investments held-to-maturity2,432 2,432 — 2,432 — 
Loans receivable, net1,103,461 1,109,887 — — 1,109,887 
FHLB stock5,465 5,465 — 5,465 — 
Accrued interest receivable5,285 5,285 — 5,285 — 
Derivative fair value asset1,491 1,491 — 1,491 — 
Financial Liabilities:    
Deposits863,347 863,347 863,347 — — 
Certificates of deposit, retail294,127 295,929 — 295,929 — 
Advances from the FHLB95,000 95,003 — 95,003 — 
Accrued interest payable112 112 — 112 — 




29


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 - Leases

    The Company follows ASC Topic 842, Leases, recognizing a ROU and related lease liabilities on the Company’s Consolidated Balance Sheets. At March 31,September 30, 2022, the Company had 13 operating leases for retail branch locations. The remaining lease terms range from 0.80.3 years to 8.88.3 years, with most leases carrying optional extensions of three to five years. The Company will include optional lease term extensions in the ROU and lease liabilities when management believes it is
27


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,September 30, 2022, the Company was committed to paying $70,000$71,000 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 on 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 threenine months ended March 31,September 30, 2022, and 2021.

At or for the three months ended
March 31, 2022March 31, 2021September 30, 2022September 30, 2021
(dollars in thousands)(dollars in thousands)
Lease expense, quarter-to-dateLease expense, quarter-to-date$268 $256 Lease expense, quarter-to-date$270 $276 
Lease expense, year-to-dateLease expense, year-to-date835 794 
ROUROU3,455 3,976 ROU3,260 3,838 
Lease liabilityLease liability3,617 4,123 Lease liability3,441 3,994 
Weighted average remaining term, yearsWeighted average remaining term, years6.4 years6.8 yearsWeighted average remaining term, years5.8 years6.4 years
Weighted average discount rateWeighted average discount rate1.90 %1.97 %Weighted average discount rate1.98 %1.91 %
    
The following table provides a reconciliation between the undiscounted minimum lease payments at March 31,September 30, 2022 and the discounted lease liability at that date:
March 31,September 30, 2022
(in thousands)
Due through one year$830814 
Due after one year through two years693709 
Due after two years through three years598622 
Due after three years through four years489405 
Due after four years through five years302296 
Due after five years931804 
Total minimum lease payments3,8433,650 
Less: present value discount226209 
Lease liability$3,6173,441 


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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 9 - Derivatives

    The Company uses derivative financial instruments, in particular, interest rate swaps, which are designated as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At March 31,September 30, 2022, the cash flow hedges have a total notional amount of $95.0 million and consist of rolling one-month or three-month FHLB advances that are renewed at the fixed interest rate at each renewal date. These hedging instruments have four to eight year terms, with remaining terms ranging from 1.61.1 years to 7.57.0 years, a weighted average remaining term of 5650 months, and stipulate that the counterparty will pay the Company interest at one-month or three-month LIBOR and the Company will pay a weighted-average fixed interest of 1.05% on the notional amount ranging from $10.0 million to $15.0 million. The Company pays or receives the
28


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
net interest 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 period compared to the one-month or three-month LIBOR interest received from the counterparty. At March 31,September
 30, 2022, a $6.0$11.1 million net fair value gain of the cash flow hedges was reported with other assets on the Company’s Consolidated Balance Sheet. The tax effected amount of $4.7$8.7 million was included in accumulated other comprehensive incomeloss on the Company’s Consolidated Balance Sheet. There were no amounts recorded on the Consolidated Income Statements for the quarters ended March 31,September 30, 2022 or 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.

    The following table presents the fair value of these derivative instruments as of March 31,September 30, 2022 and December 31, 2021:
Balance Sheet LocationFair 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 
Balance Sheet LocationFair Value at
September 30, 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)$11,059 $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, 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 
Amount Recognized in OCI for the
three months ended
September 30, 2022
Amount Recognized in OCI for the
three months ended
September 30, 2021
Amount Recognized in OCI for the
nine months ended
September 30, 2022
Amount Recognized in OCI for the
nine months ended
September 30, 2021
(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge$2,514 $437 $7,560 $2,636 

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.

31


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 bewere made. At March 31,September 30, 2022, there were 992,502969,834 total shares available for grant under the 2016 Plan, including 196,251184,917 shares available to be granted as restricted stock.

For the three months ended March 31,September 30, 2022 and 2021, total compensation expense for the 2016 Plan was $188,000$327,000 and $96,000,$315,000, respectively, and the related income tax benefit was $39,000$69,000 and $20,000,$66,000, respectively. For the nine months ended September 30, 2022 and 2021, total compensation expense for the 2016 Plan was $641,000 and $558,000, respectively, and the related income tax benefit was $135,000 and $117,000, 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
29


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,September 30, 2022, there were 270,000217,519 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,September 30, 2022, there were no stock options issued from the 2016 Plan.

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.

















32


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A summary of the Company’s stock option plan awards and activity for the three and nine months ended March 31,September 30, 2022, follows: 
For the Three Months Ended September 30, 2022
SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term in YearsAggregate Intrinsic ValueWeighted-Average Grant Date Fair Value
Outstanding at July 1, 2022Outstanding at July 1, 2022267,519 $10.63 $1,290,762 $3.83 
ExercisedExercised(50,000)8.14 360,470 2.63 
Outstanding at September 30, 2022Outstanding at September 30, 2022217,519 11.20 1.69792,575 4.10 
Vested and expected to vest assuming a 3% forfeiture rate over the vesting termVested and expected to vest assuming a 3% forfeiture rate over the vesting term217,519 11.20 1.69792,575 4.10 
Exercisable at September 30, 2022Exercisable at September 30, 2022217,519 11.20 1.69792,575 4.10 
For the Three Months Ended March 31, 2022For the Nine Months Ended September 30, 2022
SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term in YearsAggregate Intrinsic ValueWeighted-Average Grant Date Fair ValueSharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term in YearsAggregate Intrinsic ValueWeighted-Average Grant Date Fair Value
Outstanding at January 1, 2022Outstanding at January 1, 2022272,000 $10.63 $1,507,300 $3.82 Outstanding at January 1, 2022272,000 $10.63 $1,507,300 $3.82 
ExercisedExercised(2,000)10.77 12,000 4.16 Exercised(54,481)8.36 386,658 $2.70 
Outstanding at March 31, 2022270,000 10.63 1.881,750,300 3.82 
Outstanding at September 30, 2022Outstanding at September 30, 2022217,519 11.20 1.69792,575 4.10 
Vested and expected to vest assuming a 3% forfeiture rate over the vesting termVested and expected to vest assuming a 3% forfeiture rate over the vesting term270,000 10.63 1.881,750,300 3.82 Vested and expected to vest assuming a 3% forfeiture rate over the vesting term217,519 11.20 1.69792,575 4.10 
Exercisable at March 31, 2022270,000 10.63 1.881,750,300 3.82 
Exercisable at September 30, 2022Exercisable at September 30, 2022217,519 11.20 1.69792,575 4.10 

As of March 31,September 30, 2022, there was no unrecognized compensation cost related to nonvested stock options. There were no stock options granted during the threenine months ended March 31,September 30, 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.


3033


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 and nine months ended March 31,September 30, 2022, follows: 
For the Three Months Ended March 31, 2022For the Three Months Ended September 30, 2022
SharesWeighted-Average
Grant Date
Fair Value
SharesWeighted-Average
Grant Date
Fair Value
Non-vested at January 1, 202244,426 $13.78 
Nonvested at July 1, 2022Nonvested at July 1, 202231,272 $16.93 
GrantedGranted34,210 16.93 Granted13,332 14.85 
VestedVested(45,366)13.85 Vested(13,332)14.85 
Nonvested at March 31, 202233,270 16.93 
Nonvested at September 30, 2022Nonvested at September 30, 202231,272 16.93 
Expected to vest assuming a 3% forfeiture rate over the vesting termExpected to vest assuming a 3% forfeiture rate over the vesting term32,272 16.93 Expected to vest assuming a 3% forfeiture rate over the vesting term30,334 16.93 
For the Nine Months Ended September 30, 2022
SharesWeighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2022Nonvested at January 1, 202244,426 $13.78 
GrantedGranted47,542 16.35 
VestedVested(58,698)14.07 
ForfeitedForfeited(1,998)16.93 
Nonvested at September 30, 2022Nonvested at September 30, 202231,272 16.93 
Expected to vest assuming a 3% forfeiture rate over the vesting termExpected to vest assuming a 3% forfeiture rate over the vesting term30,334 16.93 

As of March 31,September 30, 2022, there was $501,000$214,000 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining elevenfive month vesting period.



























34


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 11 - Accumulated Other Comprehensive Income

The table below presents the changes in accumulated OCI after-taxother comprehensive (loss) income, net of tax, for the three and nine months ended March 31, 2022September 30, 2021 and 2021.2022.
Unrealized Gains and Losses on Available-for-Sale SecuritiesGains and Losses on Cash Flow HedgesTotalUnrealized Gains and Losses on Available-for-Sale SecuritiesGains and Losses on Cash Flow HedgesTotal
(In thousands)(In thousands)
Balance December 31, 2021$(1,004)$1,178 $174 
Balance June 30, 2021Balance June 30, 2021$(26)$(33)$(59)
Other comprehensive (loss) income before reclassificationsOther comprehensive (loss) income before reclassifications(5,595)3,532 (2,063)Other comprehensive (loss) income before reclassifications(601)437 (164)
Amounts reclassified from accumulated other comprehensive income— — — 
Net other comprehensive (loss) incomeNet other comprehensive (loss) income(5,595)3,532 (2,063)Net other comprehensive (loss) income(601)437 (164)
Balance March 31, 2022$(6,599)$4,710 $(1,889)
Balance September 30, 2021Balance September 30, 2021$(627)$404 $(223)
Balance December 31, 2020Balance December 31, 2020$314 $(2,232)$(1,918)Balance December 31, 2020$314 $(2,232)$(1,918)
Other comprehensive (loss) income before reclassificationsOther comprehensive (loss) income before reclassifications(1,542)2,945 1,403 Other comprehensive (loss) income before reclassifications(941)2,636 1,695 
Amounts reclassified from accumulated other comprehensive income— — — 
Net other comprehensive (loss) incomeNet other comprehensive (loss) income(1,542)2,945 1,403 Net other comprehensive (loss) income(941)2,636 1,695 
Balance March 31, 2021$(1,228)$713 $(515)
Balance September 30, 2021Balance September 30, 2021$(627)$404 $(223)
Balance June 30, 2022Balance June 30, 2022$(11,038)$6,224 $(4,814)
Other comprehensive (loss) income before reclassificationsOther comprehensive (loss) income before reclassifications(5,124)2,514 (2,610)
Net other comprehensive (loss) incomeNet other comprehensive (loss) income(5,124)2,514 (2,610)
Balance September 30, 2022Balance September 30, 2022$(16,162)$8,738 $(7,424)
Balance December 31, 2021Balance December 31, 2021$(1,004)$1,178 $174 
Other comprehensive (loss) income before reclassificationsOther comprehensive (loss) income before reclassifications(15,158)7,560 (7,598)
Net other comprehensive (loss) incomeNet other comprehensive (loss) income(15,158)7,560 (7,598)
Balance September 30, 2022Balance September 30, 2022$(16,162)$8,738 $(7,424)

Note 12 - 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.
    
    
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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,
 20222021
 (Dollars in thousands, except share data)
Net income$3,260 $2,497 
Less: Earnings allocated to participating securities(12)(11)
Earnings allocated to common shareholders$3,248 $2,486 
Basic weighted average common shares outstanding8,987,482 9,490,058 
Dilutive stock options100,246 67,068 
Dilutive restricted stock grants29,704 9,545 
Diluted weighted average common shares outstanding9,117,432 9,566,671 
Basic earnings per share$0.36 $0.26 
Diluted earnings per share$0.36 $0.26 
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
 (Dollars in thousands, except share data)
Net income$3,946 $3,199 $10,014 $9,507 
Less: Earnings allocated to participating securities(13)(15)(33)(43)
Earnings allocated to common shareholders$3,933 $3,184 $9,981 $9,464 
Basic weighted average common shares outstanding8,981,037 9,314,456 8,983,806 9,412,196 
Dilutive stock options75,195 109,453 90,608 89,108 
Dilutive restricted stock grants12,309 22,793 13,792 12,861 
Diluted weighted average common shares outstanding9,068,541 9,446,702 9,088,206 9,514,165 
Basic earnings per share$0.44 $0.34 $1.11 $1.01 
Diluted earnings per share$0.43 $0.34 $1.10 $0.99 

    Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For both the three months ended March 31,September 30, 2022, and 2021, there were no 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.

Note 13 - 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 and nine months ended March 31,September 30, 2022 and 2021:
Three Months EndedThree Months EndedNine Months Ended
March 31, 2022March 31, 2021September 30, 2022September 30, 2021September 30, 2022September 30, 2021
(In thousands)(In thousands)
BOLI income (1)
BOLI income (1)
$288 $269 
BOLI income (1)
$243 $377 $782 $891 
Wealth management revenueWealth management revenue82 160 Wealth management revenue89 64 276 391 
Deposit related feesDeposit related fees73 66 Deposit related fees79 75 237 221 
Debit card and ATM feesDebit card and ATM fees142 134 Debit card and ATM fees166 153 468 433 
Loan related feesLoan related fees199 132 Loan related fees195 300 748 714 
OtherOtherOther30 17 86 
Total noninterest incomeTotal noninterest income$789 $764 Total noninterest income$778 $999 $2,528 $2,736 
_______________
(1) Not within scope of Topic 606

32
36


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

    For both the three and nine months ended March 31,September 30, 2022 and 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 ourBank 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 ouranother financial institution’s customer uses the Bank’s 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 earned 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,September 30, 2022, the Company had no 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 no material performance obligations as of this date.


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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,” “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 Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the ongoing novel coronavirus of 2019 (COVID-19)(“COVID-19”) and 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 allowance for loan and lease losses;
changes in general economic conditions, either nationally or in our market areas; areas, including as a result of employment levels and labor shortages, and the effects of inflation, a potential recession or slowed economic growth caused by increasing oil prices and supply chain disruptions;
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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 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 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;
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 implementexecute 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;
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legislative or regulatory changes that adversely affect our business, including as a result of 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;
the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;markets, including market liquidity;
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;
the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and other risks detailed in our Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) and our other 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.


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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’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the FHLB and raising funds in the wholesale market (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 12 to 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 4347 other states and the District of Columbia, with the largest concentrations at March 31,September 30, 2022, in California, Oregon, Texas, Florida and Alabama of $35.8$38.0 million, $15.3$14.1 million, $11.2$12.0 million, $10.1 million and $8.1$8.0 million, respectively.

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. The Bank has also created ana SBA department, and has affiliated with ana 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 ana 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. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.

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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.income and net interest margin. First Financial Northwest Bank is currently slightly asset-sensitive,liability-sensitive, meaning our interest-earning assetsliabilities reprice at a faster rate than our interest-bearing liabilities. The Bank had a modest improvementassets. During 2022, we continued to see quarterly improvements 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 market rates.margin. During the quarter ended March 31,September 30, 2022, loan yields decreasednet interest margin was 3.65%, compared to 3.33% in the same quarter last year, primarily dueyear. Since March 2022, in response to inflation, the decreaseFederal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 300 basis points, including 150 basis points during the third quarter of 2022, to a range of 3.00% to 3.25%. If the FOMC continues to raise the targeted federal funds rate in recognitionan effort to curb inflation, which appears likely based on recent communications and interest rate forecasts, we expect the Company’s loan yields and yields from variable rate interest earning assets will continue to improve, albeit at a potentially slower pace than the anticipated rate of unamortized deferred fee income on Paycheck Protection Program (“PPP”) loans forgiven and repaid byincrease in the SBA.cost of interest-bearing liabilities.

An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for 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.

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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 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, including commissions and bonuses, 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

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 running effectively to serve its customers. As of March 31,September 30, 2022, all Bank branches are open with normal hours. The Bank 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 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 2021 Form 10-K.


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Comparison of Financial Condition at March 31,September 30, 2022 and December 31, 2021

Total assets were $1.42$1.48 billion at March 31,September 30, 2022, a decreasean increase of 0.8%4.1%, from $1.43 billion at December 31, 2021. The following table details the $11.3$58.0 million net change in the composition of our assets at March 31,September 30, 2022 from December 31, 2021.
Balance at
March 31,
2022
Balance at December 31, 2021Change from December 31, 2021Percent Change Balance at
September 30,
2022
Balance at December 31, 2021Change from December 31, 2021Percent Change
(Dollars in thousands) (Dollars in thousands)
Cash on hand and in banks Cash on hand and in banks $7,979 $7,246 $733 10.1 %Cash on hand and in banks $9,684 $7,246 $2,438 33.6 %
Interest-earning deposits19,633 66,145 (46,512)(70.3)
Interest-earning deposits with banksInterest-earning deposits with banks15,227 66,145 (50,918)(77.0)
Investments available-for-sale, at fair valueInvestments available-for-sale, at fair value180,212 168,948 11,264 6.7 Investments available-for-sale, at fair value221,278 168,948 52,330 31.0 
Investments held-to-maturity, at amortized costInvestments held-to-maturity, at amortized cost2,426 2,432 (6)(0.2)Investments held-to-maturity, at amortized cost2,438 2,432 0.2 
Loans receivable, net Loans receivable, net 1,121,382 1,103,461 17,921 1.6 Loans receivable, net 1,143,348 1,103,461 39,887 3.6 
FHLB stock, at cost FHLB stock, at cost 5,512 5,465 47 0.9 FHLB stock, at cost 7,712 5,465 2,247 41.1 
Accrued interest receivableAccrued interest receivable5,590 5,285 305 5.8 Accrued interest receivable6,261 5,285 976 18.5 
Deferred tax assets, netDeferred tax assets, net1,069 850 219 25.8 Deferred tax assets, net2,355 850 1,505 177.1 
Premises and equipment, netPremises and equipment, net22,254 22,440 (186)(0.8)Premises and equipment, net21,608 22,440 (832)(3.7)
BOLI, netBOLI, net35,552 35,210 342 1.0 BOLI, net36,064 35,210 854 2.4 
Prepaid expenses and other assetsPrepaid expenses and other assets8,451 3,628 4,823 132.9 Prepaid expenses and other assets13,605 3,628 9,977 275.0 
ROU, netROU, net3,455 3,646 (191)(5.2)ROU, net3,260 3,646 (386)(10.6)
GoodwillGoodwill889 889 — — Goodwill889 889 — — 
Core deposit intangible, netCore deposit intangible, net650 684 (34)(5.0)Core deposit intangible, net582 684 (102)(14.9)
Total assets Total assets $1,415,054 $1,426,329 $(11,275)(0.8)%Total assets $1,484,311 $1,426,329 $57,982 4.1 %

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”), decreased by $46.5$50.9 million during the threenine months ended March 31,September 30, 2022. Growth in bothExcess cash earning a nominal yield was deployed into higher yielding loans receivable and investments available-for-sale was achieved by investing idle cash into these higher yielding assets.securities.

Investments available-for-sale. Our investments available-for-sale portfolio increased by $11.3$52.3 million during the threenine months ended March 31,September 30, 2022. During this period, the Bank purchased available-for-sale investment securities that included $20.0$40.0 million of fixed rate U.S. Treasury bonds.bonds with remaining maturities of approximately two years. In addition, the Bank purchased $37.8 million of mortgage-backed securities, $3.0 million of asset-backed securities, $4.0 million of fixed rate mortgage backedin corporate securities, and $2.0$5.2 million in variable rate bonds. These purchases have an expected weighted average yield of 2.20%.Community Reinvestment Act qualified municipal and mortgage-backed securities. During the threenine months ended March 31,September 30, 2022, $30,000$1.0 million of investments available-for-sale were called, or paid-off early$2.8 million matured, and one $2.4 million investment matured.there were no sales.

The effective duration of the investments available-for-sale at March 31,September 30, 2022 was 3.65% as3.59%, compared to 3.54% at December 31, 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. Net loans receivable increased $17.9$40.0 million during the threenine months ended March 31,September 30, 2022, primarily due to growth in one-to-four family residential, loans, multifamily loans, and consumer loans of $27.1$64.3 million, $22.7$2.6 million, and $4.6$12.8 million, respectively. Partially offsetting these increases, construction/land loans decreased $20.8 million, business loans decreased $16.0$14.5 million due primarily to a $5.7$9.6 million decrease in PPP loans an $8.9 million reduction in other business loans, andcombined with a $1.4$3.7 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$5.9 million.

A total of $20.7 million of multifamily construction/land loans
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converted to permanent multi-family loans in accordance with the loan’s terms during the nine months ended September 30, 2022.
At March 31,September 30, 2022 and December 31, 2021, the Bank’s construction/land loans totaled 51.9%49.1% and 59.7% of total capital plus surplus, respectively, and total non-owner occupied commercial real estate was 379.6%354.6% and 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/land loans, should not exceed 550% of total capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total 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,September 30, 2022 and December 31, 2021. Total commercial real estate loans and construction/land loans are net of $5,000$0 and $39.0$46.4 million of LIP, respectively, at March 31,September 30, 2022, as compared to $89,000 and $43.3 million of LIP, respectively, at December 31, 2021.
March 31, 2022December 31, 2021September 30, 2022December 31, 2021
Amount% of Total in PortfolioAmount% of Total in PortfolioAmount% of Total in PortfolioAmount% of Total in Portfolio
(In thousands)(In thousands)
Multifamily residentialMultifamily residential$152,855 100.0 %$130,146 100.0 %Multifamily residential$132,755 100.0 %$130,146 100.0 %
Non-residential:Non-residential:Non-residential:
RetailRetail142,725 34.2 %138,463 33.0 %Retail137,417 33.2 %138,463 33.0 %
OfficeOffice87,394 21.0 90,727 21.6 Office84,768 20.5 90,727 21.6 
Hotel / motelHotel / motel58,406 14.0 64,854 15.5 Hotel / motel56,715 13.7 64,854 15.5 
StorageStorage34,442 8.3 32,990 7.9 Storage34,069 8.3 32,990 7.9 
Mobile home parkMobile home park20,409 4.9 20,636 4.9 Mobile home park23,531 5.7 20,636 4.9 
WarehouseWarehouse21,103 5.0 17,724 4.2 Warehouse19,934 4.8 17,724 4.2 
Nursing homeNursing home12,622 3.0 12,713 3.0 Nursing home12,452 3.0 12,713 3.0 
Other non-residentialOther non-residential39,887 9.6 41,310 9.9 Other non-residential44,600 10.8 41,310 9.9 
Total non-residentialTotal non-residential416,988 100.0 %419,417 100.0 %Total non-residential413,486 100.0 %419,417 100.0 %
Construction/land:Construction/land:Construction/land:
One-to-four family residentialOne-to-four family residential35,953 48.1 %34,677 37.1 %One-to-four family residential41,606 57.3 %34,677 37.1 %
MultifamilyMultifamily17,196 23.0 37,194 39.8 Multifamily15,500 21.3 37,194 39.8 
CommercialCommercial6,189 8.3 6,189 6.6 Commercial— — 6,189 6.6 
LandLand15,359 20.6 15,395 16.5 Land15,518 21.4 15,395 16.5 
Total construction/landTotal construction/land74,697 100.0 %93,455 100.0 %Total construction/land72,624 100.0 %93,455 100.0 %
Total multifamily residential, non-residential and construction/land loansTotal multifamily residential, non-residential and construction/land loans$644,540 $643,018 Total multifamily residential, non-residential and construction/land loans$618,865 $643,018 

Included in total construction/land loans at March 31,September 30, 2022, are $17.2$15.5 million of multifamily loans and $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, 2021, construction/land loans included $37.2 million of multifamily loans and $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.

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To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank originates and 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 and risk guidelines. During the threenine months ended March 31,September 30, 2022, the Bank purchased $9.5$40.3 million of loans and loan participations to borrowers located in Washington and other states, including $3.7$9.1 million of commercial real estate loans, $2.9 million of one-to-four family residential loans, $5.9 million of business loans and $5.8$22.5 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,September 30, 2022, total loans secured by collateral located in California represented 3.1%3.3% of our total loans, and total loans secured by collateral located outside the states of California and Washington represented 9.7%10.3% of our total loans. The following table details geographic concentrations in our loan portfolio:
At March 31, 2022At September 30, 2022
One-to-Four Family ResidentialMultifamilyCommercial Real EstateConstruction/LandBusinessConsumerTotalOne-to-Four Family ResidentialMultifamilyCommercial Real EstateConstruction/LandBusinessConsumerTotal
(In thousands)(In thousands)
King CountyKing County$316,638 $84,630 $254,176 $70,961 $18,418 $10,145 $754,968 King County$345,427 $75,577 $249,488 $71,137 $21,667 $9,178 $772,474 
Pierce CountyPierce County37,655 13,239 28,159 — 293 576 79,922 Pierce County41,788 10,548 27,297 — 255 941 80,829 
Snohomish CountySnohomish County31,936 8,454 14,740 849 6,205 1,325 63,509 Snohomish County33,252 7,542 14,225 860 4,352 948 61,179 
Kitsap CountyKitsap County4,718 740 2,253 209 — 7,925 Kitsap County4,672 732 — — — 5,409 
Other Washington CountiesOther Washington Counties16,014 31,324 35,879 634 417 563 84,831 Other Washington Counties16,563 27,590 34,651 627 238 1,322 80,991 
CaliforniaCalifornia— 9,639 18,209 — 187 7,752 35,787 California820 9,573 17,978 — — 9,626 37,997 
Outside Washington
and California
(1)
Outside Washington
and California
(1)
5,270 5,564 65,085 — 4,817 29,070 109,806 
Outside Washington
and California
(1)
6,913 1,920 69,115 — 5,542 35,604 119,094 
Total loansTotal loans$412,231 $152,855 $416,988 $74,697 $30,546 $49,431 $1,136,748 Total loans$449,435 $132,755 $413,486 $72,624 $32,054 $57,619 $1,157,973 
_______________
(1) Includes loans in Oregon, Texas, Florida and Alabama of $15.314.1 million, $11.2$11.9 million, $10.1 million and $8.1$8.0 million, respectively, and loans in 3842 other states and the District of Columbia.

The ALLL decreased to $15.2$14.7 million at March 31,September 30, 2022, from $15.7 million at December 31, 2021, and represented 1.33%1.27% and 1.40% of total loans receivable at March 31,September 30, 2022, and December 31, 2021, respectively. The ALLL consists of two components, the general allowance and the specific allowance. The ALLL decrease was primarily due to a $900,0000 recapture of provision for loan losses during the nine months ended September 30, 2022, reflecting a decrease in the general allowance. The ALLL general allowance primarily decreased as a partial result of $8.1$14.4 million of loans downgraded to substandard, whereresulting in these loans removed from the calculation of the general allowance for loan losses. An individual analysis onof these loans for required specific reserves was instead performed which indicated no additional specific reserveallowance was needed and these loans were omitted from the general allowance calculations used to calculate the ALLL and provision for loan losses.needed. The $14.4 million of 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 homesenior housing/assisted living facility waspreviously downgraded to special mention due to continued reduced occupancy as a resultin the quarter ended March 31, 2022. Each of these loans were negatively impacted by the COVID-19 pandemic. In addition, a $1.7 million multifamily loan was downgraded based on a financial review of the borrower, who also has multiple other previously downgraded substandard loans. Changes in the composition of our loan portfolio also impacted the ALLL, with growth in one-to-four family residential, consumer and multifamily loans and a decline in construction/land loans impacting the analysis. The $5.2$1.2 million balance of PPP loans was omitted from the ALLL calculation at March 31,September 30, 2022, as these loans are fully guaranteed by the SBA. Management expects that the 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.

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At March 31,September 30, 2022, total specific allowances decreased by $2,000$5,000 since December 31, 2021 as a result of amortization of the concession previously granted on an existing TDR. For additional information, see “Comparison of Operating Results for the Three Months Ended March 31,September 30, 2022, and 2021 - Provision for Loan Losses” discussed below.

We believe that the ALLL at March 31,September 30, 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 allowancesreserves or the charge-off of specific loans against established loss allowancesreserves 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 2021 Form 10-K.

As we work with our borrowers thatwho 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.

The following table presents a breakdown of our TDRs at the dates indicated, all of which were performing and on accrual status:
March 31, 2022December 31, 2021Three Month ChangeSeptember 30, 2022December 31, 2021Nine Month Change
(Dollars in thousands)(Dollars in thousands)
Performing TDRs:Performing TDRs:Performing TDRs:
One-to-four family residentialOne-to-four family residential$2,095 $2,107 $(12)One-to-four family residential$1,825 $2,107 $(282)
Total TDRsTotal TDRs$2,095 $2,107 $(12)Total TDRs$1,825 $2,107 $(282)
% TDRs classified as performing% TDRs classified as performing100.0 %100.0 %% TDRs classified as performing100.0 %100.0 %

    Our TDRs decreased $12,000$282,000 at March 31,September 30, 2022, compared to December 31, 2021 as a result of principal repayments. At March 31,September 30, 2022, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at March 31,September 30, 2022, totaled $907,000$648,000 and was secured by non-owner occupied one-to-four family properties located in 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,September 30, 2022,, total past due loans were $208,000,totaled $406,000, representing 0.02%0.04% of total loans receivable, andreceivable. At at December 31, 2021, were 255,000,past due loans totaled $255,000, representing 0.02% of total loans receivable.
    
    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. At March 31, 2022, the Bank had a $179,000 classic car loan onOur credit quality remains strong as nonaccrual status.(nonperforming) loans remained low at $232,000, representing 0.02% of total assets at September 30, 2022. There were no nonaccrual loans at December 31, 2021. The Bank has initiated repossession of the collateralized vehicle on this loan and does not expect to incur a loss.

We will continue to focus our efforts on working with borrowers to bring theirany past due loans current. By taking ownership of 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 continuedour low balance of nonperforming assets.

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OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At March 31,September 30, 2022, and December 31, 2021, the Bank had no OREO properties and no real estate secured loans in the foreclosure process.
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    Intangible assets. The balance of goodwill was $889,000 at both March 31,September 30, 2022 and December 31, 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 $650,000$582,000 at March 31,September 30, 2022 and $684,000 at December 31, 2021. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. The CDI amortizes into noninterest expense on an accelerated basis over ten years.

    Deposits. Deposit accounts consisted of the following:
 Balance at
September 30, 2022
Balance at
December 31,
2021
Change from December 31, 2021Percent Change
 (Dollars in thousands)
Noninterest-bearing demand$118,842 $117,751 $1,091 0.9 %
Interest-bearing demand95,767 97,907 $(2,140)(2.2)
Savings24,625 23,146 $1,479 6.4 
Money market572,137 624,543 $(52,406)(8.4)
Certificates of deposit, retail268,528 294,127 $(25,599)(8.7)
Brokered deposits69,537 $— $69,537 — 
$1,149,436 $1,157,474 $(8,038)(0.7)

During the first threenine months of 2022, deposits decreased $17.4$8.0 million to $1.14$1.15 billion at March 31,September 30, 2022, compared to $1.16 billion at December 31, 2021. Deposit accounts consisted of the following:
 Balance at
March 31, 2022
Balance at
December 31,
2021
Change from December 31, 2021Percent Change
 (Dollars in thousands)
Noninterest-bearing$130,596 $117,751 $12,845 10.9 %
Interest-bearing demand99,794 97,907 1,887 1.9 
Savings23,441 23,146 295 1.3 
Money market609,080 624,543 (15,463)(2.5)
Certificates of deposit, retail277,190 294,127 (16,937)(5.8)
$1,140,101 $1,157,474 $(17,373)(1.5)

DecreasesDeclines in money market accounts and retail certificates of deposit of $15.5 million$52.4 million and $16.9$25.6 million, respectively, were partially offset by increases in noninterest-bearing demand accounts$44.5 million of brokered certificates of deposit and $25.0 million of brokered interest-bearing demand accounts of $12.8 milliondeposits. We increased our reliance on brokered deposits and $1.9 million, respectively. Thewholesale funds this year to fund the reduction in deposits and assets growth. The Bank continued its strategycontinues to shiftconsider multiple funding alternatives in addition to customer deposits, including wholesale markets, brokered deposits, and the national deposit composition to lower cost transaction accounts.market.

At March 31,September 30, 2022 and December 31, 2021, we held $58.5$60.1 million and $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 $150.0 million and $95.0 million at both March 31,September 30, 2022, and December 31, 2021.2021, respectively. At March 31,September 30, 2022, the Bank’s advances included $55.0 million of overnight advances and $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, allmonthly. The $95.0 million of whichone-month and three-month advances are utilized in cash flow hedge agreements, as described below. At March 31,September 30, 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,September 30, 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 swap. The Bank pays a fixed interest rate to the counterparty and in return,
45



receives a floating interest rate based on the index noted in the below table.table below. The original term of these interest rate swap agreements range from four to eight years.
41



 Notional amountStart DateMaturity DateFixed rate paid to counterpartyIndex rate received from counterpartyRepricing Frequency
(Dollars in thousands)
$15,000 9/27/20199/27/20241.440 %1-month LIBORmonthly
10,000 11/20/201911/20/20231.585 3-month LIBORquarterly
15,000 3/2/20203/2/20260.911 1-month LIBORmonthly
15,000 3/2/20203/2/20270.937 1-month LIBORmonthly
15,000 3/2/20203/2/20280.984 1-month LIBORmonthly
15,000 10/25/202110/25/20280.793 3-month LIBORquarterly
10,000 10/25/202110/25/20290.800 3-month LIBORquarterly

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,September 30, 2022 and December 31, 2021, we recognized fair value assets of $6.0$11.1 million and $1.5 million, respectively, as a result of the increase in market value of the interest rate swap agreements.

The Bank has confirmed ourits adherence to the Interbank Offered Rate Fallbacks Protocol (“Protocol”) as published by the International Swaps and Derivatives Association (“ISDA”) 2020 LIBOR Fallbacks Protocol (“Protocol”) to prepare for the cessation of LIBOR by June 30, 2023. The Protocol, effective January 25, 2021, provides a mechanism for parties to bilaterally amend their existing derivative transaction to incorporate ISDA’s fallback terms, providing for a clear transition from LIBOR to SOFR.

    Stockholders’ Equity. Total stockholders’ equity had a slight decrease of $122,000 during the first three months of 2022, to $157.8virtually no change, remaining at $157.9 million at March 31,both September 30, 2022 from $157.9 million atand December 31, 2021. Stockholders’ equity decreased $2.1during the nine months ended September 30, 2022, reflects net income of $10.0 million netpartially offset by dividends paid of tax, following an increase$3.2 million, $2.0 million in stock based compensation and share repurchases totaling $1.4 million. In addition, stockholders’ equity was adversely impacted by unrealized losses in securities available-for-sale of $19.2 million and unrealized gains on the fair value of cash flow hedges of $9.6 million, reflecting increases in market interest rates during the quarter which negatively impacted the fair valueperiod, resulting in a $7.6 million accumulated other comprehensive loss, net of our available-for-sale investments, outpacing the improvement in market values of our cash flow hedges. In addition, stockholders’ equity decreased by $694,000 from the repurchase of 40,784 shares of common stock, $1.1 million in cash dividends paid, and $226,000 from canceled restricted stock awards.tax. 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 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 expiresexpired on August 17, 2022. This plan authorizesSeptember 16, 2022, for the repurchase of up to 455,000 shares. At March 31,September 30, 2022, the Company had repurchased 17,71661,913 shares under this repurchase plan at an average price of $17.00$16.22 per share. At that date, 437,284 shares were available for purchase under thisOn September 28, 2022, the Company’s Board of Directors approved another stock repurchase plan. These decreasesplan authorizing the repurchase of up to stockholders’ equity were partially offset by a $763,000 increase in net income5% of the Company’s outstanding stock, or approximately 456,000 shares. This plan will commence on or about October 31, 2022 and $663,000 increase in stock based compensation.will expire no later than March 17, 2023.

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 September 30,Nine Months Ended September 30,
202220212022202120222021
Dividend declared per common shareDividend declared per common share$0.12 $0.11 Dividend declared per common share$0.12 $0.11 $0.36 $0.33 
Dividend payout ratio (1)
Dividend payout ratio (1)
33.2 %42.3 %
Dividend payout ratio (1)
27.4 %32.4 %32.4 %32.7 %
______________
(1) Dividends paid per common share divided by basic earnings per common share.

46



    
Comparison of Operating Results for the Three Months Ended March 31,September 30, 2022 and 2021

General. Net income for the three months ended March 31,September 30, 2022, was $3.3$3.9 million, or $0.36$0.43 per diluted share compared to $2.5$3.2 million, or $0.26$0.34 per diluted share for the three months ended March 31,September 30, 2021. ContributingNet income increased $747,000 primarily due to the $763,000a $2.0 million increase in netinterest income during the three months ended March 31, 2022, was a $1.2 million decrease in interest expense that more
42



than offset a $538,000 decrease$675,000 increase in interest income.expense. In addition, a $500,000$400,000 recapture of provision for loan losses was recognized for the three months ended March 31,September 30, 2022, as compared to a $300,000$100,000 provision for loan losses for the three months ended March 31,September 30, 2021. Partially offsetting these improvements, noninterest expense increased $497,000.$681,000.

Net Interest Income. Net interest income for the three months ended March 31,September 30, 2022, increased $622,000$1.3 million to $11.4$12.7 million from $10.7$11.4 million for the three months ended March 31,September 30, 2021, due toas the decreaseincrease in interest expense outpacingincome outpaced the decreaseincrease in interest income.expense.

Interest income decreasedincreased by $538,000$2.0 million for the three months ended March 31,September 30, 2022, as compared to the same period in 2021, primarily asincluding a result of a $623,000 decrease$1.1 million increase in loan interest income due to a reductionan increase in average loan yields partially offset byand an increase of $38.1 million in the average loan balance. Ourbalance of loans receivable between the periods. The average loan yield declinedincreased to 4.36%4.77% for the three months ended March 31,September 30, 2022, from 4.66%4.54% for the three months ended March 31,September 30, 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 $172,000increase in the quarter ended March 31, 2022. The average balanceyield on loans was largely due to the impact of interest rates on variable rate loans receivable increased $16.1 million to $1.1 billion for the three months ended March 31, 2022.as well as new loans being originated at higher interest rates.

Interest income from investment securities increased $83,000, as$791,000, primarily due to an increase in the average yield of both taxable and non-taxable investment securities and secondarily to a combined result of a $13.5$37.0 million combined increase in the average balance of taxable and non-taxable investment securities. The average yield of taxable securities increased five126 basis points to 1.96%2.98% while the average yield on non-taxable securities decreased threeincreased 41 basis points to 1.96%2.22% for the three months ended March 31,September 30, 2022, as compared to the same periodquarter in 2021. The increase in average yields on investment securities during the current quarter, reflects the lagging benefit of variable rate interest-earning assets beginning to reprice higher to market interest rates and the purchase of higher yielding securities in 2022.

Interest income from interest-earning deposits remained relatively unchanged with a $7,000 increaseincreased $101,000 for the three months ended March 31,September 30, 2022, as compared to the three months ended March 31,September 30, 2021. During these comparative periods, the average yield increased to 0.15%2.02% for the three months ended March 31,September 30, 2022, from 0.09%0.14% for the three months ended March 31,September 30, 2021. The higher average yield from these deposits was primarily a result of increases to the target range for federal funds between periods. Excess cash was invested in higher earninginterest-earning assets, resulting in a $2.5$44.1 million decrease in the average balance of interest-earning deposits for the three months ended March 31,September 30, 2022, as compared to the same period in 2021.

The decreaseincrease in interest income was more thanpartially offset by a $1.0 million decrease$675,000 increase in deposit interest expense for the three months ended March 31,September 30, 2022, as compared to the three months ended March 31,September 30, 2021. The average rate paid on interest-bearing deposits decreasedincreased to 0.50%0.87% for the three months ended March 31,September 30, 2022, as compared to 0.94%0.63% for the three months ended March 31, 2021. AlthoughSeptember 30, 2021, primarily attributed to increases in cost of money market accounts due to recent market interest rate increases and the utilization of higher cost brokered deposits. The average balance of interest-bearing deposits increased $31.2$39.5 million for the three months ended March 31,September 30, 2022, as compared to the same period in 2021 primarily reflecting a $107.7$69.5 million increase in the average balance of brokered deposit and a $23.8 million increase in money market accounts, partially offset by a $49.2 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.deposit.

Interest expense from 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$39,000 for the three months ended March 31,September 30, 2022, as compared to the same periodthree months ended September 30, 2021, primarily due to a decrease of $14.7 million in 2021. Ourthe average balance which was partially offset by a six basis point increase in cost. At September 30, 2022, our borrowings are comprised of $95.0 million of FHLB advances matched to fixed-rate interest rate swap agreements. Reductions in both the average balanceagreements, and cost of borrowings was the result of the repayment of $25.0$55.0 million in FHLBovernight advances due to a $50.0 million maturing interest rate swap agreement, and the $25.0 million of fixed rate FHLB advances secured at lower rates upon the onset of $25.0 million of previously contracted forward-starting interest rate swap agreements in October 2021.obtained this quarter.

The Company’s net interest margin increased to 3.43%3.65% for the three months ended March 31,September 30, 2022, from 3.31%3.33% for the three months ended March 31,September 30, 2021. This increase was primarily due to the 4350 basis point reductionincrease in ourthe average yield on interest-earning assets outpacing the 22 basis point increase in the average cost of interest bearing liabilities outpacingbetween periods. These increases reflect higher market interest rates due to recent increases in the 25target range for federal funds, including a 150 basis point reduction in our average yield on interest earning assets between periods.points increase during the third quarter of 2022, to a range of 3.00% to 3.25%. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this report.
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The following table presents the effects of changing rates and volumes on our net interest income during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in 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 changes in rate and volume.
Three Months Ended March 31, 2022
Compared to March 31, 2021
 Net Change in Interest
RateVolumeTotal
(In thousands)
Interest-earning assets:
Loans receivable, net$(807)$184 $(623)
Investment securities, taxable21 37 58 
Investment securities, non-taxable(2)27 25 
Interest-earning deposits with banks(1)
FHLB stock(12)(5)
Total net change in income on interest-earning assets(773)235 (538)
Interest-bearing liabilities:
Interest-bearing demand(8)(1)(9)
Statement savings— — — 
Money market(127)114 (13)
Certificates of deposit, retail(508)(512)(1,020)
Borrowings(31)(87)(118)
Total net change in expense on interest-bearing liabilities(674)(486)(1,160)
Total net change in net interest income$(99)$721 $622 

Three Months Ended September 30, 2022
Compared to September 30, 2021
 Net Change in Interest
RateVolumeTotal
(In thousands)
Interest-earning assets:
Loans receivable, net$674 $436 $1,110 
Investment securities, taxable625 160 785 
Investment securities, non-taxable24 (18)
Interest-earning deposits with banks116 (15)101 
FHLB stock(7)(1)
Total net change in income on interest-earning assets1,445 556 2,001 
Interest-bearing liabilities:
Interest-bearing demand131 (1)130 
Savings— — — 
Money market533 17 550 
Certificates of deposit, retail(122)(184)(306)
Brokered deposits340 — 340 
Borrowings14 (53)(39)
Total net change in expense on interest-bearing liabilities896 (221)675 
Total net change in net interest income$549 $777 $1,326 

    
    

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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,September 30, 2022 and 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 September 30,
2022202120222021
Average
Balance
Interest Earned / PaidYield /
Cost
Average
Balance
Interest Earned / PaidYield /
Cost
Average
Balance
Interest Earned / PaidYield /
Cost
Average
Balance
Interest Earned / PaidYield /
Cost
(Dollars in thousands) (Dollars in thousands)
AssetsAssetsAssets
Loans receivable, net Loans receivable, net $1,115,428 $12,001 4.36 %$1,099,364 $12,624 4.66 %Loans receivable, net $1,132,233 $13,618 4.77 %$1,094,124 $12,508 4.54 %
Investment securities, taxableInvestment securities, taxable147,048 712 1.96 139,086 654 1.91 Investment securities, taxable197,228 1,480 2.98 160,230 695 1.72 
Investment securities, non-taxableInvestment securities, non-taxable24,637 119 1.96 19,122 94 1.99 Investment securities, non-taxable23,016 129 2.22 27,031 123 1.81 
Interest-earning deposits with banks Interest-earning deposits with banks 49,857 19 0.15 52,336 12 0.09 Interest-earning deposits with banks 24,565 125 2.02 68,618 24 0.14 
FHLB stock FHLB stock 5,467 74 5.49 6,412 79 5.00 FHLB stock 5,923 83 5.56 6,465 84 5.15 
Total interest-earning assetsTotal interest-earning assets1,342,437 12,925 3.90 1,316,320 13,463 4.15 Total interest-earning assets1,382,965 15,435 4.43 1,356,468 13,434 3.93 
Noninterest earning assetsNoninterest earning assets81,617 77,893 Noninterest earning assets87,851 80,333 
Total average assetsTotal average assets$1,424,054 $1,394,213 Total average assets$1,470,816 $1,436,801 
Liabilities and Stockholders' EquityLiabilities and Stockholders' EquityLiabilities and Stockholders' Equity
Interest-bearing demandInterest-bearing demand$99,862 $18 0.07 %$103,540 $27 0.11 %Interest-bearing demand$102,377 $151 0.59 %$108,578 $21 0.08 %
Statement savings23,699 0.03 19,754 0.04 
SavingsSavings24,619 0.03 22,939 0.03 
Money marketMoney market616,401 378 0.25 477,710 391 0.33 Money market592,331 959 0.64 568,494 409 0.29 
Certificates of deposit, retailCertificates of deposit, retail287,545 859 1.21 395,291 1,879 1.93 Certificates of deposit, retail267,300 874 1.30 316,529 1,180 1.48 
Brokered depositsBrokered deposits69,452 340 1.94 — — — 
Total interest-bearing depositsTotal interest-bearing deposits1,027,507 1,257 0.50 996,295 2,299 0.94 Total interest-bearing deposits1,056,079 2,326 0.87 1,016,540 1,612 0.63 
BorrowingsBorrowings95,000 300 1.28 120,000 418 1.41 Borrowings105,272 392 1.48 120,000 431 1.42 
Total interest-bearing liabilitiesTotal interest-bearing liabilities1,122,507 1,557 0.56 1,116,295 2,717 0.99 Total interest-bearing liabilities1,161,351 2,718 0.93 1,136,540 2,043 0.71 
Noninterest bearing liabilitiesNoninterest bearing liabilities142,791 120,062 Noninterest bearing liabilities150,950 138,369 
Average equityAverage equity158,756 157,856 Average equity158,515 161,892 
Total average liabilities and equityTotal average liabilities and equity$1,424,054 $1,394,213 Total average liabilities and equity$1,470,816 $1,436,801 
Net interest incomeNet interest income$11,368 $10,746 Net interest income$12,717 $11,391 
Net interest marginNet interest margin3.43 %3.31 %Net interest margin3.65 %3.33 %

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 allowances. The general allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, management’s experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. 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 recorded investment in the loan is less than the market value of the collateral less costs to sell (“market value”), a specific allowance is
49



established in the ALLL for the loan. The amount of the specific allowance is computed using current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This analysis is inherently
45



subjective as it relies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from 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,September 30, 2022, management evaluated the adequacy of the ALLL and concluded that a $500,000$400,000 recapture of provision for loan losses was appropriate. This recapture was primarily attributed to the downgrade to substandard and impaired status of a $6.4$6.3 million participationparticipant interest in a commercial loan secured by medical rehabilitation facilities and a $1.7 million multifamily loan subsequent to an overall financial analysis of a single borrowing relationship with multiple other loans that weresenior housing/assisted living facility previously downgraded to special mention in the quarter ended March 31, 2022. This loan was analyzed for impairment to determine if a specific allowance was required. The analysis concluded that no losses were anticipated, resulting in a decrease to the general allowance which offset the increase due to our loan growth, resulting in the recapture of provision for loan losses. In comparison, a $100,000 of provision for loan losses was made in the three months ended September 30, 2021. For more information, see Note 5 - Loans Receivable--ALLL.

Noninterest Income. Noninterest income decreased $221,000 to $778,000 for the quarter ended September 30, 2022, as compared to the quarter ended September 30, 2021.

The following table provides a detailed analysis of the changes in the components of noninterest income:
 Three Months Ended September 30, 2022Three Months Ended September 30, 2021Change from Three Months Ended
September 30, 2021
Percent Change
 (Dollars in thousands)
BOLI income$243 $377 $(134)(35.5)%
Wealth management revenue89 64 25 39.1 
Deposit related fees245 228 17 7.5 
Loan related fees195 300 (105)(35.0)
Other           30 (24)(80.0)
Total noninterest income$778 $999 $(221)(22.1)

    During the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, BOLI income decreased $134,000, as $161,000 in death benefits proceeds was recognized in the three months ended September 30, 2021. Also contributing to the decrease in noninterest income was the $105,000 decrease in loan related fees, including a $131,000 decrease in loan prepayment fees.

Noninterest Expense. Noninterest expense increased $681,000 to $9.0 million for the three months ended September 30, 2022, from $8.3 million for the three months ended September 30, 2021.















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The following table provides a detailed analysis of the changes in the components of noninterest expense:
 Three Months Ended September 30, 2022Three Months Ended September 30, 2021Change from Three Months Ended
September 30, 2021
Percent Change
 (Dollars in thousands)
Salaries and employee benefits$5,417 $4,856 $561 11.6 %
Occupancy and equipment1,188 1,116 72 6.5 
Professional fees                                549 502 47 9.4 
Data processing                                675 626 49 7.8 
Regulatory assessments105 121 (16)(13.2)
Insurance and bond premiums112 106 5.7 
Marketing92 64 28 43.8 
Other general and administrative876 942 (66)(7.0)
Total noninterest expense$9,014 $8,333 $681 8.2 

During the three months ended September 30, 2022, salaries and employee benefits increased $561,000 as compared to the three months ended September 30, 2021, primarily due to higher than normal vacancies in staffing in the year ago quarter as 10 open positions were filled during the current quarter and higher incentive commissions were paid for one-to-four family residential loan originations. Occupancy and equipment expense increased $72,000, due primarily to the $64,000 increase in facilities and equipment maintenance. Other general and administrative expenses decreased $66,000, due primarily to a $207,000 loss on sale of OREO properties for the three months ended September 30, 2021, which offset increased postage, subscription, conference attendance, and business entertainment related expenses this quarter as business generating opportunities continue to increase.

Federal Income Tax Expense. The federal income tax provision increased to $935,000 for the three months ended September 30, 2022, as compared to $758,000 for the same period in 2021, primarily due to a $924,000 increase in income before federal income tax provision.

Comparison of Operating Results for the Nine Months Ended September 30, 2022 and 2021

General. Net income for the nine months ended September 30, 2022 was $10.0 million, or $1.10 per diluted share as compared to net income of $9.5 million, or $0.99 per diluted share for the nine months ended September 30, 2021. The increase in net income was primarily the result of a $2.5 million improvement in net interest income and a $600,000 increase in the recapture of provision for loan losses outpacing the $2.3 million increase in noninterest expense and $208,000 decline in noninterest income between the periods.

Net Interest Income. Net interest income for the nine months ended September 30, 2022 was $35.9 million, as compared to $33.4 million for the same period in 2021, due to both increases in interest income and decreases in interest expense between the periods.

Interest income increased by $1.4 million for the nine months ended September 30, 2022, as compared to the same period in 2021, including a $1.2 million increase from investment securities. The average loan yield decreased slightly to 4.52% for the nine months ended September 30, 2022, compared to 4.61% in the nine months ended September 30, 2021. The $785,000 adverse impact to interest income from this decrease in the average yield on loans was more than offset by an increase of $906,000 resulting from the $26.2 million increase in average loan balances. The average loan yield for the nine months ended September 30, 2021, was positively impacted by significantly higher net deferred fee recognition from the forgiveness of PPP loans, totaling $1.6 million as compared to $247,000 in the current nine month period. In addition, the prior year period included $394,000 in interest and late charges received from the payoff of a $2.0 million nonperforming loan.

Interest income from investment securities increased $1.2 million, primarily as a result of an increase in both the average yield and average balance of taxable investment securities. The average yield of taxable securities increased 64 basis points to 2.48% for the nine months ended September 30, 2022, from 1.84% for the nine months ended September 30, 2021. The average balance of taxable investment securities increased $21.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021.
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Interest income from interest-earning deposits had a $128,000 increase for the nine months ended September 30, 2022, as compared to the same period in 2021, with an increase in average yield to 0.76% from 0.11%, partially offset by a $29.7 million decrease in the average balance of these deposits between periods.

Deposit interest expense decreased by $800,000 for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The average cost of interest-bearing deposits decreased 12 basis points between the periods primarily due to a shift in balances from higher cost certificates of deposit into money market accounts. Interest expense for retail certificates of deposit decreased $2.0 million due to a decrease of $81.9 million in the average balance and a 46 basis point reduction in the average cost between periods. Partially offsetting this improvement, interest expense on money market accounts increased $609,000 due primarily to a nine basis point increase in the average cost and an increase of $77.1 million in the average balance between periods. Further, brokered deposit interest expense totaled $381,000 in the nine months ended September 30, 2022, compared to none in the prior year period. During the nine months ended September 30, 2022, we supplemented our funding needs with an average balance of $28.4 million of brokered deposits.

Interest expense on borrowings declined $257,000 for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. The average cost of borrowings decreased to 1.32% for the nine months ended September 30, 2022, from 1.41% for the nine months ended September 30, 2021, and the average balance decreased by $18.4 million between periods. Reductions in both the average balance and cost of borrowings were primarily due to the repayment of $25.0 million in FHLB advances due to a maturing interest rate swap agreement, and the $25.0 million of fixed rate FHLB advances secured at lower rates upon the onset of $25.0 million of previously contracted forward-starting interest rate swap agreements in October 2021.
The Company’s net interest margin increased to 3.54% for the nine months ended September 30, 2022, from 3.34% for the nine months ended September 30, 2021. This increase was due primarily to the improvement in both interest income from interest-earning assets and interest expense from interest-bearing liabilities, as outlined above. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this Form 10-Q.


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The following table details the change in net interest income due to changes in yield or cost, or changes in the average balance of the related asset or liability:
Nine Months Ended September 30, 2022
Compared to September 30, 2021
Net Change in Interest
RateVolumeTotal
(In thousands)
Interest-earning assets:
   Loans receivable, net$(785)$906 $121 
   Investment securities, taxable838 301 1,139 
Investment securities, non-taxable38 (2)36 
   Interest-earning deposits with banks153 (25)128 
   FHLB stock(26)(19)
Total net change in income on interest-earning assets251 1,154 1,405 
Interest-bearing liabilities:
   Interest-bearing demand154 (3)151 
   Savings— 
   Money market431 178 609 
   Certificates of deposit, retail(945)(1,041)(1,986)
   Brokered deposits381 — 381 
   Borrowings(63)(194)(257)
Total net change in expense on interest-bearing liabilities(42)(1,059)(1,101)
Total net change in net interest income$293 $2,213 $2,506 


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The following table compares detailed average balances, associated yields and rates, and the resulting changes in interest and dividend income or expense for the nine months ended September 30, 2022 and 2021. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.
 Nine Months Ended September 30,
20222021
 Average BalanceInterest Earned / PaidYield or CostAverage BalanceInterest Earned / PaidYield or Cost
 (Dollars in thousands)
Assets
Loans receivable, net$1,121,642 $37,893 4.52 %$1,095,380 $37,772 4.61 %
Investment securities, taxable173,562 3,225 2.48 151,646 2,086 1.84 
Investment securities, non-taxable23,532 370 2.10 23,660 334 1.89 
Interest-earning deposits with banks                                          32,051 181 0.76 61,722 53 0.11 
FHLB stock5,767 228 5.29 6,454 247 5.12 
Total interest-earning assets1,356,554 41,897 4.13 1,338,862 40,492 4.04 
Noninterest earning assets85,575 79,674 
Total average assets$1,442,129 $1,418,536 
Liabilities and Stockholders' Equity
Interest-bearing demand$102,509 $221 0.29 %$106,857 $70 0.09 %
Savings23,856 0.03 21,201 0.03 
Money market602,742 1,825 0.40 525,615 1,216 0.31 
Certificates of deposit, retail274,813 2,550 1.24 356,707 4,536 1.70 
Brokered deposits28,407 381 1.79 — — — 
Total interest-bearing deposits1,032,327 4,982 0.65 1,010,380 5,826 0.77 
Borrowings101,740 1,006 1.32 120,165 1,263 1.41 
Total interest-bearing liabilities1,134,067 5,988 0.71 1,130,545 7,089 0.84 
Noninterest bearing liabilities149,523 127,997 
Average equity158,539 159,994 
Total average liabilities and equity$1,442,129 $1,418,536 
Net interest income$35,909 $33,403 
Net interest margin3.54 %3.34 %

Provision for Loan Losses. During the nine months ended September 30, 2022, management evaluated the adequacy of the ALLL and concluded that a recapture of provision for loan losses in the amount of $900,000 was appropriate for the period. This recapture was primarily due to $14.4 million of loans downgraded to substandard, and impaired status. These downgradesresulting in these loans being removed the loans from the calculation of the general allowance to anfor loan losses. An individual analysis of these loans for arequired specific reserves was instead performed which indicated no additional 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 nursing home facility was downgraded to special mention due to continued reduced occupancy as a resultneeded. For additional information, see “Comparison of the COVID-19 pandemic. In addition, changesFinancial Condition at September 30, 2022, and December 31, 2021 - Loans Receivable” discussed above.

Changes in the composition of our loan portfolio, with growth in lower risk one-to-four family residential, consumer and multifamily loans and a decline in construction/land loans with over $20.0 million of these loans converting to permanent multifamily loans during the period, and reduced balances in higher risk construction/land development and business loans also contributed to the recapture of provision for the threenine months ended March 31,September 30, 2022. In comparison, a $300,000recapture of provision for loan losses in the amount of $300,000 was recognized for the threenine months ended March 31,September 30, 2021, primarily the result of downgrades onto substandard of $10.5 million of loans to the single lending relationship discussed above.loans. These loans, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business were adversely impacted by the COVID-19 pandemic.pandemic and are included in substandard
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loans at September 30, 2021. Our impairment analysis on these properties showed no anticipated loss on them, resulting in a decline of general allowance and recapture of provision. For more information, see Note 5 - Loans Receivable--ALLL.Receivable - ALLL.

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The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations.
At or For the Three Months Ended March 31,At or For the Nine Months Ended September 30,
2022202120222021
(Dollars in thousands) (Dollars in thousands)
ALLL as a percent of total loansALLL as a percent of total loans1.33 %1.39 %ALLL as a percent of total loans1.27 %1.35 %
ALLL at period endALLL at period end$15,159 $15,502 ALLL at period end$14,726 $15,057 
Total loans outstandingTotal loans outstanding1,136,748 1,116,391 Total loans outstanding1,157,973 1,117,358 
Non-accrual loans as a percentage of total loans outstanding at period endNon-accrual loans as a percentage of total loans outstanding at period end0.02 %0.18 %Non-accrual loans as a percentage of total loans outstanding at period end0.02 %— %
Total non-accrual loansTotal non-accrual loans$179 $2,036 Total non-accrual loans$232 $— 
Total loans outstandingTotal loans outstanding1,136,748 1,116,391 Total loans outstanding1,157,973 1,117,358 
ALLL as a percent of non-accrual loans at period endALLL as a percent of non-accrual loans at period end8,468.72 %761.39 %ALLL as a percent of non-accrual loans at period end6,347.41 %n/a
ALLL at period endALLL at period end$15,159 $15,502 ALLL at period end$14,726 $15,057 
Total non-accrual loansTotal non-accrual loans179 2,036 Total non-accrual loans232 — 
Net recoveries during period to average loans outstanding:Net recoveries during period to average loans outstanding:Net recoveries during period to average loans outstanding:
One-to-four family residential:One-to-four family residential:— %0.01 %One-to-four family residential:— %0.05 %
Net recoveries during periodNet recoveries during period$$28 Net recoveries during period$$183 
Average loans receivable, net (1)
Average loans receivable, net (1)
390,236 374,851 
Average loans receivable, net (1)
419,839 372,679 
Multifamily:Multifamily:— %— %Multifamily:— %— %
Net recoveries during periodNet recoveries during period$— $— Net recoveries during period$— $— 
Average loans receivable, net (1)
Average loans receivable, net (1)
131,373 137,419 
Average loans receivable, net (1)
133,552 140,172 
Commercial:Commercial:— %— %Commercial:— %— %
Net recoveries during periodNet recoveries during period$— $— Net recoveries during period$— $— 
Average loans receivable, net (1)
Average loans receivable, net (1)
415,173 383,399 
Average loans receivable, net (1)
409,784 375,575 
Construction/land development:Construction/land development:— %— %Construction/land development:— %— %
Net recoveries during periodNet recoveries during period$— $— Net recoveries during period$— $— 
Average loans receivable, net (1)
Average loans receivable, net (1)
94,387 90,409 
Average loans receivable, net (1)
74,738 98,031 
Business:Business:— %— %Business:— %— %
Net recoveries during periodNet recoveries during period$— $— Net recoveries during period$— $— 
Average loans receivable, net (1)
Average loans receivable, net (1)
37,786 73,604 
Average loans receivable, net (1)
32,991 68,297 
Consumer:Consumer:— %— %Consumer:(0.07)%— %
Net recoveries during periodNet recoveries during period$— $— Net recoveries during period$(37)$— 
Average loans receivable, net (1)
Average loans receivable, net (1)
46,473 39,682 
Average loans receivable, net (1)
50,738 40,626 
Total loans:Total loans:— %— %Total loans:— %0.02 %
Net recoveries during periodNet recoveries during period$$28 Net recoveries during period(31)183 
Average loans receivable, net (1)
Average loans receivable, net (1)
1,115,428 1,099,364 
Average loans receivable, net (1)
1,121,642 1,095,380 
_______________
(1) The average loans receivable, net balances, include nonaccruing loans and deferred fees.


4755





Noninterest Income. Noninterest income increased $25,000decreased $208,000 to $789,000$2.5 million for the quarternine months ended March 31,September 30, 2022, as compared to $2.7 million for the quarternine months ended March 31,September 30, 2021.

The following table provides a detailed analysis of the changes in the components of noninterest income:
Three Months Ended March 31, 2022Three Months Ended March 31, 2021Change from Three Months Ended
March 31, 2021
Percent Change Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021Change from
Nine Months Ended September 30, 2021
Percent Change
(Dollars in thousands) (Dollars in thousands)
BOLI incomeBOLI income$288 $269 $19 7.1 %BOLI income$782 $891 $(109)(12.2)%
Wealth management revenueWealth management revenue82 160 (78)(48.8)Wealth management revenue276 391 (115)(29.4)
Deposit related feesDeposit related fees215 200 15 7.5 Deposit related fees705 654 51 7.8 
Loan related feesLoan related fees199 132 67 50.8 Loan related fees748 714 34 4.8 
Other Other 66.7 Other17 86 (69)(80.2)
Total noninterest incomeTotal noninterest income$789 $764 $25 3.3 Total noninterest income$2,528 $2,736 $(208)7.6 

    During the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, loan related 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 additional policies purchased in 2021. Wealth management revenue decreased $78,000 during$115,000 for the threenine months ended March 31,September 30, 2022, as compared to the same period in 2021, primarily due to a reduction in sales, personnel.impacted in part by reduced sales personnel and staff turnover. Also contributing to the decrease in noninterest income, BOLI income decreased $109,000, primarily as a result of $161,000 of death benefit proceeds received in 2021 with no similar proceeds received in 2022. Partially offsetting these decreases, deposit related fees increased $51,000 primarily from debit card related service fees reflecting increased usage as businesses reopened and the economy improved in our markets.

Noninterest Expense. Noninterest expense increased $497,000$2.3 million to $8.6$26.9 million for the threenine months ended March 31,September 30, 2022, from $8.1as compared to $24.7 million for the three months ended March 31,same period in 2021.

The following table provides a detailed analysis of the changes in the components of noninterest expense:
Three Months Ended March 31, 2022Three Months Ended March 31, 2021Change from Three Months Ended
March 31, 2021
Percent Change Nine Months Ended September 30, 2022Nine Months Ended September 30, 2021Change from
Nine Months Ended September 30, 2021
Percent Change
(Dollars in thousands) (Dollars in thousands)
Salaries and employee benefitsSalaries and employee benefits$5,261 $4,945 $316 6.4 %Salaries and employee benefits$16,156 $14,863 $1,293 8.7 %
Occupancy and equipmentOccupancy and equipment1,228 1,100 128 11.6 Occupancy and equipment3,621 3,403 218 6.4 
Professional fees Professional fees 452 532 (80)(15.0)Professional fees 1,732 1,423 309 21.7 
Data processing Data processing 677 697 (20)(2.9)Data processing 2,044 2,003 41 2.0 
Regulatory assessmentsRegulatory assessments101 121 (20)(16.5)Regulatory assessments295 356 (61)(17.1)
Insurance and bond premiumsInsurance and bond premiums129 124 4.0 Insurance and bond premiums354 341 13 3.8 
MarketingMarketing37 29 27.6 Marketing226 116 110 94.8 
Other general and administrativeOther general and administrative741 581 160 27.5 Other general and administrative2,497 2,146 351 16.4 
Total noninterest expenseTotal noninterest expense$8,626 $8,129 $497 6.1 Total noninterest expense$26,925 $24,651 $2,274 9.2 

During the threenine months ended March 31,September 30, 2022, as compared to the same period in 2021, salaries and employee benefits increased $316,000 as compared to the three months ended March 31, 2021,$1.3 million primarily due to an increase in the number of employees, with higher than normal vacancies in staffing in the year ago quarter. In addition, occupancyperiod, and higher incentive commissions paid for increased production of one-to-four family residential loans paid in the current period. Occupancy and equipment expense increased $128,000$218,000 during the nine months ended September 30, 2022, due primarily to an $126,000 increase in facilities and equipment maintenance, office improvements of $55,000, and increased lease rental expense of $41,000 between the periods. Professional fees increased $309,000 for the nine months ended September 30, 2022, as a result ofcompared to the opening of our fifteenth branchsame prior year period, due in Marchpart to fees paid to human resources
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recruiters to attract employees in this competitive employment environment, along with $167,000 in regulatory examination fees paid in the nine months ended September 30, 2022, with no comparable expenses in the nine months ended September 30, 2021. Marketing expense increased $110,000 primarily due to increased marketing/promotional campaigns. Other general and administrative expensesexpense increased $160,000, primarily$351,000, due to conference attendanceincreases in travel expenses, postage relating to the aforementioned marketing expenses, subscription and business entertainment related expenses as business generating opportunities increased this quarter.year. Partially offsetting these increases professional fees decreased $80,000, and data processing andwas a $61,000 decrease to regulatory assessments each decreased by $20,000.primarily due to the true-up of estimated expenses.

Federal Income Tax Expense. The federal income tax provision increased to $771,000$117,000 for the threenine months ended March 31,September 30, 2022, primarily as compared to $584,000 for the same period in 2021, primarily due to a $950,000result of a $624,000 increase in income before federal income taxes.taxes for the nine months ended September 30, 2022, as compared to the same period in 2021.

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Liquidity and Capital Resources

We are required to have enoughsufficient cash flow in order to maintain sufficientproper 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, scheduled loan and investment repayments, including interest payments, maturing loans and investment securities, and advances from the FHLB. These funds, together with equity, are used to fund loans, acquire investment securities and other assets, and fund continuing operations. 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. At September 30, 2022, the undisbursed portion of construction LIP and unused portion of lines of credit totaled $46.4 million and $30.6 million, respectively. Certificates of deposit scheduled to mature in one year or less at March 31,September 30, 2022, totaled $142.0$174.6 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.

Our primary source of funds is our retail deposits. When retail deposits are not 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, advances from the FHLB, wholesale funding, 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. During the third quarter of 2022, we supplemented our funding with $69.5 million in brokered deposits as their rates and terms were deemed most appropriate to achieve our asset/liability objectives. At September 30, 2022, brokered deposits consisted of $44.5 million of brokered certificates of deposit and $25.0 million of interest-bearing demand deposits. At September 30, 2022 the Bank maintained credit facilities with the FHLB totaling $654.6 million, subject to qualifying collateral limits that reduced our pledged collateral to $426.5 million, with an outstanding balance of $150.0 million. As further funding sources, we also had the ability to borrow $75.7 million from the FRB, and $75.0 million from unused lines of credit with other financial institutions, with no balance outstanding from these sources at September 30, 2022. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this report.

On a monthly basis we estimate our liquidity sources and 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 in forecasting funding needs and investing opportunities.
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We 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 variety of 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 services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations.

Based on our current capital allocation objectives, during the remainder of fiscal 2022 we expect cash expenditures of $432,000$1.3 million for capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to 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 dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12 per share, our average total dividend paid each quarter would be approximatelyapproximately $1.1 million, based on the number of our current outstanding shares (which assumesassumes no
49



increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

At March 31,September 30, 2022, we project that our fixed commitments for the remainder of the fiscal year ending December 31, 2022, will include (i) $627,000 $214,000 of operating lease payments and (ii) other future obligations and accrued expenses of $18.2 $23.5 million. At March 31,September 30, 2022, $95.0 million of our $95.0$150.0 million in FHLB borrowings are allwere 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 available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.

Our total stockholders’ equity was $157.8$157.9 million at SeptemberMarch 31, 30, 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” institution in accordance with regulatory standards. As of March 31,September 30, 2022, First Financial Northwest Bank exceeded all regulatory capital requirements. Regulatory capital ratios for First Financial Northwest Bank were as follows as of March 31,September 30, 2022: Total capital to risk-weighted assets was 15.33%15.49%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 14.08%14.24%; and Tier 1 capital to total assets was 10.51%10.43%. At March 31,September 30, 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 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,September 30, 2022, the Bank’s capital conservation buffer was 7.33%7.49%. 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;
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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
50



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 increase balances of non-maturity deposits that are less interest rate sensitive;    
we have investedinvest 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 utilizedutilize 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,September 30, 2022, the Bank held seven interest rate swap agreements with a total notional amount of $95.0 million, a weighted-average fixed interest rate of 1.05%, and weighted average remaining maturity of 5650 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. 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. In addition, we may determine that it is appropriate to unwind some or all of our derivative instruments, based on our assessments of the continued appropriateness of our balance sheet risks and derivative positions.

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
59



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 consultant with 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 our 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. Approximately 58.7%60.7% of our net loans were adjustable-rate loans at March 31,September 30, 2022. At that date, $454.4$357.4 million, or 68.1%50.9%, of these loans with a weighted-average interest rate of 4.23%4.03% 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
51



increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At March 31,September 30, 2022, the Bank’s net loans receivable included $128.9$151.0 million of prime based loans, of which $93.9 million werewith no loans 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, 2022
Increase in prime rate:(Dollars in thousands)
0 - 25 bps$18,916 
26 - 50 bps15,036 
51 - 75 bps32,857 
76 - 100 bps16,326 
101 - 150 bps7,607 
151 - 200 bps3,154 
$93,896 

    The inability of our loans to adjust downward with the presence of floors 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 0.25% and 0.50%.

The following table illustrates the estimated change in our net interest income over the next 12 months from March 31,September 30, 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.
         
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Net Interest Income Change at March 31, 2022
Net Interest Income Change at September 30, 2022Net Interest Income Change at September 30, 2022
Basis Point Change in RatesBasis Point Change in RatesNet Interest Income% ChangeBasis Point Change in RatesNet Interest Income% Change
(Dollars in thousands)(Dollars in thousands)(Dollars in thousands)
+300+300$46,912(1.53)%+300$51,165(5.22)%
+200+20047,039(1.26)+20052,052(3.58)
+100+10047,216(0.89)+10053,066(1.70)
BaseBase47,641Base53,985
(100)(100)46,411(2.58)(100)53,716(0.50)

The following table illustrates the change in our net portfolio value (“NPV”) at March 31,September 30, 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 PointBasis PointNet Portfolio as % ofMarketBasis PointNet Portfolio as % ofMarket
Change inChange in
Net Portfolio Value (1)
Portfolio Value of AssetsValue ofChange in
Net Portfolio Value (1)
Portfolio Value of AssetsValue of
RatesRatesAmount
$ Change (2)
% Change
NPV Ratio (3)
% Change (4)
Assets (5)
RatesAmount
$ Change (2)
% Change
NPV Ratio (3)
% Change (4)
Assets (5)
(Dollars in thousands)(Dollars in thousands)
+300+300$219,516 $(34,144)(13.46)%16.62 %(2.41)%$1,320,905 +300$231,897 $(42,994)(15.64)%16.97 %(2.94)%$1,366,764 
+200+200230,831 (22,829)(9.00)17.08 (1.61)1,351,825 +200246,301 (28,589)(10.40)17.62 (1.95)1,398,003 
+100+100242,747 (10,913)(4.30)17.53 (0.77)1,384,561 +100261,316 (13,575)(4.94)18.26 (0.93)1,430,862 
BaseBase253,660 — — 17.89 — 1,417,620 Base274,890 — — 18.78 — 1,463,355 
(100)(100)251,011 (2,649)(1.04)17.31 (0.19)1,450,230 (100)282,923 8,033 2.92 18.92 0.55 1,495,642 
_____________ 

(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,September 30, 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.
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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,September 30, 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,September 30, 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 the 2021 Form 10-K.


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

(a)     Not applicable

(b)     Not applicable

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(c)    The following table summarizes First Financial Northwest’s common stock repurchases during the three months ended March 31,September 30, 2022:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Repurchased as Part of Publicly Announced PlanMaximum Number of Shares that May Yet Be Repurchased Under the Plan
January 1 - January 31, 2022— $— — 39,336 
February 1 - February 28, 202227,107 16.98 27,107 450,961 
March 1 - March 31, 202213,677 17.03 13,677 437,284 
40,784 17.00 40,784 437,284 
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PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Repurchased as Part of Publicly Announced PlanMaximum Number of Shares that May Yet Be Repurchased Under the Plan
July 1 - July 31, 2022— $— — 420,357 
August 1 - August 31, 202220,895 15.64 20,895 399,462 
September 1 - September 30, 20226,375 14.89 6,375 393,087 
27,270 15.46 27,270 393,087 
    
On August 16, 2021, the Company’s Board of Directors approved a repurchase plan authorizing the repurchase of up to 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 the expiration of the plan, 459,732 shares had been purchased at an average price of $16.83 per share. 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 17,expired on September 16, 2022. At March 31,September 30, 2022, the Company had repurchased 17,71661,913 shares under this repurchase plan at an average price of $17.00$16.22 per share undershare. On September 28, 2022, the plan.Company’s Board of Directors approved the repurchase of up to 5% of the Company’s outstanding stock, or approximately 456,000 shares. This plan will commence on or about October 31, 2022 and will expire no later than March 17, 2023.

Item 3. Defaults Upon Senior Securities

    Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.
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Item 6. Exhibits and Financial Statement Schedules
 
(a)       Exhibits
 
3.1 
3.2 
4.1 
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
31.1
31.2
32
101The following materials from First Financial Northwest’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 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 December 21, 2020.




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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,November 10, 2022By:/s/Joseph W. Kiley III
  Joseph W. Kiley III
  President and Chief Executive Officer (Principal Executive Officer)
Date: May 12,November 10, 2022By:/s/Richard P. Jacobson
  Richard P. Jacobson
  Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Date: May 12,November 10, 2022By:/s/Christine A. HuestisEva Q. Ngu
Christine A. HuestisEva Q. Ngu
(PrincipalVice President and Controller (Principal Accounting Officer)
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