UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 20172022
[   ]☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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:
Common Stock, $0.01 par value per shareThe Nasdaq Stock Market LLC
(Title of Each Class)(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES  NO Yes No   X   
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES  NO Yes No   X   
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 Yes   X   NO No 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES 
Yes   X    NO No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X   
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitiondefinitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer _____
Accelerated filer  X       Non-accelerated filer _____X
Smaller reporting company _____
X
Emerging growth company _____


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


Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1 (b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES   NO    X  Yes   ☐     No    ☑  


The aggregate market value of the Common Stock outstanding held by nonaffiliates of the Registrant based on the closing sales price of the Registrant’s Common Stock as quoted on The Nasdaq Stock Market LLC on June 30, 2017,2022, was $150,830,985 (9,350,960$123,324,741 (7,935,955 shares at $16.13$15.54 per share). For purposes of this


calculation, common stock held only by executive officers, the employee stock ownership

plan and directors of the Registrant is considered to be held by affiliates. AsAs of March 7, 2018,9, 2023, the Registrant had 10,748,437 shares9,148,086 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of Registrant’s Definitive Proxy Statementthe Registrant��s definitive proxy statement for the 2017 Annual Meeting of Shareholders (Part III).to be held in May 2023 (the “Proxy Statement”), are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.



FIRST FINANCIAL NORTHWEST, INC.
20172022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
Forward-Looking Statements
iii

Internet Website
iiiv


PART I.

1

1

12

23

1413

2018

2421

2725

2725

  Human Capital
Employees25
27

2726

3534

36

3837

48
49
5049

5049

48
49
PART II.
5049

Selected Financial Data
[Reserved]		51
50
5450

Overview
5450

54
52
5653

  Comparison of Financial Condition at December 31, 2017,2022, and December 31, 2016202156
55
59
58
62
Comparison of Operating Results for the Years Ended December 31, 2016, and 2015
68

  Average Balances, Interest and Average Yields/Costs
7063

7164

7265

7365

  Liquidity and Capital Resources
7567

76

Commitments and Off-Balance Sheet Arrangements
76

Impact of Inflation
77

  Recent Accounting Pronouncements
7869

7869

7869

131121

131121

132122

Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
122

i


132122

132123

132123

133123

Principal Accounting Fees and Services
133124

134124

Item 16.Form 10-K Summary
134125

135126

 
 



ii


Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K 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) 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 and lease losses not being adequate to cover actual losses, and require us to materially increase our reserves;
•changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
•the transition away from the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks;
•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;
•results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
•our ability to pay dividends on our common stock;
•our ability to attract and retain deposits; increases in premiums for deposit insurance;
•our ability to control operating costs and expenses;
•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
•difficulties in reducing risk associated with the loans on our balance sheet;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
•our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; team
•our ability to implement a branch expansion strategy;
•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
•our ability to manage loan delinquency rates;
•costs and effects of litigation, including settlements and judgments;
•increased competitive pressures among financial services companies;
•changes in consumer spending, borrowing and savings habits;
•legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the implementing regulations; rules;
•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
iii

•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 economic impacteffects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or any terrorist activities; terrorism, and other external events on our businesses; and
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations;operations, pricing, products and services;services, and other risks detailed in this Form 10-K and our other reports filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”).

Any of the forward-looking statements that we make in this Form 10-K 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.
iv


Internet Website


iii


The information contained on our website, www.ffnwb.com, is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make available free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, proxy statements and other SEC filings on our investor relations page. TheseAll of our reports, proxy statements, and other SEC filings are posted as soon as reasonably practicable after they are electronically filed with the SEC. All of our SEC filingsand are also available free of charge at the SEC’s website at www.sec.gov or by calling the SEC at 1-800-SEC-0330.

www.sec.gov.
iv
v


PART I

Item 1.  Business


General


First Financial Northwest, Inc. (“First Financial Northwest” or the “Company”), a Washington corporation, was formed on June 1, 2007, for the purpose of becoming the holding company for First Financial Northwest Bank (“the Bank”(the “Bank”) in connection with the Bank’s conversion from a mutual holding company structure to a stock holding company structure which was completed on October 9, 2007. At December 31, 20172022, the Company had total assets of $1.2$1.50 billion, net loans of $988.7 million,$1.17 billion, deposits of $839.5 million$1.17 billion and stockholders’ equity of $142.6$160.4 million. First Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in First Financial Northwestthe Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to First Financial Northwestthe Bank.


The Bank was organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal mutual savings and loan association in 1935 and to a Washington state-chartered mutual savings bank in 1992. In 2002, First Savingsthe Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank, and the wholly-owned subsidiary of First Financial of Renton, Inc. In connection with the 2002 conversion, First Savingsthe Bank changed its name to First Savings Bank Northwest. Subsequently,Northwest, and then in August 2015, the Bank changed its name to First Financial Northwest Bank to better reflect the commercial banking services it provides beyond those typically provided by a traditional savings bank. In February 2016, the Bank officially changed its charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.bank as a way of better serving its customers’ needs.


First Financial Northwest became a bank holding company, after converting from a savings and loan holding company on March 31, 2015, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “Federal Reserve”) through the FRB. The change was consistent with First Financial Northwestthe Bank’s shift in focus from a traditional savings and loan association towards a full service, commercial bank. Additionally, First Financial Northwestthe Bank is examined and regulated by the DFI and by the FDIC. First Financial NorthwestFDIC. The Bank is required to maintain reserves at a level set by the Federal Reserve Board. The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Des Moines, which is one of the 11 regional banks in the Federal Home Loan Bank System (“FHLB System”). For additional information, see “How We are Regulated - Regulation and Supervision of First Financial Northwest Bank - Federal Home Loan Bank System.”


In February 2016, First Financial Northwest Bank converted its charter from a community-based savings bank to a commercial bank as a way of better serving its customer needs. The Bank’s largest concentration of customers is in King County, with additional concentrations in Snohomish, Pierce, and Kitsap counties, Washington. The Bank is headquartered in Renton, in King County, where it has a full-service branch as well as a smaller branch located in a commercial development known as the “Landing”“The Landing”. AlsoThe Bank has additional branches in King County the Bank has brancheslocated in Bellevue, Woodinville, Bothell, Kent, Kirkland, and Woodinville, and is scheduled to open another branch in Bothell in the first quarter of 2018.Issaquah. In Snohomish County, Washington, the Bank has five additional branches located in Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In addition, the Bank has two Pierce County, Washington branches, located in University Place and Gig Harbor. These Bank’s branches with the exception of its headquarters, are generally smaller branches are focused on efficiency through the extensive use of the latest banking technology. First Financial NorthwestThe Bank’s business consists of attracting deposits from the public and utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business and consumer loans.


TheOur principal executive office of First Financial Northwest Bank isoffices are located at 201 Wells Avenue South, Renton, Washington, 98057; our telephone number is (425) 255-4400.
1



Market Area


We consider our primary market area to be the Puget Sound Region that consists primarily of King, Snohomish, Pierce and, to a lesser extent, Pierce and Kitsap counties. During 2017,2022, the region experienced appreciationa slight reduction in residential markethome prices as mortgage rates rose during the year. The increase in mortgage rates contributed to a slowdown in demand in 2022 which led to a decline in sales and an increase in housing inventory at the end of the year. The number of homes listed for sale in King, Pierce, Snohomish and Kitsap counties have increased from the fifth consecutive yearend of 2021 with the supplyincreases ranging from 212% in Kitsap County to 360% in Snohomish County, and all four counties have more than one month of homes for sale declining because of strong demand and a lack of homes available for sale.inventory available.


King County has the largest population of any county in the state of Washington and covers approximately 2,100 square miles. It has a population of approximately 2.152.25 million residents and a median household income of approximately $79,000,$106,300, according to U.S. Census estimates. King County has a diversified economic base with many nationally recognized firms including Boeing, Microsoft, Amazon, Starbucks, Nordstrom, Costco and Paccar. According to the Washington State Employment Security Department, the unemployment rate for King County was 3.6%2.8% at December 31, 2017,2022, compared to 3.4%3.2% at December 31, 2016,

2021, and the national average of 4.1%3.5% at December 31, 2017.2022. In the first quarter of 2023. Amazon and Microsoft announced layoffs, totaling 3,200 workers in King County that are scheduled to take effect in mid-March 2023. According to the St. Louis Federal Reserve’s Economic Data, King County had an employment base of approximately 1.3 million workers at December 31, 2022. The median sales price of a residential home in King County for December 20172022 was $585,000, an increase$735,000, a decrease of 15.8%1.9% from 2016,December of 2021, according to the Northwest Multiple Listing Service ("MLS"). Residential sales volumes decreased 1.2%26.4% in 20172022 compared to 20162021 and inventory levels as of December 31, 20162022 were at 0.51.7 months according to the MLS.MLS


Pierce County, covering approximately 1,8001,700 square miles, has the second largest population of any county in the state of Washington. It has approximately 861,000926,000 residents and a median household income of approximately $61,000,$82,600, according to U.S. Census estimates. The Pierce County economy is diversified with the presence of military-related government employment (Joint Base Lewis-McChord), transportation and shipping employment (Port of Tacoma), and aerospace-related employment (Boeing). According to the Washington State Employment Security Department, the unemployment rate for Pierce County was 5.4% at5.3% in December 31, 2017,2022, compared to 6.0%4.1% at December 31, 2016.year-end 2021. The median sales price of a residential home in Pierce County was $315,000$500,000 for December 2017,of 2022, a 12.3% increase2.9% decrease compared to 2016,2021, according to the MLS. Residential sales volumes increaseddecreased by 8.9%21.4% in 20172022 compared to 20162021 and inventory levels as of December 31, 20172022 were at 1.12.1 months according to the MLS.


Snohomish County has the third largest population of any county in the state of Washington and covers approximately 2,090 square miles. It has approximately 788,000834,000 residents and a median household income of approximately $74,000,$95,600, according to U.S. Census estimates. The economy of Snohomish County is diversified with the presence of military-related government employment (Naval Station Everett), aerospace-related employment (Boeing), and retail trade. According to the Washington State Employment Security Department, the unemployment rate for Snohomish County was 4.0%3.2% in December 20172022 compared to 3.9%3.8% in December 2016.2021. The median sales price of a residential home in Snohomish County was $425,000$679,000 for December 2017,of 2022, a 12.0% increase0.1% decrease compared to December 2016,of 2021, according to the MLS. Residential sales volumes increaseddeclined by 3.1%23.5% in 20172022 compared to 20162021 and inventory levels as of December 31, 20172022 were at 0.61.5 months according to the MLS.


Kitsap County has the seventh largest population of any county in the state of Washington and covers approximately 570395 square miles. It has approximately 265,000274,000 residents and a median household income of approximately $65,000,$84,600, according to U.S. Census estimates. The Kitsap County economy is diversified with the presence of military-related government employment (Naval Base Kitsap, Puget Sound Naval Shipyard), health care, retail trade and education. According to the Washington State Employment Security Department, the unemployment rate for Kitsap County was 5.0%4.3% in December 2017,2022, compared to 5.5%3.3% for December of 2016.2021. The median sales price of a residential home in Kitsap County was $315,000$495,000 for December of 2017,2022 a 12.7% increase compared todecrease of 1% over December of 2016,2021, according to the MLS. Residential sales volumes increaseddecreased by 7.0%11.4% in 20172022 compared to 20162021 and inventory levels as of December 31, 20172022 were at 1.01.8 months according to the MLS. For a discussion regarding competition in our primary market area, see “- Competition” later in Item 1 of this report.


For a discussion regarding competition in our primary market area, see “- Competition” later in Item 1 of this report.






2

Lending Activities


General. We focus our lending activities primarily on loans secured by commercial real estate, construction/land, first mortgages on one-to-four family residences, multifamily, and to lesser extent, business lending. We offer a limited variety of secured consumer loans, including savings account loans, auto loans and home equity loans that include lines of credit and second mortgage term loans. As of December 31, 2017,2022, our net loan portfolio totaled $988.7 milliontotaled $1.17 billion and represented 81.7% of 77.7% of our total assets.


Our current loan policy generally limits the maximum amount of loans we can make to one borrower to 15% of the Bank’s total risk-based capital or $20.1 and surplus, or $25.7 million at December 31, 2017.2022. Exceptions to this policy are allowed only with the prior approval of the Board of Directors and if the borrower exhibits financial strength or sufficient, measurable compensating factors exist after consideration of the loan-to-value ratio, borrower’s financial condition, net worth, credit history, earnings capacity, debt service coverage, installment obligations, and current payment history. The regulatory limit of loans we can make to one borrower is 20% of total risk-based capital and surplus, or $26.9 $34.3 million, at December 31, 2017.2022. At December 31, 2017,this date, our twosingle largest lending relationships exceeded our internal guidelinerelationship, totaled $25.7 million, consisting of one commercial loan ($13.9 million) and one multifamily loan ($11.8 million), both of which were approved by the Board of Directors.performing in accordance with their terms.


During 2017, the concentration of loans to our five largest lending relationships increased. At December 31, 2017, loans to our five largest lending relationships totaled $88.5 million compared to $79.5 millionLoan Maturity and Repricing. The following table sets forth certain information at December 31, 2016, an increase of $9.0 million, or 11.3%. Although2022, regarding the total of these relationships increased during 2017, their percentageamount of total loans net of loans in process (“LIP”) decreasedour portfolio based on their contractual terms to 8.8% at December 31, 2017 from 9.6% at December 31, 2016 and the total number of loans comprising these relationships decreased to 18 at December 31, 2017 from 23 at December 31, 2016. The following table details the types of loans to our five largest lending relationships at December 31, 2017.maturity, not including prepayments.

Within One YearAfter One Year Through Five YearsAfter Five Years Through Fifteen YearsBeyond Fifteen YearsTotal
 (In thousands)
Real estate:     
   One-to-four family residential$8,273 $20,897 $22,015 $424,651 $475,836 
   Multifamily2,786 44,476 63,027 16,606 126,895 
   Commercial18,881 189,178 184,207 15,616 407,882 
   Construction/land53,131 24,989 — — 78,120 
Total real estate83,071 279,540 269,249 456,873 1,088,733 
Business24,401 3,871 3,099 — 31,371 
Consumer36 4,286 57,733 — 62,055 
Total Loans$107,508 $287,697 $330,081 $456,873 $1,182,159 


Borrower (1)
 Number of Loans 
One-to-Four Family Residential(2)
 Multifamily 
Commercial Real Estate(2)
 Construction/Land Business 
Aggregate Balance of Loans (3)
  (Dollars in thousands)
Real estate investor 2
 $556
 $—
 $—
 $22,000
 $—
 $22,556
Real estate investor 5
 —
 8,779
 13,481
 —
 —
 22,260
Real estate investor 4
 —
 —
 —
 5,355
 10,321
 15,676
Real estate investor 4
 456
 —
 14,177
 —
 —
 14,633
Real estate investor 3
 —
 1,924
 11,500
 —
 —
 13,424
Total 18
 $1,012
 $10,703
 $39,158
 $27,355
 $10,321
 $88,549
________
(1) The composition of borrowers represented in the table may change between periods.
(2) The one-to-four family residential loans for these borrowers included $456,000 of owner occupied properties and $556,000 of non-owner occupied properties. The commercial real estate loans are for non-owner occupied income producing properties.
(3) Net of LIP.

The composition of loans to our five largest borrowers has changed over the last year. As of December 31, 2017, total
multifamily loans decreased, as compared to December 31, 2016, by $15.6 million, while total construction/land development loans and business loans increased by $14.6 million and $10.3 million, respectively. At December 31, 2017, all of the loans listed in the table above were in compliance with the original repayment terms of their respective loans. Subsequent to December 31, 2017, our largest borrower paid off $20.1 million of the construction/land loan included in the above totals.


Loan Portfolio Analysis.    The following table sets forth the compositionamount of our loan portfolio by type of loan at the dates indicated.
 December 31,
 2017 2016 2015 2014 2013
 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
 (Dollars in thousands)
One-to-four family residential:                   
Permanent owner occupied$148,304
 13.6% $137,834
 15.3% $147,229
 19.6% $161,013
 22.9% $158,797
 23.0%
Permanent non-owner occupied130,351
 11.9
 111,601
 12.4
 106,543
 14.2
 112,180
 15.9
 121,877
 17.7
 278,655
 25.5
 249,435
 27.7
 253,772
 33.8
 273,193
 38.8
 280,674
 40.7
                    
Multifamily real estate184,902
 16.9
 123,250
 13.7
 122,747
 16.3
 116,014
 16.5
 106,152
 15.4
                    
Commercial real estate361,842
 33.0
 303,694
 33.7
 244,211
 32.5
 239,211
 34.0
 227,016
 33.0
                    
Construction/land: (1)
                   
One-to-four family residential87,404
 8.0
 67,842
 7.5
 52,233
 7.0
 20,360
 2.9
 3,977
 0.6
Multifamily108,439
 9.9
 111,051
 12.4
 46,666
 6.2
 22,352
 3.1
 24,851
 3.5
Commercial real estate5,325
 0.5
 —
 —
 —
 —
 10,400
 1.5
 26,631
 3.9
Land36,405
 3.3
 30,055
 3.3
 17,058
 2.3
 11,949
 1.7
 9,292
 1.4
 237,573
 21.7
 208,948
 23.2
 115,957
 15.5
 65,061
 9.2
 64,751
 9.4
Business23,087
 2.1
 7,938
 0.9
 7,604
 1.0
 3,783
 0.5
 1,142
 0.2
Consumer9,133
 0.8
 6,922
 0.8
 6,979
 0.9
 7,130
 1.0
 9,201
 1.3
Total loans1,095,192
 100.0% 900,187
 100.0% 751,270
 100.0% 704,392
 100.0% 688,936
 100.0%
Less:                 
  
Loans in process (“LIP”)92,498
   72,026
   53,854
   27,359
   10,209
  
Deferred loan fees, net1,150
   2,167
   2,881
   2,604
   2,580
  
Allowance for loan and lease losses (“ALLL”)12,882
   10,951
   9,463
   10,491
   12,994
  
Loans receivable, net$988,662
   $815,043
   $685,072
   $663,938
   $663,153
  

_____________
(1) Included in the construction/land category are “rollover”total loans which are loans that will convert upon completion of the construction period to permanent loans. Atdue one year after December 31, 2017, we included rollover loans of $2.6 million of one-to-four family residential loans, $71.4 million of multifamily loans and $5.3 million of commercial real estate loans in the construction/land category. In addition, the construction/land category included $35.9 million of loans for raw land2022, with fixed or buildable lots where the Company does not intend to finance the construction.adjustable interest rates.

The following table shows the composition of our loan portfolio by fixed- and adjustable-rate loans at the dates indicated.
 Fixed-RateAdjustable-RateTotal
 (In thousands)
Real estate:   
   One-to-four family residential$162,957 $304,606 $467,563 
   Multifamily42,420 81,689 124,109 
   Commercial159,690 229,311 389,001 
Construction/land16,123 8,866 24,989 
Total real estate381,190 624,472 1,005,662 
Business6,461 509 6,970 
Consumer54,300 7,719 62,019 
Total Loans$441,951 $632,700 $1,074,651 
3
 December 31,
 2017 2016 2015 2014 2013
 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
FIXED-RATE LOANS(Dollars in thousands)
Real estate:                   
  One-to-four family residential$177,086
 16.2% $169,523
 18.8% $172,951
 23.0% $189,399
 26.9% $224,820
 32.6%
  Multifamily77,824
 7.1
 72,593
 8.1
 82,767
 11.0
 82,639
 11.7
 82,310
 11.9
  Commercial real estate208,898
 19.1
 211,054
 23.4
 199,101
 26.5
 206,395
 29.3
 197,624
 28.7
  Construction/land55,169
 5.0
 50,431
 5.6
 12,158
 1.6
 5,469
 0.8
 860
 0.1
Total real estate518,977
 47.4
 503,601
 55.9
 466,977
 62.1
 483,902
 68.7
 505,614
 73.3
Business9,097
 0.8
 640
 0.1
 243
 —
 375
 0.1
 282
 0.1
Consumer136
 —
 432
 0.1
 558
 0.1
 689
 0.1
 855
 0.1
Total fixed-rate loans528,210
 48.2
 504,673
 56.1
 467,778
 62.2
 484,966
 68.9
 506,751
 73.5
                    
ADJUSTABLE-RATE LOANS       
  
  
  
  
  
  
Real estate:     
  
  
  
  
  
  
  
  One-to-four family residential101,569
 9.3
 79,912
 8.9
 80,821
 10.8
 83,794
 11.9
 55,854
 8.1
  Multifamily107,078
 9.8
 50,657
 5.6
 39,980
 5.3
 33,375
 4.7
 23,842
 3.5
  Commercial real estate152,944
 14.0
 92,640
 10.3
 45,110
 6.0
 32,816
 4.6
 29,392
 4.3
  Construction/land182,404
 16.6
 158,517
 17.6
 103,799
 13.8
 59,592
 8.5
 63,891
 9.3
Total real estate543,995
 49.7
 381,726
 42.4
 269,710
 35.9
 209,577
 29.7
 172,979
 25.2
Business13,990
 1.3
 7,298
 0.8
 7,361
 1.0
 3,408
 0.5
 860
 0.1
Consumer8,997
 0.8
 6,490
 0.7
 6,421
 0.9
 6,441
 0.9
 8,346
 1.2
Total adjustable-rate loans566,982
 51.8
 395,514
 43.9
 283,492
 37.8
 219,426
 31.1
 182,185
 26.5
Total loans1,095,192
 100.0% 900,187
 100.0% 751,270
 100.0% 704,392
 100.0% 688,936
 100.0%
Less:     
  
  
  
  
  
  
  
   LIP92,498
   72,026
  
 53,854
  
 27,359
  
 10,209
  
   Deferred loan fees, net1,150
   2,167
  
 2,881
  
 2,604
  
 2,580
  
   ALLL12,882
   10,951
  
 9,463
  
 10,491
  
 12,994
  
Loans receivable, net$988,662
   $815,043
  
 $685,072
  
 $663,938
  
 $663,153
  


Geographic Distribution of our Loans. The following table shows at December 31, 2017 the geographic distribution of our loan portfolio net of LIP, in dollar amounts and percentages.percentages at December 31, 2022.

Puget Sound Region (1)
Other Washington CountiesTotal in Washington State
All Other States (2)
Total
Amount% of Total in CategoryAmount% of Total in CategoryAmount% of Total in CategoryAmount% of Total in CategoryAmount% of Total in Category
Real estate:(Dollars in thousands)
One-to-four family
    residential		$451,309 94.9 %$16,749 3.5 %$468,058 98.4 %$7,778 1.6 %$475,836 100.0 %
Multifamily88,013 69.4 27,449 21.6 115,462 91.0 11,433 9.0 126,895 100.0 %
Commercial291,297 71.4 34,420 8.5 325,717 79.9 82,165 20.1 407,882 100.0 %
Construction/land77,486 99.2 634 0.8 78,120 100.0 — — 78,120 100.0 %
Total real estate908,105 83.4 79,252 7.3 987,357 90.7 101,376 9.3 1,088,733 100.0 %
Business25,961 82.8 233 0.7 26,194 83.5 5,177 16.5 31,371 100.0 %
Consumer9,675 15.6 734 1.2 10,409 16.8 51,646 83.2 62,055 100.0 %
Total Loans$943,741 79.8 %$80,219 6.8 %$1,023,960 86.6 %$158,199 13.4 %$1,182,159 100.0 %
____________
 
Puget Sound Region (1)
 Other Washington Counties Total in Washington State 
All Other States (2)
 Total
 Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category Amount % of Total in Category
Real estate:(Dollars in thousands)
One-to-four family residential$265,423
 95.3% $9,875
 3.5% $275,298
 98.8% $3,357
 1.2% $278,655
 100.0%
Multifamily125,484
 67.9
 24,368
 13.2
 149,852
 81.0
 35,050
 19.0
 184,902
 100.0%
Commercial245,317
 67.9
 48,950
 13.5
 294,267
 81.4
 67,032
 18.6
 361,299
 100.0%
Construction/land145,086
 99.6
 532
 0.4
 145,618
 100.0
 —
 —
 145,618
 100.0%
Total real estate781,310

80.5

83,725

8.6

865,035

89.1

105,439

10.9

970,474
 100.0%
Business10,906
 47.2
 1,340
 5.8
 12,246
 53.0
 10,841
 47.0
 23,087
 100.0%
Consumer8,581
 94.0
 552
 6.0
 9,133
 100.0
 —
 —
 9,133
 100.0%
Total Loans$800,797
 79.9% $85,617
 8.5% $886,414
 88.4% $116,280
 11.6% $1,002,694
 100.0%
____________
(1) Includes King, Snohomish, Pierce and Kitsap counties.
(2) Includes loans in California ($37.1 million), Oregon Arizona, Utah,($13.8 million), Texas ($9.4 million), Florida ($10.7 million), Alabama ($8.0 million), 42 other states and 18 other states.Washington, D.C. ($79.2 million).



4

One-to-Four Family Residential Lending. As of December 31, 20172022, $278.7$475.8 million, or 25.5%40.3% of our total loan portfolio consisted of loans secured by one-to-four family residences.


First Financial NorthwestThe Bank is a traditional portfolio lender when it comes to financing residential home loans. In 20172022, we originated $88.3$160.3 million and purchased $3.1$4.0 million in one-to-four family residential loans. The purchased loans were part of our efforts to increase our portfolio of Community Reinvestment Act (“CRA”) qualified loans. At December 31, 20172022, $148.3$233.8 million, or 53.2%49.1% of our one-to-four family residential portfolio consisted of owner occupied loans with the remaining $130.4$242.0 million, or 46.8%50.9% consisting of non-owner occupied loans. In addition, at December 31, 20172022, $177.1$163.7 million, or 63.6%34.4% of our one-to-four family residential loan portfolio consisted of fixed-rate loans. Substantially all of our one-to-four family residential loans require monthly principal and interest payments.


Our fixed-rate, one-to-four family residential loans are generally originated with 15 to 30 year terms, although such loans typically remain outstanding for substantially shorter periods, particularly in the current low interest rate environment.periods. We also originate hybrid loans with initial fixed-rate terms of five to ten years that convert to variable-rate which adjusts annually thereafter. In addition, substantially all of our one-to-four family residential loans contain due-on-sale clauses that allow us to declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, we enforce these due‑on‑sale clauses to the extent permitted by law and as a standard course of business. The average period of time a loan is outstanding is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates, and the interest rates payable on outstanding loans.


Our lending policy generally limits the maximum loan-to-value ratio on mortgage loans secured by one-to-four family residential properties to 85%FDIC limits. Generally, our one-to-four family loans do not exceed 80% loan-to-value based on the lower of the lesser of thepurchase price or appraised value orat the purchase price.time of loan origination. Properties securing our one-to-four family residential loans are appraised by independent appraisers approved by us. We require the borrowers to obtain title insurance and if necessary, flood insurance. We generally do not require earthquake insurance because ofdue to competitive market factors.


Loans secured by rental properties represent potentially higher risk and, as a result, we adhere to more stringent underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties depend primarily on the tenants’ continuing ability to pay rent to the property owner, the character of the borrower or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, successful operation and management of non-owner occupied properties, including property maintenance standards, may affect repayment. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We request that borrowers and loan guarantors, if any, provide annual financial statements, a budget factoring in a rental income cash flow analysis of the borrower as well as the net operating income of the property, information concerning the borrower’s expertise, credit history and profitability, and the value of the underlying property. These loans are generally secured by a first mortgage on the underlying collateral property along with an assignment of rents and leases. If the borrower has multiple rental property loans with us, the loans are typically not cross‑collateralized. At December 31, 2017, $128,000 of2022, there were no one-to-four family residential loans were inon nonaccrual status, however, all of our one-to-four family non-owner occupied loans were performing.status.


Multifamily and Commercial Real Estate Lending. As of December 31, 20172022, $184.9$126.9 million, or 16.9%10.7% of our total loan portfolio was secured by multifamily properties and $361.8$407.9 million, or 33.0%34.4% of our loan portfolio was secured by commercial real estate properties. Our commercial real estate loans are typically secured by office and medical buildings, retail shopping centers, office buildings, hotels or motels, mini-storage facilities, industrial use buildingsmobile home parks, warehouses, and warehouses.nursing homes. Commercial real estate and multifamily loans are subject to similar underwriting standards and processes. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.


Typically, multifamily and commercial real estate loans have higher balances, are more complex to evaluate and monitor, and involve a greater degree of risk than one-to-four-family residential loans. In an attempt to compensate for and mitigate this risk, these loans are generally priced at higher interest rates than one-to-four family residential loans and generally have a maximum loan-to-value ratio of 80% of the lesser of the appraised value or purchase price. We generally require loan guarantees by any parties with a property ownership interest of 20% or more. If the borrower is a corporation or partnership, we generally require personal guarantees from the principals based upon a review of their personal financial statements and individual credit reports.



5







The following table presents a breakdown of our multifamily and commercial real estate loan portfolio at December 31, 2017,2022, and 2016:2021:
December 31, 2022December 31, 2021
Amount% of Total in PortfolioAmount% of Total in Portfolio
(Dollars in thousands)
Multifamily real estate:
Total multifamily$126,895 100.0 %$130,146 100.0 %
Commercial real estate:
Retail$132,595 32.5 %$138,463 33.0 %
Office84,315 20.7 90,727 21.6 
Hotel / motel55,471 13.6 64,854 15.5 
Storage33,876 8.3 32,990 7.9 
Mobile home park25,420 6.2 20,636 4.9 
Warehouse19,783 4.9 17,724 4.2 
Nursing home12,365 3.0 12,713 3.0 
Other non-residential44,057 10.8 41,310 9.9 
Total non-residential$407,882 100.0 %$419,417 100.0 %
 December 31, 2017 December 31, 2016
 Amount % of Total in Portfolio Amount % of Total in Portfolio
 (Dollars in thousands)
Multifamily real estate:       
Multifamily, general$177,882
 96.2% $115,372
 93.6%
Micro-unit apartments7,020
 3.8
 7,878
 6.4
Total multifamily$184,902
 100.0% $123,250
 100.0%
        
Commercial real estate:       
Office$112,327
 31.0% $101,688
 33.5%
Retail129,875
 35.9
 106,294
 35.0
Storage32,201
 8.9
 34,816
 11.5
Mobile home park19,970
 5.5
 20,689
 6.8
Warehouse22,701
 6.3
 15,338
 5.0
Other non-residential44,768
 12.4
 24,869
 8.2
Total non-residential$361,842
 100.0% $303,694
 100.0%


The average loan size in our multifamily and commercial real estate loan portfolios was $1.1 million$920,000 and $2.0$2.1 million, respectively, as of December 31, 20172022. At this date, $59.4$38.9 million, or 32.1%,30.6% of our multifamily loans and $116.0$116.6 million, or 32.1%,28.6% of our commercial real estate loans were located outside of our primary market area.the Puget Sound Region. We currently target individual multifamily and commercial real estate loans between $1.0 million and $5.0 million. The largest multifamily loan as of December 31, 20172022, was a 105-unit74-unit apartment complex with a net outstanding principal balance of $8.8$12.0 million located in King County, Washington.Washington, which was performing in accordance with its loan repayment terms at that date. As of December 31, 20172022, the largest commercial real estate loan had a net outstanding balance of $13.5$15.5 million andthat was secured by an office buildinga retail facility located in King County, Washington. Both of these loans wereWashington, which was performing according to their respectivein accordance with its loan repayment terms as of December 31, 2017.at that date.


The credit risk related to multifamily and commercial real estate loans is considered to be greater than the risk related to one-to-four family residential loans because the repayment of multifamily and commercial real estate loans typically is dependent on the income stream from the real estate securing the loan as collateral and the successful operation of the borrower’s business, that can be significantly affected by adverse conditions in the real estate markets or in the economy. For example, if the cash flow from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. In addition, many of our multifamily and commercial real estate loans are not fully amortizing and contain large balloon payments upon maturity. These balloon payments generally require the borrower to either refinance or occasionally sell the underlying property in order to make the balloon payment.


If we foreclose on a multifamily or commercial real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential mortgage loan foreclosures because there are fewer potential purchasers of the collateral. Our multifamily and commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, if we make any errors in judgment in the collectability of our multifamily or commercial real estate loans, any resulting charge-offs may be larger on a per loan basis than those incurred in our one-to-four family residential or consumer loan portfolios. At December 31, 20172022, there were no commercial real estate loans or multifamily loans on nonaccrual status. There were no multifamily or commercial real estate loans past due 90 days or more or in nonaccrual status. Thereand still accruing interest at December 31, 2022. In addition, there were no multifamily or commercial real estate loans charged-off during the years ended December 31, 2017, 20162022, and 2015, respectively. For multifamily loans, there were no charge-offs during 2017 or 2016, as compared to $281,000 charged off in 2015.2021.


6

Construction/Land Loans. We originate construction/land loans primarily to residential builders for the construction of single-family residences, condominiums, townhouses, multifamily properties and residential developments located in our market area. Land loans include land non-development loans for the purchase or refinance of unimproved land held for future residential development, improved residential lots held for speculative investment purposes or lines of credit secured by land, and land development loans. Construction/land loans to builders generally require the borrower to have an existing relationship with the BankCompany and a proven record of successful projects. At December 31, 20172022, our total construction/land loans were $237.6decreased to $78.1 million, or

21.7% 6.6% of our total loan portfolio. The $28.6portfolio, from $93.5 million, or 13.7% increase in8.4% of our total loans, at December 31, 2021 as a result of $20.7 million of multifamily construction/land loans over the past year reflects our strategic decisionconverting to continue our focus on increasing construction loan origination activity in 2017 as real estate values and general economic conditions in our market areas continued to improve.permanent multifamily loans. The Bank’sCompany’s lending policy sets forth the guideline that the net balance of our net acquisition, development, and construction loans and deferred fees and costs, not exceed 100% of the Bank’s risk-based capital.total capital plus surplus. The Company was in compliance with this policy at December 31, 2022, with a balance equal to 53.1% of the Bank’s total capital plus surplus. Management intends to maintain levels near or below this guideline, however the uncertainty of the timing associated with construction loan draws occasionally results in the actual concentration exceeding the guideline. At December 31, 2017, net acquisition, development, and construction loans totaled $145.6 million while total risk-based capital was $134.3 million. There were no construction/land loans classified as nonaccrual at either December 31, 2017 or 2016.2022 and 2021. There were no construction/land loan charge-offs during the years ended December 31, 2017, 20162022, and 2015, respectively.2021. At December 31, 2022, the loans in process (“LIP”) balance on construction/land loans was $41.4 million.


Following is the composition of our total construction/land loan portfolio, that are net of LIP, at the dates indicated. All of the loans represented were performing:
December 31, December 31,
2017 2016 20222021
(In thousands) (In thousands)
Construction speculative:   Construction speculative:  
One-to-four family residential$84,834
 $65,272
One-to-four family residential$52,836 $34,677 
Multifamily9,985
 10,157
Total construction speculative94,819
 75,429
Total construction speculative52,836 34,677 
Construction permanent: (1)
   
Construction permanent: (1)
One-to-four family residential2,570
 2,570
Multifamily98,454
 100,894
Multifamily15,501 37,194 
Commercial real estate5,325
 —
Commercial real estate— 6,189 
Total construction permanent106,349
 103,464
Total construction permanent15,501 43,383 
Land:   Land:
Land development528
 3,134
Land development3,990 2,485 
Land non-development35,877
 26,921
Land non-development5,793 12,910 
Total land36,405
 30,055
Total land9,783 15,395 
Total construction/land loans (2)
$237,573
 $208,948
$78,120 $93,455 
_____________
(1) Includes loans where the builder does not intend to sell the property after the construction phase is completed.
(2) LIP for construction/land loans at December 31, 2017, and 2016, was $92.0 million and $72.0 million, respectively.

The following table includes construction/land loans by county net of LIP, at December 31, 20172022:
CountyLoan BalancePercent of Construction/Land Loan Balance
 (Dollars in thousands)
King$75,984 97.3 %
Snohomish1,502 1.9 
Other Washington counties634 0.8 
Total$78,120 100.0 %
County Loan Balance Percent of Construction/Land Loan Balance
  (Dollars in thousands)
King $132,442
 90.9%
Snohomish 1,001
 0.7
Pierce 9,508
 6.5
Kitsap 2,135
 1.5
Whatcom 529
 0.4
All other 4
 —
Total $145,619
 100.0%


Loans to finance the construction of single-family homes, and subdivisions and land loans are generally offered to builders in our primary market areas. Loans that are termed “speculative” are those where the builder does not have, at the time of loan origination, a signed contract with a buyer for the home or lot who has a commitment for permanent financing with either us or another lender. The buyer may be identified either during or after the construction period, with the risk that the builder may have to fund the debt service on the speculative loan along with real estate taxes and other carrying costs for the project for a
7

significant period of time after completion of the project until a buyer is identified. The maximum loan-to-value ratio applicable to these

loans is generally 100% of the actual cost of construction, provided that the loan-to-completed value does not exceed 80%, with approval required from the Chief Credit Officer (“CCO”) for loan-to-value ratios over 80%. In addition, a minimum of 20% verified equity is generally also required. Verified equity refers to cash equity invested in the project. Development plans are required from builders prior to committing to the loan. We require that builders maintain adequate title insurance and other appropriate insurance coverage, and, if applicable, appropriate environmental data report(s) that the land is free of hazardous or toxic waste. While maturity dates for residential construction loans are largely a function of the estimated construction period of the project and typically do not exceed one year, land loans generally are for 12 to 18 months. Substantially all of our residential construction loans have adjustable-rates of interest based on The Wall Street Journal prime rate. During the term of construction, the accumulated interest on the loan is either added to the principal of the loan through an interest reserve or billed monthly. At December 31, 2017,2022, the LIP balance on construction/land loans was $92.0 million, including $4.3included $5.2 million set aside for interest reserves. When these loans exhaust their original reserves set up at origination, no additional reserves are permitted unless the loan is re-analyzed and it is determined that the additional reserves are appropriate, based on the updated analysis. Construction loan proceeds are disbursed periodically as construction progresses and as inspections by our approved inspectors warrant. At December 31, 2017,2022, our three largest construction/land loans net of LIP, consisted of a $22.0multifamily, construction land development and construction one-to-four family residential loans of $15.5 million, land loan$4.0 million, and $3.6 million, respectively, all of which properties are located in King County, of which $20.0County. The $15.5 million subsequently paid off in January 2018, an $11.1 millionmultifamily loan in King County that will rollover to a permanent multifamily loan afterupon completion of the construction period is completed, and a $7.9 million construction bridge loan for a property located in King County.period.


OurCertain of our residential construction loans to borrowers for one-to-four family, non-owner occupied residences typically are structured to be converted to fixed-rate permanent loans at the end of the construction phase with one closing for both the construction loan and the permanent financing. Prior to making a commitment to fund a construction loan, we require an appraisal of the post‑construction value of the project by an independent appraiser. During the construction phase, which typically lastsmay last 12 to 1824 months, an approved inspector or designated Bank employee makes periodic inspections of the construction site to certify construction has reached the stated percentage of completion. Typically, disbursements are made in monthly draws and interest-only payments are required. TheseAt December 31, 2022, there were no loans are convertedrequiring a rollover to fixed-ratea permanent loansloan with the Bank at the endcompletion of the construction phase. At December 31, 2017, there was one non-owner occupied construction loan of $2.6 million that we expect will convert to a permanent non-owner occupied one‑to‑four family residential loan in 2018.


We also make construction loans for commercial development projects. The projects include multifamily, retail, office/office, warehouse, hotels and office buildings. These loans typically have an interest-only payment phase during construction and generally convert to permanent financing when construction is complete. Disbursement of funds is at our sole discretion and is based on the progress of construction. The Bank uses an independent third party or Bank employee to conduct monthly inspections to certify that construction has reached the stated percentage of completion and that previous disbursements are reflected in the degree of work performed to date. Generally, the maximum loan-to-value ratio applicable to these loans is 90% of the actual cost of construction or 80% of the prospective value at completion. At December 31, 2017, $76.7 million of multifamily and commercial construction loans will rollover to permanent loans with the Bank at the end of their construction period. The remaining $27.1 million of construction commercial permanent loans represents loans which we anticipate that the builder will either refinance with us or with another lender.


Land development loans are generally made to builders for preparation of a building site and do not include the construction of buildings on the property. The maximum loan-to-value ratio for these loans is 75%. based on the lower of the purchase price or appraised value at the time of loan origination. Land non-development loans are generally for raw land where we do not finance the cost of preparing the site for building and are subject to a maximum loan‑to‑value ratio of 65%. based on the lower of the purchase price or appraised value at the time of loan origination.


Our construction/land loans are based upon estimates of costs in relation to values associated with the completed project. Construction/land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of the uncertainties inherent in estimating construction costs, time needed to complete the building phase, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in the demand such as for new housing, longer completion times due to supply chain issues, and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. These loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall
8

demand for the project.

Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly influenced by supply and demand conditions.


Business Lending. Business loans totaled $23.1$31.4 million, or 2.1%2.7% of the loan portfolio at December 31, 20172022. The Company participated in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed unsecured loan program enacted under the CARES Act to provide near-term relief to help small businesses impacted by COVID-19 sustain operations. The PPP began in 2020 and ended on May 31, 2021. Under this program we funded 723 applications totaling $77.7 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020. At December 31, 2022, there were five PPP loans outstanding totaling $785,000, as compared to 67 PPP loans totaling $10.8 million at December 31, 2021. The Company also originates loans under other SBA lending programs, which are partially guaranteed by the SBA. At December 31, 2022, the Bank’s portfolio included $509,000 of these SBA loans, of which $409,000 is guaranteed by the SBA. At that date, these SBA loans were not held for sale, however, the Company may elect to sell off the guaranteed portion of these loans in the future.

Conventional business loans (loans other than PPP loans) are generally secured by business equipment, accounts receivable, inventory or other property. Loan terms typically vary from one to five years. The interest rates on such loans are either fixed-rate or adjustable-rate. The interest rates for the adjustable‑rate loans are indexed to the prime rate published in The Wall Street Journal plus a margin. Our business lending policy includes credit file documentation and requires analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. We generally obtain personal guarantees on our conventional business loans. The largest conventional business loan had an outstanding balance of $10.3$18.6 million at December 31, 20172022 and was performing according to its repayment terms. At December 31, 20172022, we did not have any business loans delinquent in excess of 90 days or in nonaccrual status.


In 2017, we expanded our aircraft loan portfolio through both direct originations and indirect originations through the Aircraft Owners and Pilots Association Aviation Finance Company and other brokers. At December 31, 2017, the Bank had an outstanding balance of $12.5 million in aircraft loans, or 54.1% of total business loans. We intend to continue growing this portfolio over the next several years. These loans are collateralized by new or used, single-enginesingle‑engine piston aircraft to light jets for business or personal use. We anticipate that our aircraftThese loans will initiallygenerally range in size from $250,000 to $3.0 million with the primary focus of our underwriting guidelines on the asset value of the collateral rather than the ability of the borrower to repay the loan. At December 31, 2022, the Company’s aircraft loan portfolio consisted of one loan with an outstanding balance of $2.1 million, representing 6.6% of total business loans. See Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic and collectible car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these transactions becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”


Repayments of conventional business loans are often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. Our business loans, other than aircraft and PPP loans, are originated primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing business loans may depreciate over time, may be difficult to appraise, or may fluctuate in value based on the success of the business.


Consumer Lending. We offer a limited variety of consumer loans to our customers, consisting primarily of home equity loans and savings account loans. Generally, consumer loans have shorter terms to maturity and higher interest rates than one‑to‑four family residential loans. Consumer loans are offered with both fixed and adjustable interest rates and with varying terms. At December 31, 20172022, consumer loans were $9.1$62.1 million, or 0.8%5.3% of the total loan portfolio.


At December 31, 20172022, the largest component of the consumer loan portfolio consisted of purchased indirect consumer loans to finance classic and collectible cars with a balance of $53.7 million, or 86.5% of the total consumer loan portfolio. Due to the unique nature of these cars, the estimated value often does not align with listed values, therefore, approval of the loan is based on the borrower’s ability to repay. These fixed rate loans typically have maturity periods of three to fifteen years. Included in these loans are classic cars, defined as a vehicle in excess of 25 years old, and collectible cars, with a retail price in excess of $150,000. The internal portfolio limit on these loans is currently $60.0 million and the balance in the portfolio was $53.7 million at December 31, 2022. At that date, our largest classic and collectible car loan was $792,000 and the average loan
9

size was $86,000. See Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic and collectible car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. If any of these transactions becomes nonperforming, we could suffer a loss on some or all of our value in the assets.”

At December 31, 2022, home equity loans, primarily home equity lines of credit that totaled $8.0$7.7 million, or 87.8%12.3% of the total consumer loan portfolio. The home equity lines of credit include $4.0$1.7 million of equity lines of credit in first lien position and $4.0$6.0 million of second liens on residential properties. At December 31, 2017,2022, unfunded commitments on our home equity lines of credit totaled $12.1$17.2 million. Home equity loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses. At origination, the loan-to-value ratio is generally 90% or less, when taking into account both the balance of the home equity loans and the first mortgage loan. Home equity loans are originated on a fixed-rate or adjustable-rate basis. The interest rate for the adjustable-rate second lien loans is indexed to the prime rate published in The Wall Street Journal and may include a margin. Home equity loans generally have a ten10 to thirty30 year term, with a ten10 year draw period, and either convert to principal and interest payments with no further draws or require a balloon payment due at maturity.


Consumer loans entail greater risk than one-to-four family residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets. In these cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability and are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on these loans. Classic and collectible car loans have greater risk than other consumer loans primarily due to their high value which may fluctuate significantly. Home equity lines of credit have greater credit risk than one-to-four family residential mortgage loans because they are generally secured by mortgages subordinated to the existing first mortgage on the property that

we may or may not hold in our portfolio. We do not have private mortgage insurance coverage on these loans. Adjustable-rate loans may experience a higher rate of default in a rising interest rate environment due to the increase in payment amounts when interest rates reset higher. If current economic conditions deteriorate for our borrowers and their home prices fall, we may also experience higher credit losses from this loan portfolio. For our home equity loans that are in a second lien position, it is unlikely that we will be successful in recovering our entire loan principal outstanding in the event of a default. At December 31, 20172022, consumer$193,000 of classic and collectible auto loans totaling $51,000 were in nonaccrual status, however, no consumer loans were delinquent more than 30 days.status. During the year ended December 31, 2017, there were no2022, $37,000 of consumer loans charged-off. In comparison, consumer loan charge‑offs of $83,000 and $54,000 occurred during the years ended December 31, 2016 and 2015, respectively.were charged off.

Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2017, regarding the amount of total loans in our portfolio based on their contractual terms to maturity, not including prepayments.
 Within One Year After One Year Through Three Years After Three Years Through Five Years After Five Years Through Ten Years Beyond Ten Years Total
 (In thousands)
Real estate:           
   One-to-four family residential$15,533
 $23,307
 $7,067
 $9,448
 $223,300
 $278,655
   Multifamily17,553
 18,289
 22,758
 72,738
 53,564
 184,902
   Commercial24,754
 64,553
 37,119
 198,286
 37,130
 361,842
   Construction/land111,062
 71,857
 18,816
 35,838
 —
 237,573
Total real estate168,902
 178,006
 85,760
 316,310
 313,994
 1,062,972
Business249
 10,874
 10,369
 1,595
 —
 23,087
Consumer1,475
 1,386
 11
 23
 6,238
 9,133
Total$170,626
 $190,266
 $96,140
 $317,928
 $320,232
 $1,095,192

    
The following table sets forth the amount of total loans due after December 31, 2018, with fixed or adjustable interest rates.
10

 Fixed-Rate Adjustable-Rate Total
 (In thousands)
Real estate:     
   One-to-four family residential$167,900
 $87,769
 $255,669
   Multifamily62,022
 87,148
 149,170
   Commercial196,587
 89,078
 285,665
Construction/land55,170
 9,250
 64,420
Total real estate481,679

273,245

754,924
Business9,002
 1,339
 10,341
Consumer57
 —
 57
Total$490,738
 $274,584
 $765,322
Loan Solicitation and Processing. The majority of ourOur consumer and residential mortgage loan originations are generated through the Bank and from time to time through outside brokers and correspondent relationships we have established with select mortgage companies or other financial institutions. We originate multifamily, commercial real estate, construction/land and business loans primarily using the Bank’s loan officers, with referrals coming from builders, brokers and existing customers.


Upon receipt of a loan application from a prospective borrower, we obtain a credit report and other data to verify specific information relating to the loan applicant’s employment, income, and credit standing. All real estate loans requiring an appraisal are done by our internal appraisal department or an independent third-party appraiser. All appraisers are approved by us, and their credentials are reviewed annually, as is the quality of their appraisals.



We use a multi-level approvalunderwriting matrix which establishes lending targets and tolerance levels depending on the loan type being approved. The matrix also sets minimum credit standards and approval limits for each of the loan types as well as approval limits.types.


Lending Authority. The Directors’ Loan Committee consists of at least three members of the Board of Directors. The Directors’ Loan Committee recommends for approval by the Board of Directors exceptions to the aggregate loan limit to one borrower of 15% of total risk-based capital plus surplus, or $20.1$25.7 million at December 31, 2017.2022. The Board of Directors approves exceptions to such aggregate loan limit to one borrower up to 20% of total risk-based capital plus surplus, or $26.9$34.3 million at December 31, 2017.2022.
 
Officer Lending Authority. Individual signing authority has been delegated to two lending officers. Our Senior Credit Approval Officer (“SCAO”) has authority from the Board of Directors to approve loans and aggregate relationships up to and including $3.0$8.0 million. The Board of Directors has given our Chief Credit Officer (“CCO”)CCO authority to approve credit to one borrower not to exceed 15%the legal lending limit of 20% of total risk-based capital.capital plus surplus.


Loan Originations, Servicing, Purchases, Sales and Repayments. For the years ended December 31, 20172022, 2021, and 2016,2020, our total loan originations and purchases were $430.7$321.4 million, $363.0 million, and $420.8$317.9 million, respectively.


One-to-four family residential loans are generally originated in accordance with theFDIC guidelines, established by Freddie Mac and Fannie Mae, with the exception of our special community development loans originated to satisfy compliance with the Community Reinvestment Act. Our loans are underwritten by designated real estate loan underwriters internally in accordance with standards as provided by our Board-approved loan policy. We require title insurance on all loans and fire and casualty insurance on all secured loans and home equity loans where real estate serves as collateral. Flood insurance is also required on all secured loans when the real estate is located in a flood zone.


























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The following table shows total loans originated, purchased, repaid and other changes during the periodsyears indicated.
Year Ended December 31, Year Ended December 31,
2017 2016 2015 202220212020
(In thousands)(In thousands)
Loan originations:     Loan originations:  
Real estate:     Real estate:  
One-to-four family residential$89,622
 $59,222
 $37,808
One-to-four family residential$160,290 $124,220 $107,609 
Multifamily20,612
 22,914
 44,579
Multifamily8,287 20,976 27,873 
Commercial49,524
 92,495
 64,046
Commercial38,580 62,552 33,588 
Construction/land138,591
 165,363
 68,637
Construction/land55,524 72,825 62,444 
Total real estate298,349
 339,994
 215,070
Total real estate262,681 280,573 231,514 
Business23,438
 13,998
 11,050
Business (1)
Business (1)
2,567 26,029 59,001 
Consumer9,379
 5,674
 3,660
Consumer6,155 1,852 5,308 
Total loans originated331,166
 359,666
 229,780
Total loans originated271,403 308,454 295,823 
Loan purchases and participations:     Loan purchases and participations:
One-to-four family residential3,087
 7,352
 1,368
One-to-four family residential4,042 1,665 1,467 
Multifamily45,340
 11,761
 195
Multifamily12 251 — 
Commercial46,802
 41,990
 —
Commercial9,073 32,374 1,208 
Construction/land1,100
 —
 —
Business3,177
 —
 —
Business5,000 — — 
ConsumerConsumer31,834 20,290 19,390 
Total loan purchases and participations (1)(2)
99,506
 61,103
 1,563
49,961 54,580 22,065 
Principal repayments(235,667) (271,768) (183,962)Principal repayments(258,743)(342,945)(352,460)
Charge-offs—
 (83) (362)Charge-offs— — (2)
Loans transferred to other real estate owned (“OREO”)—
 —
 (141)
Change in LIP, net deferred fees, and ALLL(21,386) (18,947) (25,744)
Net increase in loans$173,619
 $129,971
 $21,134
Change in LIPChange in LIP2,000 (16,457)29,746 
Change in net deferred (costs) fees, and ALLLChange in net deferred (costs) fees, and ALLL(999)(753)(3,052)
Net increase (decrease) in loansNet increase (decrease) in loans$63,622 $2,879 $(7,880)
_______________
(1)Includes $76.2$25.6 million and $52.1 million in PPP loans originated during 2021 and 2020, respectively. PPP expired on May 31, 2021.
(2) Totals include $9.4 million, $8.2 million and $0 million in loan purchasesparticipations during 2017.2022, 2021 and 2020, respectively.



Loan Origination and Other Fees. In some instances, we receive loan origination fees on real estate-related products. Loan fees generally represent a percentage of the principal amount of the loan and are paid by the borrower. The amount of fees charged to the borrower on one-to-four family residential loans and multifamily and commercial real estate loans can range from 0% to 2%. In addition to the 1.0% interest earned on PPP loans, the SBA paid processing fees for PPP loans of either 1%, 3%, or 5%, based on the size of the loan. Banks were not authorized to collect any fees from the loan applicants. United States generally accepted accounting principles (“GAAP”) require that certain fees received, net of certain origination costs, be deferred and amortized over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid or sold are recognized in income at the time of prepayment or sale. We had $1.2 million and $2.2 million$151,000 of net deferred loan feescosts at December 31, 20172022, and 2016, respectively.net deferred loan fees of $418,000 at December 31, 2021.


Loan purchases generally include a premium, which is deferred and amortized into interest income with net deferred fees over the contractual life of the loan. During 2017,2022, total premiums of $1.8$1.4 million, or 2.3%3.5% of the purchased principal, were paid on purchased loans. In comparison, premiums of $1.3$1.6 million, or 2.1%3.4% of the purchased principal, waswere paid on purchased loans during 2016.2021.


One-to-four family residential and consumer loans are generally originated without a prepayment penalty. TheHowever, the majority of our one-to-four family residential loans held in the name of an entity, and multifamily and commercial real estate loans however, have prepayment penalties associated with the loans. Most of the multifamily and commercial real estate loan originations with interest rates fixed for the first five years will adjust thereafter and have a prepayment penalty of 2% -to 3% of
12

the principal balance in year one, with decreasing penalties in subsequent years. Longer initial fixed rate terms generally have correspondingly longer prepayment penalty periods.


Asset Quality


As of December 31, 20172022, we had one owner occupied one-to-four family residential loan$220,000 of $101,000loans past due 30 days or more. This loanThese loans represented 0.01%0.02% of total loans net of LIP, and is a one-to-four family, owner-occupied residential loan.receivable. We generally assess late fees or penalty charges on delinquent loans of up to 5.0% of the monthly payment. The borrower is given up to a 15 day grace period from the due date to make the loan payment.


The Company actively manages delinquent loans and nonperforming assets by aggressively pursuing the collection of debts and marketing saleable properties we foreclosed or repossessed, work-outs of classified assets and loan charge-offs. We handle collection procedures internally or with the assistance of outside legal counsel. Late charges are incurred when the loan exceeds 10 to 15 days past due depending upon the loan product. When a delinquent loan is identified, corrective action takes place immediately. The first course of action is to determine the cause of the delinquency and seek cooperation from the borrower in resolving the issue. Additional corrective action, if required, will vary depending on the borrower, the collateral, if any, and whether the loan requires specific handling procedures as required by the Washington State Deed of Trust Act.
If the borrower is chronically delinquent and all reasonable means of obtaining payments have been exhausted, we will seek to foreclose on the collateral securing the loan according to the terms of the security instrument and applicable law. The following table shows our delinquent loan by the type of loan, net of LIP, and the number of days delinquent at December 31, 2017:
 Loans Delinquent Total
 30-59 Days 60-89 Days 90 Days and Greater Delinquent Loans
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 
Number
of Loans
 
Principal
Balance
 (Dollars in thousands)
Real estate:               
One-to-four family residential:               
   Owner occupied1
 $101
 —
 $—
 —
 $—
 1
 $101
Total1
 $101
 —
 $—
 —
 $—
 1
 $101

Construction/land, commercial real estate, and multifamily loans generally have larger individual loan amounts that have a greater single impact on asset quality in the event of delinquency or default. We continue to monitor our loan portfolio and believe additions to nonperforming loans, charge-offs, provisions for loan losses, and/or OREO are possible in the future, particularly if the housing market and other economic conditions do not continue to improve.

The following table sets forth information with respect to our nonperforming assets and troubled debt restructured loans (“TDRs”) for the periods indicated. All loan balances and ratios are calculated using loan balances that are net of LIP.

  December 31,
  2017 2016 2015 2014 2013
  (Dollars in thousands)
Loans accounted for on a nonaccrual basis:          
Real estate:          
   One-to-four family residential $128
 $798
 $996
 $830
 $2,297
   Multifamily —
 —
 —
 —
 233
   Commercial —
 —
 —
 434
 1,198
   Construction/land —
 —
 —
 —
 223
Consumer 51
 60
 89
 75
 44
Total loans accounted for on a nonaccrual basis 179
 858
 1,085
 1,339
 3,995
           
Total nonperforming loans 179
 858
 1,085
 1,339
 3,995
OREO 483
 2,331
 3,663
 9,283
 11,465
Total nonperforming assets $662
 $3,189
 $4,748
 $10,622
 $15,460
           
TDRs:  
  
  
  
  
   Nonaccrual (1)
 $—
 $174
 $131
 $—
 $968
   Performing 17,805
 30,083
 42,128
 54,241
 60,170
Total TDRs $17,805
 $30,257
 $42,259
 $54,241
 $61,138
Nonperforming loans as a percent of total loans, net
  of LIP
 0.02% 0.10% 0.16% 0.20% 0.59%
Nonperforming loans as a percent of total assets 0.01
 0.08
 0.11
 0.14
 0.43
Nonperforming assets as a percent of total assets 0.05
 0.31
 0.48
 1.13
 1.68
Total loans, net of LIP $1,002,694
 $828,161
 $697,416
 $677,033
 $678,727
Foregone interest on nonaccrual loans 26
 51
 103
 126
 650
_______
(1) These loans are also included in the appropriate loan category above under the caption: “Loans accounted for on a nonaccrual basis.”

Non Performing        Nonperforming Loans. When a loan becomes 90 days past due, we generally place the loan on nonaccrual status unless the credit is well secured and in the process of collection. Loans may be placed on nonaccrual status prior to being 90 days past due if there is an identified problem such as an impending foreclosure or bankruptcy or if the borrower is unable to meet their scheduled payment obligations. We have reduced our nonperformingNonperforming loans, by $679,000,which include nonaccrual loans and accruing loans 90 days or 79.1%,more past due, were $193,000 at December 31, 2017, as compared to2022, and we had no nonperforming loans at December 31, 2016. This reduction was accomplished through payoffs or principal payments. During 2017, there were no charge offs or new additions to nonperforming loans.2021.
    
Other Real Estate Owned. Real estate acquired by us as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until it is sold. When the property is acquired, it is recorded at the lower of its cost or fair market value of the property, less selling costs. WeThe Bank had $483,000 and $2.3 million ofno OREO properties at both December 31, 20172022 and 2016, respectively. At December 31, 2017, OREO consisted of two commercial real estate properties comprised of undeveloped lots. Our special assets department’s primary focus is the prompt and effective management of our troubled, nonperforming assets, and expediting their disposition to minimize any potential losses. During 2017 and 2016, we did not foreclose or accept deeds-in-lieu of foreclosure on any loans.2021. In the future, we may experience foreclosure, deed-in-lieu of foreclosure, and short sale activity while we work with our nonperforming loan customers to minimize our loss exposure.
 
Because of our structure, we believe we are able to make decisions regarding offers on OREO and the real estate underlying our nonperforming loans very quickly compared to larger institutions where decisions could take six to twelve months. This distinction has historically worked to our benefit in reducing our nonperforming assets and disposing of OREO. During 2017, three OREO properties were sold and no new properties were transferred into OREO.




Troubled Debt Restructured Loans. We account for certain loan modifications or restructurings as TDRs. In general, the modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. These loans are all considered to be impaired loans. At December 31, 20172022, we had $17.8$1.4 million in TDRs as compared to $30.3$2.1 million at December 31, 2016.2021.

Prior to 2012, we utilized a strategy for a limited number of our lending relationships of establishing an “A” and “B” note structure. We created an “A” note representing a reduced principal balance expected to be fully collected and at a debt service level and loan-to-value ratio acceptable to us. The “A” note was classified as a performing TDR as long as the borrower continued to perform in accordance with the note terms. The “B” note represented the amount of the principal reduction portion of the original note and was immediately charged-off. The “B” note is held by the Bank and when the “A” note is paid off, the Bank may proceed with collection efforts on the “B” note. During 2017, due to the improved financial condition of the borrowers holding “A” and “B” notes, and the increased market value of the underlying properties, the Bank issued revised notes that allowed for recovery of the “B” note principal, and in some cases, recognition of interest income as payments were made. This resulted in recoveries of $1.8 million on previously charged off “B” notes. At December 31, 2017, the balance of TDRs included $5.7 million related to an “A” note as the result of an “A” and “B” note workout strategy. The related balance in “B” notes was $4.3 million, and is carried off-balance sheet.

The largest TDR relationship at December 31, 2017 totaled $6.0 million and2022 was comprised of $5.3 million in one‑to‑foura $512,000 one-to-four family residential loans secured by rental properties and a $739,000 owner occupied commercial property all located in KingPierce County. At December 31, 20172022, there was no LIP in connection with our TDRs. For additional information regarding our TDRs, see Note 4 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
    











13

The following table summarizes our total TDRs:
December 31,
December 31, 20222021
2017 2016 (In thousands)
(In thousands)
Nonperforming TDRs:   
One-to-four family residential$—
 $174
Total nonperforming TDRs—
 174
Performing TDRs: 
  
Performing TDRs:  
One-to-four family residential13,434
 24,274
 One-to-four family residential$1,360 $2,107 
Multifamily1,134
 1,564
Commercial real estate3,194
 4,202
Consumer43
 43
Total performing TDRs17,805
 30,083
Total performing TDRs1,360 2,107 
Total TDRs$17,805
 $30,257
Total TDRs$1,360 $2,107 
 
Classified Assets. Federal regulations provide for the classification of lower quality loans and other assets as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.


When we classify problem assets as either substandard or doubtful, we may establish a specific allowance in an amount we deem prudent. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but unlike specific allowances, have not been specifically allocated to particular problem assets. When an insured institution classifies problem assets as a loss, it is required to charge-off those assets in the period in which they are deemed uncollectible. Our determinations as to the classification of our assets and the amount of our valuation allowances are subject to review by the FDIC and the DFI that can order the establishment of additional loss allowances or the charge-off of specific loans against established loss reserves. Assets that do not currently expose us to sufficient risk to warrant classification in one of the

aforementioned categories but possess weaknesses are designated as special mention. At December 31, 2017,2022, special mention loans totaled $5.0 million.$5.9 million and were comprised of a $4.7 million office building loan, $1.0 million in one-to-four family fixed rate mortgage loans, and $203,000 in classic and collectible auto secured fixed rate loans. At December 31, 2022, these loans were current on their payments and were in compliance with their original loan terms.
 
In connection with the filing of periodic reports with the FDIC and in accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. The decreaseincrease in our classified loans during the year ended December 31, 20172022 was aprimarily the result of early payments$47.4 million of loans downgraded to substandard. The downgrades included $45.5 million of commercial loans, $1.6 million in multifamily loan and $193,000 in consumer loans. All substandard loans at December 31, 2022, were classified as impaired and evaluated for a specific allowance. The impairment analysis on loans as well as our efforts to work with our borrowers to bring their loans current when possible or restructure the loan when appropriate. During 2017, we continued our aggressive approach to reduce nonperforming assets and improve asset quality.these properties showed no anticipated loss on these loans.


Classified loans net of LIP, consisting solely of substandard loans, were as follows at the dates indicated:
December 31,
December 31, 20222021
2017 2016 (In thousands)
(In thousands)
One-to-four family residential$673
 $1,351
Multifamily—
 —
Multifamily1,632 — 
Commercial real estate555
 —
Commercial real estate45,542 34,030 
Construction/land—
 495
Consumer52
 60
Consumer193 179 
Total classified loans$1,280
 $1,906
Total classified loans$47,367 $34,209 
 
With the exception of these classified loans, of which $179,000 were accounted for as nonaccrual loans at December 31, 2017, management is not aware of any loans as of December 31, 2017, where the known credit problems of the borrower would cause us to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which may result in the future inclusion of such loans in the nonperforming loan categories.
Allowance for Loan and Lease 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, the prevailing economy, the borrower’s ability to repay, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, the current and expected economic conditions, the nature and volume of the loan portfolio, managements’management’s experience level, the level of problem loans, our loan review and grading systems, the value of underlying collateral, geographic and the level of problem loansloan type
14

concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. The specific allowance component is createdSpecific 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 collectabilityrecorded investment in the loan is less than the market value of the collateral less costs to sell (“market value”), a specific loan has been impaired and a lossreserve is probable.established in the ALLL for the loan. The amount of the specific reserves arereserve 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 evaluationanalysis is inherently subjective as it requiresrelies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from predictions. In addition, specific reserves may be created uponLoans classified as a loan’s restructuring, based onTDR due to the borrower being granted a rate concession are analyzed by discounted cash flow analysisanalysis. The amount of the specific reserve on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the outstanding principal balancerecorded investment in the loan.

When determining the appropriate ALLL during 2022, management took into consideration the continued impact of the loan.COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, the expiration of previous financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, and a review of the Bank's largest commercial loan relationships. See also “Allowance for Loan and Lease Losses” in Item 7. Critical Accounting Estimates, and Item 8. Note 1 - Summary of Significant Accounting Policies in this report.

Quarterly, our Board of Directors’ Internal Asset Review Committee reviews and recommends approval of the allowance for loan and lease losses and any provision or recapture of provision for loan losses, and the full Board of Directors approves the provision or recapture after considering the Committee’s recommendation. The allowanceALLL is increased by the provision for loan losses which is charged against current period earnings. If the analysis of our loan portfolio indicates the risk of loss is less than the balance of the ALLL, a recapture of provision offor loan losslosses is added to current period earnings.


For the year ended December 31, 2017,2022, we recordedhad a $400,000 recapture of provision for loan losses, to our ALLL, as compared to a $300,000 provision of $1.3 million and recapture of provision of $2.2 millionfor loan losses for the yearsyear ended December 31, 2016 and 2015, respectively.2021. The recapture of provision for loan losses in 20172022 was primarily a result of $14.4 million of loans downgraded to substandard, resulting in these loans being removed from the $2.3 millioncalculation of the general allowance for loan and lease losses and instead being individually analyzed for required specific reserve, which indicated no additional specific reserve was needed. Changes in net recoveries received on previously charged-off loans partially offset by the provision necessary to support the increase in total loans, net LIP, of $174.5 million. The qualitycomposition of our loan portfolio, continued to improve, as reflectedwith $90.7 million growth in reductions in the levels of nonperforminglower risk one-to-four family residential loans and classified assets due primarilya $15.3 million decline in higher risk construction/land loans also contributed to our efforts working with our borrowers to bring their loan payments current whenever possible. the recapture of provision in 2022.

The ALLL was $12.9$15.2 million, or 1.28%1.29% of total loans net of LIP at December 31, 20172022, as compared to $11.0$15.7 million, or 1.32%1.40% at December 31, 2016.2021. The level of the ALLL is based on estimates and the ultimate losses may vary from the estimates. Management reviews the adequacy of the ALLL on a quarterly basis.
 

A loan is considered impaired when, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, market conditions, rent rolls, and the borrower’s and guarantor’s, if any, financial strength. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record and the amounts of the shortfall in relation to the principal and interest owed. Loans are evaluated for impairment on a loan-by-loan basis. As of December 31, 20172022 and 2016,2021, impaired loans were $18.0$48.5 million and $30.9$36.1 million, respectively. The increase in 2022 was primarily due to $12.4 million of commercial real estate loans downgraded to substandard in 2022. At December 31, 2017, there was no LIP in connection with our2022, these impaired loans were well collateralized and the Bank does not expect to incur losses on these loans.












15

The following table summarizes the distribution of the ALLL by loan category, at the dates indicated.
 December 31,
 202220212020
 Loan
Balance		Allowance
 by Loan Category		Percent of Loans
to Total Loans		Loan
Balance		Allowance
 by Loan Category		Percent of Loans
to Total Loans		Loan
Balance		Allowance
 by Loan Category		Percent of Loans
to Total Loans
Real estate:(Dollars in thousands)
  One-to-four
    family residential		$475,836 $4,043 40.3 %$385,116 $3,214 34.4 %$381,960 $3,181 34.2 %
  Multifamily126,895 1,210 10.7 130,146 1,279 11.6 136,694 1,366 12.2 
  Commercial real
     estate		407,882 5,397 34.5 419,417 6,615 37.5 385,265 6,127 34.5 
  Construction/land78,120 1,717 6.6 93,455 2,064 8.3 92,207 2,189 8.3 
Total real estate1,088,733 12,367 92.1 1,028,134 13,172 91.8 996,126 12,863 89.2 
Business31,371 948 2.7 46,590 1,112 4.2 80,663 1,242 7.2 
Consumer62,055 1,912 5.2 44,812 1,373 4.0 40,621 1,069 3.6 
Total$1,182,159 $15,227 100.0 %$1,119,536 $15,657 100.0 %$1,117,410 $15,174 100.0 %

 December 31,
 2017 2016 2015 2014 2013
 
Loan
Balance
 
Allowance
 by Loan Category
 
Percent of Loans
to Total Loans
 
Loan
Balance
 
Allowance
 by Loan Category
 
Percent of Loans
to Total Loans
 
Loan
Balance
 
Allowance
 by Loan Category
 
Percent of Loans
to Total Loans
 
Loan
Balance
 
Allowance
 by Loan Category
 
Percent of Loans
to Total Loans
 
Loan
Balance
 
Allowance
 by Loan Category
 
Percent of Loans
to Total Loans
Real estate:(Dollars in thousands)
  One-to-four family                             
     residential$278,655
 $2,837
 25.5% $249,435
 $2,551
 27.7% $253,772
 $3,028
 33.8% $273,193
 $3,691
 38.8% $280,674
 $5,141
 40.7%
  Multifamily184,902
 1,820
 16.9
 123,250
 1,199
 13.7
 122,747
 1,193
 16.4
 116,014
 1,606
 16.5
 106,152
 1,269
 15.4
  Commercial real
     estate
361,842
 4,418
 33.0
 303,694
 3,893
 33.7
 244,211
 3,395
 32.5
 239,211
 4,476
 34.0
 227,016
 5,101
 33.0
Construction/land237,573
 2,816
 21.7
 208,948
 2,792
 23.2
 115,957
 1,193
 15.4
 65,061
 519
 9.2
 64,751
 1,287
 9.4
Total real estate1,062,972
 11,891
 97.1
 885,327
 10,435
 98.3
 736,687
 8,809
 98.1
 693,479
 10,292
 98.5
 678,593
 12,798
 98.5
Business23,087
 694
 2.1
 7,938
 237
 0.9
 7,604
 229
 1.0
 3,783
 47
 0.5
 1,142
 14
 0.2
Consumer9,133
 297
 0.8
 6,922
 279
 0.8
 6,979
 425
 0.9
 7,130
 152
 1.0
 9,201
 182
 1.3
Total$1,095,192
 $12,882
 100.0% $900,187
 $10,951
 100.0% $751,270
 $9,463
 100.0% $704,392
 $10,491
 100.0% $688,936
 $12,994
 100.0%



We believeBased on its comprehensive analysis, management believes that the ALLL as of December 31, 20172022 was adequate to absorb the probable and inherent losses in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the ALLL are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, or that the actual amount of future provisions 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 ALLL 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 the ALLL is subject to review by bank regulators as part of the routine examination process that may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan and lease losses and may adversely affect the Company’s financial condition and results of operations.


16

The following table sets forth an analysis of our ALLLshows certain credit ratios at the dates and for the periods indicated.indicated and each component of the ratio’s calculations.
 At or For the Year Ended December 31,
202220212020
 (Dollars in thousands)
ALLL as a percent of total loans1.29 %1.40 %1.36 %
ALLL at period end$15,227 $15,657 $15,174 
Total loans outstanding1,182,159 1,119,536 1,117,410 
Non-accrual loans as a percentage of total loans outstanding at period end0.02 %— %0.19 %
Total non-accrual loans$193 $— $2,104 
Total loans outstanding1,182,159 1,119,536 1,117,410 
ALLL as a percent of non-accrual loans at period end7,889.78 %n/a721.20 %
ALLL at period end$15,227 $15,657 $15,174 
Total non-accrual loans193 — 2,104 
Net recoveries (charge-offs) during period to average loans outstanding:
One-to-four family residential:— 0.05%0.05%
Net recoveries during period$7 $183 $28 
Average loans receivable, net (1)
427,455 374,796 379,049 
Multifamily:— %— %— %
Net recoveries during period$— $— $— 
Average loans receivable, net (1)
132,845 139,298 156,031 
Commercial:— %— %0.01 %
Net recoveries during period$— $— $30 
Average loans receivable, net (1)
408,688 382,341 383,807 
Construction/land development:— %— %— %
Net recoveries during period$— $— $— 
Average loans receivable, net (1)
74,438 97,494 95,258 
Business:— %— %— %
Net recoveries during period$— $— $— 
Average loans receivable, net (1)
32,539 63,263 68,118 
Consumer:(0.07)%— %(0.01)%
Net charge-offs during period$(37)$— $(2)
Average loans receivable, net (1)
52,870 41,580 38,626 
Total loans:— %0.02 %— %
Net (charge-offs) recoveries during period$(30)$183 $56 
Average loans receivable, net (1)
1,128,835 1,098,772 1,120,889 
_______________
(1) The average loans receivable, net balances, include nonaccruing loans and deferred (costs) fees.
17

 At or For the Year Ended December 31,
 2017 2016 2015 2014 2013
 (Dollars in thousands)
ALLL at beginning of period$10,951
 $9,463
 $10,491
 $12,994
 $12,542
(Recapture of provision) provision for loan losses(400) 1,300
 (2,200) (2,100) (100)
Charge-offs:     
  
  
   One-to-four family residential—
 —
 (27) (78) (456)
   Multifamily—
 —
 (281) —
 (346)
   Commercial real estate—
 —
 —
 (311) (98)
   Construction/land—
 —
 —
 (223) (582)
   Business—
 —
 —
 —
 (13)
   Consumer—
 (83) (54) (30) (101)
Total charge-offs—
 (83) (362) (642) (1,596)
Total recoveries2,331
 271
 1,534
 239
 2,148
Net recoveries (charge-offs)2,331
 188
 1,172
 (403) 552
ALLL at end of period$12,882
 $10,951
 $9,463
 $10,491
 $12,994
          
ALLL as a percent of total loans, net of LIP1.28 % 1.32 % 1.36 % 1.55% 1.91 %
Net (recoveries) charge-offs to average loans receivable, net of LIP(0.27) (0.02) (0.18) 0.06
 (0.08)
ALLL as a percent of nonperforming loans, net of LIP7,196.65 % 1,276.34 % 872.17 % 783.50% 325.26 %


Investment Activities


General. Under Washington State law, commercial banks are permitted to invest in various types of liquid assets, including, but not limited to, U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt securities, and obligations of states and their political sub-divisions.


The Investment, Asset/Liability Committee (“ALCO”), consisting of the Chief Executive Officer, Chief Financial Officer, and Controller of First Financial Northwest Bank, other members of management and the Board of Directors, has the authority and responsibility to administer our investment policy, monitor portfolio strategies, and recommend appropriate changes to policy and strategies to the Board of Directors. On a monthly basis, management reports to the Board a summary of investment holdings with respective market values and all purchases and sales of investment securities. The Chief Financial Officer has the primary responsibility for the management of the investment portfolio and considers various factors when making decisions, including the marketability, maturity, liquidity, and tax consequences of proposed investments. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.



The general objectives of the investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low, and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk.


At December 31, 2017,2022, our investment portfolio consisted principally of mortgage-backed securities, municipal bonds, U.S. government agency obligations, and corporate bonds. From time to time, investment levels may increase or decrease depending upon yields available on investment opportunities and management’s projected demand for funds for loan originations, net deposit flows, and other activities. At December 31, 2017, we did not hold securities of any single issuer (other than government-sponsored entities) that exceeded 10% of our shareholders’ equity.2022, and 2021, the Bank held three annuity contracts, totaling $2.4 million, as held-to-maturity investments. These annuity contracts were purchased to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements.


Other than our utilization of interest rate swaps, we do not currently participate in other hedging programs, stand-alone contracts for interest rate caps or floors or other activities involving the use of off-balance sheet derivative financial instruments, and have no present intention to do so. As of December 31, 2017, we had one interest rate swap with an aggregate notional amount of $50.0 million and a fair value of $1.5 million. For additional information, see Item 1A. Risk Factors -“If interest rate swaps we entered into prove ineffective, it could result in volatility in our operating results, including potential loses, which could have a material adverse effect on our results of operations and cash flows, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management” and Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Mortgage-Backed Securities. The mortgage-backed securities in our portfolio were primarily comprised of Fannie Mae, Freddie Mac, and Ginnie Mae issued mortgage-backed securities.securities, all which were classified as available-for-sale. These issuers guarantee the timely payment of principal and interest in the event of default. At December 31, 2022, our available-for-sale mortgage-backed securities portfolio included other “private label” mortgage-backed securities with a fair value of $32.4 million and an amortized cost of $34.3 million. The mortgage-backed securities portfolio had a weighted-average yield of 2.44%3.75% at December 31, 2017.2022.


U.S. Government Agency Obligations. The agency securities in our portfolio were comprised of Fannie Mae, Freddie Mac, Ginnie Mae, SBA and FHLB agency securities. These issuers guarantee the timely payment of principal and interest in the event of default. At December 31, 20172022, the portfolio of government agency securities had a weighted-average yield of 2.06%3.49%.


The guarantees of the SBA, as a U.S. government agency and Ginnie Mae, areas part of a U.S. government agency and their guarantees are backed by the full faith and credit of the United States. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are U.S. government-sponsored entities. Although their guarantees are not backed by the full faith and credit of the United States, they may borrow from the U.S. Treasury, which has taken other steps to ensure these U.S. government-sponsored entities can fulfill their financial obligations.

Corporate Bonds. The corporate bond portfolio was primarilyis comprised of both fixed and variable rate securities issued by various financial institutions. At December 31, 2017,2022, the corporate bond portfolio had a weighted-average yield of 4.27%4.69%.

Municipal Bonds. The municipal bond portfolio is comprised of both taxable and tax-exempt municipal bonds. The pre-tax weighted-average yield on the municipal bond portfolio was 2.68%2.10% at December 31, 2017.2022.

Federal Home Loan Bank Stock. As a member of the FHLB, Des Moines, we are required to own capital stock. The required amount of capital stock is based on a percentage of our previous year-end assets and our outstanding FHLB advances. The redemption of any excess stock we hold is at the discretion of the FHLB Des Moines.FHLB. During 2017,2022, our FHLB stock holdings increased by $1.9$2.0 million, primarily as a result of the $44.5$50.0 million increase in our FHLB advances during 2017.2022. The carrying value of our
18

FHLB stock totaled $9.9$7.5 million at December 31, 20172022. During the years ended December 31, 20172022 and 2016,2021, we received dividends on our FHLB cash dividendsstock of $296,000$318,000 and $202,000,$332,000, respectively.
    
The following table sets forth the composition of our investment portfolio at the dates indicated.

 December 31,
 2017 2016 2015
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 (In thousands)
Available-for-sale:           
Mortgage-backed securities:           
   Fannie Mae$26,961
 $26,564
 $42,060
 $41,332
 $50,288
 $50,321
   Freddie Mac5,510
 5,472
 18,013
 18,009
 26,011
 26,137
   Ginnie Mae22,288
 21,576
 19,133
 18,634
 13,802
 13,732
Tax-exempt municipal bonds13,126
 13,395
 13,083
 12,987
 11,231
 11,507
Taxable municipal bonds—
 —
 120
 120
 556
 557
U.S. government agencies43,088
 42,633
 15,937
 15,857
 13,541
 13,542
Corporate bonds22,502
 22,602
 22,506
 22,321
 14,010
 13,769
Total available-for-sale$133,475
 $132,242
 $130,852
 $129,260
 $129,439
 $129,565

At December 31, 2017, 2016, and 2015 there were no investments held to maturity.

During the year ended December 31, 2017,2022, gross proceeds from the call, maturity and sale of investments was $44.2$11.1 million, with net realized lossesgains of $567,000.$27,000.


Management reviews investment securities on an ongoing basis for the presence of other than temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether management intends to sell a security or if it is likely that we will be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if management intends to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that we will be required to sell the security, but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate, depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, 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 (loss). Impairment losses related to all other factors are presented as separate categories within other comprehensive income (loss). There were no losses related to OTTI at December 31, 20172022 and 2016.2021. For additional information regarding our investments, see Note 32 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.



19

The table below sets forth information regarding the carrying value and weighted-average yield by contractual maturity of our investment portfolio at December 31, 20172022. Mortgage-backed securities are includedpresented in the totals column as a result of the variable nature of their principal reductions. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.
 December 31, 2022
 Within One YearAfter One Year
Through Five Years		After Five
Through Ten Years		ThereafterTotals
Carrying
Value		Weighted-
Average
Yield		Carrying
Value		Weighted-
Average
Yield		Carrying
Value		Weighted-
Average
Yield		Carrying
Value		Weighted-
Average
Yield		Carrying
Value		Weighted-
Average
Yield
 (Dollars in thousands)
Available-for-sale:
Mortgage-backed securities$— — %$— — %$— — %$— — %$82,061 3.75 %
Municipal bonds— — 513 2.20 3,751 2.36 26,619 2.07 30,883 2.10 
U.S. government agencies— — 38,470 2.35 1,597 4.52 34,287 4.77 74,354 3.49 
Corporate bonds— — 9,749 6.57 20,731 3.87 — — 30,480 4.69 
Total available-for-sale$— — %$48,732 3.18 %$26,079 3.70 %$60,906 3.51 %$217,778 3.56 %


20
 December 31, 2017
 Within One Year 
After One Year
Through Five Years
 
After Five
Through Ten Years
 Thereafter Totals
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 (Dollars in thousands)
Available-for-sale:                   
Mortgage-backed securities$—
 —% $—
 —% $—
 —% $—
 —% 53,612
 2.44%
Municipal bonds—
 —
 1,078
 1.63
 2,128
 2.16
 10,189
 2.90
 13,395
 2.68
U.S. Government agencies33
 5.38
 585
 2.63
 1,033
 2.51
 40,982
 2.04
 42,633
 2.06
Corporate bonds5,007
 2.15
 —
 —
 17,595
 4.88
 —
 —
 22,602
 4.27
Total available-for-sale$5,040
 2.17% $1,663
 1.99% $20,756
 4.51% $51,171
 2.21% $132,242
 2.67%




Deposit Activities and Other Sources of Funds


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


Our deposit composition reflects a mixture of various deposit products. We rely on marketing activities, customer service, and the availability of a broad range of products and services to attract and retain customer deposits.


Deposits. We offer a competitive range of deposit products within our market area, including noninterest bearing accounts, interest-bearing demand accounts, money market deposit accounts, statement savings accounts, and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the development of long-term profitable customer relationships, current market interest rates, current maturity structures, deposit mix, preferences of our customer preferences,customers, and the profitability of acquiring customer deposits compared to alternative funding sources. As part of our strategy to shift our deposit mix to lower cost funds, we continued to better align our pricing with competitors in our local market to meet our goals. To supplement local deposits, funds are also generated as needed through nationalwholesale market (which may include brokered certificatesdeposits). The Company had $124.9 million of deposit. Atbrokered deposits at December 31, 2017, $75.5 million, or 9.0% of total deposits were brokered certificates of deposit, with remaining maturities ranging from 0.5 to three years. These funds cannot be withdrawn early except in the case of the death or adjudication of incompetence of the depositor. However, the Bank has a quarterly call option six months after issuance on $56.4 million of these2022 and had no brokered deposits that allows the Bankat December 31, 2021. The Company may continue to close the certificate of deposit and return the deposit to the customer if the Bank determines it is in its best interest to do so. The longer term nature of theseutilize brokered deposits along with the enhanced features of theseto supplement our retail deposits as compared to retail certificates of deposit, assists usand assist in our interest rate risk management efforts.

During the third quarter of 2017, the Bank acquired four branches from Opus Bank (the “Branch Acquisition”) that included $74.7 million in customer deposits. Included in the acquired accounts were $32.7 million in money market accounts and $15.6 million in retail certificates of deposit. The deposits were purchased at a 3.125% premium and had an average cost of funds at the acquisition date of 0.58%.


The following table sets forth our total deposit activity for the periodsyears indicated.

Year Ended December 31,
202220212020
(In thousands)
Total deposits, beginning balance$1,157,474 $1,093,633 $1,033,534 
(Decrease) increase in retail deposits(112,320)63,841 154,571 
Increase (decrease) in brokered funds124,886 — (94,472)
Net increase in deposits12,566 63,841 60,099 
Total deposits, ending balance$1,170,040 $1,157,474 $1,093,633 
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Total deposits, beginning balance$717,476
 $675,407
 $614,127
Increase in retail deposits122,026
 32,732
 49,558
Increase in brokered funds—
 9,337
 11,722
Net increase in deposits122,026
 42,069
 61,280
Total deposits, ending balance$839,502
 $717,476
 $675,407


At December 31, 2017,2022, deposits totaled $839.5 million.$1.17 billion. We had $246.0$568.7 million of jumbo (greaterdeposit accounts greater than the FDIC insurance amount of $250,000, or equal to $100,000)48.6% of our total deposits. Of this amount, $88.1 million were retail certificates of deposit, which were 29.3% of total deposits atdeposit. At December 31, 2017. Of these jumbo deposits, $84.32021, $637.1 million, or 55.0%, of deposit accounts were greater than or equal to $250,000. At that date, includedDecember 31, 2022, we held $61.0 million in the jumbo certificates of deposit, were public funds, totaling $21.5 million, or 2.6% of total deposits, of which $20.6$35.5 million was in excess of the $250,000 standard FDIC insurance coverage.exceeded $250,000. Under Washington State law, in order to participate in the public funds program, we are required to pledge eligible securities of a minimum of 50% of the public deposits in excess of $250,000.


















21

The following table sets forth information regarding our certificates of deposit and other deposits at December 31, 2017.2022. Certificates of deposit are categorized by their original term.
Weighted-Average Interest RateProduct TermCategoryAmountPercentage
of Total
Deposits
(Dollars in thousands)
— %N/ANoninterest bearing demand deposits$119,944 10.3 %
1.14 N/AInterest-bearing demand96,632 8.3 
0.03 N/ASavings23,636 2.0 
1.58 N/AMoney market542,388 46.4 
  Certificates of deposit, retail
0.10 Three months or less 50 — 
2.07 Over three through six months 2,532 0.2 
1.50 Over six through twelve months 37,798 3.2 
1.83 Over twelve months 222,174 18.9 
1.78  Total certificates of deposit, retail262,554 22.3 
4.25 Over twelve monthsBrokered certificates of deposit89,768 7.6 
3.20 N/AInterest-bearing demand, brokered25,062 2.2 
4.43 N/AMoney market, brokered10,056 0.9 
4.05 Total brokered deposits124,886 10.7 
Total deposits$1,170,040 100.0 %
Weighted-Average Interest Rate Term Category Amount 
Percentage
of Total
Deposits
(Dollars in thousands)
—% N/A Noninterest bearing demand deposits $45,434
 5.4%
0.22
 N/A Interest-bearing demand 38,224
 4.5
0.13
 N/A Statement savings 28,456
 3.4
0.93
 N/A Money market 318,636
 38.0
         
 
   Certificates of deposit, retail    
0.10
 Three months or less   693
 0.1
0.67
 Over three through six months   2,292
 0.3
0.97
 Over six through twelve months   37,310
 4.4
1.38
 Over twelve months   293,076
 34.8
    Retail certificates of deposit, fair value adjustment (107) —
1.33
   Total certificates of deposit, retail 333,264
 39.6
         
1.57
 Over twelve months Certificates of deposit, brokered 75,488
 9.0
         
    Total deposits $839,502
 99.9%


Certificates of Deposit. The following table sets forth the amount and remaining maturities of certificates of deposit at December 31, 2017.2022.
Within
One Year		After One Year Through Two YearsAfter Two Years Through Three YearsAfter Three Years Through Four YearsThereafterTotal
 (In thousands)
0.00 - 1.00%$50,760 $19,903 $5,693 $3,165 $457 $79,978 
1.01 - 2.00%35,135 15,155 958 238 — 51,486 
2.01 - 3.00%31,720 45,538 10,133 2,753 2,191 92,335 
3.01 - 4.00%45,481 1,788 — 876 5,328 53,473 
4.01 - 5.00%75,050 — — — — 75,050 
Total$238,146 $82,384 $16,784 $7,032 $7,976 $352,322 











22
 
Within
One Year
 After One Year Through Two Years After Two Years Through Three Years After Three Years Through Four Years Thereafter Total
 (In thousands)
0.00 - 1.00%$66,028
 $11,058
 $2,314
 $956
 $5
 $80,361
1.01 - 2.00%99,904
 147,470
 38,700
 26,913
 3,496
 316,483
2.01 - 3.00%—
 3,800
 2,570
 3,177
 2,468
 12,015
Retail certificates of deposit, fair value adjustment(49) (30) (16) (9) (3) (107)
Total$165,883
 $162,298
 $43,568
 $31,037
 $5,966
 $408,752


The following table sets forthprovides the amountuninsured portion by account of our jumbo certificates of deposit at December 31, 2022, by their remaining maturity as of December 31, 2017.period.
Maturity PeriodCertificates of Deposit
(In thousands)
Three months or less$6,100 
Over three months through six months8,070 
Over six months through twelve months33,325 
Over twelve months40,643 
Total$88,138 


23

Maturity Period Certificates of Deposit
  (In thousands)
Three months or less $33,248
Over three months through six months 17,786
Over six months through twelve months 53,493
Over twelve months 141,438
Total $245,965

Deposit Flow. Deposits by Type. The following table sets forth the deposit balances by the types of accounts we offered at the dates indicated.
 December 31,
 202220212020
AmountPercent of TotalAmountPercent of TotalAmountPercent of Total
(Dollars in thousands)
Noninterest bearing$119,944 10.3 %$117,751 10.2 %$91,285 8.3 %
Interest-bearing demand96,632 8.3 97,907 8.5 108,182 9.9 
Savings23,636 2.0 23,146 2.0 19,221 1.8 
Money market542,388 46.4 624,543 54.0 465,369 42.5 
Certificates of deposit, retail:
0.00 - 1.00%79,978 6.8 176,376 15.2 93,570 8.6 
1.01 - 2.00%51,486 4.4 21,264 1.8 86,145 7.9 
2.01 - 3.00%92,335 7.8 57,509 4.9 180,733 16.5 
3.01 - 4.00%37,793 3.2 38,978 3.4 49,128 4.5 
4.01 - 5.00%962 0.1 0— — 
Total certificates of deposit, retail262,554 22.3 294,127 25.3 409,576 37.5 
Brokered deposits:
3.01 - 4.00%15,680 1.3 — — — — 
4.01% - 5.00%74,088 6.3 — — — — 
Total certificates of deposit, brokered89,768 7.6 — — — — 
Interest-bearing demand, brokered25,062 2.2 — — — — 
Money market, brokered10,056 0.9 — — — — 
Total brokered deposits124,886 10.7 — — — — 
Total deposits$1,170,040 100.0 %$1,157,474 100.0 %$1,093,633 100.0 %
 December 31,
 2017 2016 2015
 Amount Percent of Total Amount Percent of Total Amount Percent of Total
 (Dollars in thousands)
Noninterest bearing$45,434
 5.4% $33,422
 4.7% $29,392
 4.4%
Interest-bearing demand38,224
 4.5
 18,532
 2.5
 16,261
 2.4
Statement savings28,456
 3.4
 28,383
 4.0
 28,327
 4.2
Money market318,636
 38.0
 204,998
 28.6
 211,436
 31.3
Certificates of deposit, retail:           
   0.00 - 1.00%79,323
 9.4
 124,710
 17.4
 154,011
 22.8
   1.01 - 2.00%247,517
 29.5
 228,458
 31.8
 169,494
 25.1
   2.01 - 3.00%6,531
 0.8
 3,349
 0.5
 206
 —
   5.01 - 6.00%—
 —
 136
 —
 129
 —
Retail certificates of deposit, fair value adjustment(107) —
 —
 —
 —
 —
Total certificates of deposit, retail333,264
 39.7
 356,653
 49.7
 323,840
 47.9
Certificates of deposit, brokered           
   0.00 - 1.00%1,038
 0.1
 1,038
 0.1
 —
 —
   1.01 - 2.00%68,965
 8.2
 74,014
 10.3
 65,715
 9.7
   2.01 - 3.00%5,485
 0.7
 436
 0.1
 436
 0.1
Total certificates of deposit, brokered75,488
 9.0
 75,488
 10.5
 66,151
 9.8
Total deposits$839,502
 100.0% $717,476
 100.0% $675,407
 100.0%


Borrowings. Customer deposits are the primary source of funds for our lending and investment activities. We use advances from the FHLB and to a lesser extent federal funds (“Fed Funds”) purchased to supplement our supply of lendable funds, to meet short-term deposit withdrawal requirements and to provide longer term funding to better matchassist in the management of our interest rate risk by matching the duration of selected loan and investment maturities. In addition, at December 31, 2017 we had available a total of $35.0 million lines of credit between two other financial institutions as supplemental funding sources.


As a member of the FHLB, we are required to own capital stock in the FHLB and are authorized to apply for advances on the security of that stock and certain of our mortgage loans, provided that certain creditworthiness standards have been met. Advances are individually made under various terms pursuant to several different credit programs, each with its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. We maintain a credit facility with the FHLB that provides for immediately available advances, subject to acceptable collateral. At December 31, 2017,2022, our remaining FHLB credit capacity was $190.5$522.9 million and outstanding advances from the FHLB totaled $216.0$145.0 million.


The following table sets forth information regarding FHLB advances In addition, at December 31, 2022, we had supplemental funding sources of $70.4 million available at the endFRB and $75.0 million available between two correspondent financial institutions.

Other than our utilization of interest rate swaps, we do not currently participate in other hedging programs, stand-alone contracts for interest rate caps or floors or other activities involving the use of off-balance sheet derivative financial instruments, however, these options are evaluated on occasion. At both December 31, 2022, and during the periods indicated. The table includes both long-December 31, 2021, we had seven interest rate swaps with an aggregate notional amount of $95.0 million. At December 31, 2022, we had a fair value gain of $10.5 million as compared to a fair value gain of $1.5 million at December 31, 2021. In October 2021, a $50.0 million interest rate swap agreement matured and short-term borrowings.was partially replaced with two interest rate swap agreements with an aggregate notional amount of $25.0 million and original weighted-average term of 7.4 years. For additional information, see Item 1A.
24

 At or for the Year Ended December 31,
 2017 2016 2015
 (Dollars in thousands)
Maximum amount of borrowings outstanding at any month end$231,500
 $251,500
 $135,500
Average borrowings outstanding192,227
 163,893
 133,527
Average rate paid during the year1.30% 0.87% 0.94%
Balance outstanding at end of the year$216,000
 $171,500
 $125,500
Weighted-average rate paid at end of the year1.60% 0.87% 0.97%
Risk Factors -“Risks Related to Market and Interest Rate Changes - If the interest rate swaps we entered into prove 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,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management,” and Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.


Subsidiaries and Other Activities


First Financial Northwest, Inc. First Financial Northwest has two wholly-owned subsidiaries, First Financial Northwestthe Bank and First Financial Diversified Corporation. First Financial Diversified Corporation currently holdspreviously held a loansmall portfolio of one‑to-four family residential, commercial real estate, and consumer loans. At December 31, 2017, First Financial Diversified’s netSubsequent to these loans receivable of $2.0 million represented less than one percent ofpaying off in 2019, the Company’s loan portfolio.company has had minimal activity.


First Financial Northwest Bank. First Financial NorthwestThe Bank is a community-based commercial bank. The Bankbank which primarily serves the greater Puget Sound region of King and to a lesser extent, Pierce, Snohomish and Kitsap Counties, Washington through our full-service banking office in Renton, Washington and eightfourteen additional branches in King, Pierce and Snohomish Counties, Washington. We are in the business of attracting deposits from the public and utilizing those deposits to originate loans.


Competition


The Bank operates in the highly competitive Puget Sound region of Western Washington. We face competition in originating loans and attracting deposits within our geographic market area. The competitive environment is impacted by changes in the regulatory environment, technology and product delivery systems as well as consolidation in the industry creating larger, more diversified competitors. We compete by striving to consistently deliverdelivering high-quality personal service to our customers seeking to achievethat results in a high level of customer satisfaction.

The Bank attracts deposits primarily through its branch office system. The competition is primarily from commercial banks, savings institutions and credit unions in the same geographic area. Based on the most current FDIC market share data dated June 30, 2017,2022, the top five banks in the Seattle-Tacoma-Bellevue metropolitan statistical area (comprised of Bank of America, Wells Fargo, JP Morgan Chase, Wells Fargo, US Bancorp and KeyBank) controlled over 70%72% of the deposit market. In addition to the FDIC insured competitors, credit unions, insurance companies and brokerage firms also compete for consumer deposit relationships. According to FDIC statistical market data, theThe Bank’s share of aggregate deposits in the market area wasis less than 1%.

Our competition for loans comes principally from commercial banks, mortgage brokers, thrift institutions, credit unions and finance companies. Several other financial institutions compete with us for banking business in our market area. These institutions have substantially more resources than the Bank and, as a result, are able to offer a broader range of services, such as trust departments and enhanced retail services. Among the advantages of some of these institutions are their ability to make larger loans, initiate extensive advertising campaigns, access lower cost funding sources, and allocate their investable assets in regions of highest yield and demand. The challenges posed by such large competitors may impact our ability to originate loans secure low cost deposits, and establish product pricing levels that support our net interest margin goals that may limit our future growth and earnings potential.


EmployeesHuman Capital


The Company continually strives to recruit the most talented, motivated employees in their respective fields. By providing opportunities for personal and professional growth coupled with an environment that values teamwork and work-life balance, we are able to attract and retain outstanding individuals. We pride ourselves on providing excellent benefits, competitive salaries and the opportunity for participation in the company's long-term success.

Workforce. At December 31, 2017,2022, we had 145151 full-time employees. Our employees are not represented by any collective bargaining group. We considerThe Company is committed to providing equality of opportunity in all aspects of employment through a comprehensive affirmative action plan that is updated annually. As of December 31, 2022, our workforce was 61.6% female and 38.4% male, and women held 55.0% of the Bank’s management roles. The average tenure of mid-level officers and managers is 3.8 years and the average tenure of executive / senior level officers is 8.2 years. The ethnicity of our workforce was 66.9% White, 23.8% Asian, 0.7% Black, 0.7% Native Hawaiian or Other Pacific Islander, 1.3% Two or More Races, and 6.6% undisclosed.

The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31, 2022, by job classification as defined by the Equal Employment Opportunity Commission (“EEOC”):
25

Job ClassificationFemale
Minority (1)
Distribution by EEOC Job Classification
Executive / Senior level officers46.2%30.8%8.6%
Mid-level officers and managers57.423.431.1
Professionals46.740.019.9
Sales workers55.644.46.0
Technicians—25.02.6
Administrative support85.416.731.8
Total61.6%26.5%100.0%
__________
(1) Includes employees self-disclosed as Asian, Black, Native Hawaiian or Other Pacific Islander, or Two or More Races.

Benefits. The Company provides competitive comprehensive benefits to employees. The Company values the health and well-being of its employees and strives to provide programs to support this. Benefit programs available to eligible employees may include 401(k) savings plan, profit-sharing plan, ESOP, health and life insurance, employee relationsassistance program, paid holidays, paid time off, and other leave as applicable. Effective January 1, 2023, the Company made changes to its 401(k) plan to qualify as a Safe Harbor plan. Under the revised plan, employee contributions up to 5% will be good.matched 100% by the Company and said matching contributions will be immediately vested to the employee. Separately, in an effort to replace the ESOP benefits that matured in 2022, the Company introduced a profit-sharing plan beginning in 2023, wherein a contribution will be made to every employee’s retirement account in an amount ranging from 5% to 8% annually, based on the Company’s profitability.


Board of directors. The Company’s board of directors is comprised of the Company’s Chief Executive Officer and Chief Financial Officer and six non-employee directors. The non-employee directors are represented by 50% female and 17% minority.


Response to COVID-19 pandemic. The Company will continue to monitor any federal or Washington state mandates and make adjustments to support employees and prioritize employee safety.

Training and education. The Company recognizes that the skills and knowledge of its employees are critical to the success of the organization, and promotes training and continuing education as an ongoing function for employees. The Bank’s compliance training program provides annual training courses to assure that all employees and officers know the rules applicable to their jobs.

How We Are Regulated


The following is a brief description of certain laws and regulations that are applicable to First Financial Northwest and First Financial Northwestthe Bank. On March 31, 2015, First Financial Northwest rescinded the 10(1) election made by First Financial Northwest Bank and converted from a registered savings and loan holding company to a bank holding company. As a bank holding company, First Financial Northwest is subject to examination and supervision by, and is required to file certain reports with the FRB. First Financial Northwest also is subject to the rules and regulations of the SEC under the federal securities laws. First Financial NorthwestThe Bank, which changed its charter from a Washington-chartered savings bank to a Washington-chartered commercial bank effective on February 11, 2016, is subject to regulation and oversight by the DFI, the applicable provisions of Washington law and by the regulations of the DFI adopted thereunder. First Financial NorthwestThe Bank also is subject to regulation and examination by the FDIC, which insures its deposits to the maximum extent permitted by law.


The laws and regulations affecting depository institutions and their holding companies have changed significantly, particularly in connection with the enactment of the Dodd-Frank Act. Among other changes, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve. The CFPB assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. In addition, the regulations governing us may be amended from time to time by the respectiverelevant legislative bodies and regulators. Any such legislationlegislative action or regulatory changes in the future could adversely affect us. We cannot predict whether any such changes may occur.



26

Regulation and Supervision of First Financial Northwest Bank


General. As a state-chartered commercial bank, First Financial Northwestthe Bank is subject to applicable provisions of Washington state law and regulations of the DFI in addition to federal law and regulations of the FDIC applicable to state banks that are not members of the Federal Reserve.Reserve System. State law and regulations govern First Financial Northwestthe Bank’s ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various banking services to its customers and to establish branch offices. Under state law, commercial banks in Washington also generally have all of the powers that federal commercial banks have under federal laws and regulations. First Financial NorthwestThe Bank is subject to periodic examination by and reporting requirements of the DFI.


Insurance of Accounts and Regulation by the FDIC. First Financial Northwest The Bank’s deposits are insured up to $250,000 per separately insured depositordeposit ownership right or category by the Deposit Insurance Fund (“DIF”) of the FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions.

    The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its deposit base, which is its average consolidated total assets minus its Tier 1 capital. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments.

Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DIF reserve ratio to decline below the statutory minimum of 1.35 percent.In September 2020, the FDIC Board of Directors adopted a Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act.The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the deposit insurance fund balance and reserve ratio at least semiannually. In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio.Based on this update, the FDIC Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by 2 basis points, applicable to all insured depository institutions. In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment period of 2023.The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the statutory minimum level of 1.35 percent by September 30, 2028

Management cannot predict what FDIC assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment. The Bank paid $399,000 in FDIC assessments for the year ending December 31, 2022.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The FDIC also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the deposit insurance fund.DIF. The FDIC also has the authority to initiatetake enforcement actions against commercial institutionsbanks and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices orsavings associations. Management is in an unsafe or unsound condition.

The Dodd-Frank Act requires the FDIC’s deposit insurance assessments to be based on assets instead of deposits. The FDIC has issued rules which specify that the assessment base for a bank is equal to its total average consolidated assets less average tangible equity capital. Currently, the FDIC’s base assessment rates are 3 to 30 basis points and are subject to certain adjustments. For institutions with less than $10 billion in assets, rates are determined based on supervisory ratings and certain financial ratios. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. 

In addition, federally insured institutions are required to pay a Financing Corporation (“FICO”) assessment in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. For the quarter ended December 31, 2017, the FICO assessment rate was 0.54 basis points (annualized) of the assessment base, computed on assets. These assessments will continue until the bonds mature in the years 2017 through 2019. For 2017, the Bank incurred approximately $491,000 in FDIC and FICO assessment expense.

The FDIC may terminate the deposit insurance of any insured depository institution, including First Financial Northwest Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. We are not aware of any practice, condition or violation that might lead toexisting circumstances which would result in termination of First Financial Northwest Bank’sthe Bank's deposit insurance.



A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. There can be no prediction as to what changes in insurance assessment rates may be made in the future.

Standards for Safety and Soundness. TheEach federal banking regulatory agencies have prescribed, by regulation,agency, including the FDIC, has adopted guidelines for all insured depository institutionsestablishing general standards relating to:to internal controls, information systems and internal audit systems,systems; loan documentation,documentation; credit underwriting,underwriting; interest rate risk exposure,exposure; asset growth,growth; asset quality, earningsquality; earnings; and compensation, fees and benefits. TheIn general, the guidelines set forth the safetyrequire, among other things, appropriate systems and soundness standards that the federal banking agencies usepractices to identify and address problems at insured depository institutions before capital becomes impaired. Each insured depository institution must implement a comprehensive written information security program that includes administrative, technicalmanage the risks and physical safeguards appropriateexposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the institution’s size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threatsservices performed by an executive officer, employee, director, or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems.principal shareholder. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to submit to the FDIC an acceptable plan to achieve compliance. We areManagement of the Bank is not aware of any conditions relating to these safety and soundness standards thatwhich would require submission of a plan of compliance by First Financial Northwest Bank.compliance.


Capital Requirements. Federally insured financial institutions, such as First Financial Northwestthe Bank, and their holding companies, are required to maintain a minimum level of regulatory capital.


Effective January 1, 2015 (with some changes phased in over several years), First Financial Northwest and First Financial Northwest
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The Bank becameis subject to new capital regulations adopted by the Federal Reserve and the FDIC, which establish minimum required ratios for a common equity Tier 1 capital (“CET1”), capital to risk-based assets ratio, a Tier 1 capital andto risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the leverage ratio; set out risk-weights for assets and certain off-balance sheet items for purposesmaintenance of the risk-based capital ratios, require an additional capital conservation buffer over the minimum risk-based ratios’ and define what qualifies as capital for purposes of meeting the capital requirements. These regulations implement the regulatory capital reforms required by the Dodd-Frank Act and the “Basel III” requirements.

Under the capital regulations, thefollowing minimum capital ratios are: (1)ratios: (i) a CET1 capital ratio of 4.5% of risk-weighted assets; (2); (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3)6%; (iii) a total risk-based capital ratio of 8.0% of risk-weighted assets;8%; and (4)(iv) a Tier 1 leverage ratio (theof 4%. Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.However, the Federal Reserve has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and bank holding companies with less than $3.0 billion of consolidated assets are not subject to the consolidated holding company capital requirements unless otherwise directed by the Federal Reserve.

The Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”), enacted in May 2018, required the federal banking agencies, including the FDIC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” or “CBLR” of between 8 to 10%.Institutions with capital meeting or exceeding the ratio and otherwise complying with the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The CBLR was established at 9% Tier 1 capital to total average total adjusted assets) of 4.0%. CET1 generally consists of common stock, retained earnings, accumulated other comprehensive income (“AOCI”) unless an institution has elected to exclude AOCI from regulatory capital, and certain minority interests, all subject to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock. Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for loan and lease losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.

There are a number of changes in what constitutes regulatory capital compared to the rules in effect prior toassets, effective January 1, 2015, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as2020. A qualifying capitalinstitution may opt in and eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Mortgage servicing assets and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities. However, because of our asset size, we were eligible for the one-time option of permanently opting out of the inclusioncommunity bank leverage ratio framework on its quarterly call report.An institution that temporarily ceases to meet any qualifying criteria is provided with a two-quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of unrealized gains and losses on available for sale debt and equity securities in8% or greater requires the institution to comply with the generally applicable capital requirements. Although the Bank qualified to make this election, as of December 31, 2022, management has not elected to use the CBLR as the Bank’s margin above the current minimum levels to be well-capitalized is greater than our capital calculations. We elected this option inmargin would be under the first quarter of 2015.CBLR.

For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on the risk characteristics of the asset or item. The new regulations make certain changes in the risk-weighting of assets to better reflect credit risk and other risk exposure compared to the earlier capital rules. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non‑residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.


In addition to the minimum CET1, Tier 1, and total capital ratios, the capital regulations require a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order

to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The phase-in of the capital conservation buffer requirement began on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which increases each year until the buffer requirement is fully implemented on January 1, 2019.
 
To be considered “well capitalized,” a depository institution must have a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10%, a CET1 capital ratio of at least 6.5% and a leverage ratio of at least 5%, and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator requires it to maintain a specific capital level. As of December 31, 2017,2022, First Financial Northwest Bank met the requirements to be “well capitalized” and met the fully phased-in capital conservation buffer requirement.























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The table below sets forth First Financial Northwestthe Bank’s capital position at December 31, 20172022 and 2016,2021, based on FDIC thresholds to be well-capitalized.
 December 31,
 20222021
 AmountRatioAmountRatio
 (Dollars in thousands)
Bank equity capital under GAAP$150,370 $149,563 
Tier 1 leverage capital$156,147 10.31 %$147,816 10.34 %
Tier 1 leverage capital requirement75,722 5.00 71,489 5.00 
Excess$80,425 5.31 %$76,327 5.34 %
Common equity tier 1$156,147 14.37 %$147,816 14.23 %
Common equity tier 1 capital requirement70,641 6.50 67,536 6.50 
Excess$85,506 7.87 %$80,280 7.73 %
Tier 1 risk-based capital$156,147 14.37 %$147,816 14.23 %
Tier 1 risk-based capital requirement86,942 8.00 83,121 8.00 
Excess$69,205 6.37 %$64,695 6.23 %
Total risk-based capital$169,755 15.62 %$160,840 15.48 %
Total risk-based capital requirement108,678 10.00 103,901 10.00 
Excess$61,077 5.62 %$56,939 5.48 %
 December 31,
 2017 2016
 Amount Ratio Amount Ratio
 (Dollars in thousands)
Bank equity capital under U.S. Generally Accepted Accounting Principles
  (“GAAP”)
$123,023
   $118,346
  
        
Tier 1 leverage capital$122,090
 10.20% $119,652
 11.17%
Tier 1 leverage capital requirement59,843
 5.00
 53,558
 5.00
Excess$62,247
 5.20% $66,094
 6.17%
        
Common equity tier 1$122,090
 12.52% $119,652
 14.36%
Common equity tier 1 capital requirement63,379
 6.50
 54,163
 6.50
Excess$58,711
 6.02% $65,489
 7.86%
        
Tier 1 risk-based capital$122,090
 12.52% $119,652
 14.36%
Tier 1 risk-based capital requirement$78,006
 8.00% $66,662
 8.00%
Excess$44,084
 4.52% $52,990
 6.36%
        
Total risk-based capital$134,292
 13.77% $130,078
 15.61%
Total risk-based capital requirement97,507
 10.00
 83,328
 10.00
Excess$36,785
 3.77% $46,750
 5.61%


The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular risks or circumstances. Management of First Financial Northwest Bank believes that, under the current regulations, First Financial Northwest Bank will continue to meet its minimum capital requirements in the foreseeable future.


For a complete description of First Financial Northwestthe Bank’s required and actual capital levels on December 31, 2017,2022, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.


The FASB has adopted a new accounting standard for GAAP that will be effective for us for our first fiscal year beginning after December 15, 2022. This standard, referred to as Current Expected Credit Loss, or CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital.

The federal banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC) have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.

Prompt Corrective Action. Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital categories:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution’s category depends upon where its capital levels are in relation to relevant capital measures. The well-capitalized category is described above. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the rates it can offer on its deposits, generally. To be considered adequately capitalized, an institution must have the minimum capital ratios described above. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized. The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital framework provides that a qualifying institution whose capital

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exceeds the community bank leverage ratio and opts to use that framework will be considered “well capitalized” for purposes of prompt corrective action.

Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become more extensive as an institution becomes more severely undercapitalized. Failure by First Financial

Northwestthe Bank to comply with applicable capital requirements would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance with capital requirements.


At December 31, 2017, First Financial Northwest2022, the Bank was categorized as “well capitalized” under the prompt corrective action regulations of the FDIC. For additional information, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.


Federal Home Loan Bank System. First Financial Northwest The Bank is a member of the FHLB of Des Moines, one of 11 regional FHLBs that administer the home financing credit function of savings institutions. The FHLBs are subject to the oversight of the Federal Housing Finance Agency (“FHFA”) and each FHLB serves as a reserve or central bank for its members within its assigned region. The FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System and makesmake loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight of the FHFA. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See “Business – Deposit Activities and Other Sources of Funds – Borrowings.”


    As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines based on the Bank's asset size and level of borrowings from the FHLB. At December 31, 2017,2022, the Bank held $9.9$7.5 million in FHLB stock that was in compliance with the holding requirements. The Bank purchased 708 shares of additional stock in March 2017 as a result of the increase in assets as of December 31, 2016. In addition, activity stock was purchased and sold throughout 2017 in response to increases or payoffs to our outstanding advances. At December 31, 2017, the Bank had a net increase in activity stock held of 17,800 shares for the year. The FHLB pays dividends quarterly, and First Financial Northwestthe Bank received $296,000$318,000 in dividends during the year ended December 31, 2017.2022.


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


Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the FDIC and other federal bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:


•Total reported loans for construction, land development and other landrepresent 100% or more of the bank’s total regulatory capital; or


•Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.


The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2017, First Financial Northwest2022, the Bank’s aggregate recorded loan balances for construction, land development and land loans were 108.6%53.1% of regulatory
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capital. In addition, at December 31, 2017, First Financial Northwest2022, the Bank’s loans on commercial real estate, as defined by the FDIC, were 514.0%346.9% of regulatory capital.


Activities and Investments of Insured State-Chartered Financial Institutions. Federal law generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing

as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions and (4) acquiring or retaining the voting shares of a depository institution owned by another FDIC-insured institution if certain requirements are met.


Under the law of Washington State, has enacted a law regarding financial institution parity. Primarily, the law affords Washington state‑chartered commercial banks the same powers as Washington state-chartered savings banks and provides that Washington chartered commercialsavings banks may exercise any of the powers that the Federal Reserve has determined to be closely related to the business of bankingWashington-chartered commercial banks, national banks and the powers of nationalfederally-chartered savings banks, subject to the approval of the Director of the DFI in certain situations. Finally, the law provides additional flexibility forIn addition, Washington state-chartered commercial and savings banks with respect to interest rates on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and other extensions of credit by federally-chartered financial institutions to Washington residents.


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


Federal Reserve System. The Federal Reserve requires that all depository institutions to maintain reserves onat specified levels against their transaction accounts, and non-personal time deposits. These reserves may be inprimarily checking accounts. In response to the form of cash or deposits with the regional Federal Reserve Bank. Interest-bearing demand accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to reserve requirements, as are any non-personal time deposits at a savings bank. As of December 31, 2017, First Financial Northwest Bank’s deposits withCOVID-19 pandemic, the Federal Reserve exceeded its Regulation Dreduced reserve requirements.requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At December 31, 2022, the Bank was in compliance with the reserve requirements in place at that time.


Affiliate Transactions. First Financial Northwest and First Financial Northwestthe Bank are separate and distinct legal entities. First Financial Northwest (and any non-bank subsidiary of First Financial Northwest) is an affiliate of First Financial Northwestthe Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act and between a bank and an affiliate are limited to 10% of the bank’s capital andplus surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital andplus surplus. Further, covered transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and its affiliates be on terms as favorable to the bank as transactions with nonaffiliates. For additional information, see “– Regulation and Supervision of First Financial Northwest – Limitations on Transactions with Affiliates” below.


In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal shareholders. Under Section 22(h), loans to a director, executive officer or greater than 10% shareholder of a bank and certain affiliated interests, generally may not exceed, together with all other outstanding loans to such person and affiliated interests, the bank’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus).plus surplus. Section 22(h) also requires that loans to directors, executive officers and principal shareholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (1) is widely available to employees of the institution and (2) does not give preference to any director, executive officer or principal shareholder, or certain affiliated interests, over other employees of the bank. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the bank’s unimpaired capital andplus surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2017, First Financial Northwest2022, the Bank was in compliance with these restrictions.


Community Reinvestment Act. First Financial NorthwestThe Bank is subject to the provisions of the Community Reinvestment Act of 1977 (“CRA”), which require the appropriate federal bank regulatory agency to assess a bank’s performance under the CRA in
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meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available to the public. Further, a bank’s CRA

performance must be considered in connection with a bank’s application, to among other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. First Financial NorthwestAn unsatisfactory rating may be the basis for denial of certain applications. The Bank received a “satisfactory”an “outstanding” rating during its most recent CRA examination.


Dividends. The amount of dividends payable by First Financial Northwestthe Bank to First Financial Northwest depends upon First Financial Northwestthe Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, First Financial Northwestthe Bank may not declare or pay a cash dividend on its capital stock if it would cause its net worth to be reduced below (1) the amount required for liquidation accounts or (2) the net worth requirements, if any, imposed by the Director of the DFI. In addition, dividends may not be declared or paid if First Financial Northwestthe Bank is in default in payment of any assessments due to the FDIC. Dividends on First Financial Northwestthe Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of First Financial Northwestthe Bank, without the approval of the Director of the DFI. Dividends payable by the Bank can be limited or prohibited if the Bank does not meet the capital conservation buffer requirement.


The amount of dividends actually paid during any one period is affected by First Financial Northwestthe Bank’s policy of maintaining a strong capital position. Federal law further restricts dividends payable by an institution that does not meet the capital conservation buffer requirement and provides that no insured depository institution may pay a cash dividend if it would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice.


Privacy Standards.Standards and Cybersecurity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. First Financial Northwest Bank is subject toFederal banking agencies, including the FDIC, regulationshave adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the privacy protection provisionssupervision of the GLBA.board of directors.These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. These regulations require First Financial Northwestthe Bank to disclose its privacy policy, including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices.In addition, other federal and state cybersecurity and data privacy laws and regulations may expose the Bank to risk and result in certain risk management costs. In addition, on November 18, 2021, the federal banking agencies announced the adoption of a final rule providing for new notification requirements for banking organizations and their service providers for significant cybersecurity incidents.Specifically, the new rule requires a banking organization to notify its primary federal regulator as soon as possible, and no later than 36 hours after, the banking organization determines that a “computer-security incident” rising to the level of a “notification incident” has occurred.Notification is required for incidents that have materially affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products and services, or the stability of the financial sector.Service providers are required under the rule to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect the banking organization’s customers for four or more hours.Compliance with the new rule was required by May 1, 2022.Non-compliance with federal or similar state privacy and cybersecurity laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private causes of action and/or reputational harm.


Anti-Money Laundering and Customer Identification.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT Act and the Bank Secrecy Act requires financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts, and, effective in 2018, the beneficial owners of accounts. Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act applications.


Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the CFPBConsumer Financial Protection Bureau (“CFPB”) and empowered it to exercise broad regulatory, supervisory and enforcement authority with
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respect to both new and existing consumer financial protection laws. First Financial NorthwestThe Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, First Financial NorthwestThe Bank is generally subject to supervision and enforcement by the FDIC with respect to its compliance with federal consumer financial protection laws and CFPB regulations.


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




Regulation and Supervision of First Financial Northwest


General. First Financial Northwest, as sole shareholder of First Financial Northwestthe Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”), and the regulations of the FRB. Accordingly, First Financial Northwest is required to file quarterlysemi-annual reports with the Federal Reserve and provide additional information as the Federal Reserve may require. The Federal Reserve may examine First Financial Northwest, and any of its subsidiaries, and charge First Financial Northwest for the cost of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. First Financial Northwest is also required to file certain reports with, and otherwise comply with the rules and regulations of the SEC.


The Bank Holding Company Act.  Under the BHCA, First Financial Northwest is supervised by the Federal Reserve. The Federal Reserve has a policy that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary bank and may not conduct its operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act and earlier Federal Reserve policy provide that a bank holding company should serve as a source of strength to its subsidiary bank by having the ability to provide financial assistance to its subsidiary bank during periods of financial distress to the bank. A bank holding company’s failure to meet its obligation to serve as a source of strength to its subsidiary bank will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength provisions required by the Dodd-Frank Act. First Financial Northwest and any subsidiaries that it may control are considered “affiliates” within the meaning of the Federal Reserve Act, and transactions between First Financial Northwestthe Bank and affiliates are subject to numerous restrictions. With some exceptions, First Financial Northwest and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered by First Financial Northwest or by its affiliates.


Acquisitions.The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include:  operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

Regulatory Capital Requirements. Bank holding companies, like First Financial Northwest, are subject to capital adequacy requirements of the The Federal Reserve undermust approve the BHCA and the regulationsacquisition (or acquisition of the Federal Reserve. These capital requirements are the same as those applicable to First Financial Northwest Bank as described above. At December 31, 2017, First Financial Northwest exceeded all regulatory requirements for bank holding companies with $1.0 billion or more in assets.

The following table presents the regulatory capital ratios for First Financial Northwest as of December 31, 2017:
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 Actual
 Amount Ratio
 (Dollars in thousands)
Tier I leverage capital (to average assets)$141,660
 11.82%
Common equity tier I (to risk-weighted assets)141,660
 14.50
Tier I risk-based capital (to risk-weighted assets)141,660
 14.50
Total risk-based capital (to risk-weighted assets)153,885
 15.75

Under the regulationscontrol) of the Federal Reserve,a bank or other FDIC-insured depository institution by a bank holding company, with consolidated assetsand the appropriate federal banking regulator must approve a bank’s acquisition (or acquisition of more than $1.0 billion, including First Financial Northwest, is “well capitalized” if it has a total risk-based capital ratiocontrol) of 10.0%another bank or more and a Tier 1 risk-based capital ratio of 8.0% or more, and is not be subject to an individualized order, directive or agreement under which theother FDIC-insured institution.


Federal Reserve requires it to maintain a specific capital level. As of December 31, 2017, First Financial Northwest met the requirements to be “well capitalized” and met the fully phased-in capital conservation buffer requirement.

Acquisition of Control. Control of a Bank Holding Company. Under federal law, a notice or application must be submitted to the Federal Reserveappropriate federal banking regulator if any person (including a company), or group acting in concert, seeks to acquire “control” of a bank holding company. An acquisition of control can occur upon the acquisition of 10% or more of the voting stock of a bank holding company or as otherwise defined by the Federal Reserve.federal regulations. In considering such a notice or application, the Federal Reserve takes into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that acquires control becomes subject to regulation as a bank holding company. Depending on circumstances, a notice or application may be required to be filed with appropriate state banking regulators and may be subject to their approval or non-objection.


Regulatory Capital Requirements. As discussed above, pursuant to the “Small Bank Holding Company” exception, effective August 30, 2018, bank holding companies with less than $3 billion in consolidated assets were generally no longer subject to the Federal Reserve’s capital regulations, which are generally the same as the capital regulations applicable to First Financial Northwest Bank. At the time of this change, First Financial Northwest was considered “well capitalized” (as defined for a bank holding company), with a total risk-based capital ratio of 10.0% or more and a Tier 1 risk-based capital ratio of 8.0% or more, and was not subject to an individualized order, directive or agreement under which the Federal Reserve requires it to maintain a specific capital level.

Restrictions on Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies which expresses its view that a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company’s capital needs, asset quality, and overall financial condition.  The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. As described above under “Capital Requirements,”Under Washington corporate law, First Financial Northwest generally may not pay dividends if after that payment it would not be able to pay its liabilities as they become due in the usual course of business, or its total assets would be less than its total liabilities.The capital conversionconservation buffer requirement discussed above can also restrict First Financial Northwest’s and the Bank’s ability to paylimit dividends. For additional information, see Item 1.A. “Risk Factors – Certain regulatory restrictions are imposed on usRisks Related to Regulatory and lack of complianceCompliance Matters-Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in monetary penalties and/fines or additional regulatory actions.” in Item 1.A. Risk Factors containedsanctions” in this report.


Stock Repurchases.  A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve.During the year ended December 31, 2017,2022, First Financial Northwest repurchased 326,80084,981 shares of its common stock.


Federal Securities Laws. First Financial Northwest’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We are subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

The Dodd-Frank Act. Among other requirements, the Dodd-Frank Act requires public companies, like First Financial Northwest, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees. For certain of these changes, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.

The federal banking agencies have issued final rules to implement the provisions of Section 619 of the Dodd-Frank Act commonly referred to as the Volcker Rule. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Management believes First Financial Northwest’s investment portfolio and investment strategies are in compliance with the various provisions of the Volcker Rule regulations.

Sarbanes-Oxley Act of 2002. As a public company that files periodic reports with the SEC under the Exchange Act, First Financial Northwest, is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. Our policies and procedures have been updated to comply with the requirements of the Sarbanes-Oxley Act.


Taxation


Federal Taxation


General. First Financial Northwest and First Financial Northwest Bank areThe Company is subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to First Financial Northwest or First Financial Northwest Bank.the Company. The tax years still open for review by the Internal Revenue Service are 2014are 2019 through 2017.2022.

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate income tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the net deferred tax asset (“DTA”) was reduced through an increase to the provision for income tax. The revaluation of our DTA balance resulted in a one-time increase for the year ended December 31, 2017 to federal income tax of $807,000.


First Financial Northwest files a consolidated federal income tax return with First Financial Northwestthe Bank. Accordingly, any cash distributions made by First Financial Northwest to its shareholders are considered to be taxable dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.


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Method of Accounting. For federal income tax purposes, First Financial Northwestthe Company currently reports its income and expenses on the accrual method of accounting and uses a fiscal year ending on December 31 for filing its federal income tax return.


Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Company’s alternative minimum tax credit carryforward was fully utilized during the year and had a zero balance at December 31, 2017.

Net Operating Loss Carryovers. A financial institution may carry backcarryforward net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 2009.indefinitely. The Company had no net operating loss carryforwards at December 31, 2017.2022.


Corporate Dividends-Received Deduction. First Financial Northwest may eliminate from its income dividends received from First Financial Northwestthe Bank as a wholly-owned subsidiary of First Financial Northwest that files a consolidated return with First Financial Northwestthe Bank. The corporate dividends-received deduction is 100%, or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the dividend. Corporations that own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.


For additional information regarding our federal income taxes, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.


State Taxation


First Financial Northwest and its subsidiaries areThe Company is subject to a business and occupation tax imposed under Washington state law at the rate of 1.50%1.75% of gross receipts.receipts for the Bank, as gross receipts are greater than $1.0 million, and 1.50% for its other subsidiaries with gross receipts less than $1.0 million. In addition, various municipalities also assess business and occupation taxes at differing rates. Interest received on loans secured by first lien mortgages or deeds of trust on residential properties, rental income from properties, and certain investment securities are exempt from this tax. An audit by the Washington State Department of Revenue was completed for the years 2010 through 2013, resulting in no material tax revisions.


The Bank has purchased and originated loans in California, and is subject to the California income tax on revenue earned from these loans. Corporations doing business in California are subject to an annual minimum franchise tax of $800 or an income tax of 10.84% of net income.
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Executive Officers of First Financial Northwest, Inc.


The business experience for at least the past five years for the executive officers of First Financial Northwest and its primary subsidiary First Financial Northwest Bankthe Company is set forth below.


Joseph W. Kiley III,, age 62, 67, has served as President and Chief Executive Officer of First Financial Northwest and First Financial Diversified since September 2013,2013; as director of First Financial and servedFirst Financial Diversified since December 2012; and as President, Chief Executive Officer Directorand director of First Financial Northwest Bank since September 2012, and Director of First Financial Northwest and First Financial Diversified since December 2012. He previously served as President, Chief Executive Officer, and Directordirector of Frontier Bank, F.S.B., located in Palm Desert, California, and its holding company, Western Community Bancshares, Inc. from 2010 to 2012. From 2007 to 2010, Mr. Kiley was a Director at California General Bank. From 2009 to 2011, Mr. Kiley served as the President, Chief Executive Officer and Director of Imperial Capital Bank, located in San Diego, California and its holding company, Imperial Capital Bancorp, Inc. Mr. Kiley has over 2530 years of executive experience at banks, thrifts and their holding companies that includedincludes, but is not limited to, serving as president, chief executive officer, chief financial officer, and director. Mr. Kiley holds a Bachelor of Science degree in Business Administration (Accounting) from California State University, Chico, and is a former California certified public accountant. Mr. Kiley is a member of the Renton Rotary Club, City of Renton Mayor’s Business Executive Forum, City of Renton Mayor’s Blue Ribbon Panel, and serves onpast Chair of the boardsBoard of directorsDirectors of the Renton Chamber of CommerceCommerce. He is a director and past Chairman of the Board of Directors of the Washington Bankers’Bankers Association. In addition, Mr. Kiley currently serves on the Board of Directors of the California Bankers Association and its Executive Committee and is a member of the Community Bankers Council of the American Bankers Association.


Richard P. Jacobson,, age 54, 59, has served as Chief Operating Officer of theFirst Financial Northwest Bank since July 2013, and as Chief Financial Officer of First Financial Northwest, First Financial Diversified, and the Bank since August 2013, and Chief Operating Officer of First Financial Northwest since September 2013. He was appointed as a director of First Financial, Northwest and First Financial NorthwestDiversified and the Bank effective September 2013. Mr. Jacobson served as a consultant to First Financial Northwest from April 2010 to April 2012, and from that time until July 2013, served2012. Subsequently, he worked as a mortgage loan originator in Palm Desert, California. PriorCalifornia from July 2012 to that,July 2013. Previously, he had been employed by Horizon Financial Corp,Corp. and Horizon Bank, Bellingham, Washington, since 1987,for 23 years, and had served as President, Chief Executive Officer and a director of Horizon Financial CorpCorp. and Horizon Bank from January 2008 to January 2010. Mr. Jacobson also served as Chief Financial Officer of Horizon Financial CorpCorp. and Horizon Bank from March 2000 until October 2008. Between 1985 and 2008, Mr. Jacobson served in several other positions at Horizon Financial Corp. and Horizon Bank and spent two years as a Washington Statestate licensed real estate appraiser from 1992 to 1994. Mr. Jacobson received his Bachelor’s degree in Business Administration (Finance) from the University of Washington. In addition, Mr. Jacobson graduated with honors from the American BankerBankers Association’s National School of Banking. Mr. Jacobson is a past president of the Whatcom County North Rotary clubClub and has served on the boards of his church, the United Way, Boys and Girls Club, and Junior Achievement.


Simon Soh, age 5358, iswas appointed Senior Vice President and Chief Credit Officer of First Financial Northwest Bank. Prior to his promotionBank in December 2019, a position he held on an interim basis since November 2019, and between August 2017 and December 2018. Mr. Soh served as Senior Vice President and Chief Lending Officer a position he held sincefrom October 2012.2012 to December 2019. From August 2010 until October 2012, Mr. Soh served as Vice President and Loan Production Manager of First Financial Northwest Bank, a position he held since August 2010.Bank. Prior to that, he was First Vice President and Commercial Lending Manager at East West Bank. In 1998, Mr. Soh was a founding member of Pacifica Bank in Bellevue, Washington that merged with United Commercial Bank in 2005, later becoming East West Bank in 2009. Mr. Soh has over 2930 years of experience in commercial banking.


Ronnie J. Clariza, age 3742, was appointed Senior Vice President and Chief Risk Officer and Senior Vice President of First Financial Northwest Bank in November 2013. Mr. Clariza previously served as Vice President and Risk Management Officer since May 2008, and prior to that, as Assistant Vice President and Compliance Officer, as well as serving in various other compliance and internal audit roles since he began with the Bank in 2003. Mr. Clariza is a graduate of the University of Washington where he received his Bachelor of Arts degree in Business Administration, Finance, and is a certified regulatory Compliance Officer. Mr. Clariza is an active member of the Education and Enterprise Risk Management and Government Relations Committees for the California Bankers and Washington Bankers’ Association.Bankers Associations, respectively. He washas also participated in numerous working groups for the American Bankers Association and previously served as a past member ofVolunteer Compliance Manager for the Seattle Children’s Hospital Guild Association as a Volunteer Compliance Manager.Association.


Dalen D. Harrison, age 58,63, was promoted to Chief Banking Officer of First Financial Northwest Bank in December 2019. She was appointed Senior Vice President in July 2014 and previously served as Chief Deposit Officer of First Financial Northwest Bank infrom March 2014 and Senior Vice President in July 2014.to December 2019. Ms. Harrison served as Senior Vice President and Director of Retail Banking at Peoples Bank in Bellingham, Washington from 2010 until 2014. Prior to that, she served as Vice President of Rainier Pacific Bank, Tacoma, Washington, from 1994 until 2010. Ms. Harrison received a Bachelor of Arts degree in Business Administration from StSaint Mary’s College in Moraga, California. Ms. Harrison has served on the boards of Rainier Pacific Foundation, First Place for Children, and Gig Harbor Rotary Foundation, Renton Downtown Partnership, and currently serves on the boards of the Renton Area Youth and Family Services and the Renton Downtown Partnership.Services.

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Christine A. Huestis, age 52, is Vice President and Controller of First Financial Northwest and First Financial Northwest Bank. Prior to joining First Financial Northwest in October 2013, she was employed by Realty in Motion, LLC, a holding company for several mortgage default service companies in Bellevue, Washington. From 1999 until joining First Financial Northwest, Ms. Huestis held key accounting positions at affiliated companies within Realty in Motion, with her most recent position being that


of Controller. Ms. Huestis received a Bachelor of Science degree in Accounting from Central Washington University. She is a certified public accountant and is a member of the American Institute of Certified Public Accountants.


Item 1A. Risk Factors.


An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report and our other filings with the SEC. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows, liquidity, results of operations and prospects. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. The market price of our common stock could decline significantly due to any of these identified or other risks and you could lose some or all of your investment. This report is qualified in its entirety by these risk factors.


Risks Related to Macroeconomic Conditions

Our business may be adversely affected by downturns in the national economy and in the economies in our market areas.


Our loans are primarily to businesses and individuals in the state of Washington with 88.4%86.6% of loans to borrowers or secured by properties located in Washington and 11.6%13.4% of loans to borrowers or secured by properties in other states. Through our efforts to geographically diversify our loan portfolio, at December 31, 2022, our portfolio included $158.2 million, or 13.4% of loans to borrowers or secured by properties located in 47 other states and Washington, D.C., including $37.1 million, or 3.1% of loans, secured by properties or to borrowers in California. A decline in the national economy or the economies of the four counties which we consider to be our primary market area could have a material adverse effect on our business, financial condition, results of operations, and prospects. Weakness in the global economy hasand global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Continued changestrade and it is not known how tariffs being imposed on international trade may also affect these businesses. Changes in agreements or relationships between the United States and other countries may also affect these businesses.


While real estate values and unemployment rates have recently improved, aA deterioration in economic conditions in the market areas we serve, in particularas a result of inflation, a recession, the Puget Sound areaeffects of Washington State,COVID-19 variants or other factors, could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:


•loan delinquencies, problem assets and foreclosures may increase;
•we may increase our allowance for loan and lease losses;
•demand for our products and services may decline resulting in a decrease in our total loans or assets;
•collateral for loans, especially real estate, may decline in value, exposing us to increased risk of loss on existing loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
•the amount of our low-cost or noninterest-bearing deposits may decrease and the composition of our deposits may be adversely affected.


A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes and tornadoes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.


Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.




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External economic factors, such as changes in monetary policy and inflation, may have an adverse effect on our business, financial condition and results of operations.

Our financial condition and results of operations liquidity and cash flows are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions andaffected by credit policies of various governmental and regulatory agencies, and, in particular,monetary authorities, particularly the Federal Reserve Board. In an attempt to help the economy,Actions by monetary and fiscal authorities, including the Federal Reserve Board, could lead to inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has kept interest rates low through its targeted Fed Funds rate. The Federal Reserve Board increasedrisen sharply since the targeted Fed Funds rateend of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2023. Small to medium-sized businesses may be impacted more during 2017periods of high inflation as they are not able to 1.50% at December 31, 2017 and has indicated further increases are likely during 2018, subjectleverage economics of scale to economic conditions. Asmitigate cost pressures compared to larger businesses. Consequently, the Federal Reserve Board increases the Fed Funds rate, overall interest rates will likely rise, which may negatively impact both the housing markets by reducing refinancing activity and new home purchases and the U.S. economic recovery.

Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assetsbusiness customers to repay their loans may deteriorate, and liabilities and (iii) the average duration of our mortgage-backed securities portfolio and other interest-earning assets.

Changes in interest rates could also have a negativesome cases this deterioration may occur quickly, which would adversely impact on our results of operations by reducingand financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the abilityCompany to increase, which could adversely affect our results of borrowers to repay their current loan obligations or by reducing our marginsoperations and profitability. Our net interest margin is the difference between the yield we earn onfinancial condition. Virtually all of our assets and the interest rate we pay for deposits and our other sources of funding. Changesliabilities are monetary in interest rates-up or down-could adversely affect our net interest margin and, asnature. As a result, our net interest income. Although the yield we earnrates tend to have a more significant impact on our assets and our funding costs tend toperformance than general levels of inflation or deflation. Interest rates do not necessarily move in the same direction or by the same magnitude as the prices of goods and services.

The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations.

The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in responsewhich our clients operate.Given its ongoing and dynamic nature, it is difficult to changes in interest rates, one can rise or fall faster thanpredict the other, causing our net interest marginfull impact of the COVID-19 pandemic on the business of the Company, its clients, employees and third-party service providers.The extent of such impact will depend on future developments, which are highly uncertain.Additionally, the responses of various governmental and nongovernmental authorities and consumers to expand or contract. Our liabilities tendthe pandemic may have material long-term effects on the Company and its clients which are difficult to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up. Changesquantify in the slope of the “yield curve”,near-term or the spread between short-term and long-term interest rates-could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend tolong-term.

We could be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment riska number of risks as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.

A sustained increase in market interest rates could adversely affect our earnings. As athe result of the low interest rate environment, an increasing percentageCOVID-19 pandemic, any of our deposits have been comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected

In addition, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. At December 31, 2017, 49.9% of our net loans were comprised of adjustable-rate loans. At that date, $185.4 million, or 37.1%, of these loans with an average interest rate of 4.1% were at their floor interest rate. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their respective floor, which is above the fully-indexed rate, 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 and could have a material, adverse effect on our results of operations.

Changes in interest rates also affect the value of our interest-earning assets, including our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on ourbusiness, financial condition, liquidity, results of operations, any substantial, unexpectedability to execute our growth strategy, and ability to pay dividends.These risks include, but are not limited to, changes in demand for our products and services; increased loan losses or other impairments in our loan portfolios and increases in our allowance for loan and lease losses; a decline in collateral for our loans, especially real estate; unanticipated unavailability of employees; increased cyber security risks as employees work remotely; a prolonged changeweakness in market interest rateseconomic conditions resulting in a reduction of future projected earnings could havenecessitate a material adverse effectvaluation allowance against our current outstanding deferred tax assets; a triggering event leading to impairment testing on our financial conditiongoodwill or core deposit and results of operations. Also,customer relationships intangibles, which could result in an impairment charge; and increased costs as the Company and our interest rate risk modeling techniquesregulators, customers and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for additional information about our interest rate risk management.vendors adapt to evolving pandemic conditions.

Risks Related to Our Lending

Our construction/land loans are based upon estimates of costs and the value of the completed project.


We make construction/land loans to contractors and builders primarily to finance the construction of single and multifamily homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale. At December 31, 2017,2022, construction/land loans totaled $237.6$78.1 million, or 21.7%6.6% of our total loan portfolio, an increase of $28.6 million or 13.7% since December 31, 2016.portfolio. At December 31, 2017, $108.4 million were multifamily construction loans, $87.42022, $52.8 million were one-to-four family construction loans and $5.3$15.5 million were multifamily construction loans. We had no commercial construction loans.loans at that day. Land loans, which are loans made with land as security, totaled $36.4$9.8 million, or 3.3%0.8% of our total loan portfolio at December 31, 2017.2022. Land loans include land non-development loans for the purchase or refinance of unimproved land held for future residential development, improved residential lots held for speculative investment purposes, and lines of credit secured by land, and land development loans.



Construction/land lending involves additional risks when compared with permanent residential lending because funds are advanced upon the collateral for the project based on an estimate of costs that will produce a future value at completion. Because of theThe uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, make it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated building costs, may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in
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housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.


In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers’ borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Furthermore, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions.


At December 31, 2017, $94.82022, $56.8 million of our construction/land loans were for speculative construction loans and $27.1 millionloans. All of our permanent multifamilyconstruction loans did not have a take-out commitment for a permanent loan with us or another lender.us. At December 31, 2017,2022, all of our construction/land loans were classified as performing.


Our level of commercial and multifamily real estate loans may expose us to increased lending risks.


While commercial and multifamily real estate lending may potentially be more profitable than single-family residential lending, it is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. At December 31, 2017,2022, we had $361.8$407.9 million of commercial real estate loans, representing 33.0%34.4% of our total loan portfolio and $184.9$126.9 million of multifamily loans, representing 16.9%10.7% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-fourone‑to‑four family residential loan. Repayment on these loans is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service that may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow from the borrower’s project is reduced as a result of leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. Commercial and multifamily loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multifamily real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment that may increase the risk of default or non-payment.


A secondary market for most types of commercial and multifamily real estate loans is not readily available, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one‑to‑four family residential loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.


The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.


The FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if,
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among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multifamily and non-farm residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on the FDIC criteria, the Bank hashad a concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land represented 514.0%346.9% of total risk-based capital at December 31, 2017.2022. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our commercial real estate lending consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.


Expansion of our business loans may expose the Company to greater risk of loss.

The Company’s strategic plan includes growth in originations of business loans that are collateralized by non-real estate assets. Our business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral is accounts receivable, inventory, or equipment. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. Further, the borrowers’ ability to repay these loans may be impacted more from general economic conditions as compared to real estate secured loans.

Our non-owner occupied real estate loans may expose us to increased credit risk.


At December 31, 2017, $130.42022, $242.1 million, or 46.8%50.9% of our one-to-four family residential loan portfolio and 11.9%20.5% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. At December 31, 2017, all of our non-owner occupied one-to-four family residential loans were performing in accordance with their repayment terms. Loans secured by non-owner occupied properties generally expose a lender to greater risk of non-payment and loss than loans secured by owner occupied properties because repayment of such loans depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lenient property maintenance standards that negatively impact the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. At December 31, 2017,2022, we had 78127 non-owner occupied residential loan relationships with an outstanding balance over $500,000 and an aggregate balance of $102.1$196.8 million. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan.


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


At December 31, 2017, $278.72022, $475.8 million, or 25.5%40.3% of our total loan portfolio, was secured by first liens on one‑to‑four family residential loans.properties. In addition, at December 31, 2017,2022, our home equity lines of credit totaled $8.0$7.7 million. A significant portion of our one‑to‑four family residential real estate loan portfolio consists of jumbo loans that do not conform to secondary market mortgage requirements, and therefore are not immediately salable to Fannie Mae or Freddie Mac because such loans exceed the maximum balance allowable for sale (generally $453,000$647,000 to $667,000 $891,000 for single‑family homes in our primary market area)areas in 2022). Jumbo one‑to‑four family residential loans may expose us to increased risk because of their larger balances, and because they cannot be immediately sold to government sponsored enterprises.


In addition, one-to-four family residential loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the housing market may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These
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potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.


High loan-to-value ratios on a portion of our residential mortgage loan portfolio exposes us to greater risk of loss.

Some of our residential mortgage loans are secured by liens on mortgage properties in which the borrowers have little or no equity because of a decline in the value of the property subsequent to when the loans were originated. Residential loans with high loan-to-value ratios will be more sensitive to declining property values than those with lower loan-to-value ratios and, therefore, may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, such borrowers may be unable to repay their loans in full from the sale. As a result, these loans may experience higher rates of delinquencies, defaults and losses.

To meet our growth objectives we may originate or purchase loans outside of our market area which could affect the level of our net interest margin and nonperforming loans.


In order to achieve our desired loan portfolio growth, we have and may continue to opportunistically originate or purchase loans outside of our market area either individually, through participations, or in bulk or “pools”. We perform certain due diligence procedures and may re-underwrite these loans to our underwriting standards prior to purchase, and anticipate acquiring loans subject to customary limited indemnities, however, we may be exposed to a greater risk of loss as we acquire loans of a type or in geographic areas where management may not have substantial prior experience and which may be more difficult for us to monitor. Further, when determining the purchase price we are willing to pay to acquire loans, management will make certain assumptions about, among other things, how borrowers will prepay their loans, the real estate market and our ability to collect loans successfully and, if necessary, to dispose of any real estate that may be acquired through foreclosure. To the extent that our underlying assumptions prove to be inaccurate or the basis for those assumptions change (such as an unanticipated decline in the real estate market), the purchase price paid may prove to have been excessive, resulting in a lower yield or a loss of some or all of the loan principal. For example, if we purchase “pools” of loans at a premium and some of the loans are prepaid before we anticipate, we will earn less interest income on the acquired loans than expected. Our success in increasing our loan portfolio through loan purchases will depend on our ability to price the loans properly and on general economic conditions in the geographic areas where the underlying properties or collateral for the loans acquired are located. Inaccurate estimates or declines in economic conditions or real estate values in the markets where we purchase loans could significantly adversely affect the level of our nonperforming loans and our results of operations. At December 31, 2017,2022, our loan portfolio included $85.6$80.2 million, or 8.5%6.8% of total loans, net of LIP,located in counties within Washington State that are outside of our primary market area. In addition, our portfolio included $116.3$158.2 million, or 11.6%13.4% of total loans, in loans located outside of Washington State.


If the lead institutions on our loan participation agreements do not keep us informed about the changes in credit quality on the underlying loans in a timely manner, we could be subject to misstatement in our ALLL, or possibly losses on these loans.

The lead institution in our participation agreements is responsible for obtaining necessary credit information related to the underlying loans in these agreements. If there is credit deterioration on the loans in these agreements that results in a downgrade, and this information is not provided to us in a timely manner, we will not have the loans appropriately graded, which will result in an understatement of our ALLL. If the credit downgrade was significant, and our ALLL was not adequate, we could incur a loss on these loans. At December 31, 2022, we had $39.0 million in loan participations in which we were not the lead lender.

We engage in aircraft and classic and collectible car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. Consequently, if any of these transactions becomes non-performing,nonperforming, we could suffer a loss oron some or all of our value in the assets.


Because our primary focus for aircraft loans is on the asset value of the collateral, the collectability of an aircraft loanthese loans ultimately may be dependent on the value of the aircraft.underlying collateral. Aircraft values have from time to time experienced sharp decreases due to a number of factors including, but not limited to, the availability of used aircraft, decreases in passenger and air cargo demand, increases in fuel costs, government regulation and the comparative value of newly manufactured similar aircraft. AircraftClassic and collectible car values are similarly affected by availability and demand, however, due to the unique nature of these cars, the estimated value often does not align with listed values, therefore, approval of the loan is based on the borrower’s ability to repay. An aircraft, classic or collectible car as collateral also presents unique risks because it isof its high-value and being susceptible to rapid movement across different locations and potential catastrophic loss. Although the loan documentation for these transactions will include insurance covenants and other provisions to protect us against risk of loss, there can be no assurance that the insurance proceeds would be sufficient to ensure our full recovery of the aircraft loan. Moreover, a relatively small number of non-performing aircraftnonperforming loans could have a significant negative impact on the value of our loan portfolio. If we are required to liquidate a significant amountnumber of aircraft collateralaircrafts or classic or collectible cars during a period of reduced values, our financial condition and profitability could be adversely affected. At December 31, 2017, or2022, our loan portfolio included $12.5$53.7 million in classic and collectible car loans and $2.1 million in aircraft loans.


If interest rate swaps we entered into prove 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.

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We are exposed to the effects of interest rate changes as a result of the borrowings we use to maintain liquidity and fund our expansion and operations. To limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk, we may borrow at fixed rates or variable rates depending upon prevailing market conditions. We may also enter into derivative financial instruments such as interest rate swaps in order to mitigate our interest rate risk on a related financial instrument.



Our interest rate contracts expose us to:

basis or spread risk, which is the risk of loss associated with variations in the spread between the interest rate contract and the hedged item;

credit or counter-party risk which is the risk of the insolvency or other inability of another party to the transaction to perform its obligations;

interest rate risk;

volatility risk which is the risk that the expected uncertainty relating to the price of the underlying asset differs from what is anticipated; and

liquidity risk.

If we suffer losses on our interest rate contracts, our business, financial condition and prospects may be negatively affected, and our net income will decline.

We record the swaps at fair value, and designate them as an effective cash flow hedge under ASC 815, Derivatives and Hedging. Each quarter, we measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our swaps could prove to be ineffective for a number of reasons, including early retirement of the debt, as is allowed under the debt, or in the event the counterparty to the interest rate swaps were determined to not be creditworthy. Any determination that the hedge created by the swaps was ineffective could have a material adverse effect on our results of operations and cash flows and result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swaps, especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.

As of December 31, 2017, we had invested in interest rate swaps with an aggregate notional amount of $50.0 million.  At December 31, 2017, market value of our interest rate swaps was $1.5 million. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management”.

Our allowance for loan lossesALLL may prove to be insufficient to absorb losses in our loan portfolio. Future additions to our ALLL, as well as charge-offs in excess of reserves, will reduce our earnings.


While conditionsOur business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an ALLL to reflect potential defaults and nonperformance, which represents management's best estimate of probable incurred losses inherent in the housing and real estate markets and economic conditions in our market areas have recently improved, if slow economic conditions return or real estate values and sales deteriorate, we may experience higher delinquencies and credit losses. As a result, we could be required to increase our provision for loan losses and to charge-off additional loans in the future. If charge-offs in future periods exceed the ALLL, we may need additional provisions to replenish the ALLL.

portfolio.The determination of the appropriate level of the ALLL inherently involves a high degree of subjectivity and requires us to make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the ALLL, we review our loans and the loss and delinquency experience and evaluate economic conditions and make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the ALLL may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our provision for loan losses.losses which is charged against income. Deterioration in economic conditions, new information regarding existing loans, identification of additional problem loans or relationships, and other factors, both within and outside of our control, may increase our loan charge‑offs and/or may otherwise require an increase in the ALLL. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. In addition, bank regulatory agencies periodically review our allowance for loan and lease losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge‑offs based on their judgment about information available to them at the time of their examination. Any increases in the provision for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition, results of operations, and capital.


In addition, the Financial Accounting Standards Board has adopted newan accounting standard 2016-13 that will be effective for our first fiscal year after December 15, 2019. This standard referred to as Current Expected Credit Loss, or CECL, which will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses thatonly when they have been incurred and are probable, which may require us to increase our allowance for loan and lease losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. This accounting pronouncement will be applicable to us as of January 1, 2023. We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a one-time cumulative-effect adjustment to the allowance for loan and lease losses as of March 31, 2023, the first reporting period in which the new standard is effective. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital. For more on this new accounting

standard, see Note 1 of the Notes to Consolidated Financial Statements - Recently Issued Accounting Pronouncements contained in Item 8 of this report.

Risks Related to Market and Interest Rate Changes

Our results of operations, liquidity and cash flows are subject to interest rate risk.

Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve has increased the target range for the federal funds rate by 425 basis, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are to be expected during 2023. If the FOMC further increases the targeted federal funds rate, interest rates will likely continue to rise, which will positively impact our interest income, however, the increase in interest expense may be greater. In addition, higher rates may negatively impact the housing market, by reducing refinancing activity and new home purchases, and the U.S. economy.

We principally manage interest rate risk by managing the volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.

Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding.
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Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates increase, the yield we earn on our assets may not rise as fast as our funding costs, causing our net interest margin to contract. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates, however, at December 31, 2022, the yield curve was inverted with short-term rates above long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.

A sustained increase in market interest rates could adversely affect our earnings. As is the case with many banks our emphasis on increasing core deposits has resulted in an increasing percentage of our deposits being comprised of deposits bearing no or a relatively low rate of interest and having a shorter duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid on deposits and other real estate owned are not properly valuedborrowings increase at a faster rate than the interest rates received on loans and managedother investments, our net interest income, and therefore earnings, could be reduced.adversely affected.


Our inventoryIn addition, a portion of OREO property reduced from $2.3 million atour adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. At December 31, 20162022, 62.2% of our net loans were comprised of adjustable-rate loans. At that date, $377.6 million, or 51.3%, of these loans with an average interest rate of 4.21% were at their floor interest rate. The inability of our loans to $483,000 at December 31, 2017. We use current property valuationsadjust downward can contribute to increased income in the formperiods of appraisals when a loan has been foreclosed and the property taken in as OREO. Subsequently, an evaluationdeclining interest rates, although this result is performed by our experienced lending staff during the asset’s holding period. Our net book value in the loan at the time of foreclosure and thereafter is comparedsubject to the updated marketrisks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their respective floor, which is above the fully-indexed rate, 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 and could have a material adverse effect on our results of operations.

Changes in interest rates also affect the value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s net book value over its fair value. If our valuation process is incorrect,securities portfolio. Generally, the fair value of our investmentsfixed-rate securities fluctuates inversely with changes in OREO may not be sufficient to recover ourinterest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net book value in such assets, resultingof tax. Decreases in the needfair value of securities available for additional write-downs. During 2017, we had $50,000sale resulting from increases in valuation write-downsinterest rates could have an adverse effect on stockholders’ equity.

Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our inventoryresults of OREO properties. We may also incur significant property management and legal expenses related to our OREO. Additional material write-downs or expenses relating to our OREOoperations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results. For further discussion of how changes in interest rates could impact us, see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk" for additional information about our interest rate risk management.


Bank regulators periodically review our OREO and may require us to recognize additional write-downs. Any increaseIf interest rate swaps we entered into prove ineffective, it could result in volatility in our write-downs, as required by such regulators, mayoperating results, including potential losses, which could have a material adverse effect on our financial condition, results of operations and capital.cash flows.


We are exposed to the effects of interest rate changes as a result of the borrowings we use to maintain liquidity and fund our expansion and operations. To limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk, we may borrow at fixed rates or variable rates depending upon prevailing market conditions. We may also enter into derivative financial instruments such as interest rate swaps in order to mitigate our interest rate risk on a related financial instrument.

Our interest rate contracts expose us to:

•basis or spread risk, which is the risk of loss associated with variations in the spread between the interest rate contract and the hedged item;
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•credit or counter-party risk, which is the risk of the insolvency or other inability of another party to the transaction to perform its obligations;
•interest rate risk;
•volatility risk, which is the risk that the expected uncertainty relating to the price of the underlying asset differs from what is anticipated; and
•liquidity risk.

If we suffer losses on our interest rate contracts, our business, financial condition and prospects may be negatively affected, and our net income will decline.

We record the swaps at fair value and designate them as an effective cash flow hedge under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. Each quarter, we measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our swaps could prove to be ineffective for a number of reasons, including early retirement of the debt, as is allowed under the debt, or in the event the counterparty to the interest rate swaps were determined to not be creditworthy. Any determination that the hedge created by the swaps was ineffective could have a material adverse effect on our results of operations and cash flows and result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swaps, especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.

As of December 31, 2022, we had interest rate swaps outstanding with an aggregate notional amount of $95.0 million. At December 31, 2022, the fair value of our interest rate swaps was a $10.5 million gain. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management”.
We may incur losses on our securities portfolio as a result of changes in interest rates.portfolio.


Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting, the issuer or with respect to the underlying securities, instability in the capital markets and, as previously discussed, changes in market interest rates and continued instability in the capital markets.rates. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material effect on our business, financial condition and results of operations. As we are required to have sufficient liquidity to ensure a safe and sound operation, we may be required to sell securities at a loss if our liquidity position is not at a desirable level and all other sources of liquidity are exhausted. In an environment where other market participants are also liquidating securities, our loss could be materially higher than expected, significantly adversely impacting liquidity and capital levels. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, and would lead to accounting charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2022, we did not incur any other-than-temporary impairments on our securities portfolio.


Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

Liquidity is essentialRisks Related to our business, therefore, the inability to obtain adequate funding may negatively affect growth and, consequently, our earnings capability and capital levels. We rely on a number of different sources in order to meet our potential liquidity demands. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, or other sources could have a substantial negative effect on our liquidity.  Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and the continued uncertainty in credit markets. In particular, our liquidity position could be significantly constrained if we are unable to access funds from the FHLB Des Moines, the Federal Reserve Bank of San Francisco or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations. Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment that, on the one hand, tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand, reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us,Business Strategy

availability depends on the individual municipality’s fiscal policies and cash flow needs. At December 31, 2017 we had $21.5 million in public funds.

If limitations arise in our ability to utilize the national brokered deposit market or to replace short-term deposits, our ability to replace maturing deposits on acceptable terms could be adversely impacted.

First Financial Northwest Bank utilizes the national brokered deposit market for a portion of our funding needs. At December 31, 2017, the balance of brokered certificates of deposit was $75.5 million, with remaining maturities of 0.5 to 3 years. Under FDIC regulations, in the event we are deemed to be less than well-capitalized, we would be subject to restrictions on our use of brokered deposits and the interest rate we can offer on our deposits. If this happens, our use of brokered deposits and the rates we would be allowed to pay on deposits may significantly limit our ability to use deposits as a funding source. If we are unable to participate in this market for any reason in the future, our ability to replace these deposits at maturity could be adversely impacted.

Further, there may be competitive pressures to pay higher interest rates on deposits, which would increase our funding costs. If deposit clients move money out of the Bank deposits and into other investments (or into similar products at other institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could result in reduced loan originations, which could materially negatively impact our growth strategy and results of operations.

Our limited branch locations limit our ability to attract deposits and as a result, a large portion of our deposits are certificates of deposit, including “jumbo” certificates that may not be as stable as other types of deposits.

With nine branch locations in operation during 2017, our ability to compete with larger institutions for noninterest bearing deposits is limited as these institutions have a larger branch network providing greater convenience to customers. As a result, we are dependent on more interest rate sensitive deposits. At December 31, 2017, $333.3 million, or 39.7%, of our total deposits were retail certificates of deposit and, of that amount, $246.0 million were “jumbo” certificates greater than or equal to $100,000, with $84.3 million of these certificates greater than or equal to $250,000. In addition, deposit inflows are significantly influenced by general interest rates. Our money market accounts and jumbo certificates of deposit and the retention of these deposits are particularly sensitive to general interest rates, making these deposits traditionally a more volatile source of funding than other deposit accounts. In order to retain our money market accounts and jumbo certificates of deposit, we may have to pay a higher rate, resulting in an increase in our cost of funds. In a rising rate environment, we may be unwilling or unable to pay a competitive rate because of the resulting compression in our interest rate spread. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings or other deposits that could increase our cost of funds and negatively impact our interest rate spread and financial condition.


Our branching strategy may cause our expenses to increase faster than revenues.
During 2017, we opened a new branch office in Bellevue, Washington and acquired four additional branch locations in Woodinville, Clearview, Smokey Point, and Lake Stevens, all in Washington.
Our current business strategy includes continued similar branch expansion in strategic areas to enhance our market presence. These offices arenew branches tend to be much smaller than traditional bank branch offices, utilizing the improved technology available with our new core data processor. This allows us to maintain management’s focus on efficiency, while working to expand the Bank’sour presence into new markets. The success of our expansion strategy into new markets, however, is contingent upon numerous factors, such as our ability to select suitable locations, assess each market’s competitive environment, secure managerial resources, hire and retain qualified personnel and implement effective marketing strategies. The opening of new offices may not increase the volume of our loans and deposits as quickly as or to the degree that we hope, and opening new offices will increase our operating expenses. On average, de novo branches do not become profitable until three to four years after opening. We currently expect to lease rather than own theany additional branch properties. Further, the projected time linetimeline and the estimated dollar amounts involved in opening de novo branches could differ significantly from actual results. The success of our acquired
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branches is dependent on retention of existing customers’ deposits as well as expanding our market presence in these locations. We may not successfully manage the costs and implementation risks associated with our branching strategy. Accordingly, any new branch may negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Finally, there is a risk that our new branches will not be successful even after they have been established or acquired.



Risks Related to Regulatory and Compliance Matters
Our Wealth Management segment is subject to a number of risks, including reputational risk.

Our Wealth Management segment derives the majority of its revenue from noninterest income. Success in this business segment is highly dependent on reputation. Our ability to attract wealth management clients is highly dependent upon external perceptions of this division’s level of service, trustworthiness, business practices and financial condition. Negative perceptions or publicity regarding these matters could damage the division’s and our reputation among existing customers and corporate clients, which could make it difficult for the wealth management line of business to attract new clients and maintain existing ones. Adverse developments with respect to the financial services industry or our operation may also negatively impact our reputation, or result in greater regulatory or legislative scrutiny or litigation against us. Although we monitor developments for areas of potential risk to the lines of business and our reputation and brand, negative perceptions or publicity could materially and adversely impact both revenue and net income.

We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our growth strategy could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations that are expected to increase our costs of operations.

As a state-chartered, federally insured commercial bank, First Financial Northwest Bank is currently subject to extensive examination, supervision and comprehensive regulation by the FDIC and the DFI and as a bank holding company First Financial Northwest is subject to examination, supervision and regulation by the Federal Reserve. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on an institution’s operations, reclassify assets, determine the adequacy of an institution’s ALLL and determine the level of deposit insurance premiums assessed.

Additionally, the Dodd-Frank Act has significantly changed the bank regulatory structure and will affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws and rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Financial institutions such as First Financial Northwest Bank with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators but are subject to the rules of the CFPB.

The CFPB has issued a number of final regulations and changes to certain consumer protections under existing laws. These final rules, most of the provisions of which (including the qualified mortgage rule) generally prohibit creditors from extending mortgage loans without regard for the consumer’s ability-to-repay and add restrictions and requirements to mortgage origination and servicing practices. In addition, these rules limit prepayment penalties and require the creditor to retain evidence of compliance with the ability-to-repay requirement for three years. Compliance with these rules has increased our overall regulatory compliance costs and may require changes to our underwriting practices with respect to mortgage loans. This includes compliance with The Truth in Lending Act and the Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule, which combines certain disclosures that consumers receive in connection with applying for and closing a mortgage loan. Moreover, these rules may adversely affect the volume of mortgage loans that we underwrite and may subject us to increased potential liabilities related to such residential loan origination activities.


It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs, which could adversely affect key operating efficiency ratios. See - “How We are Regulated” contained in, Item I‑Business of this report.


Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
 
The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan, including acquisitions.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.


We may be adversely affected by changes in U.S. tax lawsIf our enterprise risk management framework is not effective at mitigating risk and regulations.

The Tax Act was signed into law in December 2017 reforming the U.S. tax code. The legislation includes lowering the 35% corporate income tax rateloss to 21%, modifying the U.S. taxation of income earned outside the U.S.us, we could suffer unexpected losses and limiting or eliminating various deductions, tax credits and/or other tax preferences. While we expect to benefit on a prospective net income basis from the decrease in corporate income tax rates, the legislation has resulted in an $807,000 decrease in the value of our deferred tax asset, which resulted in a material reduction to net income during the year ended December 31, 2017. In addition, the legislation could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, could also negatively impact the housing market, which could adversely affect our business and loan growth.

New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations cash flows,could be materially adversely affected.

Our enterprise risk management framework seeks to achieve an appropriate balance between risk and financial condition.

The banking industryreturn, which is extensively regulated. Federalcritical to optimizing stockholder value. We have established processes and state banking regulationsprocedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program designed primarily to protect the deposit insurance fundsidentify, measure, assess, and consumers, notreport on our adherence to benefit a company’s shareholders. These regulations may sometimes impose significant limitationsapplicable laws, policies and procedures. While we assess and improve these programs on operations. The significant federal and state banking regulationsan ongoing basis, there can be no assurance that affect us are described in this report under the heading “Item 1. Business- How We are Regulated”. These regulations,our risk management or compliance programs, along with the currently existing tax, accounting, securities, insurance,other related controls, will effectively mitigate all risk and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. The current administration has indicated that it would like to see changes made to certain financial reform regulations, including the Dodd-Frank Act, which has resultedlimit losses in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. ChangesHowever, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, whichthe future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and or otherwise adversely affect ussuffer unexpected losses and our profitability. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report ourbusiness financial condition and results of our operations as could our interpretation of those changes.


Our operations rely on numerous external vendors.

We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptivematerially adversely affected.

Risks Related to our operations, which in turn could have a material negative impact on our financial conditionCybersecurity, Data and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third party vendor or is renewed on terms less favorable to us.Fraud


We are subject to certain risks in connection with our use of technology.
    
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.


We support the ability of our customers to transact business through multiple automated methods. As such, we may be susceptible to fraud performed through these technologies.

Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems), or other developments could result in a
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compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. TheseAlthough we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in significant legal liability and significantlosses to us or our customers, our loss of business and/or customers, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business.business, financial condition and results of operations.


Our security measures may not protect us from systemssystem failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches, or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.


The occurrence of anyWe cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may require usnot be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and our results of operations could be materially adversely affected.

Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. We also maintain a compliance program to identify measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk

management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially adversely affected.


We are subject to certain risks in connection with our data management or aggregation.


We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs, processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage current and emerging risks, as well as to manage changing business needs.


Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.


Our loansAs a bank, we are susceptible to businesses and individuals andfraudulent activity that may be committed against us or our deposit relationships and related transactions are subjectcustomers which may result in financial losses or increased costs to exposureus or our customers, disclosure or misuse of our information or our customer’s information, misappropriation of assets, privacy breaches against our customers, litigation, or damage to the risk of loss due toour reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other financial crimes.dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.


Risks Related to Our Business and Industry Generally

We rely on other companies to provide key components of our business infrastructure.

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We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor's organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent a service agreement is not renewed by the third-party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of their vendors’ performance, including aspects which they delegate to third parties.

We will be required to transition from the use of the London Interbank Offered Rate ("LIBOR") in the future.

We have certain FHLB advances, loans, interest rate swaps and investment securities, indexed to LIBOR to calculate the interest rate. ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June 2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates. The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities, and may impact the availability and cost of hedging instruments and borrowings., including the rates we pay on our subordinated debentures and trust preferred securities. The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Ineffective liquidity management could adversely affect our financial results and condition.

Effective liquidity management is essential to our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and at times, borrowings from the FHLB of Des Moines and certain other wholesale funding sources to fund our operations. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve. Further, changes to the FHLB of Des Moines's underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our ability to borrow, and could therefore have a significant adverse impact on our liquidity. Historically, we have been able to replace maturing deposits and borrowings if desired, however, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB of Des Moines, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry or deterioration in credit markets. Additional factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us. Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations. In addition, in order to maintain adequate liquidity we may have to sell investment securities at a loss, which could adversely impact our financial condition and operations, including but not necessarily limited to lower earnings and capital levels.
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Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed, or the cost of that capital may be very high.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. At some point, we may need to raise additional capital to support our growth or replenish future losses. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.


Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where First Financial Northwest Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing, and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President, and certain other employees. In addition, our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors.


We participate in a multiple employer defined benefit pension plan for the benefit of our employees. If we were to withdraw from this plan, or if Pentegra, the multiple employer defined benefit pension plan sponsor, requires us to make additional contributions, we could incur a substantial expense in connection with the withdrawal or the request for additional contributions.


We participate in the Pentegra Defined Benefit Plan for Financial Institutions, a multiple employer pension plan for the benefit of our employees. Effective March 31, 2013, we did not allow additional employees to participate in this plan. On March 31, 2013, weplan and froze the future accrual of benefits under this plan with respect to those participating employees. In connection with our decision to freeze our benefit accruals under the plan, and since then, we considered withdrawing from the plan.

If we choose to withdraw from the plan, we could incur a substantial expense in connection with the withdrawal. The actual expense that would be incurred in connection with a withdrawal from the plan is primarily dependent upon the timing of the withdrawal, the total value of the plan’s assets at the time of withdrawal, general market interest rates at that time, expenses imposed on withdrawal, and other conditions imposed by Pentegra as set forth in the plan. If we choose to withdraw from the plan in the future, we could incur a substantial expense in connection with the withdrawal.


Even if we do not withdraw from the plan, Pentegra, as sponsor of the plan, may request that we make an additional contribution to the plan, in addition to contributions that we are regularly required to make, or obtain a letter of credit in favor of the plan, if our financial condition worsens to the point that it triggers certain criteria set out in the plan. If we fail to make the contribution or obtain the requested letter of credit, then we may be forced to withdraw from the plan and establish a separate, single employer defined benefit plan that we anticipate would be underfunded to a similar extent as under the multiple employer plan.


We rely on dividends from the Bank for substantially all of our revenue at the holding company level.



We are    First Financial Northwest is an entity separate and distinct from our principal subsidiary, First Financial Northwestthe Bank, and derivederives substantially all of ourits revenue at the holding company level in the form of dividends from that subsidiary.the Bank. Accordingly, we are,First Federal Northwest is, and will be, dependent upon dividends from the Bank to pay the principal of and interest on ourits indebtedness, to satisfy ourits other cash needs and to pay dividends on ourits common stock. First Financial NorthwestThe Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements.requirements, including the capital conservation buffer requirement. In the event the Bank is unable to pay dividends to us, weFirst Financial Northwest, it may not be able to pay dividends on ourits common stock or continue its stock repurchases.

48

If we fail to meet the expectations of our stakeholders with respect to our environmental, social and governance (“ESG”) practices, including those relating to sustainability, it may have an adverse effect on our reputation and results of operation.

Our reputation may also be negatively impacted by our diversity, equity and inclusion (“DEI”) efforts if they fall short of expectations. In addition, various private third-party organizations have developed ratings processes for evaluating companies on their approach to ESG and DEI matters. These ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. Furthermore, increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation to do business with certain partners, and our stock repurchases. Also, our right to participateprice. New government regulations could also result in a distributionnew or more stringent forms of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.


Item 1B. Unresolved Staff Comments


First Financial Northwest has not received any written comments from the SEC regarding its periodic or current reports under the Securities Exchange Act of 1934, as amended, that are unresolved.amended.


Item 2. Properties


The corporate office for First Financial Northwest and First Financial Northwest Bankthe Company is located at 201 Wells Avenue South, Renton, Washington and is owned by us. The Bank’s full service retail operation is also at this location. As part of the Branch Acquisition in August 2017,In addition, the Bank purchasedowns a branch facility in Clearview,retail office located at 17424 SR 9, Snohomish, Washington. At December 31, 2017,2022, the Bank had seventhirteen leased locations in Washington currently in operation: Mill Creek, Edmonds, “The Landing” in Renton, Bellevue, Bothell, Woodinville, Smokey Point, and Lake Stevens. In addition, the Bank entered into a lease for a future branch location in Bothell, Washington, that is scheduled to open in the first quarter of 2018. In addition, the branch operations at Woodinville and Lake Stevens, are moving to new leased locations during the first quarter of 2018.Kent, Kirkland, University Place, Gig Harbor, and Issaquah. The lending division operations of First Financial Northwest Bank are at our owned location at 207 Wells Avenue South, Renton, Washington. This location is also the site for the operations of First Financial Northwest’s wholly-owned subsidiary, First Financial Diversified. The lease terms for our properties are for an initial term of three to five years with the option to extend for additional three to five year periods. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use. For additional information on our lease commitments, see Note 10- “Leases” of the Notes to Consolidated Financial Statements in Item 8 of this report.


Item 3. Legal Proceedings


From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. As of December 31, 2017,2022, we were not involved in any significant litigation and do not anticipate incurring any material liability as a result of any such litigation.


Item 4. Mine Safety Disclosures


Not applicable.

PART II


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


Our common stock is traded on The Nasdaq Stock Market LLC’s Global Select Market (“NASDAQ”), under the symbol “FFNW.” As of December 31, 2017,March 9, 2023, there were 10.7 million shares of common stock issued and outstanding and we had 554 were approximately 473 shareholders of record, excluding persons or entities that hold stockstock in nominee or “street name” accounts with brokers.


Dividends

First Financial Northwest BankAs of December 31, 2022, our board of directors had declared 39 consecutive quarterly cash dividends on our common stock. Our cash dividend payout policy is a wholly-owned subsidiaryreviewed regularly by management and the Board of First Financial Northwest. Under federal regulations, the dollar amount of dividends First Financial Northwest Bank may pay to First Financial Northwest depends upon its capital position and recent net income. Generally, if First Financial Northwest Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed by state law and FDIC regulations. See “Item 1. Business – How We Are Regulated – Regulation and Supervision of First Financial Northwest – Dividends” and Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

There were $2.8 million inDirectors. Any dividends declared and paid in the future would depend upon a number of factors, including capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods. Our
49

future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations.

Stock Repurchases

The following table represents First Financial Northwest common shares repurchased during the yearsfourth quarter ended December 31, 2017 and 2016. The price range per share of our common stock presented below represents the highest and lowest sales prices for our common stock on the NASDAQ during each quarter of the two most recent fiscal years.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
October 1 - October 31, 2022— $— — 456,000 
November 1 - November 30, 2022— — — 456,000 
December 1 - December 31, 2022— — — 456,000 
— — — 

 High Low Cash Dividends Declared and Paid
2017     
First Quarter$21.29
 $17.38
 $0.06
Second Quarter17.68
 14.83
 0.07
Third Quarter17.78
 15.67
 0.07
Fourth Quarter17.91
 14.90
 0.07
      
2016     
First Quarter$13.88
 $12.51
 $0.06
Second Quarter13.89
 12.55
 0.06
Third Quarter14.20
 12.88
 0.06
Fourth Quarter20.54
 14.06
 0.06

Stock Repurchases

The Company’s Board of Directors authorized the repurchase of shares of our common stock under two stock repurchase plans in 2017. Stock repurchases through the stock repurchase plans are made in accordance with a plan established under the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934 as administered through an independent broker. During 2017,On August 16, 2021, the Company did not repurchase any additional shares under the stock repurchase planannounced that began on September 16, 2016 and expired on March 17, 2017. On May 22, 2017, theits Board of Directors authorized the repurchase of up to 1,100,000476,000 shares of the Company’s stock between May 30, 2017 and November 30, 2017. At the completion of the repurchase period, the Company had repurchased under thiscommon stock. The August 2021 stock repurchase plan 326,800program expired on February 15, 2022, with 459,732 shares repurchased at an average price of $15.99$16.83 per share.

On February 15, 2022, the Company announced that its Board of Directors authorized the repurchase of up to 5% of the Company’s outstanding common stock, or approximately 455,000 shares. The following table representsFebruary 2022 stock repurchase program expired on September 16, 2022, with 61,913 shares repurchased at an average price of $16.22 per share. On October 3, 2022, the share repurchased duringCompany announced that its Board of Directors authorized the fourth quarter endedrepurchase of up to 456,000 shares of the Company common stock. The October 2023 stock repurchase program expires upon the earlier of March 17, 2023, or repurchase of the full amount of authorized shares. As of December 31, 2017.

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Plan Maximum Number of Shares that May be Repurchased Under the Plan
October 1 - October 31, 2017 (1)
 —
 $—
 —
 786,800
November 1 - November 30, 2017 (1)
 13,600
 15.99
 13,600
 —
December 1 - December 31, 2017 —
 —
 —
 —
Total 13,600
 15.99
 13,600
 —
_______________
(1) Shares2022, there was no shares repurchased under the stock repurchase plan effective May 30, 2017 through November 30, 2017.this plan.


Equity Compensation Plan Information


The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this report is incorporated herein by reference.


Performance Graph

The following graph compares the cumulative total shareholder return on First Financial Northwest’s Common Stock with the cumulative total return on the Russell 2000 Index, the SNL Micro CAP U.S. Bank Index, and the SNL Thrift Index, a peer group index. Last year, the stock performance graph contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 also included the NASDAQ Bank Index and for the first time, the SNL Micro CAP U.S. Bank Index, the intended replacement for the NASDAQ Bank Index. The Company believes that a better industry comparison is provided by our replacement of the NASDAQ Bank Index with the SNL Micro CAP U.S. Bank, which we believe provides a better peer group comparison of our Company.

The graph assumes that total return includes the reinvestment of all dividends and that the value of the investment in First Financial Northwest’s common stock and each index was $100 on December 31, 2012, and is the base amount used in the graph. The closing price of First Financial Northwest’s common stock on December 29, 2017 was $15.51.

 Period Ended
Index12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
First Financial Northwest, Inc.100.00
 138.95
 164.31
 194.25
 279.39
 223.03
Russell 2000 Index100.00
 138.82
 145.62
 139.19
 168.85
 193.58
SNL Thrift Index100.00
 128.33
 138.02
 155.20
 190.11
 188.72
SNL Micro Cap U.S. Bank100.00
 129.02
 146.32
 162.71
 200.04
 244.72



Item 6. Selected Financial DataReserved

The following table sets forth certain information concerning our consolidated financial position and results of operations at and for the dates indicated and has been derived from our audited consolidated financial statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data” included in this Form 10-K.
 At or For the Year Ended December 31,
 2017 2016 2015 2014 2013
FINANCIAL CONDITION DATA:(In thousands, except share data)
          
Total assets$1,210,229
 $1,037,584
 $979,913
 $936,997
 $920,979
Investments available-for-sale132,242
 129,260
 129,565
 120,374
 144,364
Loans receivable, net (1)
988,662
 815,043
 685,072
 663,938
 663,153
Deposits839,502
 717,476
 675,407
 614,127
 612,065
Advances from the FHLB216,000
 171,500
 125,500
 135,500
 119,000
Stockholders’ equity142,634
 138,125
 170,673
 181,412
 184,355
          
OPERATING DATA:         
          
Interest income$47,644
 $41,709
 $37,197
 $38,689
 $38,539
Interest expense10,022
 7,507
 6,751
 6,241
 7,526
Net interest income37,622
 34,202
 30,446
 32,448
 31,013
Provision (recapture of provision) for loan losses(400) 1,300
 (2,200) (2,100) (100)
Net interest income after provision (recapture of provision) for loan losses38,022
 32,902
 32,646
 34,548
 31,113
Noninterest income2,208
 2,651
 1,279
 498
 891
Noninterest expense26,809
 22,949
 19,878
 18,503
 21,082
Income before provision (benefit) for federal
   income taxes
13,421
 12,604
 14,047
 16,543
 10,922
Provision (benefit) for federal income taxes4,942
 3,712
 4,887
 5,856
 (13,543)
Net income$8,479
 $8,892
 $9,160
 $10,687
 $24,465
Basic earnings per share$0.82
 $0.75
 $0.67
 $0.72
 $1.47
Diluted earnings per share$0.81
 $0.74
 $0.67
 $0.71
 $1.46
___________________
(1) Net of ALLL, LIP and deferred loan fees and costs. 



 At or For the Year Ended December 31,
KEY FINANCIAL RATIOS:2017 2016 2015 2014 2013
Performance Ratios:         
Return on average assets0.76 % 0.88 % 0.96 % 1.17% 2.73 %
Return on average equity5.94
 5.55
 5.15
 5.85
 13.12
Dividend payout ratio32.93
 32.02
 35.57
 27.73
 8.11
Equity-to-assets ratio11.79
 13.31
 17.42
 19.36
 20.02
Interest rate spread3.47
 3.47
 3.23
 3.62
 3.49
Net interest margin3.60
 3.60
 3.38
 3.77
 3.68
Average interest-earning assets to average interest-bearing
   liabilities
114.07
 117.11
 120.45
 121.15
 121.77
Efficiency ratio67.31
 62.27
 62.66
 56.37
 66.08
Noninterest expense as a percent of average total assets2.42
 2.27
 2.07
 2.03
 2.36
Book value per common share$13.27
 $12.63
 $12.40
 $11.96
 $11.25
Capital Ratios: (1)
         
Tier 1 leverage10.20 % 11.17 % 11.61 % 11.79% 18.60 %
Common equity tier 112.52
 14.36
 16.36 n/a n/a
Tier 1 capital ratio12.52
 14.36
 16.36
 18.30
 27.18
Total capital ratio13.77
 15.61
 17.62
 19.56
 28.44
Asset Quality Ratios: (2)
         
Nonperforming loans as a percent of total loans0.02
 0.10
 0.16
 0.20
 0.59
Nonperforming assets as a percent of total assets0.05
 0.31
 0.48
 1.13
 1.68
ALLL as a percent of total loans, net of LIP1.28
 1.32
 1.36
 1.55
 1.91
ALLL as a percent of nonperforming loans, net of LIP7,196.65
 1,276.34
 872.17
 783.50
 325.26
Net (recoveries) charge-offs to average loans receivable, net(0.27) (0.02) (0.18) 0.06
 (0.08)
_______________
(1) Capital ratios are for First Financial Northwest Bank only.
(2) Loans are reported net of LIP.

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


This discussion and analysis reviews our consolidated financial statements and other relevant statistical data for the years ending December 31, 2022 and 2021, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in Item 8 of this Form 10-K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of First Financial Northwest and its subsidiaries. For a discussion and review of our consolidated financial statements and other relevant statistical data for the years ending December 31, 2021 and 2020 see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2021.


Overview


First Financial Northwest Bank is a wholly-owned subsidiary of First Financial Northwest and, as such, comprises substantially all of the activity for First Financial Northwest. First Financial NorthwestThe Bank was a community-based savings bank until February 4, 2016, when the Bank converted to a Washington state chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Snohomish, Pierce Snohomish and Kitsap counties, Washington through its full-service banking office and headquarters in Renton, Washington, as well as threeseven retail branches in King County, Washington, and five retail branches in Snohomish County, Washington. On August 25, 2017, the Bank completed the purchase of fourWashington, and two retail branches in WoodinvillePierce County, Washington at December 31, 2022. The Bank purchased four of these branches in King County, and Lake Stevens, Clearview, and Smokey Point in Snohomish County2017 and acquired $74.7 million in deposits.deposits (the “Branch
50

Acquisition”). The Branch Acquisition expanded our retail footprint and provided an opportunity to extend our unique brand of community banking into those communities. In addition, the Bank has received regulatory approval to open a new branch office at The Junction, a new, mixed use development in Bothell, Washington which is expected to open in the first quarter of 2018.


The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the Federal Home Loan Bank of Des Moines (“FHLB”)FHLB and raising funds in the wholesale market, 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 with our current risk tolerance levels and asset/liability objectives. Our current business strategy emphasizes commercial real estate, construction, one-to-four family residential, and multifamily lending. With the current low interest rate environment, we are not aggressively pursuing longer term assets, but rather are focused on financing shorter term loans, in particular construction/land loans. During 2017,2022, loan originations, of new loansrefinances and refinancespurchases outpaced repayments of loans, resulting in an increase of $63.6 million in net loans receivable with a balance of $988.7 million$1.17 billion at December 31, 2017,2022. Originations of one-to-four family residential loans were $160.3 million in 2022, as compared to $815.0$124.2 million in 2021.

We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans, as well as consumer classic and collectible car loans, that are outside of our primary market area. Commercial and multifamily real estate purchases and participation in 2022 were $9.1 million, compared to $32.6 million in 2021. Consumer loans purchased in 2022 were $31.8 million, compared to $20.3 million in 2021.

Through our efforts to geographically diversify our loan portfolio outside of the State of Washington with direct loan originations, loan participations, or loan purchases, our portfolio includes $158.2 million of loans to borrowers or secured by properties located in 47 other states, plus Washington, D.C., with the largest concentrations at December 31, 2016. Recently, improvements2022, in California, Oregon, Texas, Florida, and Alabama of $37.1 million, $13.8 million, $9.4 million, $10.7 million and $8.0 million of loans, respectively.

The Bank has affiliated with an SBA partner to process our SBA loans while the economy, employment rates, stronger real estate prices, and a general lack of new housing inventory in certain areas inBank retains the Puget Sound region have resulted in our significantly increasing originations of construction loans for properties located in our market area. We anticipate that construction/land lending will continuecredit decisions. This enables us to be a strong element ofactive in lending to small businesses until our totalvolumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan portfolio in future periods. We will continueapproval as well as closing and most servicing and liquidation authority, enabling the Bank 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. Originations of construction/land loans decreased to $138.6 million in 2017 from $165.4 million in 2016. These short term loans typically mature in six to eighteen months.make loan decisions more rapidly. In addition, the funding is usually not fully disbursed at origination, thereby reducingBank 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.

    Net income for the year ended December 31, 2022, was $13.2 million, or $1.45 per diluted share, compared to $12.2 million, or $1.29 per diluted share, for the year ended December 31, 2021. The primary contributor to this increase was a $3.4 million increase in net interest income as our increase in interest income exceeded the increase in interest expense. In addition, we recorded a recapture of the provision for loan losses of $400,000 in 2022, compared to a $300,000 provision for loan losses in 2021, primarily as a result of the net loans receivableimpact of changes in the short term. At December 31, 2017, construction/land loans netloan portfolio mix and changes in impairment status of LIP was $145.6 million, a 6.4% increase from $136.9 million at December 31, 2016.loans. Partially offsetting these improvements, noninterest income decreased $639,000 and noninterest expense increased $2.2 million.

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income. First Financial NorthwestThe Bank is liability-sensitive,currently liability sensitive, meaning our interest-bearing liabilities reprice at a faster rate than our interest-earning assets. Despite increasingThe Bank had a modest improvement in the net interest ratesmargin over the last year, changesyear. Other than the FHLB stock, average yields of all interest-earning assets increased, primarily due to an increase in interest rates resulting from the compositionrising rate environment. For the same reasons, cost of our interest‑earning assets and interest-bearing liabilities enabled us to maintain our net interest rate spread and net interest margin at 3.47% and 3.60%, respectively, for both the years ended December 31, 2017 and 2016.
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 ALLLfunds also increased, but at a level that adequately provides for probable losses inherentslower pace than interest income. During 2022, the Bank supplemented its funding needs with higher cost brokered deposits as they were deemed the most appropriate alternative funding source, resulting in our loan portfolio. a $1.1 million increase in interest expense from those funds.

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.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. During 2017, we had a recapture from the ALLL of $400,000 as compared to a provision for loan losses of $1.3 million forFor the year ended December 31, 2016. The2022, the Company recorded a recapture of provision for loan losses in 2017 was primarily a resultthe amount of $2.3 million in net recoveries received on previously charged-off loans partially offset by the provision necessary to support the $173.6 million growth in net loans receivable. Our total adversely classified loans decreased to $1.3 million at December 31, 2017 from $1.9 million at December 31, 2016. We will continue to monitor our loan portfolio and make adjustments to our ALLL as we deem necessary.$400,000.


51

Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of bank owned life insurance (“BOLI”), and revenue earned on our wealth management brokerage services. This incomeservices and is increased or partially offsetalso affected by any net gain or loss on sales of investment securities. Our noninterest income decreased $443,000$639,000 during the year ended December 31, 20172022, as compared to 2016. The decrease was2021, primarily attributable to a $567,000 loss on sale of investments and a $221,000$425,000 decrease in the noninterest income from our BOLI policies, partially offset by a $290,000 increase in deposit and loan related fees, and a $106,000 increase in wealth management revenue.prepayment penalties.


Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement, and other employee benefits. OREO-related expenses consist primarily of maintenance and costs of utilities for the OREO inventory, market valuation adjustments, build-out expenses, gains and losses from OREO sales, legal fees, real estate taxes, and insurance related to the properties included in the OREO inventory. 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 are changes to the Company’s unfunded commitment reserve which are 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. Our noninterest expenses increased $3.9$2.2 million during the year ended December 31, 20172022, as compared to 2016.2021. The increase was primarily attributable to a $2.4 million

$896,000 increase in salarysalaries and employee benefits, expenses,reflecting higher than normal vacancies in staffing during 2021, a $546,000 increase in data processing expenses, a $522,000$219,000 increase in occupancy and equipment, expenses,a $440,000 increase in professional fees, including a $183,000 examination fee that was not included in 2021, a $149,000 increase in marketing expense and a $730,000$574,000 increase in other general and administrative expenses in 2017 as comparedexpense, due to 2016.a number of factors, including increased subscriptions, travel and business development efforts.


Net income for the year ended December 31, 2017, was $8.5 million, or $0.81 per diluted share, compared to $8.9 million, or $0.74 per diluted share, for the year ended December 31, 2016. Following the passing of the Tax Act, we elected to restructure a portion of our investment portfolio. Specifically, we sold approximately $37.0 million in securities at a loss of $670,000, which was the primary reason for the $443,000 decline in noninterest income. The investments sold were all fixed rate securities, with the proceeds reinvested primarily into adjustable rate securities. Also relating to passage of the Tax Act, we recorded a charge of $807,000 through the federal income tax provision relating to changes to our net deferred tax asset valuation as a result of the new lower enacted corporate income tax rates, which, along with higher pre-tax net income, resulted in a $1.2 million increase in the federal income tax provision. These charges, combined with a $3.9 million increase in noninterest expense reflecting the growth in our operations over the last year, which was partially offset by a $3.4 million increase in net interest income, due primarily to the increase in net loans receivable and a $400,000 recapture of provision for loan losses, were the primary factors for the decrease in net income for the year ended December 31, 2017.

Business Strategy


Our long-term business strategy is to operate and grow First Financial Northwestthe Bank as a well-capitalized and profitable community bank, offering one-to-four family residential, commercial and multifamily, construction/land, consumer and business loans along with a diversified array of deposit and other products and services to individuals and businesses in our market areas. We intend to accomplish this strategy by leveraging our established name and franchise, capital strength, and loan production capability by:
•Capitalizing on our intimate knowledge of our local communities to serve the convenience and needs of customers, and delivering a consistent, high-quality level of professional service;
•Offering competitive deposit rates and developing customer relationships to diversify our deposit mix, growing lower cost deposits, attracting new customers, and expanding our footprint in the geographical area we serve;
•Utilizing wholesale funding sources, including but not limited to FHLB advances and acquiring deposits in the national brokered certificate of deposit market, to assist with funding needs and interest rate risk management efforts, as needed;
•Managing our loan portfolio to minimize concentration risk and diversify the types of loans within the portfolio;
•Managing credit risk to minimize the risk of loss and interest rate risk to optimize our net interest margin; and
•Improving profitability through disciplined pricing, expense control and balance sheet management, while continuing to provide excellent customer service.
52



Critical Accounting PoliciesEstimates


CriticalWe prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting policiesestimates are those estimates that involve a significant judgmentslevel of uncertainty at the time the estimate was made, and assumptions by management andchanges in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have or couldused in the current period, would have a material impact on our incomefinancial condition or results of operations.Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the carrying value of our assets. The following arecircumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting policies.estimates with the audit committee of our Board of Directors.


See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.

Allowance for Loan and Lease 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. 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, borrower’s ability to repay, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, 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 the level of problem loansloan 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 it determines it is probablemanagement believes that all contractual amounts of principal and interest will not be paid as scheduled. TheBased on this impairment analysis, usually occurs when aif the recorded investment in the loan has been classified as substandard or placed on nonaccrual status. Ifis less than the market value of the collateral less costs to sell (“market value”) of the impaired loan is less than the recorded investment in the loan, impairment is recognized by establishing, a specific reserve is established in the ALLL for the loan or by adjusting an existing reserve amount.loan. The amount of the specific reserve 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 evaluationanalysis is inherently subjective as it requiresrelies on estimates that are susceptible to significant revision as more information becomes available or as future events differ from predictions. In addition, specific reserves may be created uponLoans classified as TDRs due to the borrower being granted a loan’s restructuring,

based onrate concession are analyzed by a discounted cash flow analysis,analysis. The amount of the specific reserve on these loans is calculated by comparing the present value of the anticipated repayments under the restructured terms to the outstanding principal balance ofrecorded investment in the loan.


Our Board of Directors’ Internal Asset Review Committee reviews and recommends for approval the allowance for loan and lease losses on a quarterly basis, and any related provision or recapture of provision for loan losses, and the full Board of Directors approves the provision or recapture after considering the Committee’s recommendations. The allowance is increased by the provision for loan losses which is charged against current period earnings. When analysis of the loan portfolio warrants, the allowance is decreased and a recapture of provision of loan losses is included in current period earnings.


We believe that the ALLL is a critical accounting estimate because it is highly susceptible to change from period‑to‑period requiring management to make assumptions about probable losses inherent in the loan portfolio. The impact of an unexpected large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, thereby reducing earnings. For additional information see Item 1A. “Risk Factors – Risks Related to Our Lending - Our allowance for loan and lease losses may prove to be insufficient to absorb losses in our loan portfolio,” in this Form 10-K.


Valuation of OREO. Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. Fair value is generally determined by management based on a number of factors, including third-party appraisals of fair value in an orderly sale. Accordingly, the valuation of OREO is subject to significant external and internal judgment. If the carrying value of the loan at the date a property is transferred into OREO exceeds the fair value less estimated costs to sell, the excess is charged to the ALLL. Management periodically reviews OREO values to determine whether the property continues to be carried at the lower of its recorded book value or fair value, net of estimated costs to sell. Any further decreases in the value of OREO are considered valuation adjustments and are charged to noninterest expense in the Consolidated Income Statements. Expenses and income from the maintenance and operations and any gains or losses from the sales of OREO are included in noninterest expense.

Deferred Taxes.  Deferred tax assets arise from a variety of sources, the most significant being expenses recognized in our financial statements but disallowed in the tax return until the associated cash flow occurs, and write-downs in the value of assets for financial statement purposes that are not deductible for tax purposes until the asset is sold or deemed worthless.


When warranted, we record a valuation allowance to reduce our deferred tax assets to the amount that can be recognized in line with the relevant accounting standards. The level of deferred tax asset recognition is influenced by management’s assessment of our historic and future profitability profile. At each balance sheet date, existing assessments are reviewed and, if necessary, revised to reflect changed circumstances. In a situation where income is less than projected or recent losses have been incurred, the relevant accounting standards require convincing evidence that there will be sufficient future tax capacity. For additional information regarding our deferred taxes, see Note 13 of the Notes to Consolidated Financial Statements contained in Item 8.


Other-Than-Temporary Impairments Onon the Market Value of Investments. Declines in the fair value of available‑for‑sale or held-to-maturity investments below their cost that is deemed to be other-than-temporary results in a reduction in the carrying amount of such investments to their fair value. A charge to earnings and an establishment of a new
53

cost basis for the investment is made. Unrealized investment losses are evaluated at least quarterly to determine whether such declines should be considered other-than-temporary and therefore be subject to immediate loss recognition. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the investment security is below the carrying value primarily due to changes in interest rates and there has not been significant deterioration in the financial condition of the issuer. Other factors that may be considered in determining whether a decline in the value of a debt security is other-than-temporary include ratings by recognized rating agencies; the extent and duration of an unrealized loss position; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and near-term prospects of the issuer and recommendations of investment advisers or market analysts. Therefore, deterioration of market conditions could result in impairment losses recognized within the investment portfolio.


Fair Value. FASB ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the

transaction. See Note 76 of the Notes to Consolidated Financial Statements contained in Item 8 for additional information about the level of pricing transparency associated with financial instruments carried at fair value.
Derivatives and Hedge Accounting. The Bank recognizes its interest rate swapswaps as a cash flow hedge derivative instrument,instruments, and as such, reports the net fair value as an asset or liability. Fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. The derivative isderivatives are marked to itstheir fair value through other comprehensive income. Any ineffectiveness is recognized in earnings. The net gain or loss on the derivativederivatives is removed from equity and recognized in noninterest incomereclassified into earnings in the same periodincome statement line item that is used to present the corresponding loss or gain on theearnings effect of hedged cash flow is recognized in earnings.items.


Intangible Assets. The Company incurred goodwill and a core deposit intangible asset “(CDI”) through the Branch Acquisition during 2017. These assets were booked at fair value at the time of the acquisition. Goodwill will beis evaluated in the futureannually for impairment, annually during the fourth quarter, with any impairment recognized as noninterest expense. The core deposit intangibleCDI is amortized into noninterest expense.
54



Comparison of Financial Condition at December 31, 20172022 and December 31, 20162021


Assets. The following table details the changes in the composition of our assets at December 31, 20172022 from December 31, 2016.2021.
 Balance at
December 31, 2022		Balance at
December 31, 2021		$ Change%
Change
 (Dollars in thousands)
Cash on hand and in banks                                           $7,722 $7,246 $476 6.6 %
Interest-earning deposits                                           16,598 66,145 (49,547)(74.9)
Investments available-for-sale, at fair value217,778 168,948 48,830 28.9 
Investments held-to-maturity, at amortized cost2,444 2,432 12 0.5 
Loans receivable, net                                           1,167,083 1,103,461 63,622 5.8 
FHLB stock, at cost7,512 5,465 2,047 37.5 
Accrued interest receivable6,513 5,285 1,228 23.2 
Deferred tax assets, net2,597 850 1,747 205.5 
Premises and equipment, net21,192 22,440 (1,248)(5.6)
BOLI36,286 35,210 1,076 3.1 
Prepaid expenses and other assets12,479 3,628 8,851 244.0 
Right of use asset (“ROU”), net3,275 3,646 (371)(10.2)
Goodwill889 889 — — 
Core deposit intangible, net548 684 (136)(19.9)
Total assets                                $1,502,916 $1,426,329 $76,587 5.4 %
 Balance at
December 31, 2017		 Change from December 31, 2016 
Percentage
Change
 (Dollars in thousands)
Cash on hand and in banks                                           $9,189
 $3,410
 59.0 %
Interest-earning deposits                                           6,942
 (18,631) (72.9)
Investments available-for-sale, at fair value132,242
 2,982
 2.3
Loans receivable, net                                           988,662
 173,619
 21.3
Premises and equipment, net20,614
 2,153
 11.7
FHLB stock, at cost                                9,882
 1,851
 23.0
Accrued interest receivable4,084
 937
 29.8
Deferred tax assets, net1,211
 (1,931) (61.5)
OREO483
 (1,848) (79.3)
BOLI29,027
 4,874
 20.2
Prepaid expenses and other assets5,738
 3,074
 115.4
Goodwill889
 889
 n/a
Core deposit intangible1,266
 1,266
 n/a
Total assets                                $1,210,229
 $172,645
 16.6 %


The $172.6$76.6 million increase in total assets during 20172022 was primarily a result of utilizing growth in our loan portfolio of $63.6 million, funded by growth in deposits, primarily brokered deposits, additional advances from the FHLB, and excess cash held at the Federal Reserve Bank of San Francisco to growFrancisco. Additional factors in our loan portfolio by $173.6 million.asset growth are described below.


Interest-earning deposits with banks. Our interest-earningInterest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco, decreased by $18.6$49.5 million from December 31, 20162021 to December 31, 20172022 primarily due to fund new loan originationsthe deployment of a portion of these funds into higher earning loans and investment securities during 2017.2022.


Investments available-for-sale. OurDuring 2022, investments available-for-sale increased by $3.0$49.0 million, or 2.3%29.0%, during 2017 as we continued to restructure our available‑for‑sale investment portfolio to transition our investment portfolio to securities with higher yields in order to enhance our interest income. Following the passing of the Tax Act, we elected to restructure a portion of our investment portfolio through the sale of certain fixed rate securities that were carried in an unrealized loss position and the purchase of primarily adjustable rateexcess liquidity was reinvested into higher yielding available-for-sale securities. During the year, we purchased $58.8 million of securities with an expected yield of 2.24%, partially funded by sales of $40.0 million with an average yield of 1.78%. The restructure discussed above resulted in an increase in the average yield of our available-for-sale investments to 2.61% in 2017 from 2.31% in 2016. Securities purchased included $15.1 million in fixed rate and $43.7 million in variable rate securities, comprised of $36.0 million in U.S. government agency bonds, $18.2 million in mortgage-backed securities, $3.0 million in corporate bonds and $1.6 million in municipal bonds.

The sales of investments available-for-sale generated a net loss of $567,000 for the year ended December 31, 2017. We also received calls or partial2022, we purchased $54.2 million of fixed rate securities and $41.8 million of variable rate securities. Purchases included $40.0 million of fixed rate U.S. Treasury bonds with maturities of approximately two years. In addition, the Bank purchased $37.8 million of mortgage-backed securities, $3.0 million of asset-backed securities, $10.0 million in corporate securities, and $5.2 million in Community Reinvestment Act qualified municipal and mortgage-backed securities. These purchases were partially offset by $11.1 million in proceeds from sales, calls and proceeds at maturity during 2017maturities of $731,000securities, generating a net gain of U.S. Government agency and municipal securities. In addition to the purchase and call activity, we received principal repayments of $10.7 million on our investments available-for-sale during 2017.$27,000.


The effective duration of our securities portfolio decreasedincreased slightly to 2.90%3.65% at December 31, 20172022, as compared to 4.00%3.54% at December 31, 2016.2021. Effective duration is a measure that attempts to quantifymeasures the anticipated percentage change in the value of an investment (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 by $173.6$63.6 million during 20172022 to $988.7$1.17 billion. During the year ended December 31, 2022, one-to-four family loans increased $90.7 million as a resultand consumer loans, consistent with management’s strategy to increase the Bank’s portfolio of growth in all loan categories. The most significant classic and collectible car loans, increased $17.2 million. Partially offsetting these
55

increases, occurredwere decreases in multifamily loans with a $61.7of $3.3 million, or 50.0% increase and commercial real estate loans with a $58.1of $11.5 million, or 19.1% increase. Commercial real estate and one-to-four family residential loans continue to be the largest concentrations in our loan portfolio at 33.0% and 25.5%, respectively, of total loans. The growth in construction/land loans was less than other loan types, withof $15.3 million. In addition, business loans decreased $15.2 million, primarily due to a $10.1 million decrease in concentrationPPP loans, due to 21.7%the expiration of our total loan portfoliothe PPP in 2017 from 23.2%May 2021, and $4.0 million decrease in 2016. aircraft loans.

During 2017,2022, we supplemented our loan originations and participations by purchasing $76.2$40.6 million in loans, including $31.8 million of performing classic and collectible car loans, and $4.0 million of CRA qualified one-to-four family multifamily, commercial, and aircraft loans from other financial institutions. The loans wereloans. In addition, during 2022 we purchased at an average premium of 2.3% and are intended to be held to maturity. The majority of these purchased loans area $3.7 million loan secured by propertiesa commercial real estate property located in states across the country, reflectingNevada and a $1.1 million loan secured by a commercial real estate property located in New York. These out-of-state purchases reflect our efforts to geographically diversify our loan portfolio with loans meeting our investment and credit quality objectives.


The quality of our loan portfolio continued to improve during 2017 as our nonperforming loans decreased to $179,000 atAt December 31, 2017 from $858,000 at December 31, 2016.2022, the Bank had $193,000 of nonaccrual loans. Nonperforming loans as a percent of our total loans remained low atincreased to 0.02% and 0.10% at December 31, 2017 and 2016, respectively.2022, from 0.00% at December 31, 2021. Adversely classified loans, defined as substandard or below, decreasedincreased to $1.3$47.4 million at December 31, 2017,2022, from $1.9$34.2 million at December 31, 2016. 2021. The increase in our classified loans during the year ended December 31, 2022 was primarily the result of $47.4 million of loans downgraded to substandard. The downgrades included $45.5 million of commercial loans, $1.6 million in multifamily loan and $193,000 in consumer loans. All substandard loans at December 31, 2022, were classified as impaired and evaluated for a specific allowance. The Bank is monitoring these loans closely, all of which remain current on their payment obligations, and does not expect to incur any loss.

The following table presents a breakdown of our nonperforming assets:loans at the dates indicated. At both December 31, 2022 and 2021, we had no accruing loans 90 days or more past due or OREO.
December 31,$
Change
 20222021
 (Dollars in thousands)
Nonperforming loans:   
   Consumer$193 — $193 
Total nonperforming loans193 — 193 
Total nonperforming assets$193 $— $193 
  December 31, 
Amount of
Change
 
Percent of
Change
  2017 2016
  (Dollars in thousands)
Nonperforming loans:        
   One-to-four family residential $128
 $798
 $(670) (84.0)%
   Consumer 51
 60
 (9) (15.0)
Total nonperforming loans 179
 858
 (679) (79.1)
OREO 483
 2,331
 (1,848) (79.3)
Total nonperforming assets $662
 $3,189
 $(2,527) (79.2)%


We continued to focusThe Bank did not foreclose on reducing our nonperforming assets through loan work outsany properties during either 2022 or pursuing foreclosure. Foregone2021, as a result, we had no foregone interest during the year ended December 31, 2017 relating to nonperforming loans totaled $26,000.2022. There was no LIP related to nonperforming loans at December 31, 20172022 or 2016. OREO decreased to $483,000 at December 31, 2017 as we continued to sell our inventory2021. The level of foreclosed real estate. During 2017, we sold three properties for $1.9 million as compared to sales of two properties for $988,000 during 2016. We did not foreclose on any properties during either 2017 or 2016. The continued decline in our nonperforming assets reflects improvements in the qualitymodest risk profile of our loan portfolio and our commitment to promptly identify any problem loans and take prompt actions to turn nonperforming assets into performing assets.


Allowance for loan and lease losses. We believe that we use the best information available to establish the ALLL, and that the ALLL as of December 31, 20172022 was adequate to absorb the probable and inherent losses 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 not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions, or that any increased 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 that which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination.


The ALLL was $12.9$15.2 million, or 1.28%1.29% of total loans outstandingreceivable at December 31, 20172022, as compared to $11.0$15.7 million, or 1.32%1.40% of total loans outstandingreceivable at December 31, 2016. The ALLL represented 7,196.7% of nonperforming loans at December 31, 2017 compared to 1276.3% at December 31, 2016.2021. The following table details activity and information related to the ALLL for the years ended December 31, 20172022 and 2016. All loan balances and ratios are calculated using loan balances that are net of LIP.

2021.
56

At or For the Years Ended
December 31,
At or For the Years Ended
December 31,
2017 2016 20222021
(Dollars in thousands) (Dollars in thousands)
ALLL balance at beginning of year$10,951
 $9,463
ALLL balance at beginning of year$15,657 $15,174 
(Recapture of provision) provision for loan losses(400) 1,300
(Recapture of provision) provision for loan losses(400)300 
Charge-offs—
 (83)Charge-offs(37)— 
Recoveries2,331
 271
Recoveries7 183 
ALLL balance at end of year$12,882
 $10,951
ALLL balance at end of year$15,227 $15,657 
ALLL as a percent of total loans, net of LIP1.28% 1.32%
ALLL as a percent of total loansALLL as a percent of total loans1.29 %1.40 %
ALLL as a percent of nonperforming loans7,196.65
 1,276.34
ALLL as a percent of nonperforming loans7,889.78 %— %
Total nonperforming loans$179
 $858
Total nonperforming loans$193 $— 
Nonperforming loans as a percent of total loans0.02% 0.10%Nonperforming loans as a percent of total loans0.02 %— %
Total loans receivable, net LIP$1,002,694
 $828,161
Total loans receivableTotal loans receivable$1,182,159 $1,119,536 
Total loans originated331,166
 359,666
Total loans originated271,403 308,454 


Intangible assets. As a result of ourthe Branch Acquisition the Bankin 2017, we recognized goodwill of $889,000 and a core deposit intangible (“CDI”)CDI of $1.3 million. Goodwill was calculated as the excess purchase price of the branches over the fair value of the assets acquired and liabilities assumed at August 25, 2017. The Company performed an impairment analysis at December 31, 2022, and determined that no impairment of goodwill and CDI existed. However, if adverse economic conditions or the decrease in the Company’s stock price and market capitalization were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill.


The CDI was provided by a third partythird-party valuation service and represents the fair value of the customer relationships that provide a low-cost source of funding. The analysis was performed on the acquired noninterest-bearing checking, interest-bearing checking, savings, and money market accounts. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. This amount will amortizeis amortized into noninterest expense on an accelerated basis over ten years.years and had a balance of $548,000 at December 31, 2022.


Deposits. During the year ended December 31, 2017,2022, deposits increased $122.0$12.6 million from December 31, 2016.2021. Details of deposit balances and their concentrations are as follows:
December 31,
20222021
(Dollars in thousands)
Noninterest-bearing demand deposits$119,944 10.3 %$117,751 10.2 %
Interest-bearing demand96,632 8.3 97,907 8.5 
Savings23,636 2.0 23,146 2.0 
Money market542,388 46.4 624,543 54.0 
Certificates of deposit, retail262,554 22.3 294,127 25.3 
Brokered deposits (1)
124,886 10.7 — — 
Total deposits$1,170,040 100.0 %$1,157,474 100.0 %
 December 31,
 2017 2016
 (dollars in thousands)
Noninterest-bearing demand deposits$45,434
 5.4% $33,422
 4.7%
Interest-bearing demand38,224
 4.6
 18,532
 2.5
Statement savings28,456
 3.4
 28,383
 4.0
Money market318,636
 38.0
 204,998
 28.6
Certificates of deposit, retail (1)
333,264
 39.6
 356,653
 49.7
Certificates of deposit, brokered75,488
 9.0
 75,488
 10.5
Total deposits$839,502
 100.0% $717,476
 100.0%
____________ 
____________________
(1) Retail certificates of deposit are shown net of $107,000 fair value adjustmentBrokered deposits at December 31, 2017 from acquired2022, were comprised of $89.8 million of certificate of deposits, $25.1 million of interest-bearing demand deposits and $10.0 million of money market deposits. There is no fair value adjustment at December 31, 2016.


The $12.6 million growth in retail deposits during 20172022 was primarily the result of our expansion from four branch locations to nine, withbrokered deposit growth as retail deposits declined in the additionrising rate environment, especially in the latter half of one de novo branch and acquisition of four other branches. The Branch Acquisition was executed to further shift our deposit mix by increasing core deposits and strengthen our liquidity position while providing access to contiguous markets. At the acquisition date, deposits were $74.7 million, consisting primarily of $32.7 million in moneyyear. Money market accounts and $15.6decreased by $82.2 million, in retail certificates of deposit. At December 31, 2017, we had retained 98% of the acquired deposits.

During 2017, we continued the work on shifting the mix of our deposit portfolio to be less reliant on certificates of deposit, as the Bank continued to focus its efforts on growing accounts with a lower cost of funds. Our efforts resulted in money market accounts increasing $113.6 million and checking accounts increasing $31.7 million while retail certificates of deposit decreased $23.4$31.6 million, during 2017. In addition, continuedand interest-bearing demand accounts decreased by $1.3
57

million. Partially offsetting to these decreases, was a $2.2 million increase in noninterest-bearing demand accounts, which increase was due primarily to growth in our wealth management services provided our customers with other long-term investment choices, resulting in a decrease in deposits (primarily maturing certificates of deposit) which converted to investmentbusiness checking accounts.


OurThe Bank’s strategic initiatives seek to diversify our loan portfolio of brokered certificates ofand broaden growth opportunities within our current risk tolerance levels and asset/liability objectives. When retail deposit remained at $75.5 million at December 31, 2017, unchanged from December 31, 2016. We may add tobalances do not meet our portfolio of thesefunding needs, we utilize brokered deposits, as a source of additionalthe national deposit marketplace and other wholesale funding in future periods. While brokered certificates of deposit may carry a higher cost than our retail certificates, their remaining maturity periods of six monthssources. These funds are used to 36 months, along with the enhanced call features of a majority of these deposits, assist us in our efforts to manage interest rate risk.fund loan origination and support other operation needs.


At December 31, 20172022 and December 31, 2016,2021, we held $21.5$61.0 million and $23.7$60.6 million in public funds, respectively, nearly all of which $20.1 million were retail certificates of deposit. These funds were secured at December 31, 20172022 with the Washington State Public Deposit Protection Commission by $14.2$21.0 million in pledged investment securities.


Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, and to leverage our balance sheet. Throughout the year, we utilized FHLB federal fundssheet and to balancesupplement our funding needs with our total funding sources. Totaldeposits. FHLB advances at December 31, 20172022 were $216.0$145.0 million as compared to $171.5$95 million at December 31, 2016. During 2017, as part of our ongoing liquidity management efforts, we replaced a $20.0 million matured advance, and refinanced our existing $80.0 million member option variable-rate advance and $20.0 million of FHLB Fed Funds into a new $120.0 million three-year member option variable-rate advance that reprices quarterly and allows for prepayment without penalties on the repricing date.2021. At December 31, 2017, we had $24.52022, our FHLB advances consisted of $35.0 million of fixed-rate three-month advances that renew quarterly, $60.0 million of fixed-rate one-month advances that renew monthly, all of which are utilized in cash flow hedge agreements, as described below, and $50.0 million of overnight FHLB Fed Funds. Our averageadvances. The availability of overnight FHLB advances provides us flexibility to adjust the level of our borrowings as our funding needs change consistent with our asset/liability objectives. Average borrowings during 20172022 were $192.2$113.9 million. At December 31, 2017, $86.0 million2022, all of our FHLB advances including Fed Funds, were due to mature in 2018, with the remaining $130.0 million due to mature in one to three years.less than two months.


Cash Flow Hedge. As part of itsTo assist in managing interest rate risk, management efforts, the Bank entered into a five-year, $50 million notional, pay fixed, receive floatingseven interest rate swap agreements with qualified institutions designated as cash flow hedge orinstruments. The agreements have an aggregate notional amount of $95.0 million, with individual notional amounts ranging from $10.0 million to $15.0 million, a weighted-average remaining term of 3.9 years and a weighted-average fixed rate of 1.05%. The remaining maturity of these agreements is from 10 months to seven years. On October 25, 2021, a $50.0 million notional swap with a fixed rate of 1.34% matured and was partially replaced with two previously contracted forward-starting interest rate swap withagreements of $15.0 million and $10.0 million, effective on that date. These swaps had an original weighted-average term of 7.4 years and a qualified institution on October 25, 2016. weighted-average fixed rate of 0.80%.

Under the terms of the agreement,interest rate swap agreements, the Bank pays a fixed interest rate of 1.34% for five years and in return receives an interest payment based on the three-monthcorresponding LIBOR index, which resets quarterly.quarterly or monthly, depending on the hedge term. Concurrently, the Bank borrowed a $50 million fixed rate three-month FHLB advance that will be renewed quarterly or monthly, as designated by the hedge agreement, at the fixed interest rate at that time. Effectiveness of the interest rate swap is evaluated quarterly with any ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair value of the cash flow hedge created by the interest rate swap agreements 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 December 31, 2017,2022, we recognized a $1.5$10.5 million fair value asset as a result of the increase in market value of the hedge agreement.interest rate swap agreements.


The Bank has confirmed our adherence to 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 provides a mechanism for parties to bilaterally amend their existing derivatives transactions to incorporate ISDA’s fallback terms, providing for a clear transition from LIBOR to SOFR.

Stockholders’ Equity. Total stockholders’ equity increased $4.5 million, or 3.3% to $142.6$160.4 million at December 31, 20172022, from $138.1$157.9 million at December 31, 2016. The increase in2021. Increases to stockholders’ equity was primarily a resultfor the year ended December 31, 2022, included $13.2 million of $8.5net income and $1.9 million in net income partially offset by $2.8 million in shareholder dividends and the repurchase of 326,800 shares of stock at an aggregate cost of $5.3 million.stock-based compensation. In addition, the exercise of stock options andresulted in the issuance of restricted54,481 shares of common stock resulted in 136,986 shares being issued from authorized shares and ana $454,000 increase to stockholders’ equity of $1.2 million.additional paid-in capital.


The Company has elected to early adopt ASU 2018-02 and reclassified $41,000 of strandedThese increases were partially offset by a $7.4 million other comprehensive income as a result of the reduction in the tax rate in the corporate income rateloss from the enactmentdecrease in fair value of the Tax Act from 35% to 21%. The result wasour available-for-sale investments, partially offset by increases in value of our derivative portfolio. These increases were further offset by a $1.4 million decrease to accumulated other comprehensive incomeadditional paid-in-capital from the repurchase and retirement of 84,981 shares of First Financial Northwest common stock at an increase toaverage price of $16.43 per share. In addition, shareholder cash dividends of $0.48 per share were paid during 2022, reducing retained earnings with no net change in stockholders’ equity.by $4.3 million.


Comparison of Operating Results for the Years Ended December 31, 20172022 and December 31, 20162021


Net Interest Income. Net interest income in 20172022 was $37.6$48.4 million, a $3.4 million or 10.0%7.6% increase from $34.2$45.0 million in 20162021, due primarily to a $5.9$5.5 million increase in interest income partially offset by a $2.5$2.1 million increase in
58

interest expense. The increase in

terest expense. Interest interest income increased duringprimarily was due to the year ended December 31, 2017 primarily as a result of the growthincrease in average loans receivable and in particular, multifamily and commercial real estate loans. In addition, the average yield ofon interest-earning assets increased to 4.57%4.33% for the year ended December 31, 20172022 from 4.39%4.01% for the year ended December 31, 2016. The increase2021,a result of increases in averagemarket interest rates during the year and our deployment of excess liquidity into higher yielding assets. Average interest-earning assets wasincreased $26.8 million, partially funded by a $102.7$16.9 million increase in average interest-bearing liabilities. The average cost of these fundsinterest-bearing liabilities increased to 1.10%0.95% for the year ended December 31, 20172022 from 0.92%0.78% for the year ended December 31, 2016, primarily2021, as a result of the overall increaserising rate environment and the change in federal funds ratethe Company’s deposit mix. In 2022, we supplemented our funding needs by utilizing brokered deposits to fund asset growth and replace retail deposit withdrawals. The average balance of retail certificates of deposit declined $69.0 million during 2017. Although2022 compared to 2021. The average balances in money market accounts and saving accounts increased by $48.7 million and $2.1 million respectively. However, money market balances declined to $542.4 million at December 31, 2022 compared to $624.5 million at December 31, 2021, contributing to the total yield on assetsneed for brokered deposits and total costother wholesale funding alternatives. Average balance in interest-bearing demand accounts decreased $4.9 million while the average balance of fundsnoninterest bearing accounts increased during 2017,$12.7 million. The resulting impact was an improvement in our net interest rate spreadmargin to 3.53% for the year ended December 31, 2022, from 3.35% for the year ended December 31, 2021. For more information, see “Asset and net interest margin remained constant at 3.47%Liability Management and 3.60% year over year. Continued growth in higher yielding loans helped contribute to maintaining these ratios.Market Risk.”


The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest and dividend income for the years ended December 31, 20172022 and 2016:2021:
 Year Ended December 31,
 20222021Change in Interest and Dividend Income
 Average
Balance		YieldAverage
Balance		Yield
 (Dollars in thousands)
Loans receivable, net$1,128,835 4.69 %$1,098,772 4.57 %$2,765 
Investments203,148 2.76 176,110 1.83 2,379 
Interest-earning deposits30,176 1.28 60,482 0.12 314 
FHLB stock                      6,256 5.08 6,271 5.29 (14)
Total interest-earning assets$1,368,415 4.33 %$1,341,635 4.01 %$5,444 
 Year Ended December 31,
 2017 2016 Change in Interest and Dividend Income
 
Average
Balance
 Yield 
Average
Balance
 Yield 
 (Dollars in thousands)
Loans receivable, net                                           $878,449
 4.96% $765,948
 4.99% $5,389
Investments available-for-sale134,105
 2.61
 132,372
 2.31
 450
Interest-earning deposits                                           22,194
 1.07
 45,125
 0.52
 2
FHLB stock                      8,914
 3.32
 7,714
 2.62
 94
Total interest-earning assets                                                      $1,043,662
 4.57% $951,159
 4.39% $5,935


During the year ended December 31, 2017,2022, interest income on net loans receivable increased $2.8 million due to increases in both the $5.4average yield and balance of loans. The average loan yield increased to 4.69% from 4.57% and the average balance of loans receivable increased $30.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily due to loans originated or refinanced at higher rates or adjusted upward in this rising rate environment.

Interest income on investments available-for-sale increased $2.4 million during 2022, due to an increase in loan interest income was primarily the result ofaverage yield to 2.76% from 1.83% for the prior year and, to a $112.5lesser extent, a $27.0 million increase in the average balance of net loans receivable. Also contributing toinvestments. Approximately half of our investment portfolio was comprised of variable rate securities which repriced during the increase in loan interest income, repayments of previously charged off notes as part of an A/B note restructure contributed $495,000 in additional loan interest income.rising rate environment during 2022.


Interest income from investments available-for-saleon interest-earning deposits increased $450,000$314,000 during 2017the year ended December 31, 2022 compared to the prior year, as a combined result of a $1.7 million increase in the average balance of our investments and a 30116 basis point increase in the average yield to 2.61% from 2.31% during 2016. The increase in the average yield was a result of the restructuring of our investments portfolio through the sales of lower yielding investment securities and utilizing the proceeds received to purchase higher yielding, long-term investment securities.

Interest income on interest-earning deposits remained stable with a modest $2,000 increase during the year ended December 31, 2017. Although the average balance of these funds decreased by $22.9 million as they were converted into higher-yielding assets, the increase in average yield to 1.07%1.28% for the year ended December 31, 20172022, from 0.52%0.12% for the year ended December 31, 2016 more than2021, partially offset the declineby a reduction of $30.3 million in thetheir average balance. The rate increase was the result of increases in the Federal Reserve’s targeted federal funds rate during 2017.


59

The following table details average balances, cost of funds and the resulting increasechanges in interest expense for the years ended December 31, 20172022 and 2016:2021:

 Year Ended December 31,
 20222021Change in
Interest
Expense
 Average
Balance		CostAverage
Balance		Cost
 (Dollars in thousands)
Interest-bearing demand accounts $101,744 0.47 %$106,684 0.08 %$388 
Savings accounts 23,823 0.03 21,715 0.03 1 
Money market accounts 593,984 0.63 545,306 0.29 2,143 
Certificates of deposit, retail273,197 1.33 342,147 1.61 (1,884)
Brokered deposits41,603 2.62 — — 1,091 
FHLB advances and other borrowings113,890 1.70 115,466 1.39 331 
Total interest-bearing liabilities$1,148,241 0.95 %$1,131,318 0.78 %$2,070 
 Year Ended December 31,
 2017 2016 Change in
Interest
Expense
 
Average
Balance
 Cost 
Average
Balance
 Cost 
 (Dollars in thousands)
Interest-bearing demand accounts                                $25,267
 0.29% $17,545
 0.17% $43
Statement savings accounts                                                      28,160
 0.15
 29,221
 0.16
 (5)
Money market accounts                                           247,770
 0.72
 196,670
 0.44
 909
Certificates of deposit, retail                                     345,981
 1.26
 335,496
 1.17
 428
Certificates of deposit, brokered75,488
 1.67
 69,392
 1.76
 41
Advances from the FHLB                                           192,227
 1.30
 163,893
 0.86
 1,099
Total interest-bearing liabilities                                                      $914,893
 1.10% $812,217
 0.92% $2,515


Interest expense increased $2.5$2.1 million to $10.0$10.9 million for the year ended December 31, 20172022 from $7.5$8.8 million for the year ended December 31, 2016.2021. The increase in interest expense during 2017 was primarily a result of the increase in the average cost of interest-bearing deposits to 0.87% for the year ended December 31, 2022, as compared to 0.71% for the year ended December 31, 2021.

Interest expense on retail certificates of 10deposit decreased $1.9 million as a result of a $69.0 million decrease in the average balance of and a 28 basis pointspoint decrease in the average rate paid on these deposits. To compensate for the volume loss in retail certificates of deposit, the Bank utilized brokered deposits as an alternative funding source in 2022, which increased interest expense by $1.1 million in 2022 compared to 2021 when we had no brokered deposits. Brokered deposits had an average balance of $41.6 million and an average cost of 2.62% in 2022. Interest expense on money market accounts increased $2.1 million, primarily due to the average cost increasing to 0.63% in 2022 as compared to 0.29% in 2021 and, to a lesser extent, an increase of $48.7 million in average balance. Interest expense on interest-bearing demand deposits increased $388,000 due primarily to a 39 basis point increase in average cost.

Interest expense on FHLB advances and other borrowings increased $331,000 in 2022 compared to 2021 due to a 31 basis point increase in the average cost of our FHLB borrowings of 44 basis points. Also contributing to a lesser extent to the increase in interest expense, therate paid on advances, slightly offset by lower average balances of interest-bearing deposits and borrowings increased by $74.3 million and $28.3 million, respectively, in support of our asset growth.

The average cost of our retail deposits increased asbalance. As a result of the increaserate hikes in market interest rates that occurred during 2017. The2022, the average cost of brokered certificates of deposit decreased by nine basis points during 2017these advances increased to 1.70% for the year ended December 31, 2022 as a result ofcompared to 1.39% for the redemption of higher rate brokered certificates of deposit and subsequent replacement with lower rate brokered certificates of deposit during 2016.year ended December 31, 2021.


Provision for Loan Losses. OurWe recorded a recapture of the provision for loan losses wasof $400,000 for the year ended December 31, 2017 as2022, compared to a $300,000 provision for loan losses for the year ended December 31, 2021. This recapture, combined with a net charge off of $1.3$30,000, resulted in a $430,000 decrease in the ALLL and a decrease in the percentage of the ALLL to total loans to 1.29% at December 31, 2022, compared to 1.40% at December 31, 2021. The recapture of provision for loan losses in 2022 was primarily a result of $14.4 million of loans downgraded to substandard, resulting in these loans being removed from the calculation of the general allowance for loan and lease losses and instead being individually analyzed for required specific reserve, which indicated no additional specific reserve was needed. Changes in the composition of our loan portfolio, with $90.7 million growth in lower risk one-to-four family residential loans and a decline in higher risk construction/land loans with over $20.0 million of these loans converting to permanent multifamily loans also contributed to the recapture of provision in 2022.

In comparison, the provision for loan losses was $300,000 for the year ended December 31, 2021. This provision was primarily a result of a $2.1 million increase in net loans receivable and a change in the composition of our loan portfolio as $30.4 million in repaid PPP loans omitted from our loan loss analysis were replaced with other loans included in the analysis, offsetting the impact from decreased historical loss factors and qualitative factors for certain loan categories as the expected economic impact as a result of the COVID-19 pandemic to the credit quality of our loan portfolio has diminished in 2021. In addition, the provision for loan losses was impacted by the $31.6 million increase in substandard loans and the $14.7 million increase in impaired loans during 2021 evaluated for specific reserve and omitted from the general reserve calculations used to calculate the ALLL and provision for loan losses. Our individual evaluation of our impaired loans during 2021 indicated no additional specific reserve was needed.
60

Noninterest Income. Noninterest income decreased $639,000 to $3.2 million for the year ended December 31, 2016. The recapture of provision in 2017 was primarily the result of $2.3 million in net recoveries of previously charged off loans partially reduced by the provision for loan losses required as a result of the $173.6 million increase in net loans receivable. In comparison, the provision in 2016 was primarily the result of a $130.0 million increase in net loans receivable. The quality of our loan portfolio continued to improve as indicated by our credit metrics and that the loans evaluated individually for specific reserves decreased by $13.0 million. The related specific reserves declined to $135,000 at December 31, 20172022 from $309,000 at December 31, 2016.

In February, 2018, we received a $4.0 million payment from a borrower for the remaining balance of previously charged off loans, resulting in $3.1 million to recovery and the recognition of $914,000 of interest income. For additional information see Note 19 of the Notes to Consolidated Financial Statements included in Item 8 of this report.

Noninterest Income. Noninterest income decreased $443,000 to $2.2$3.9 million for the year ended December 31, 2017 from $2.7 million for the year ended December 31, 2016.2021. The following table provides a detailed analysis of the changes in the components of noninterest income:
 Year Ended
December 31, 2022		Year Ended
December 31, 2021		$ Change%
Change
 (Dollars in thousands)
Gain on sale of investments, net$27 $32 $(5)(15.6)%
BOLI change in cash surrender value1,004 1,107 (103)(9.3)
Wealth management revenue312 494 (182)(36.8)
Deposit related fees936 872 64 7.3 
Loan related fees919 1,265 (346)(27.4)
Other           49 92 (43)(46.7)
Total noninterest income$3,247 $3,862 $(615)(15.9)%
 Year Ended
December 31, 2017		 Change from
December 31, 2016		 
Percentage
Change
 (Dollars in thousands)
Deposit related fees$446
 $185
 70.9 %
Loan related fees776
 105
 15.6
Gain on sale of investments, net(567) (617) (1,234.0)
BOLI change in cash surrender value623
 (221) (26.2)
Wealth management revenue919
 106
 13.0
Other           11
 (1) (8.3)
Total noninterest income                                           $2,208
 $(443) (16.7)%


The largest change to our noninterest income was the $567,000 loss on sales of investments$346,000 decrease in loan related fees for the year ended December 31, 2017 as compared2022, primarily due to a $50,000 gain$425,000 decrease in fees collected on salethe early payoff of investmentscertain loans during the year ended December 31, 2022.

    Wealth management revenue decreased by $182,000 in 2022. Beginning in early 2022, due to volatile capital markets and rising investor fears, our wealth management services experienced sales headwinds from investors seeking more conservative products and solutions, resulting in a decline in revenue versus 2021.
BOLI income decreased $103,000 for the year ended December 31, 2016. As a result of the

Tax Act, we opted to sell a selection of our investment securities that were in a loss position to receive the optimal tax benefit of the losses.
Our BOLI noninterest income decreased by $221,000 during 20172022, primarily due to the $4.2$161,000 in death benefit proceeds received in 2021 with no similar activity in 2022. The $1.0 million purchase in the second quarter of new policies that offset the premium against the increase in cash surrender value for the first year. For the year ended December 31, 2017, we recognized theBOLI income also included a net $623,000 increase in cash surrender value of these policies as noninterest income, which assists in offsetting expenses for employee benefits.policies.


Partially offsetting these losses, depositDeposit related fees increased by $185,000, primarily as a result of the increase in debit card transactions reflecting the increase in the number of our accounts as well as other deposit related services at our branch locations. Loan related fees increased by $105,000 as a result of a $166,000 increase in prepayment penalties duringwere $936,000 for the year ended December 31, 2017, partially2022, a $64,000 increase over the prior year, primarily from increased debit card usage in 2022. The increase in deposit related fees was fully offset by a $40,000 reductionthe $67,000 decrease in loan servicing fees and a $21,000 reduction in fees from interest rate swaps from commercial loan customers during the year. Interest rate swap fees are received on loans when certain commercial loan customers participate in an interest rate swap with a third party broker institution and the Bank receives a fee that is recognized as other noninterest income at the time the loan is originated. In addition, wealth management revenue continued growing with a $106,000 increase during 2017. Since inception of our wealth management services in 2015, this line of business has grown to $44.6 million of assets under management.income.


Noninterest Expense. Expense. Noninterest expense increased $3.9$2.2 million to $26.8$35.6 million for the year ended December 31, 20172022 from $22.9$33.4 million for the year ended December 31, 2016.2021. The following table provides a detailed analysis of the changes in the components of noninterest expense:
 Year Ended
December 31, 2022		Year Ended
December 31, 2021		$ Change%
Change
 (Dollars in thousands)
Salaries and employee benefits$21,133 $20,237 $896 4.4 %
Occupancy and equipment 4,776 4,557 219 4.8 
Professional fees                                2,339 1,899 440 23.2 
Data processing                                2,678 2,692 (14)(0.5)
Regulatory assessments403 456 (53)(11.6)
Insurance and bond premiums 464 451 13 2.9 
Marketing303 154 149 96.8 
Other general and administrative3,495 2,921 574 19.7 
Total noninterest expense $35,591 $33,367 $2,224 6.7 %
 Year Ended
December 31, 2017		 Change from
December 31, 2016		 
Percentage
Change
 (Dollars in thousands)
Salaries and employee benefits$17,773
 $2,396
 15.6 %
Occupancy and equipment                                           2,506
 522
 26.3
Professional fees                                1,809
 (170) (8.6)
Data processing                                1,457
 546
 59.9
OREO-related reimbursement of expenses, net(67) (361) (122.8)
Regulatory assessments491
 71
 16.9
Insurance and bond premiums                                           399
 50
 14.3
Marketing270
 76
 39.2
Other general and administrative2,171
 730
 50.7
Total noninterest expense                                           $26,809
 $3,860
 16.8 %


For the year ended December 31, 2017, salaries and employee benefits increased by $2.4 million as comparedThe primary contributor to the previous year to $17.8 million as a result of normal wage increases and the hiring of 24 new full time positions in support of the growth in our operations, including new branches and new product lines. In addition, in response to the Tax Act, the Bank paid a special one-time bonus to all non-executive employees totaling $224,000 to share with our employees the expected future tax benefits the legislation provides.

Occupancy and equipment expense increased $522,000 to $2.5 million during 2017 as a result of the addition of five branch locations, expenses related to our automated teller machine (“ATM”) conversion and the upgrade of our main Renton branch. Lease expense increased by $165,000 and depreciation expense increased by $186,000 as we added one building, leasehold improvements and computer equipment to support the new branch operations. In support of our ATM conversion and Branch Acquisition, our data processing expense increased by $546,000 for 2017 as compared to 2016. The rate of the increase in data processing expense is expected to decline in future periods as we complete system conversion costs, although our core processor service fees will increase reflecting the expected increase in deposit accounts activity from the growth in customer accounts.

OREO related reimbursement of expense was $67,000, a $361,000 improvement over the previous year. Valuation expense to adjust our carrying value to market value decreased by $207,000 for the year ended December 31, 2017 as compared to the year ended December 31, 2016. In addition, sales of OREO properties resulted in a net gain of $110,000 in 2017 as compared to a net loss of $87,000 in 2016.


Other general and administrative expenses increased by $730,000 during the year ended December 31, 2017, primarily as a result of a $254,000 increase in the reserve for unfunded commitments due to a $20.5 million increase in our unfunded loans in process and $9.3 million increase in unfunded lines of credit. This reserve is held to absorb estimated probable losses of our unfunded lines of credit and construction loans and varies as a result of the timing of funding these loans. Other general and administrative expense increases included $103,000 for additional debit card operating expenses and $88,000 in additional deposit related expenses, both the result of increased customer volumes at our branch locations. With the addition of California loan activity and overall increase in loan income, the Bank incurred an $83,000 increase in state taxes. As a result of our Branch Acquisition, the Bank recognized CDI amortization expense of $53,000 during 2017.

Federal Income Tax Expense. We recorded a $4.9 million federal income tax provision for 2017, compared to $3.7 million for 2016. The Tax Act resulted in a revaluation of our DTA balance at the new corporate income tax rate of 21% rather than the 35% rate previously used, effective January 1, 2018. The reduction in our DTA balance resulted in a one-time $807,000 increase in federal income taxnoninterest expense for the year ended December 31, 2017. In addition, our federal income tax expense2022 compared to the prior year, was a $896,000 increase in salaries and employee benefits. The increase was due in part to a $944,000 net increase in salaries, payroll related taxes, commissions and employees incentives reflecting higher than normal vacancies in staffing in the year ago period. Also contributing to the increase, were employee benefit related expenses, including the 401(k) match contribution, which increased $145,000 from the prior year. Partially offsetting these increases was a decrease in stock-based
61

compensation of $262,000 primarily due to pretax net income increasing by $817,000the maturity of the Bank’s ESOP in 2022 that resulted in nine months of related expense recognition in 2022 versus 12 months in 2021.

Occupancy and equipment increased $219,000 for the year ended December 31, 2017 as2022 compared to the prior year, ended December 31, 2016.

Comparison of Financial Condition at December 31, 2016 and December 31, 2015

Assets. The following table details the changes in the composition of our assets at December 31, 2016 from December 31, 2015.
 Balance at December 31, 2016 Change from December 31, 2015 
Percentage
Change
 (Dollars in thousands)
Cash on hand and in banks                                           $5,779
 $66
 1.2 %
Interest-earning deposits                                           25,573
 (74,425) (74.4)
Investments available for sale, at fair value129,260
 (305) (0.2)
Loans receivable, net                                           815,043
 129,971
 19.0
Premises and equipment, net18,461
 754
 4.3
FHLB stock, at cost                                8,031
 1,894
 30.9
Accrued interest receivable3,147
 179
 6.0
Deferred tax assets, net3,142
 (1,414) (31.0)
OREO                      2,331
 (1,332) (36.4)
Bank owned life insurance (“BOLI”)24,153
 844
 3.6
Prepaid expenses and other assets2,664
 1,439
 117.5
Total assets                                $1,037,584
 $57,671
 5.9 %

During 2016, total assets surpassed $1.0 billion withdue primarily to a $57.7 million$120,000 increase in total assets during the year. The increase was primarilyfacilities and equipment maintenance and a result of redirecting $74.4 million from lower-yielding interest-earning deposits, consisting primarily of funds held at the Federal Reserve Bank of San Francisco, to partially fund the $130.0 million growth in higher-yielding loans receivable.

Investments. Our investments available-for-sale remained stable during 2016 with a $305,000 or 0.2% decrease to $129.3 million at December 31, 2016 from $129.6 million at December 31, 2015. During 2016, we continued to restructure our available‑for‑sale investment portfolio to transition our investment portfolio to securities with longer maturity periods, higher yields, and primarily fixed rates in order to enhance our interest income. During the year, we purchased $44.6 million of securities with an expected yield of 2.99%, partially funded by sales of $25.9 million with an average yield of 1.68%. Restructuring of our investment portfolio during 2016 and 2015 resulted in an$65,000 increase in average yield of our available-for-sale investmentsdepreciation expense.

Professional fees increased $440,000, due to 2.31%a $162,000 increase in 2016 from 1.84%legal fees, a $100,000 increase in 2015. The purchases included $31.9 millionaudit and accounting service fees, along with $183,000 in fixed rateregulatory examination fees paid in 2022, with no comparable expense in 2021.

Marketing expense increased $149,000 during 2022, primarily due to increased marketing/promotional campaigns.

Other general and $12.0 million in variable rate securities. These consisted of $28.2 million in mortgage-backed securities, $10.0 million in corporate bonds, consisting of two subordinated debt instruments issued by well capitalized financial institutions located in southern California in the amounts of $5.0 million each, $4.0 million in U.S. government agency bonds and $1.7 million in municipal bonds. The sales of investments available-for-sale generated a net gain of $50,000 for the year ended December 31, 2016. We also received calls or partial calls of $438,000 of U.S. Government agency and municipal securities. In additionadministrative expense increased $574,000 to the purchase and call activity, we received principal repayments of $15.9 million on our investments available-for-sale during the 2016.


The effective duration of our portfolio increased to 4.00% at December 31, 2016 as compared to 3.20% at December 31, 2015. Effective duration is a measure that attempts to quantify the anticipated percentage change in the value of an investment (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 by $129.9$3.5 million during 2016 to $815.0 million2022, primarily due to increases of $74.8 million, or 120.5% in our net construction/land loans and $59.5 million or 24.4% in our commercial real estate loans. These increases were partially offset by a decrease of $4.3 million in our one-to-four family residential loans. Commercial real estate and one-to-four family residential loans continue to be the largest concentrations in our loan portfolio at 33.7% and 27.7%, respectively, of total loans. Our construction/land loans increased to 23.2% of our total loan portfolio in 2016 from 15.5% in 2015 as we continued to originate more of these shorter term, higher yielding loans. During 2016, we supplemented our loan originations by purchasing $61.1 million in performing residential and non-residential commercial real estate and multifamily loans from other financial institutions. The loans were purchased at a 1.8% - 3.0% premium and are intended to be held to maturity. Included in these real estate loan purchases were $20.9 million of real estate loans secured by properties located in Washington. The remaining balance of $40.2 million of loan purchases were multifamily and commercial real estate loans secured by properties located in Arizona, California, Colorado, Oregon, and Utah, reflecting our efforts to geographically diversify our loan portfolio with loans meeting our investment and credit quality objectives.

The quality of our loan portfolio continued to improve during 2016 as our nonperforming loans decreased to $858,000 at December 31, 2016 from $1.1 million at December 31, 2015. Nonperforming loans as a percent of our total loans remained low at 0.10% and 0.16% at December 31, 2016 and 2015, respectively. Adversely classified loans, defined as substandard or below, decreased to $1.9 million at December 31, 2016, from $3.3 million at December 31, 2015. The following table presents a breakdown of our nonperforming assets:
  December 31, 
Amount of
Change
 
Percent of
Change
  2016 2015
  (Dollars in thousands)
Nonperforming loans:        
   One-to-four family residential $798
 $996
 $(198) (19.9)%
   Consumer 60
 89
 (29) (32.6)
Total nonperforming loans 858
 1,085
 (227) (20.9)
OREO 2,331
 3,663
 (1,332) (36.4)
Total nonperforming assets $3,189
 $4,748
 $(1,559) (32.8)%

We continued to focus on reducing our nonperforming assets through loan work outs or pursuing foreclosure. Foregone interest during the year ended December 31, 2016travel expenses, subscription, postage relating to nonperforming loans totaled $51,000. There was no LIPthe aforementioned marketing expenses, miscellaneous loan expense and business entertainment related to nonperforming loans at December 31, 2016 or 2015. OREO decreased to $2.3expenses as business generating opportunities increased this year.

Federal Income Tax Expense. We recorded a $3.2 million at December 31, 2016 as we continued to sell our inventory of foreclosed real estate. During 2016, we sold two propertiesfederal income tax provision for $988,000 and had no additional foreclosures. During 2015, we sold nine properties for $6.2 million and foreclosed on one property for $141,000. The decline in both the transfer of properties into OREO and the sale of OREO properties reflects our continuing efforts to identify the problem loans within our portfolio and to take prompt appropriate actions to turn nonperforming assets into performing assets.

Allowance for loan and lease losses. The ALLL was $11.0 million or 1.32% of total loans outstanding at December 31, 2016 as2022, compared to $9.5 million or 1.36% of total loans outstanding at December 31, 2015. The ALLL represented 1,276.3% of nonperforming loans at December 31, 2016 compared to 872.2% at December 31, 2015. The following table details activity and information related to the ALLL for the years ended December 31, 2016 and 2015. All loan balances and ratios are calculated using loan balances that are net of LIP.


 
At or For the Years Ended
December 31,
 2016 2015
 (Dollars in thousands)
ALLL balance at beginning of year$9,463
 $10,491
Recapture of provision for loan losses1,300
 (2,200)
Charge-offs(83) (362)
Recoveries271
 1,534
ALLL balance at end of year$10,951
 $9,463
ALLL as a percent of total loans, net of LIP1.32% 1.36%
ALLL as a percent of nonperforming loans1,276.34
 872.17
Total nonperforming loans$858
 $1,085
Nonperforming loans as a percent of total loans0.10% 0.16%
Total loans receivable, net LIP$828,161
 $697,416
Total loans originated359,019
 229,780

Deposits. During the year ended December 31, 2016, deposits increased $42.1 million to $717.5 million as compared to $675.4 million at December 31, 2015. Our retail certificates of deposit increased by $32.8 million primarily as a result of the increased customer base with our new branch locations. Retail deposits in our three new branch locations increased by $30.6 million during 2016 as a direct result of our added market presence and focus on relationship development. These efforts also resulted in a $4.0 million increase in noninterest-bearing deposits and a $2.3 million increase in interest-bearing demand deposits.

Partially offsetting these increases, our money market accounts decreased by $6.4 million during the year ended December 31, 2016. Money market accounts related to short term deposits from large construction developers that are part of the EB-5 Immigrant Investor Program to fund development projects decreased to $8.5 million at December 31, 2016 from $62.8 million at December 31, 2015 as these funds were withdrawn in support of the construction projects. We do not anticipate new short term accounts of this nature to be a significant part of our retail deposits.

Brokered certificates of deposit increased by $9.3 million during the year to $75.5 million at December 31, 2016. While brokered certificates of deposit may carry a higher cost than our retail certificates, their remaining maturity periods of 18 to 48 months, along with the enhanced call features of the majority of these deposits, assist us in our interest rate risk management efforts.

At December 31, 2016 and December 31, 2015, we held $23.7 million and $16.0 million in public funds, respectively, nearly all of which were retail certificates of deposit.

Advances. We use advances from the FHLB as an alternative funding source to manage funding costs, reduce interest rate risk and to leverage our balance sheet. Total FHLB advances at December 31, 2016 were $171.5 million as compared to $125.5 million at December 31, 2015. During 2016, we restructured our borrowings by paying off $84.0 million of maturing advances, and adding an $80.0 million FHLB member option variable rate advance which reprices monthly and allows prepayment without penalties on the repricing dates and a $50.0 million three-month fixed rate advance entered into simultaneously with an interest rate swap for the same amount. Our average borrowings during 2016 were $163.9 million. At December 31, 2016, $70.0 million of our FHLB advances were due to mature in 2017, $21.5 million were due in one to three years and the remaining $80.0 million is due to mature in seven years.

Cash Flow Hedge. As part of its interest rate risk management efforts, the Bank entered into a five-year, $50 million notional, pay fixed, receive floating cash flow hedge or interest rate swap with a qualified institution on October 25, 2016. Under the terms of the agreement, the Bank will pay a fixed interest rate of 1.34% for five years and will in return receive an interest payment based on the three-month LIBOR index, which resets quarterly. Concurrently, the Bank borrowed a $50 million fixed rate three-month FHLB advance that will be renewed quarterly at the fixed interest rate at that time. Effectiveness of the swap is evaluated quarterly with any ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair value of the cash flow hedge 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 December 31, 2016, we recognized a $1.3 million fair value asset as a result of the increase in market value of the hedge agreement.


Stockholders’ Equity. Total stockholders’ equity decreased $32.5 million, or 19.1% to $138.1 million at December 31, 2016 from $170.7 million at December 31, 2015, primarily due to common stock repurchases totaling $40.8 million. Partially offsetting the repurchase activity, retained earnings increased $6.1 million due to net income of $8.9$2.9 million for 2016, reduced by $2.8 million of dividends paid to shareholders. Additional paid-in-capital decreased $39.5 million due to the repurchase and retirement of 2,864,389 shares of common stock at an average price of $14.07 per share, partially offset by $621,000 of stock‑based compensation expense, $297,000 from the exercise of stock options and $476,000 from the annual allocation of ESOP shares.

Comparison of Operating Results for the Years Ended December 31, 2016 and December 31, 2015

Net Interest Income. Net interest income in 2016 was $34.2 million, a $3.8 million or 12.3% increase from $30.4 million in 2015 due to a $4.5 million increase in interest income partially offset by a $756,000 increase in interest expense.2021. The increase in interestfederal income was primarily a result of a $50.5 million increase during the year ended December 31, 2016 in the average balance of our interest-earning assets, primarily due to our loan growth. In addition, as we moved funds from lower yielding interest-earning deposits to higher yielding loans receivable, we improved the total average yield on interest-earning assets by 26 basis points to 4.39%tax provision for the year ended December 31, 2016 as compared 4.13% for the prior year. These changes resulted in an increase to our interest rate spread of 24 basis points to 3.47% for the year ended December 31, 2016 from 3.23%. In addition, for the year ended December 31, 2016 our net interest margin increased 22 basis points to 3.60% from 3.38% for the year ended December 31, 2015. The following table compares average interest-earning asset balances, associated yields, and resulting changes in interest and dividend income for the years ended December 31, 2016 and 2015:
 Year Ended December 31,
 2016 2015 Change in Interest and Dividend Income
 Average
Balance		 Yield Average
Balance		 Yield 
 (Dollars in thousands)
Loans receivable, net                                           $765,948
 4.99% $667,739
 5.18% $3,606
Investments available-for-sale132,372
 2.31
 121,893
 1.84
 812
Interest-earning deposits                                           45,125
 0.52
 104,476
 0.26
 (39)
FHLB stock                      7,714
 2.62
 6,527
 1.06
 133
Total interest-earning assets                                                      $951,159
 4.39% $900,635
 4.13% $4,512

During the year ended December 31, 2016, the $3.6 million increase in loan interest income2022 was primarily the result of a $98.2$1.2 million increase in the average balance ofpretax net loans receivable. The increase to interest generated from this loan growth was partially offset by a decrease in the average loan yield to 4.99% from 5.18% for the year ended December 31, 2016 and 2015, respectively.

Interest income from investments available-for-sale increased $812,000 during 2016 as a combined result of a $10.5 million increase in the average balance of our investments and a 47 basis point increase in the average yield to 2.31% from 1.84% a year ago. The increase in the average yield was a result of the restructuring of our investments portfolio by purchasing longer term higher-yielding investment securities to increase earnings on our investment portfolio.

Interest income on interest-earning deposits decreased $39,000 during the year ended December 31, 2016 as a result of the $59.4 million decrease in the average balance of these deposits and despite the Federal Reserve’s federal funds rate increases in December 2016 and 2015 which positively impacted the rate we receive on our interest-earning deposits. The average rate earned on interest-earning deposits increased 26 basis points for the year ended December 31, 2016, as compared to the prior year.

Interest expense increased $756,000 to $7.5 million for the year ended December 31, 2016 from $6.8 million for the year ended December 31, 2015. The increase in interest expense during 2016 was primarily a result of the increase in the average balance of interest-bearing liabilities as we acquired funds to be used for loan growth and stock repurchases. The following table details average balances, cost of funds and the resulting increase in interest expense for the years ended December 31, 2016 and 2015:


income.
62
 Year Ended December 31,
 2016 2015 Change in
Interest
Expense
 Average
Balance		 Cost Average
Balance		 Cost 
 (Dollars in thousands)
Interest-bearing demand accounts                                $17,545
 0.17% $17,866
 0.10% $12
Statement savings accounts                                                      29,221
 0.16
 26,083
 0.15
 7
Money market accounts                                           196,670
 0.44
 167,139
 0.36
 267
Certificates of deposit, retail                                     335,496
 1.17
 338,180
 1.06
 360
Certificates of deposit, brokered69,392
 1.76
 64,917
 1.91
 (23)
Advances from the FHLB                                           163,893
 0.86
 133,527
 0.95
 133
Total interest-bearing liabilities                                                      $812,217
 0.92% $747,712
 0.90% $756

The average cost of our deposits increased by five basis points during 2016 primarily as a result of the increase in market interest rates that occurred late in 2015. As a result of the early redemption of several brokered certificates of deposit and obtaining new brokered certificates at lower rates, we were able to reduce our cost of these funds by 15 basis points.

Reductions in the average cost of FHLB advances were a further benefit to our net interest margin. Although the average balance of our FHLB advances increased by $30.4 million year over year, we were able to replace maturing longer-term fixed rate advances and obtain additional advances by utilizing short-term, variable rate advances, thereby reducing the overall average cost of these funds by nine basis points. In addition, low-rate fed funds borrowing was utilized during 2016 as needed to provide the necessary funds for loan growth, then were paid off as core deposits increased.

Provision for Loan Losses. Our provision for loan losses was $1.3 million for the year ended December 31, 2016 as compared to a recapture of the provision for loan losses of $2.2 million for the year ended December 31, 2015. The additional provision in 2016 was primarily the result of a $130.0 million increase in net loans receivable. The quality of our loan portfolio continued to improve as indicated by our credit metrics and that the loans evaluated individually for specific reserves decreased by $12.4 million. The related specific reserves declined to $309,000 at December 31, 2016 from $732,000 at December 31, 2015. In comparison, the recapture recognized in 2015 was primarily the result of recoveries of previously charged-off loans and declines in classified and special mention loans.

Noninterest Income. Noninterest income increased $1.4 million to $2.7 million for the year ended December 31, 2016 from $1.3 million for the year ended December 31, 2015. The following table provides a detailed analysis of the changes in the components of noninterest income:

 Year Ended
December 31, 2016		 Change from
December 31, 2015		 
Percentage
Change
 (Dollars in thousands)
Service fees on deposit accounts$83
 $14
 20.3 %
Loan service fees                                445
 294
 194.7
Gain on sale of investments, net50
 (42) (45.7)
BOLI change in cash surrender value844
 311
 58.3
Wealth management revenue813
 630
 344.3
Other           416
 165
 65.7
Total noninterest income                                           $2,651
 $1,372
 107.3 %

The largest change to our noninterest income was the $630,000 increase in wealth management revenue to $813,000 for the year ended December 31, 2016 as compared to $183,000 for the year ended December 31, 2015. The increase in 2016 is a reflection of the full year of operations and increased investment sales commissions. The Bank began offering wealth management services during the second quarter of 2015.

Our BOLI policies generated $844,000 of income for the year ended December 31, 2016 as a result of the increase in cash surrender values of these policies. The $311,000 increase from the year ended December 31, 2015 was primarily the result of holding throughout the year ended December 31, 2016, $20.0 million in additional BOLI policies purchased in April 2015. In

addition, we replaced a $10.2 million BOLI policy with a higher yielding policy in the second quarter of 2016. We recognize the increase in cash surrender value of these policies as noninterest income, which assists in offsetting expenses for employee benefits.

Loan service fees increased by $294,000 for the year ended December 31, 2016 primarily as a result of the growth and related activity in our loan portfolio. In addition, other noninterest income increased by $165,000 during 2016 primarily as a result of $226,000 of fees received on loans where certain commercial loan customers participate in an interest rate swap. As a result of the interest rate swap, these commercial loan customers pay a fixed interest rate to us, which we forward to a third party broker institution and receive variable interest payments based on one month LIBOR in return. On most of these loans, in addition to the interest payment, the Bank receives a fee from the counterparty that is recognized as noninterest income at the time the loan is originated. In comparison, for the year ended December 31, 2015, other noninterest income solely included a $95,000 gain on the sale of investment property.
Noninterest Expense. Noninterest expense increased $3.0 million to $22.9 million for the year ended December 31, 2016 from $19.9 million for the year ended December 31, 2015. The following table provides a detailed analysis of the changes in the components of noninterest expense:
 Year Ended
December 31, 2016		 Change from
December 31, 2015		 Percentage
Change
 (Dollars in thousands)
Salaries and employee benefits$15,377
 $1,437
 10.3 %
Occupancy and equipment                                           1,984
 544
 37.8
Professional fees                                1,979
 348
 21.3
Data processing                                911
 152
 20.0
OREO-related expenses, net294
 778
 (160.7)
Regulatory assessments420
 (50) (10.6)
Insurance and bond premiums                                           349
 (10) (2.8)
Marketing194
 (17) (8.1)
Other general and administrative1,441
 (111) (7.2)
Total noninterest expense                                           $22,949
 $3,071
 15.4 %

For the year ended December 31, 2016, salaries and employee benefits increased by $1.4 million as compared to the previous year to $15.4 million as a result of normal wage increases and the hiring of 14 new full time positions in support of our growth, new branches and new product lines. Occupancy and equipment expense increased $544,000 to $2.0 million during 2016 as a result of the locations of new branches.

OREO-related expenses were $294,000, a $778,000 decline from a $484,000 reimbursement the previous year. Valuation expense to adjust our carrying value to market value increased by $216,000 for the year ended December 31, 2016 as compared to the year ended December 31, 2015. In addition, sales of OREO properties resulted in a net loss of $613,000 in 2016 as compared to a net gain of $526,000 in 2015.

Other general and administrative expenses decreased by $111,000 during the year ended December 31, 2016. The primary contributor to this decline was a recapture of $160,000 in the reserve for unfunded commitments. This reserve is funded to absorb estimated probable losses related to unfunded credit facilities. The strong credit quality metrics of the Company’s loan portfolio resulted in corresponding modifications in the unfunded commitment reserve calculation methodology, resulting in the recapture during the year. In comparison, for the year ended December 31, 2015, we recognized $148,000 in additional expense representing an increase in the reserve for unfunded commitments.

Federal Income Tax Expense. We recorded a $3.7 million federal income tax provision for 2016, compared to $4.9 million for 2015, primarily as a result of the decrease in pre-tax net income. In addition, a $213,000 tax benefit was incurred for the year ended December 31, 2016 as a partial result of utilization of the capital loss carryforward on our 2015 federal tax return. The provision was based on a 35% tax rate, adjusted for permanent and temporary differences.


Average Balances, Interest and Average Yields/Cost


The following table presents information regarding average balances of assets and liabilities as well as interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spreads, net interest margins and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis.
Year Ended December 31,Year Ended December 31,
2017 2016 2015202220212020
Average Balance (1)
 Interest and Dividends Yield/Cost 
Average Balance (1)
 Interest and Dividends Yield/Cost 
Average Balance (1)
 Interest and Dividends Yield/Cost
Average Balance (1)
Interest and DividendsYield/Cost
Average Balance (1)
Interest and DividendsYield/Cost
Average Balance (1)
Interest and DividendsYield/Cost
(Dollars in thousands) (Dollars in thousands)
Interest-earnings assets:                 Interest-earnings assets:    
Loans receivable, net $878,449
 $43,607
 4.96% $765,948
 $38,218
 4.99% $667,739
 $34,612
 5.18%Loans receivable, net$1,128,835 $52,935 4.69 %$1,098,772 $50,170 4.57 %$1,120,889 $52,546 4.69 %
Investments available-for-sale134,105
 3,504
 2.61
 132,372
 3,054
 2.31
 121,893
 2,242
 1.84
Investments, taxableInvestments, taxable180,085 5,105 2.83 151,768 2,765 1.82 124,162 2,960 2.38 
Investments, non-taxableInvestments, non-taxable23,063 498 2.16 24,342 459 1.89 9,422 236 2.50 
Interest-earning deposits22,194
 237
 1.07
 45,125
 235
 0.52
 104,476
 274
 0.26
Interest-earning deposits30,176 386 1.28 60,482 72 0.12 25,108 52 0.21 
FHLB stock8,914
 296
 3.32
 7,714
 202
 2.62
 6,527
 69
 1.06
FHLB stock6,256 318 5.08 6,271 332 5.29 6,600 320 4.85 
Total interest-earning assets1,043,662
 47,644
 4.57
 951,159
 41,709
 4.39
 900,635
 37,197
 4.13
Total interest-earning assets1,368,415 59,242 4.33 1,341,635 53,798 4.01 1,286,181 56,114 4.36 
Noninterest earning assets64,994
     59,084
     57,519
    Noninterest earning assets87,324 79,841 75,423 
Total average assets$1,108,656
     $1,010,243
     $958,154
    Total average assets$1,455,739 $1,421,476 $1,361,604 
Interest-bearing liabilities:                 Interest-bearing liabilities:
Interest-bearing demand accounts$25,267
 $73
 0.29% $17,545
 $30
 0.17% $17,866
 $18
 0.10%Interest-bearing demand accounts$101,744 $478 0.47 %$106,684 $90 0.08 %$92,839 $292 0.31 %
Statement savings accounts28,160
 42
 0.15
 29,221
 47
 0.16
 26,083
 40
 0.15
Savings accountsSavings accounts23,823 7 0.03 21,715 6 0.03 18,369 15 0.08 
Money market accounts247,770
 1,779
 0.72
 196,670
 870
 0.44
 167,139
 603
 0.36
Money market accounts593,984 3,744 0.63 545,306 1,601 0.29 415,190 3,497 0.84 
Certificates of deposit, retail345,981
 4,362
 1.26
 335,496
 3,934
 1.17
 338,180
 3,574
 1.06
Certificates of deposit, retail273,197 3,635 1.33 342,147 5,519 1.61 430,179 9,474 2.20 
Certificates of deposit, brokered75,488
 1,261
 1.67
 69,392
 1,220
 1.76
 64,917
 1,243
 1.91
Brokered depositsBrokered deposits41,603 1,091 2.62 — — — 30,492 727 2.38 
Total deposits722,666
 7,517
 1.04
 648,324
 6,101
 0.94
 614,185
 5,478
 0.89
Total deposits1,034,351 8,955 0.87 1,015,852 7,216 0.71 987,069 14,005 1.42 
Advances from the FHLB and other borrowings192,227
 2,505
 1.30
 163,893
 1,406
 0.86
 133,527
 1,273
 0.95
Advances from the FHLB and other borrowings113,890 1,934 1.70 115,466 1,603 1.39 125,392 1,640 1.31 
Total interest-bearing liabilities914,893
 10,022
 1.10
 812,217
 7,507
 0.92
 747,712
 6,751
 0.90
Total interest-bearing liabilities1,148,241 10,889 0.95 1,131,318 8,819 0.78 1,112,461 15,645 1.41 
Noninterest bearing liabilities51,116
     37,834
     32,538
    Noninterest bearing liabilities148,813 130,117 93,556 
Average equity142,647
     160,192
     177,904
    Average equity158,685 160,041 155,587 
Total average liabilities and equity$1,108,656
     $1,010,243
     $958,154
    Total average liabilities and equity$1,455,739 $1,421,476 $1,361,604 
Net interest income  $37,622
     $34,202
     $30,446
  Net interest income$48,353 $44,979 $40,469 
                 
Interest rate spread    3.47%     3.47%     3.23%
Net interest margin    3.60%     3.60%     3.38%Net interest margin3.53 %3.35 %3.15 %
Ratio of average interest-                 Ratio of average interest-
earning assets to average                  earning assets to average
interest-bearing liabilities114.07%     117.11%     120.45%     interest-bearing liabilities119.17 %118.59 %115.62 %
________________ 
(1)The average loans receivable, net balances include nonaccruing loans.nonaccrual loans and deferred fees.


63



Yields Earned and Rates Paid


The following table presents the weighted-average yields earned on our assets and the weighted-average interest rates paid on our liabilities, together with theas well as our interest rate spread and net yield on interest-earning assetsinterest margin, at and liabilities, for the datesperiods indicated.
 Weighted Average Yield at
December 31, 2022		Net Yield
Year Ended December 31,
 202220212020
Yield on interest-earning assets:    
Loans receivable, net                                           5.34 %4.69 %4.57 %4.69 %
Investments, taxable           3.68 2.83 1.82 2.38 
Investments, non-taxable1.98 2.16 1.89 2.50 
Interest-earning deposits4.36 1.28 0.12 0.21 
FHLB stock5.88 5.08 5.29 4.85 
Total interest-earning assets                           5.04 4.33 4.01 4.36 
Rate paid on interest-bearing liabilities:
Interest-bearing demand accounts                        1.14 0.47 0.08 0.31 
Savings accounts                                   0.03 0.03 0.03 0.08 
Money market accounts                                           1.58 0.63 0.29 0.84 
Certificates of deposit, retail                                1.78 1.33 1.61 2.20 
Brokered deposits4.05 2.62 — 2.38 
Total interest-bearing deposits1.85 0.87 0.71 1.42 
Advances from the FHLB and other borrowings   2.37 1.70 1.39 1.31 
Total interest-bearing liabilities                         1.91 0.95 0.78 1.41 
Interest rate spread3.13 3.38 3.23 2.95 
Net interest margin                                n/a3.53 3.35 3.15 
64

 
Weighted Average Yield at
December 31, 2017
 
Net Yield
Year Ended December 31,
 2017 2016 2015
Yield on interest-earning assets:       
Loans receivable, net                                           4.71% 4.96% 4.99% 5.18%
Investment securities available-for-sale                                                                2.63
 2.61
 2.31
 1.84
Interest-earning deposits1.20
 1.07
 0.52
 0.26
FHLB stock—
 3.32
 2.62
 1.06
Total interest-earning assets                                                      4.40
 4.57
 4.39
 4.13
Rate paid on interest-bearing liabilities:       
Interest-bearing demand accounts                                0.23
 0.29
 0.17
 0.10
Statement savings accounts                                                      0.13
 0.15
 0.16
 0.15
Money market accounts                                           0.93
 0.72
 0.44
 0.36
Certificates of deposit, retail                                           1.33
 1.26
 1.17
 1.06
Certificates of deposit, brokered1.57
 1.67
 1.76
 1.91
Total interest-bearing deposits1.10
 1.04
 0.94
 0.89
Advances from the FHLB and other borrowings                                    1.60
 1.30
 0.86
 0.95
Total interest-bearing liabilities                                                                1.20
 1.10
 0.92
 0.90
Interest rate spread                                3.20
 3.47
 3.47
 3.23
Net interest margin                                N/A 3.60
 3.60
 3.38


Rate/Volume Analysis


The following table presents the effects of changing rates and volumes on our net interest income. 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.

 Year Ended December 31, 2022 Compared to December 31, 2021 Change in InterestYear Ended December 31, 2021 Compared to December 31, 2020 Change in Interest
 20222021
 RateVolumeTotalRateVolumeTotal
 (In thousands)
Interest-earning assets:      
Loans receivable, net$1,392 $1,373 $2,765 $(1,339)$(1,037)$(2,376)
Investments, taxable1,824 516 2,340 (859)664 (195)
Investments, non-taxable63 (24)39 (151)374 223 
Interest-earning deposits350 (36)314 (53)73 20 
FHLB stock(13)(1)(14)28 (16)12 
Net change in interest income3,616 1,828 5,444 (2,374)58 (2,316)
Interest-bearing liabilities:  
Interest-bearing demand accounts392 (4)388 (246)44 (202)
Savings accounts— 1 1 (12)3 (9)
Money market accounts2,000 143 2,143 (2,992)1,096 (1,896)
Certificates of deposit, retail(772)(1,112)(1,884)(2,016)(1,939)(3,955)
Brokered deposits1,091 — 1,091 — (727)(727)
Advances from FHLB and other borrowings353 (22)331 93 (130)(37)
Net change in interest expense3,064 (994)2,070 (5,173)(1,653)(6,826)
Net change in net interest income$552 $2,822 $3,374 $2,799 $1,711 $4,510 
 Year Ended December 31, 2017 Compared to December 31, 2016 Change in Interest Year Ended December 31, 2016 Compared to December 31, 2015 Change in Interest
 2017 2016
 Rate Volume Total Rate Volume Total
 (In thousands)
Interest-earning assets:           
Loans receivable, net$(224) $5,613
 $5,389
 $(1,485) $5,091
 $3,606
Investments available-for-sale410
 40
 $450
 619
 193
 $812
Interest-earning deposits121
 (119) $2
 117
 (156) $(39)
FHLB stock63
 31
 $94
 120
 13
 $133
Net change in interest income370
 5,565
 5,935
 (629) 5,141
 4,512
            
Interest-bearing liabilities:           
Interest-bearing demand accounts$30
 $13
 $43
 $12
 $—
 $12
Statement savings accounts(3) (2) $(5) 2
 5
 $7
Money market accounts683
 226
 $909
 160
 107
 $267
Certificates of deposit, retail305
 123
 $428
 388
 (28) $360
Certificates of deposit, brokered(66) 107
 $41
 (109) 86
 $(23)
Advances from the FHLB856
 243
 $1,099
 (156) 289
 $133
Net change in interest expense1,805
 710
 2,515
 297
 459
 756
Net change in net interest income$(1,435) $4,855
 $3,420
 $(926) $4,682
 $3,756


Asset and Liability Management and Market Risk


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


65

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


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

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


We have utilized the following strategies in our efforts to manage interest rate risk:
•we are originating shorter term, higher yielding loans, whenever possible;
•we have attempted, where possible, to extend the maturitiesincrease balances of ournon-maturity deposits which typically fund our long-term assets;with less rate sensitivity;
•we have invested in securities with relatively short average lives, generally less than eight years;
•we have added adjustable-rate loans to our loan portfolio;
•we have addedmay utilize brokered certificates of deposit with a call option as a funding source; and
•we have utilized an interest rate swapswaps to effectively fix the rate on $50.0$95.0 million of FHLB advances.


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 partythird-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 49.9%62.2% of our net loans were adjustable-rate loans at December 31, 2017.2022. At that date, $185.4$377.6 million, or 37.1%51.3%, of these loans with a weighted-average interest rate of 4.1%4.21% were at their floor interest rate. A portion of these loans are set to reprice at defined time intervals. Adjustable rate loans that are based on prime rate plus a specified margin recalculate each time the prime rate changes. When the floor rate is above a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At December 31, 2022, the Bank’s net loans receivable included $158.5 million of prime based loans, all of which were priced above their floors at such date.

The inability of our loans to adjust downward can contribute to increased income in 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. Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed. 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 are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, 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 deposits can be maintained with rate adjustments not directly 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 demonstratedobserved in the past that the tiering structure of our deposit accounts during changing rate environments results inhave relatively lower volatility and less than market rate changes in our interest expense for deposits. We tier our deposit accounts by balance and rate, whereby higher balances within an account earn higher rates of interest. Therefore, deposits that are not very rate sensitive (generally, lower balance tiers) are separated from deposits that are rate sensitive (generally, higher balance tiers).changes. When interest rates rise, we do
66

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.


Our income simulation model examines changes in net interest income in whichscenarios where 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. Reductions of rates by 200 and 300 basis points were not reported due to the very low rate environment.points.


The following table illustrates the estimated change in our net interest income over the next 12 months from December 31, 2017,2022, 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.

Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2017
Basis Point Change in Rates Net Interest Income % Change
(Dollars in thousands)
+300 $37,345
 (4.13)%
+200 37,861
 (2.81)
+100 38,481
 (1.21)
Base 38,954
 —
(100) 38,657
 (0.76)

The following table illustrates Net interest income would decline in year one under all three rate rising scenarios, with the change in our net portfolio value (“NPV”) at December 31, 2017 that would occurbigger the increase 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.the bigger decline in net interest income. The declines would be due to the level of adjustable-rate loans that are currently at their floor rate. The $377.6 million of loans at their floor rate would not experience the full impact of the increase in rates because the fully-indexed rate is below the floor rate that is currently in effect for these loans.

Basis Point
Change in Rates (1)
 
Net Portfolio Value (2)
 Net Portfolio as % of Portfolio Value of Assets 
Market Value
of Assets (6)
Amount 
$ Change (3)
 % Change
NPV Ratio (4)
 
% Change (5)
(Dollars in thousands)  
Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2022		Interest Rate Simulation Impact on Net Interest Income
for the year ended December 31, 2022
Basis Point Change in RatesBasis Point Change in RatesNet Interest Income% Change
(Dollars in thousands)(Dollars in thousands)
+300 $115,257
 $(38,752) (25.16)% 10.33% (3.23)% $1,115,212
+300$46,237 (6.87)%
+200 127,405
 (26,604) (17.27) 11.16
 (2.22) 1,141,956
+20047,320 (4.69)
+100 142,171
 (11,838) (7.69) 12.13
 (0.99) 1,172,063
+10048,536 (2.24)
Base 154,009
 —
 —
 12.83
 —
 1,199,992
Base49,647 — 
(100) 158,890
 4,881
 3.17
 12.97
 0.41
 1,225,156
(100)51,056 2.84 
(200)(200)51,306 3.34 
(300)(300)50,266 1.25 
__________
(1)
No rates in the model are allowed to go below zero. Given the relatively low level of market interest rates, a calculation for a decrease of greater than 100 basis points has not been prepared.
(2)
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 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.
(3)
The increase or decrease in the estimated net portfolio value at the indicated interest rates compared to the net portfolio value assuming no change in interest rates.
(4)
Net portfolio value divided by the market value of assets.
(5)
The increase or decrease in the net portfolio value divided by the market value of assets.
(6)
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 tablestable presented above areis 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 assumed. 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.


Liquidity and Capital Resources


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



Our primary sources of funds are customer deposits, 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 securitiesinvestments 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 as described in greater detail under Item 1. “Business – Lending Activities.” At December 31, 2017,2022, the undisbursed portion of construction LIP totaled $92.5$41.4 million and unused lines of credit were $33.9$32.7 million. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of
67

deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. Certificatesinvestments. Retail certificates of deposit and brokered certificates of deposit scheduled to mature in one year or less at December 31, 20172022, totaled $165.9 million.$148.4 million and $89.8 million, respectively. Management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions. In 2017, our posture was to be less aggressive in competing for certificates of deposit and public funds and focus on core deposit acquisition to reduce our cost of funds. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial Northwestthe Bank. As further funding sources,In addition, we had the ability at December 31, 20172022 to borrow an additional $190.5$317.2 million from the FHLB, based on our collateral capacity, $70.4 million from the FRB, and $35.0$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 8 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 our liquidity and funding requirements.


Our primary source of funds is our retail deposits. When retail deposits are not availablesufficient 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, including but not limited to, meetselling investments at a loss, which could adversely impact our earnings and capital levels. During 2022, to supplement the decline in retail deposits resulting from the rising rate environment, we utilized brokered deposits as a funding needs.source. We may continue to utilize this type of funding to manage our liquidity position if desirable growth in retail deposits is not expected.


On a monthly basis, we estimate our liquidity sources and needs for the next sixtwelve 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.


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.
Capital

Based on our current capital allocation objectives, during fiscal 2023 we expect cash expenditures of $1.5 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 $0.13 per share, 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 2023 at this rate of $0.13 per share, our average total dividend paid each quarter would be approximately $1.2 million, based on the number of our current outstanding shares at December 31, 2022.

For the fiscal year ending December 31, 2023, we project that our fixed commitments will include (i) $843,000 of operating lease payments and (ii) other future obligations and accrued expenses of $23.7 million. At December 31, 2022, our $145.0 million in FHLB borrowings are all short-term and $95.0 million of our advances are tied to interest rate swap agreements and are expected to be renewed as they mature during 2023. 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 $142.6$160.4 million at December 31, 2017.2022. 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 December 31, 2017, First Financial Northwest2022, the Bank exceeded all regulatory capital requirements. Regulatory capital ratios for First Financial Northwestthe Bank were as follows as of December 31, 2017:2022: Total capital to risk-weighted assets was 13.77%15.62%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was 12.52%14.37%; and Tier 1 capital to total assets was 10.20%10.31%. At December 31, 2017, First Financial Northwest2022, the Bank met the financial ratios to be considered well-capitalized under the regulatory guidelines. See Item 1. “Business – How We Are Regulated – Regulation and Supervision of First Financial Northwest Bank – Capital Requirements.”


68

Commitments and Off-Balance Sheet Arrangements

We areThe Accumulated Other Comprehensive Income (“AOCI”) component of capital includes a party to financial instruments with off-balance sheet risk invariety of items, including the normal course of business to meet the financing needsvalue of our customers. These financial instruments include commitments to extend creditavailable-for-sale investment portfolio and the unused portionsvalue of linesour derivative instruments, net of credit. These instruments involve, to varying degrees,tax. We model various interest rate scenarios that could impact these elements of creditAOCI and believe that we have sufficient capital to withstand the estimated potential fluctuations in a variety of interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At December 31, 2017 and 2016, we had no commitments to originate loans for sale.environments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts

do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the customer. The amount and type of collateral required varies, but may include real estate and income-producing commercial properties.

The following table summarizes our outstanding commitments to advance additional amounts pursuant to outstanding lines of credit, and to disburse funds related to our construction loans at December 31, 2017.
   Amount of Commitment Expiration - Per Period
 Total Amounts Committed Through One Year After One Through Three Years After Three Through Five Years After Five Years
 (In thousands)
Commitments to originate loans$1,668
 $1,668
 $—
 $—
 $—
Unused portion of lines of credit                                                      33,922
 1,673
 20,887
 2,343
 9,019
Undisbursed portion of construction loans92,498
 50,782
 41,716
 —
 —
Total commitments                                           $128,088
 $54,123
 $62,603
 $2,343
 $9,019


First Financial Northwest is a separate legal entity from the Bank and must provide for its subsidiariesown liquidity. In addition to its own operating expenses, First Financial Northwest is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses. Since First Financial Northwest is a holding company and does not conduct operations, its primary sources of liquidity are interest earned on interest-earning assets, principally interest-earning deposits, dividends up streamed from timethe Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid to time are involved in various claims and legal actions arisingFirst Financial Northwest by the Bank. See, Item 8. "Note 14: Regulatory Capital Requirements" in the ordinary courseaccompanying notes to consolidated financial statements and Item 1. “Business – How We Are Regulated – Regulation and Supervision of business. There are currently no matters that in the opinion of management would have a material adverse effect on First Financial Northwest’s consolidated financial position, results of operation or liquidity.

We anticipate that we will continue to have sufficient funds and alternative funding sources to meet our current commitments.

The following table presents a summary of significant contractual obligations as ofNorthwest Bank – Dividends” in this Form 10-K. At December 31, 2017, maturing as indicated:2022, First Financial Northwest, on an unconsolidated basis, had $9.8 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.

 Less Than One Year One to Three Years Three to Five Years More Than Five Years Total
 (In thousands)
Deposits (1)
$596,682
 $205,912
 $37,015
 $—
 $839,609
Term debt86,000
 130,000
 —
 —
 216,000
Other long-term liabilities (2)
192
 330
 309
 995
 1,826
Lease commitments455
 943
 531
 245
 2,174
Total contractual obligations$683,329
 $337,185
 $37,855
 $1,240
 $1,059,609
___________
(1)
Deposit accounts with indeterminate maturities, such as noninterest bearing, interest-bearing demand, savings and money market accounts are reflected as obligations due in less than one year.
(2)
Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional information about employee benefit plans is provided in Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of this report.

Impact of Inflation

The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. The primary impact of inflation is reflected in the increased cost of our operations. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. In a period of rapidly rising interest rates, the liquidity and maturity structures of our assets and liabilities are critical to the maintenance of acceptable performance levels.


The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of noninterest expense. Expense items such as employee compensation, employee benefits, and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in dollar value of the collateral securing loans that we have made. Our management is unable to determine the extent, if any, to which properties securing loans have appreciated in dollar value due to inflation.

Recent Accounting Pronouncements


See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk


The information contained under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk” of this Form 10-K is incorporated herein by reference.


Item 8. Financial Statements and Supplementary Data


Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Everett, Washington, PCAOB ID: 659)
7970
Consolidated Balance Sheets as of December 31, 2017,2022, and 20162021
8172
Consolidated Income Statements for the Years Ended December 31, 2017, 2016,2022, and 20152021
8273
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016,2022, and 20152021
8374
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016,2022, and 20152021
8475
Consolidated Statements of Cash Flows Forfor the Years Ended December 31, 2017, 2016,2022, and 20152021
8576
Notes to Consolidated Financial Statements
8778

69


[Letterhead of Moss Adams LLP]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors of
First Financial Northwest, Inc. and Subsidiaries


OpinionsOpinion on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of First Financial Northwest, Inc., and Subsidiaries (the “Company”)Company) as of December 31, 20172022 and 2016,2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the periodthen ended, December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172022 and 2016,2021, and the consolidated results of its operations and its cash flows for each of the three years in the periodthen ended, December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.


Basis for OpinionsOpinion
The Company’s management is responsible for these
These consolidatedfinancial statements for maintaining effective internal control over financial reporting, and for its assessmentare the responsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A. Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effectivefraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting was maintained in all material respects.



Our auditsaccordance with the standards of the consolidatedPCAOB. As part of our audit we are required to obtain an understanding of internal control over financial statementsreporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provideaudit provides a reasonable basis for our opinions.opinion.


Definition
70



Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and Limitationsthat (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of Internal Control Over Financial Reportingcritical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
A company’s internal control over
Allowance for Loan and Lease Losses

As described in Notes 1 and 3 to the consolidated financial reportingstatements, the Company’s allowance for loan and lease losses balance was $15.2 million at December 31, 2022. The allowance for loan and lease losses is a process designedmaintained to provide reasonable assurancefor specific losses on impaired loans and probable losses inherent in the loan portfolio. It is based upon the Company’s analysis of the factors underlying the quality of the loan portfolio. These factors include, among others, charge-off history, current economic conditions, borrowers’ ability to repay, the regulatory environment, competition, geographic and loan type concentrations, policy underwriting standards, nature and volume of the loan portfolio, management’s experience level, loan review and loan grading, and the value of underlying collateral.

We identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the overall allowance for loan and lease losses calculation, as critical audit matters. The Company uses credit quality indicators, including internally determined risk ratings, to classify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan and lease losses. Determination of the risk ratings is inherently subjective and involves significant management judgement. The qualitative factors are used to estimate probable losses that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involves significant management judgement. Auditing management’s judgments regarding the reliabilitydetermination of financial reportingrisk ratings and qualitative factors applied to the preparationallowance for loan and lease losses involved a high degree of financial statements for external purposessubjectivity.

The primary procedures we performed to address these critical audit matters included:

•Tested a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately risk rating these loans in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes thoseits policies, and procedures that (1) pertainthe risk ratings for the loans are reasonable based on the current facts and circumstances.

•Tested qualitative factors to determine that management's evaluation was derived from adequate supporting documentation.

•Tested the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsappropriateness of the assetsmethodology and assumptions used in the calculation of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,allowance for loan and that receiptslease losses, evaluating the completeness and expendituresaccuracy of the company are being made onlydata used in accordance with authorizationsthe calculation, application of the risk ratings determined by management and directorsused in the calculation, application of the company;qualitative factors determined by management and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dispositionused in the calculation, and recalculation of the company’s assets that could have a material effect on the financial statements.allowance for loan and lease losses balance.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ Moss Adams LLP


Everett, Washington
March 9, 201813, 2023


We have served as the Company’s auditor since 2009.




71


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share data)

 December 31,
20222021
Assets
Cash on hand and in banks$7,722 $7,246 
Interest-earning deposits with banks16,598 66,145 
Investments available-for-sale, at fair value217,778 168,948 
Investments held-to-maturity, at amortized cost2,444 2,432 
Loans receivable, net of allowance of $15,227 and $15,6571,167,083 1,103,461 
Federal Home Loan Bank (“FHLB”) stock, at cost7,512 5,465 
Accrued interest receivable6,513 5,285 
Deferred tax assets, net2,597 850 
Premises and equipment, net21,192 22,440 
Bank owned life insurance (“BOLI”)36,286 35,210 
Prepaid expenses and other assets12,479 3,628 
Right of use asset (“ROU”), net3,275 3,646 
Goodwill889 889 
Core deposit intangible, net548 684 
Total assets$1,502,916 $1,426,329 
Liabilities and Stockholders’ Equity 
Deposits
Noninterest-bearing deposits$119,944 $117,751 
Interest-bearing deposits1,050,096 1,039,723 
Total deposits1,170,040 1,157,474 
FHLB advances145,000 95,000 
Advance payments from borrowers for taxes and insurance3,051 2,909 
Lease liability, net3,454 3,805 
Accrued interest payable328 112 
Other liabilities20,683 9,150 
Total liabilities1,342,556 1,268,450 
Commitments and contingencies (Note 15)
Stockholders’ Equity 
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 9,127,595 shares at December 31, 2022, and 9,125,759 shares at December 31, 202191 91 
Additional paid-in capital72,424 72,298 
Retained earnings, substantially restricted95,059 86,162 
Accumulated other comprehensive (loss) income, net of tax(7,214)174 
Unearned Employee Stock Ownership Plan (“ESOP”) shares— (846)
Total stockholders’ equity$160,360 $157,879 
Total liabilities and stockholders’ equity$1,502,916 $1,426,329 
 December 31,
 2017 2016
Assets   
    
Cash on hand and in banks$9,189
 $5,779
Interest-earning deposits with banks6,942
 25,573
Investments available-for-sale, at fair value132,242
 129,260
Loans receivable, net of allowance of $12,882 and $10,951988,662
 815,043
Federal Home Loan Bank (“FHLB”) stock, at cost9,882
 8,031
Accrued interest receivable4,084
 3,147
Deferred tax assets, net1,211
 3,142
Other real estate owned (“OREO”)483
 2,331
Premises and equipment, net20,614
 18,461
Bank owned life insurance (“BOLI”), net29,027
 24,153
Prepaid expenses and other assets5,738
 2,664
Goodwill889
 —
Core deposit intangible1,266
 —
Total assets$1,210,229
 $1,037,584
    
Liabilities and Stockholders’ Equity 
  
    
Deposits   
Noninterest-bearing deposits$45,434
 $33,422
Interest-bearing deposits794,068
 684,054
Total deposits$839,502
 $717,476
Advances from the FHLB216,000
 171,500
Advance payments from borrowers for taxes and insurance2,515
 2,259
Accrued interest payable326
 231
Other liabilities9,252
 7,993
Total liabilities$1,067,595
 $899,459
    
Commitments and contingencies (Note 15)

 

    
Stockholders’ Equity 
  
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
   10,748,437 shares at December 31, 2017, and 10,938,251 shares at December 31, 2016
107
 109
Additional paid-in capital94,173
 96,852
Retained earnings, substantially restricted54,642
 48,981
Accumulated other comprehensive loss, net of tax benefit(928) (1,328)
Unearned Employee Stock Ownership Plan (“ESOP”) shares(5,360) (6,489)
Total stockholders’ equity$142,634
 $138,125
Total liabilities and stockholders’ equity$1,210,229
 $1,037,584


See accompanying notes to consolidated financial statements.
72



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Income Statements
(Dollars in thousands, except share data)

 Year Ended December 31,
 20222021
Interest income  
Loans, including fees$52,935 $50,170 
Investments5,603 3,224 
Interest-earning deposits386 72 
Dividends on FHLB stock318 332 
Total interest income$59,242 $53,798 
Interest expense
Deposits8,955 7,216 
FHLB advances and other borrowings1,934 1,603 
Total interest expense$10,889 $8,819 
Net interest income48,353 44,979 
(Recapture of provision) provision for loan losses(400)300 
Net interest income after (recapture of provision) provision for loan losses$48,753 $44,679 
Noninterest income
Net gain on sale of investments27 32 
BOLI income1,004 1,107 
Wealth management revenue, net312 494 
Deposit related fees936 872 
Loan related fees919 1,265 
Other49 92 
Total noninterest income$3,247 $3,862 
Noninterest expense
Salaries and employee benefits21,133 20,237 
Occupancy and equipment4,776 4,557 
Professional fees2,339 1,899 
Data processing2,678 2,692 
Regulatory assessments403 456 
Insurance and bond premiums464 451 
Marketing303 154 
Other general and administrative3,495 2,921 
Total noninterest expense$35,591 $33,367 
Income before provision for federal income taxes16,409 15,174 
Federal income tax provision3,169 2,925 
Net income$13,240 $12,249 
Basic earnings per common share$1.47 $1.31 
Diluted earnings per common share$1.45 $1.29 
Basic weighted average number of common shares outstanding9,006,3699,340,997
Diluted weighted average number of common shares outstanding9,102,2839,454,495
 Year Ended December 31,
 2017 2016 2015
Interest income     
Loans, including fees$43,607
 $38,218
 $34,612
Investments available-for-sale3,504
 3,054
 2,242
Interest-earning deposits with banks237
 235
 274
Dividends on FHLB stock296
 202
 69
Total interest income$47,644
 $41,709
 $37,197
Interest expense 
  
  
Deposits7,517
 6,101
 5,478
FHLB advances2,505
 1,406
 1,273
Total interest expense$10,022
 $7,507
 $6,751
Net interest income37,622
 34,202
 30,446
(Recapture of provision) provision for loan losses(400) 1,300
 (2,200)
Net interest income after (recapture of provision) provision for loan losses$38,022
 $32,902
 $32,646
Noninterest income 
  
  
Net (loss) gain on sale of investments(567) 50
 92
BOLI income623
 844
 533
Wealth management revenue919
 813
 183
Deposit related fees446
 261
 208
Loan related fees776
 671
 151
Other11
 12
 112
Total noninterest income$2,208
 $2,651
 $1,279
Noninterest expense 
  
  
Salaries and employee benefits17,773
 15,377
 13,940
Occupancy and equipment2,506
 1,984
 1,440
Professional fees1,809
 1,979
 1,631
Data processing1,457
 911
 759
OREO related (reimbursements) expenses, net

(67) 294
 (484)
Regulatory assessments491
 420
 470
Insurance and bond premiums399
 349
 359
Marketing270
 194
 211
Other general and administrative2,171
 1,441
 1,552
Total noninterest expense$26,809
 $22,949
 $19,878
Income before provision for federal income taxes13,421
 12,604
 14,047
Federal income tax provision4,942
 3,712
 4,887
Net income$8,479
 $8,892
 $9,160
      
Basic earnings per common share$0.82
 $0.75
 $0.67
Diluted earnings per common share$0.81
 $0.74
 $0.67
Basic weighted average number of common shares outstanding10,289,049
 11,868,278
 13,528,393
Diluted weighted average number of common shares outstanding10,437,449
 12,028,428
 13,685,982


See accompanying notes to consolidated financial statements.
73



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



  Year Ended December 31,
  2017 2016 2015
  (In thousands)
Net income $8,479
 $8,892
 $9,160
       
Other comprehensive income (loss), net of tax:      
Unrealized holding losses on available-for-sale securities (207) (1,669) (1,016)
Tax benefit 72
 584
 356
       
Reclassification adjustment for net (gains) losses realized in income 567
 (50) (92)
Tax provision (benefit) (198) 18
 32
       
Gain on cash flow hedge 192
 1,333
 —
Tax provision (67) (467) —
       
Other comprehensive income (loss), net of tax $359
 $(251) $(720)
Total comprehensive income $8,838
 $8,641
 $8,440
Year Ended December 31,
20222021
(In thousands)
Net income$13,240 $12,249 
Other comprehensive (loss) income, net of tax:
Unrealized holding losses on available-for-sale securities(18,319)(1,636)
Tax effect3,847 343 
Reclassification adjustment for net gains realized in income(27)(32)
Tax effect6 7 
Gains on cash flow hedges8,994 4,316 
Tax effect(1,889)(906)
Other comprehensive (loss) income, net of tax$(7,388)$2,092 
Total comprehensive income$5,852 $14,341 


See accompanying notes to consolidated financial statements.




74
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)

 SharesCommon 
Stock		Additional 
Paid-in
Capital		Retained
Earnings		Accumulated Other Comprehensive (Loss) Income, net of taxUnearned
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— — — 12,249 — — 12,249 
Other comprehensive income— — — — 2,092 — 2,092 
Exercise of stock options41,000 — 344 — — — 344 
Issuance of common stock - restricted stock awards, net55,673 1 — — — — 1 
Compensation related to stock options and restricted stock awards— — 708 — — — 708 
Allocation of 112,853 ESOP shares— — 567 — — 1,129 1,696 
Repurchase and retirement of common stock(704,950)(7)(11,377)— — — (11,384)
Canceled common stock - restricted stock awards(2,839)— (39)— — — (39)
Cash dividends declared and paid ($0.44 per share)— — — (4,090)— — (4,090)
Balances at December 31, 20219,125,759 91 72,298 86,162 174 (846)157,879 
Net income— — — 13,240 — — 13,240 
Other comprehensive loss— — — — (7,388)— (7,388)
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— — 770 — — — 770 
Allocation of 84,640 ESOP shares— — 526 — — 846 1,372 
Repurchase and retirement of common stock(84,981)1 (1,399)— — — (1,398)
Canceled common stock - restricted stock awards(13,208)— (226)— — — (226)
Cash dividends declared and paid ($0.48 per share)— — — (4,343)— — (4,343)
Balances at December 31, 20229,127,595 $91 $72,424 $95,059 $(7,214)$— $160,360 
 Shares 
Common 
Stock
 
Additional 
Paid-in
Capital
 
Retained
Earnings
 Accumulated Other Comprehensive Income (Loss), net of tax 
Unearned
ESOP
Shares
 
Total
Stockholders’ Equity
Balances at December 31, 201415,167,381
 $151
 $153,395
 $36,969
 $(357)188
$(8,746) $181,412
Total other comprehensive income, net of tax—
 —
 —
 9,160
 (720)

—
 8,440
Cash dividends declared and paid ($.24 per share)—
 —
 —
 (3,237) —
 —
 (3,237)
Exercise of stock options125,000
 1
 934
 —
 —
 —
 935
Repurchase and retirement of common stock(1,523,567) (14) (18,703) —
 —
 —
 (18,717)
Stock compensation expense—
 —
 440
 —
 —


—
 440
Allocation of 112,853 ESOP shares—
 —
 272
 —
 —


1,128
 1,400
Balances at December 31, 201513,768,814
 $138
 $136,338
 $42,892
 $(1,077)

$(7,618) $170,673
Net income—
 —
 —
 8,892
 —


—
 8,892
Other comprehensive income—
 —
 —
 —
 (251) —
 (251)
Exercise of stock options101,303
 1
 297
 —
 —
 —
 298
Issuance of common stock - restricted stock awards, net7,001
 —
 (98) —
 —
 —
 (98)
Compensation related to stock options and restricted stock awards—
 —
 621
 —
 —
 —
 621
Allocation of 112,853 ESOP shares—
 —
 476
 —
 —
 1,129
 1,605
Repurchase and retirement of common stock(2,864,389) (29) (40,783) —
 —
 —
 (40,812)
Canceled common stock - restricted stock awards(74,478) (1) 1
 —
 —


—
 —
Cash dividends declared and paid ($.24 per share)—
 —
 —
 (2,803) —


—
 (2,803)
Balances at December 31, 201610,938,251
 $109
 $96,852
 $48,981
 $(1,328) $(6,489) $138,125
Net income—
 —
 —
 8,479
 —
 —
 8,479
Other comprehensive income—
 —
 —
 —
 359


—
 359
Exercise of stock options134,880
 2
 1,307
 —
 —
 —
 1,309
Issuance of common stock - restricted stock awards, net10,434
 —
 (138) —
 —
 —
 (138)
Compensation related to stock options and restricted stock awards—
 —
 574
 —
 —
 —
 574
Allocation of 112,854 ESOP shares—
 —
 812
 —
 —
 1,129
 1,941
Repurchase and retirement of common stock(326,800) (4) (5,234) —
 —
 —
 (5,238)
Canceled common stock - restricted stock awards(8,328) —
 —
 —
 —
 —
 —
Cash dividends declared and paid ($.27 per share)—
 —
 —
 (2,777) —
 —
 (2,777)
Reclassification of stranded OCI for tax rate change—
 —
 —
 (41) 41
 —
 —
Balances at December 31, 201710,748,437
 $107
 $94,173
 $54,642

$(928) $(5,360) $142,634

See accompanying notes to consolidated financial statements.
75



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

 Year Ended December 31,
 20222021
Cash flows from operating activities:  
Net income$13,240 $12,249 
Adjustments to reconcile net income to net cash provided by operating activities
(Recapture of provision) provision for loan losses(400)300 
Loss on sale of OREO property, net— 207 
Net amortization of premiums and discounts on investments720 1,100 
Gain on sale of investments available-for-sale(27)(32)
Depreciation of premises and equipment2,153 2,158 
Loss on disposal of premises and equipment1 1 
Deferred federal income taxes217 235 
Allocation of ESOP shares1,372 1,696 
Stock compensation expense770 708 
BOLI income(1,004)(1,107)
Annuity income(10)(24)
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other assets279 (354)
Decrease in right of use asset739 759 
Increase in advance payments from borrowers for taxes and insurance142 411 
(Increase) decrease in accrued interest receivable(1,228)223 
Decrease in lease liability(719)(736)
Increase (decrease) in accrued interest payable216 (99)
Increase in other liabilities11,531 743 
Net cash provided by operating activities27,992 18,438 
Cash flows from investing activities:
Proceeds from sales and call of investments11,089 20,042 
Principal repayments on investments16,729 20,028 
Purchases of investments available-for-sale(95,687)(84,203)
Net increase in loans receivable(63,222)(3,179)
Proceeds from sales of OREO properties— 247 
Purchases of premises and equipment(906)(2,020)
(Purchase) sale of FHLB stock(2,047)945 
Proceeds from BOLI death benefit settlement— 1,086 
Purchase of BOLI(72)(2,155)
Net cash used in investing activities(134,116)(49,209)
continued
76
 Year Ended December 31,
 2017 2016 2015
Cash flows from operating activities:     
Net income$8,479
 $8,892
 $9,160
Adjustments to reconcile net income to net cash provided by operating activities 
  
  
(Recapture of provision) provision for loan losses(400) 1,300
 (2,200)
OREO market value adjustments50
 257
 41
(Gain) loss on sale of OREO property, net(110) 87
 (526)
Net amortization of premiums and discounts on investments721
 908
 1,104
Loss (gain) on sale of investments available-for-sale567
 (50) (92)
Depreciation of premises and equipment1,262
 1,076
 809
Loss on sale of premises and equipment65
 3
 —
Deferred federal income taxes1,738
 1,548
 4,170
Allocation of ESOP shares1,941
 1,605
 1,400
Stock compensation expense574
 621
 440
Increase in cash surrender value of BOLI(623) (844) (533)
Changes in operating assets and liabilities:     
Prepaid expenses and other assets(2,829) (105) 270
Advance payments from borrowers for taxes and insurance256
 465
 87
Accrued interest receivable(937) (179) 297
Accrued interest payable95
 96
 (7)
Other liabilities1,259
 1,589
 2,295
Net cash provided by operating activities$12,108
 $17,269
 $16,715
Cash flows from investing activities:     
Proceeds from sales and call of investments44,164
 26,437
 27,327
Principal repayments on investments10,722
 15,852
 18,651
Purchases of investments(58,796) (44,561) (57,290)
Net increase in loans receivable(173,219) (131,271) (19,075)
Proceeds from sales of OREO properties1,908
 988
 6,246
Net proceeds from sale or disposal of fixed assets7
 —
 —
Purchases of premises and equipment(2,824) (1,833) (1,781)
(Purchase) redemption of FHLB stock

(1,851) (1,894) 608
Purchase of BOLI(4,251) —
 (20,000)
Net cash received from branch acquisition71,658
 —
 —
Net cash used in investing activities$(112,482) $(136,282) $(45,314)
Cash flows from financing activities:     
Net increase in deposits47,497
 42,069
 61,280
Advances from the FHLB108,500
 525,000
 —
Repayments of advances from the FHLB(64,000) (479,000) (10,000)
Proceeds from stock options exercises1,309
 298
 935
Net share settlement of stock awards(138) (98) —
Repurchase and retirement of common stock(5,238) (40,812) (18,717)
Dividends paid(2,777) (2,803) (3,237)
Net cash provided by financing activities$85,153
 $44,654
 $30,261

continued

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)

Year Ended December 31,
20222021
Cash flows from financing activities: 
Net increase in deposits12,566 63,841 
Advances from the FHLB196,000 25,000 
Repayments of advances from the FHLB(146,000)(50,000)
Proceeds from stock options exercises454 344 
Net share settlement of stock awards(226)(38)
Repurchase and retirement of common stock(1,398)(11,384)
Dividends paid(4,343)(4,090)
Net cash provided by financing activities$57,053 $23,673 
Net decrease in cash and cash equivalents$(49,071)$(7,098)
Cash and cash equivalents at beginning of year73,391 80,489 
Cash and cash equivalents at end of year$24,320 $73,391 
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest$10,673 $8,918 
Federal income taxes2,485 3,190 
Noncash transactions:
Change in unrealized loss on investments available-for-sale(18,346)(1,668)
Change in unrealized gain on cash flow hedge8,994 4,316 
Initial recognition of right-of-use asset for new leases368 758 
Initial recognition of lease liability for new leases368 758 
 Year Ended December 31,
 2017 2016 2015
Net (decrease) increase in cash and cash equivalents$(15,221) $(74,359) $1,662
Cash and cash equivalents at beginning of year31,352
 105,711
 104,049
Cash and cash equivalents at end of year$16,131
 $31,352
 $105,711
      
Supplemental disclosures of cash flow information: 
  
  
Cash paid during the period for: 
  
  
Interest$9,927
 $7,411
 $6,757
Federal income taxes3,350
 2,730
 228
Assets acquired in acquisition of branches (Note 2)72,329
 —
 —
Liabilities assumed in acquisition of branches (Note 2)74,657
 —
 —
Noncash transactions: 
  
  
Loans transferred to OREO, net of deferred loan fees and allowance for loan and
  lease losses (“ALLL”)
—
 —
 141
Change in unrealized loss on investments available-for-sale360
 (1,719) (1,108)
Change in unrealized gain on cash flow hedge192
 1,333
 —


See accompanying notes to consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Summary of Significant Accounting Policies


Nature of Operations and Principles of Consolidation


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”(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 Northwestthe Bank. Accordingly, the information presented in the consolidated financial statements and related data, relates primarily to First Financial Northwestthe Bank. First Financial Northwest converted from a savings and loan holding company to a bank holding company in 2015 and is subject to regulation by the Board of Governors of the Federal Reserve of the Federal Reserve System ((the “Federal Reserve Board” or “Federal Reserve”) through the Federal Reserve Bank of San Francisco (“FRB”(the “FRB”). First Financial NorthwestThe Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”(the “FDIC”) and the Washington State Department of Financial Institutions (“(the DFI”).


First Financial Northwest BankThe was organized in 1923 as a Washington state-chartered savings and loan association, converted to a federal mutual savings and loan association in 1935, and converted to a Washington state-chartered mutual savings bank in 1992. In 2002, First Financial Northwestthe Bank reorganized into a two-tier mutual holding company structure, became a stock savings bank and became the wholly-owned subsidiary of First Financial of Renton, Inc. In connection with the mutual to stock conversion in 2007, the Bank changed its name to First Savings Bank Northwest. In August 2015, the Bank changed its name to First Financial Northwest Bank to support the expansion of focus to being more than a traditional “savings” bank and inbank. In February 4, 2016, the Bank changed its charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.


First Financial NorthwestThe Bank is a community-based commercial bank primarily serving King and Snohomish Counties, and to a lesser extent, Pierce and Kitsap Counties, Washington. In King County, the headquarters and full-service banking office, as well as one branch office, are located in Renton. Additional King County branch offices are located in Bellevue, Woodinville, Bothell, Kent, Kirklandand Woodinville, with a third scheduled to open in Bothell in the first quarter of 2018.Issaquah. In SnohomishSnohomish County, five additional branch offices serve Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. First Financial NorthwestIn Pierce County, two branch offices serve Gig Harbor and University Place. The Bank’s business consists of attracting deposits from the public and utilizing these deposits to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business and consumer loans.

First Financial Diversified Corporation (“FFD”), a wholly-owned subsidiary of First Financial Northwest, continues to hold a portfolio of one-to-four family, land and consumer loans that are serviced by the Bank. At December 31, 2017, FFD had net loans receivable of $2.0 million that were all performing.


The accompanying consolidated financial statements include the accounts of First Financial Northwest and its wholly‑owned subsidiaries First Financial Northwest Bank and First Financial Diversified Corporation (collectively, “the Company”). All significant intercompany balances and transactions between First Financial Northwest and its subsidiaries have been eliminated in consolidation.


Basis of Presentation and Use of Estimates


The accounting and reporting policies of First Financial Northwest and its subsidiariesthe Company conform to U.S. generally accepted accounting principles (“GAAP”). In preparing the consolidated financial statements, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from these estimates. Material estimates particularly subject to change include the allowance for loan and lease losses (“ALLL”), other real estate owned (“OREO”), deferred tax assets and the fair values of financial instruments.


Subsequent Events
    
The Company has evaluated    There are no events and transactions subsequent to December 31, 20172022 for potential recognition or disclosure. See Note 19 - Subsequent Events for more information.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents


For purposes of reporting cash flows, cash and cash equivalents include cash on hand and in banks, interest-bearing deposits and federal funds sold all with maturities of three months or less.


The BankCompany is required to maintain an average reserve balance with the FRB or maintain such reserve balance in the form of cash. AtEffective March 26, 2020 the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to zero percent. There was no required reserve balance at December 31, 2017, cash balances were sufficient where no additional reserve was required. At December 31, 2016, the required reserve was $228,000.2022 and 2021.


Investments


Investments in debt securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading. We had no held-to-maturity or trading securities atAt December 31, 2017, or 2016. 2022 and 2021, we had held-to-maturity and available-for-sale, but no trading securities.

Investments are categorized as held-to-maturity when we have the positive intent and ability to hold them to maturity. Held-to-maturity investments are reported at amortized cost.


Investments are classified as available-for-sale if the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Investments available-for-sale are reported at fair value. Unrealized holding gains and losses on investments available-for-sale are excluded from earnings and are reported in other comprehensive income (loss), net of applicable taxes. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Amortization or accretion of purchase premiums and discounts are included in investment income using the level-yield method over the remaining period to contractual maturity. Dividend or interest income is recognized when it is earned.


The estimated fair value of investments is based on quoted market prices for investments traded in active markets or dealer quotes. Mortgage-backed investments represent participation interest in pools of first mortgage loans originated and serviced by the issuers of the investments.


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. Management 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. For equity securities, the write-down is recorded as a realized loss in noninterest income in the Consolidated Income Statements. For debt securities, if management intends to sell the security or it is likely that management will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If management does not intend to sell the security and it is not likely that management will be required to sell the security but management does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, 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.


Loans Receivable


Loans are recorded at their outstanding principal balance adjusted for charge-offs, the ALLL and net deferred fees or costs. Interest on loans is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.


The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in the process of collection. Consumer and other loans are typically managed in the same manner. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is doubtful. The Company did not designate loans with payment deferrals granted due to the COVID-19 pandemic as delinquent in accordance with

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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provisions of The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and the Consolidated Appropriations Act, 2021 (the “CAA, 2021”) and related regulatory guidance.

All interest accrued but not collected on loans that are placed on nonaccrual is reversed against interest income. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. We evaluate the borrower’s financial condition to ensure that future loan payments are reasonably assured. We also take into consideration the borrower’s willingness and ability to make the loan payments and historical repayment performance. We require the borrower to make the loan payments consistently for a period of at least six months as agreed to under the terms of any modified loan agreement before we will consider reclassifying the loan to accrual status.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Impaired Loans


A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, market conditions, rent rolls and the financial strength of the borrower(s) and guarantor(s), if any. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.


Management determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrowers, including the length of the delay, the reasons for the delay, the borrower’s prior payment history and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured by the fair value method on a loan-by-loan basis.


When a loan is identified as impaired, its impairment is measured using the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, the Company uses an observable market price or current fair value of the collateral, less certain completion costs and closing costs when foreclosure is probable, instead of discounted cash flows. The Company obtains annual updated appraisals for impaired collateral dependent loans that exceed $1.0 million and loans that have been transferred to OREO.million. In addition, the Company may order appraisals on properties not included within these guidelines when there are extenuating circumstances where the Company is not otherwise able to determine the fair value of the property. Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation and/or management’s expertise and knowledge of the borrower. If management determines that the value of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through an allowance estimate or a charge-off to the ALLL.


Troubled Debt Restructurings


Certain loan modifications or restructurings are accounted for as troubled debt restructurings (“TDR”). In general, the modification or restructuring of a debt is considered a TDR if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that the Company would not otherwise consider. Examples of these modifications or restructurings include advancement of maturity date, accepting interest only payments for a period of time, or granting an interest rate concession for a period of time. The impaired portion of the loan with an interest rate concession and/or interest-only payments for a specific period of time are calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The effective interest rate is the rate of return implicit on the original loan. This impaired amount reduces the ALLL and a valuation allowance is established to reduce the loan balance. As loan payments are received in future periods, the ALLL entry is reversed and the valuation allowance is reduced utilizing the level yieldlevel-yield method over the modification period. A loan that is determined to be classified as a TDR is generally reported as a TDR until the loan is paid in full or otherwise settled, sold, or charged-off. The Company elected to apply the temporary relief under the CARES Act and related regulatory guidance to certain eligible short-term modifications, past due loans, and modifications. Qualifying loan modifications were not classified as TDR for accounting or disclosure purposes until 180 days following a loan's initial modification under the CARES Act and related regulatory guidance at which time those loans were classified as a TDR.



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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Loan and Lease Losses


The allowance for loan and lease losses (“ALLL”)ALLL is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Any subsequent recoveries are credited to the allowance.


The ALLL is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans and factors such as the nature and volume of the loan portfolio, historical loss considerations, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.


While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions or changes to the credit quality of the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require management to make adjustments to the allowance based on their judgments about information available to them at the time of their examination.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Premises and Equipment


Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation and amortization is 15 to 40 years for buildings and building improvements, and is three to seven years for furniture, fixtures, and equipment. Leasehold improvements are amortized over the life of the lease. Management reviews buildings, improvements and equipment for impairment on an annual basis or whenever events or changes in the circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an impairment loss is recognized through a charge to earnings based on the fair value of the property.


Federal Home Loan Bank Stock


As a member of the Federal Home Loan Bank System, the BankCompany is required to maintain a minimum level of investment in the Federal Home Loan Bank of Des Moines (“FHLB”) stock, based on specified percentages of total assets and the Bank’s outstanding FHLB advances. Ownership of FHLB stock is restricted to the FHLB and member institutions. The Bank’sCompany’s investment in FHLB stock is carried at par value ($($100 per share), which reasonably approximates its fair value.


Transfer of Financial Assets


Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank,Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the BankCompany does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.


Other Real Estate Owned


OREO consists principally of properties acquired through foreclosure and is originally stated at the lower of cost or estimated market value less selling costs. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the ALLL.


Subsequent to the transfer of foreclosed assets held for sale, the assets continue to beare recorded at the lower of cost or fair value (less estimated costs to sell), based on periodic evaluations. Subsequent write-downs in value are charged to noninterest expense. Generally, legal and professional fees associated with foreclosures are expensed as incurred. Costs incurred to improve property prior to sale are capitalized; however, in no event are recorded costs allowed to exceed estimated fair value. Subsequent gains, losses, or expenses recognized on the sale of these properties are included in noninterest expense. The
81


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts that will ultimately be recovered from foreclosed assets may differ substantially from the carrying value of the assets because of future market factors beyond management’s control.


Bank-Owned Life Insurance


The Company has purchased life insurance on certain key executives and officers. Bank-owned life insurance (“BOLI”) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Increases to the cash surrender value are recorded as noninterest income and partially offset expenses for employee benefits. Certain BOLI contracts contain endorsement split-dollar life agreements. In these circumstances, the Bank accrues a reserve liability and related compensation expense for the expected future benefit payout.


Loan Commitments and Related Financial Instruments


Financial instruments include off-balance sheet credit instruments, such as unused lines of credit and commercial letters of credit issued to meet customer financing needs. The face amount of these items represents the exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.


Reserve for Unfunded Commitments


Management maintains a reserve for unfunded commitments to absorb probable losses associated with our off-balance sheet commitments to lend funds such as unused lines of credit and the undisbursed portion of construction loans. Management determines the adequacy of the reserve based on reviews of individual exposures, current economic conditions, and other relevant
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

factors. The reserve is based on estimates and ultimate losses may vary from the current estimates. The reserve is evaluated on a regular basis and necessary adjustments are reported in earnings during the period in which they become known. The reserve for unfunded commitments is included in the other liabilities section of the consolidated balance sheets.


Stock-Based Compensation


Compensation cost is recognized for stock options and restricted stock awards, based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the grant date is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.


Federal Income Taxes


The Company files a consolidated Federal income tax return and records its provision for income taxes under the asset and liability method. Deferred taxes result from temporary differences in the recognition of certain income and expense amounts between the Company’s financial statements and its tax return. The principal items giving rise to these differences include net operating losses, valuation adjustments on foreclosed properties, and allowance for credit losses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized. The Company’s policy is to recognize interest and penalties associated with income tax matters in income tax expense.


Employee Stock Ownership Plan


The cost of shares issued to the Employee Stock Ownership Plan (“ESOP”), but not yet allocated to participants, is shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce debt and accrued interest. The ESOP allocation process was complete in 2022.


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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 earnings per share (“EPS”) pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared or accumulated and participation rights in undistributed earnings. Certain shares 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 share 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. As ESOP shares are committed to be released, they are included in the outstanding shares used in the basic EPS calculation.


Diluted earnings per share is computed in a similar manner, except that first the denominator is increased to include the number of additional shares that would have been outstanding if potentially dilutive shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, stock options and certain restricted stock awards are potentially dilutive non-participating instruments issued by the Company.


Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.


Comprehensive Income


Comprehensive income consists of net income and unrealized gains and losses on investments available-for-sale and derivatives, which are also recognized as separate components of equity, net of tax.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Advertising Expenses


Advertising costs are generally expensed as incurred.incurred and are not material.


Fair Value of Financial Instruments


Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.


Segment Information


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 providing lending services. Substantially all income is derived from a diverse base of investments and commercial, construction, mortgage, and consumer lending activities.


Reclassification


Certain amounts in the consolidated financial statements for prior years have been reclassified to conform to the current consolidated financial statement presentation. The results of the reclassifications are not considered material and have no effect on previously reported net income or stockholders’ equity.


Derivatives


The Company designates certain interest rate swap agreements as a cash flow hedge, and as such, reports the net fair value as an asset or liability. The hedge is utilized to mitigate the risk of variability in future interest payments. The fair value of
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the cash flow hedge is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. The derivative is marked to its fair value, with the effective portion of changeschange in fair value recorded as other comprehensive income or loss. Any portionEach derivative is tested for effectiveness quarterly and all of the change in fair value that is consideredour derivatives continue to be ineffective is recognized immediately in earnings.deemed effective. The gain or loss on the derivative is removed from equity and recognized inreclassified into earnings in the same periodincome statement line item that is used to present the corresponding loss or gain onearnings effect of the hedged cash flow is recognized in earnings.item.


Goodwill


Goodwill is recorded from a business combination as the difference in purchase price and fair value of the assets acquired and liabilities assumed. Goodwill has an indefinite useful life, and as such, is not amortized. The Company performs a goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs an impairment analysis as needed when circumstances indicate impairment potentially exists. Any impairment will be recorded as a noninterest expense and corresponding reduction in intangible asset on the consolidated financial statements.


Core Deposit Intangible


A core deposit intangible (“CDI”) asset iswas recognized from the assumption of core deposit liabilities in connection with the acquisition of four branches from Opus Bank, a California state-chartered commercial bank in 2017 (the “Branch Acquisition”). The asset was valued by a third party and is amortized into noninterest expense over ten years. The CDI is evaluated for impairment annually with any additional decline recorded as a noninterest expense on the Consolidated Income Statement.



Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued    Accounting Standards Update ("ASU"(“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) which postponed the effective date of 2014-09. Subsequently, in March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. The standard is effective
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. The standard allows for full retrospective adoption for all periods presented or modified retrospective adoption to only the most current period presented in the financial statements. The cumulative effect of initially applying the standard is recognized at the date of the initial application. Our primary source of revenue is interest income, which is recognized as it is earned and is deemed to be in compliance with this ASU. With respect to noninterest income, the Company is in process of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company is developing processes and procedures to ensure it is fully compliant with this ASU. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to implementing this ASU in 2018. Accordingly, the Company does not expect implementation of this standard to have a material impact on our consolidated financial statements.

In January 2016, FASB issued ASU No. 2016-01, Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The amendments in this ASU also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk. In addition, the ASU eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The ASU also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for fiscal years or interim periods that have not yet been issued if adopted at the beginning of the fiscal year. The Company is reviewing our available-for-sale investment portfolio in accordance with the provision of this standard. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize on the balance sheet the assets and liabilities arising from operating leases. A lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. A lessee should include payments to be made in an optional period only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. For a finance lease, interest payments should be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income. For operating leases, the lease cost should be allocated over the lease term on a generally straight-line basis. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in the ASU is permitted. The effect of the adoption will depend on leases at the time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices under noncancelable operating lease agreements, however, based on current leases, the adoption is expected to increase our consolidated balance sheets by less than 5% and not to have a material impact on our regulatory capital ratios.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued in June 2016. This ASU replaces the existing incurred loss impairment methodology that recognizes credit losses when a probable loss has been incurred with new methodology where loss estimates are based upon lifetime expected credit losses. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. The amendments in thisThis ASU areis effective for smaller reporting companies, such as the Company, for fiscal years beginning after December 15, 2019,2022, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018.permitted. The Company is evaluating ourits current expected loss methodology of ouron 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 ourthe 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 has completed compiling historical and industry data. In addition, we have engaged a third-party vendor to assist in the CECL calculation. We are in the process of compiling historical datadeveloping and implementing an internal governance framework. Based on our preliminary analysis, we estimate that the adoption of the ASU will result in a combined increase to our allowance for credit losses and reserve for unfunded loan commitments of 1% to 10%.

In January 2021, the Financial Accounting Standards Board 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 used to calculate expected credit losses on our loan portfolio to ensure we are fully compliant with themodified by reference rate reform. This ASU at the adoption date and are evaluating the potential impact adoption of thprovides
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is ASU will have on our consolidated financial statements. Once adopted, we expect our allowance for loan lossesimplementation guidance to increase, however, until our evaluation is complete the magnitude of the increase willclarify that certain optional expedients and exceptions in Topic 848 may be unknown.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.applied to derivative instruments. This ASU wasmay be elected on a full retrospective basis for any interim period subsequent to address the appropriate classification of eight specific cash flow issuesMarch 12, 2020, or on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceedsprospective basis to new modifications from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU asany date subsequent to the appropriate classificationdate of the cash inflows or outflows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently have items on its cash flow statement that would be impacted by adoption of this ASU. Adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805). This ASU clarifies the definition of a business to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when a set of assets and activities is not a business, thereby reducing the number of transactions requiring further evaluation. If the screen is not met, the amendments in this ASU further provide a framework to evaluate if the criteria is present to qualify for a business. This ASU is effective for annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. Adoption of ASU 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.     
In January 2017, FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU simplifies the impairment calculation for subsequent measurement of goodwill by eliminating the step of comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this ASU, an entity will evaluate the carrying amount of a reporting unit to its fair value, as if the reporting unit had been acquired in a business combination. An impairment charge should be recognized for the amount that the carrying amount exceeds the fair value, not to exceed the amount of goodwill. The income tax effect should be considered for any tax deductible goodwill when measuring the impairment loss. The amendments in this ASU are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for reporting periods after January 1, 2017. The Company recognized goodwill from its recent Branch Acquisition and intends on adopting this ASU in 2018. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2017, FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium. The ASU will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company's consolidated financial statements.

In May 2017, FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based payment award. According to this ASU, an entity should account for the effects of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. This ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company has not had any modifications on share-based payment awards. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). This ASU was issued to provide investors better insight to an entity’s risk management hedging strategies by permitting companies to recognize the economic results of its hedging strategies in its financial statements. The amendments in this ASU permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the ASU requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for fiscal years beginning after December 15, 2018, and early adoption is permitted. Adoption of ASU 2017-12 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2018, FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU was issued to allow a reclassification from accumulated other comprehensive income to retained earnings from stranded tax effects resulting from the revaluation of the net deferred tax asset (“DTA”) to the new corporate tax rate of 21% as a result of the
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Tax Act. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company has adopted this ASU asissuance. As of December 31, 2017, which resulted in reclassifying a net unrealized gain from2022, the change in tax rate with an increaseCompany’s derivative instruments continued to accumulated other comprehensive income and a decrease to retained earnings by $41,000, respectively.

Applicationuse LIBOR as the basis for interest-rate swap calculations. The Company is evaluating the optional election of US GAAP in Accountingthis ASU for the Tax Cuts and Jobs Acttransition from LIBOR to a new reference rate.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”). SAB 118 provides guidance to registrants under three scenarios: (1) Measurement of certain income tax effects is complete, (2) Measurement of certain income tax effects can be reasonable estimated and (3) Measurement of certain income tax effects cannot be reasonably estimated. SAB 118 provides a one year measurement period for the registrant to complete its accounting for certain income tax effects that are considered provisional or for which reasonable estimates cannot be made. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SAB 118.


Note 2 - Acquisition

On August 25, 2017, First Financial Northwest Bank completed the Branch Acquisition, which included four retail branches located in Woodinville, Clearview, Lake Stevens, and Smokey Point, Washington. The Bank acquired $74.7 million of retail deposits, prior to the fair value adjustment, one owned bank branch, three leased branches, and certain fixed assets at these branches. The purchase price of the Branch Acquisition paid by the Bank included a deposit premium of 3.125% of the average daily balance of acquired deposits for 20 days prior to the closing date, or $2.5 million; 80% of the fair market value of the owned branch building and land, or $488,000; the net book value of fixed assets, or $56,000; and $14,000 for other pro rations and adjustments as of the closing date. In connection with the transaction, Opus Bank paid the Bank $71.6 million in cash for the difference between these amounts and the total deposits assumed.

The Branch Acquisition was accounted for under the acquisition method of accounting, and accordingly, the assets received and liabilities assumed were recorded at their fair market value as of August 25, 2017. Determining the fair value of assets and liabilities is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to adjustment for up to one year after the closing date of the acquisition as additional information regarding the fair values as of the acquisition date become available. The excess cost over fair value of net assets acquired is recorded as goodwill.

The application of the acquisition method of accounting resulted in recognition of a CDI of $1.3 million and goodwill of $889,000. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis, or more often if circumstances dictate, to determine if the carrying value remains appropriate.

For the year ended December 31, 2017, the Company included on the Consolidated Income Statement $41,000 in revenue from the acquired branches, consisting of loan interest income and deposit related fees.

The following table presents the estimated fair values of the assets received and liabilities assumed as of the acquisition date:
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 At August 25, 2017
 Acquired Book Value Fair Value Adjustments Amount Recorded
 (In thousands)
Assets     
Cash and cash equivalents$71,649
 $—
 $71,649
Premises and equipment, net553
 119
 672
Goodwill—
 889
 889
Core deposit intangible—
 1,319
 1,319
Total assets acquired$72,202
 $2,327
 $74,529
      
Liabilities     
Deposits     
Noninterest-bearing deposits$11,995
 $—
 $11,995
Interest-bearing deposits62,662
 (128) 62,534
Total deposits74,657
 (128) 74,529
Total liabilities assumed$74,657
 $(128) $74,529

Fair value estimates for the acquisition are set forth as follows:

(1)Premises and equipment: The fair value adjustment to fixed assets was the result of the markup of the building and land to the appraised value and the immediate disposal of certain fixed assets that were included with the purchase price.

(2) Goodwill: The difference of the fair value of liabilities assumed and the fair value of assets acquired was recognized as goodwill and was calculated as of August 25, 2017 as follows:

 At August 25, 2017
 (In thousands)
  
Purchase price$3,008
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value 
Cash and cash equivalents74,657
Premises and equipment, net672
Core deposit intangible1,319
Deposits(74,529)
Total fair value of identifiable net assets2,119
Goodwill889

(3) Core deposit intangible: The CDI represents the fair value of the acquired core deposits. The CDI will be amortized over ten years into noninterest expense, with amortization expense of $53,000 recognized for the year ended December 31, 2017. Amortization expense of the CDI is expected as follows:

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 At August 25, 2017
 (In thousands)
2017$53
2018150
2019148
2020144
2021140
Thereafter684
Total$1,319

(4) Certificates of deposit: The fair value of acquired certificates of deposit was determined by a third-party valuation and will be amortized into interest expense over 2.0 to 5.0 years, with amortization of $21,000 recognized for the year ended December 31, 2017. Amortization of the fair value adjustment is expected as follows:

 At August 25, 2017
 (In thousands)
2017$21
201849
201930
202016
20219
20223
Total$128

Note 3 - Investments


The following tables summarize the amortized cost and fair value of investments available-for-sale at December 31, 2017,2022 and 2016,2021, and the corresponding amounts of gross unrealized gains and losses. 
 December 31, 2022
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
 (In thousands)
Mortgage-backed investments:    
Fannie Mae$11,800 $— $(1,860)$9,940 
Freddie Mac13,720 — (1,831)11,889 
Ginnie Mae29,426 18 (1,601)27,843 
Other34,295 — (1,906)32,389 
Municipal bonds36,968 17 (6,102)30,883 
U.S. Government agencies76,718 6 (2,370)74,354 
Corporate bonds33,000 — (2,520)30,480 
 $235,927 $41 $(18,190)$217,778 
December 31, 2017 December 31, 2021
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(In thousands) (In thousands)
Mortgage-backed investments:       Mortgage-backed investments:   
Fannie Mae$26,961
 $69
 $(466) $26,564
Fannie Mae$12,920 $146 $(88)$12,978 
Freddie Mac5,510
 18
 (56) 5,472
Freddie Mac13,039 115 (330)12,824 
Ginnie Mae22,288
 14
 (726) 21,576
Ginnie Mae23,728 105 (146)23,687 
OtherOther11,278 47 (61)11,264 
Municipal bonds13,126
 290
 (21) 13,395
Municipal bonds36,078 677 (289)36,466 
U.S. Government agencies43,088
 81
 (536) 42,633
U.S. Government agencies41,711 61 (338)41,434 
Corporate bonds22,502
 527
 (427) 22,602
Corporate bonds29,997 505 (207)30,295 
$133,475
 $999
 $(2,232) $132,242
 $168,751 $1,656 $(1,459)$168,948 
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
 (In thousands)
Mortgage-backed investments: 
   Fannie Mae$42,060
 $126
 $(854) $41,332
   Freddie Mac18,013
 95
 (99) 18,009
   Ginnie Mae19,133
 41
 (540) 18,634
Municipal bonds13,203
 11
 (107) 13,107
U.S. Government agencies15,937
 75
 (155) 15,857
Corporate bonds22,506
 241
 (426) 22,321
 $130,852
 $589
 $(2,181) $129,260


There were no$2.4 million of investments classified as held-to-maturity at both December 31, 2017, or 2016.2022, and 2021. In January 2020, the Company purchased three annuity contracts to be held long-term to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements. The annuities are reported at amortized cost as investments held-to-maturity on the Company’s consolidated balance sheet. The amortized cost includes increases from interest income.


The amortized cost and estimated fair value of investments available-for-sale at December 31, 2017,2022, by expected 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.
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December 31, 2017 December 31, 2022
Amortized Cost Fair Value Amortized CostFair Value
(In thousands) (In thousands)
Due within one year$5,035
 $5,040
Due within one year$— $— 
Due after one year through five years1,658
 1,663
Due after one year through five years50,100 48,732 
Due after five years through ten years20,645
 20,756
Due after five years through ten years28,769 26,079 
Due after ten years51,378
 51,171
Due after ten years67,817 60,906 
78,716
 78,630
 146,686 135,717 
Mortgage-backed investments54,759
 53,612
Mortgage-backed investments89,241 82,061 
$133,475
 $132,242
$235,927 $217,778 
 
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. Investments with a carrying value of $14.2$21.0 million and $22.6$23.1 million were pledged as collateral for public deposits at December 31, 2017,2022, and 2016,2021, respectively, both of which exceeded the minimum collateral requirements established by the Washington Public Deposit Protection Commission. At both December 31, 2017,2022, and 2016,2021, there were no investments pledged as collateral for FHLB advances.



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Sales and other redemptions of available-for-sale investments were as follows: 
Year Ended December 31, Year Ended December 31,
2017 2016 2015 20222021
(In thousands) (In thousands)
Proceeds$44,164
 $26,437
 $27,327
Proceeds$11,088 $20,042 
Gross gains119
 245
 449
Gross gains27 104 
Gross losses(686) (195) (357)Gross losses— (72)
 
The following tables summarize the aggregate fair value and gross unrealized loss by length of time those investments have been continuously in an unrealized loss position at December 31, 20172022 and 2016.2021.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
 December 31, 2022
 Less Than 12 Months12 Months or LongerTotal
Fair ValueUnrealized
Loss		Fair ValueUnrealized
Loss		Fair ValueUnrealized
Loss
(In thousands)
Mortgage-backed investments:
Fannie Mae$6,710 $(1,073)$3,226 $(787)$9,936 $(1,860)
Freddie Mac4,677 (272)6,476 (1,559)11,153 (1,831)
Ginnie Mae7,645 (310)13,714 (1,291)21,359 (1,601)
Other27,430 (1,614)4,959 (292)32,389 (1,906)
Municipal bonds7,892 (680)20,901 (5,422)28,793 (6,102)
U.S. Government agencies43,664 (1,184)30,224 (1,186)73,888 (2,370)
Corporate bonds17,241 (1,259)13,239 (1,261)30,480 (2,520)
 $115,259 $(6,392)$92,739 $(11,798)$207,998 $(18,190)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2021
 Less Than 12 Months12 Months or LongerTotal
 Fair ValueUnrealized
Loss		Fair ValueUnrealized
Loss		Fair ValueUnrealized
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)
 $64,255 $(841)$29,764 $(618)$94,019 $(1,459)


 December 31, 2017
 Less Than 12 Months 12 Months or Longer Total
 Fair Value 
Unrealized
Loss
 Fair Value 
Unrealized
Loss
 Fair Value 
Unrealized
Loss
 (In thousands)
Mortgage-backed investments:           
Fannie Mae$15,202
 $(91) $6,759
 $(375) $21,961
 $(466)
Freddie Mac3,189
 (56) —
 —
 3,189
 (56)
Ginnie Mae6,454
 (61) 14,234
 (665) 20,688
 (726)
Municipal bonds1,403
 (21) —
 —
 1,403
 (21)
U.S. Government agencies33,268
 (435) 1,800
 (101) 35,068
 (536)
Corporate bonds1,499
 (1) 7,074
 (426) 8,573
 (427)
 $61,015
 $(665) $29,867
 $(1,567) $90,882
 $(2,232)

 December 31, 2016
 Less Than 12 Months 12 Months or Longer Total
 Fair Value 
Unrealized
Loss
 Fair Value 
Unrealized
Loss
 Fair Value 
Unrealized
Loss
 (In thousands)
Mortgage-backed investments:           
Fannie Mae$34,763
 $(854) $—
 $—
 $34,763
 $(854)
Freddie Mac8,343
 (99) —
 —
 8,343
 (99)
Ginnie Mae16,734
 (540) —
 —
 16,734
 (540)
Municipal bonds8,815
 (107) —
 —
 8,815
 (107)
U.S. Government agencies9,000
 (153) 1,426
 (2) 10,426
 (155)
Corporate bonds3,880
 (119) 4,693
 (307) 8,573
 (426)
 $81,535
 $(1,872) $6,119
 $(309) $87,654
 $(2,181)

At December 31, 2017,2022, and 2016,2021, the Company had 36123 and 5351 securities, respectively, with a gross unrealized loss position. Management reviewed the financial condition of the entities underlying the securities at both December 31, 2017,2022 and December 31, 2016,2021, and determined that no OTTI was required. Management believes that, while actual fluctuation in unrealized losses will occur over the life of an investment security, the temporary impairment on the investment securities that were in an unrealized loss position at December 31, 20172022 and 2016,2021, will be incrementally relieved as the individual investment securities approach their respective contractual maturity dates. The unrealized losses relate principally to the general change in interest rate and illiquidity, and not credit quality. As management does not intend to sell the security, and it is likely that it will not be required to sell the security before its anticipated recovery, no declines are deemed to be other-than-temporary.
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Note 43 - Loans Receivable


Loans receivable net of loans in process (“LIP”), at December 31, 2017,2022, and 20162021 are summarized as follows: 
 December 31,
 20222021
 (In thousands)
One-to-four family residential:  
Permanent owner occupied$233,785 $185,320 
Permanent non-owner occupied242,051 199,796 
 475,836 385,116 
 
Multifamily126,895 130,146 
 
Commercial real estate407,882 419,417 
Construction/land: (1)
 
One-to-four family residential52,836 34,677 
Multifamily15,501 37,194 
Commercial— 6,189 
Land9,783 15,395 
 78,120 93,455 
Business31,371 46,590 
Consumer62,055 44,812 
Total loans1,182,159 1,119,536 
Less: 
Deferred loan (costs) fees, net (2)
(151)418 
ALLL15,227 15,657 
Loans receivable, net$1,167,083 $1,103,461 
 December 31,
 2017 2016
 (In thousands)
One-to-four family residential:   
Permanent owner occupied$148,304
 $137,834
Permanent non-owner occupied130,351
 111,601
 278,655
 249,435
Multifamily: 
  
Permanent184,902
 123,250
 184,902
 123,250
Commercial real estate: 
  
Permanent361,842
 303,694
 361,842
 303,694
Construction/land: (1)
 
  
One-to-four family residential87,404
 67,842
Multifamily108,439
 111,051
Commercial5,325
 —
Land36,405
 30,055
 237,573
 208,948
    
Business23,087
 7,938
Consumer9,133
 6,922
Total loans1,095,192
 900,187
Less: 
  
Loans in process (“LIP”)92,498
 72,026
Deferred loan fees, net1,150
 2,167
Allowance for loan and lease losses ("ALLL")

12,882
 10,951
Loans receivable, net$988,662
 $815,043
____________
___________
(1)
Included in the construction/land category are “rollover” loans, which are loans that will convert upon completion of the construction period to permanent loans. At that time, the loans will be classified(1)Included in the construction/land category are “rollover” loans, which are loans that will convert upon completion of the construction period to permanent loans and be reclassified according to the underlying collateral. In addition, raw land or buildable lots, where the Company does not intend to finance the construction are included in the construction/land category. At December 31, 2017, we classified $71.4 million of multifamily loans, $35.9 million of commercial land loans, $2.6 million of one-to-four family residential and $5.3 million of commercial real estate loans as construction/land loans to facilitate the review of the composition of our loan portfolio. At December 31, 2016, $62.9 million of multifamily loans, $26.9 million of commercial land loans and $2.6 million one-to-four family residential loans were reclassified to the construction/land category.

At December 31, 2017,2022, the Company had $15.5 million of multifamily loans and 2016, there were no$9.8 million of commercial land loans classified as held for sale.included in the construction/land loan portfolio that will be converted to permanent loans upon completion of the construction period. At December 31, 2021, total loans included in the construction/land loan portfolio to be converted to permanent loans included $37.2 million of multifamily loans, $12.9 million of commercial land loans, and $6.2 million of commercial real estate loans.

(2)Deferred loan (costs) fees, net, include $3.4 million of unamortized loan purchase premiums at December 31, 2022.

Concentrations of credit. Most of the Bank’sCompany’s lending activity occurs within the state of Washington. The primary market areas include King, and to a lesser extent, Pierce, Snohomish and Kitsap counties. At December 31, 2017,2022, the Company’s loan portfolio consistswas comprised of one-to-four family residential loans which comprised 25.5%,representing 40.3% of the total loan portfolio, commercial real estate and multifamily loans were 33.0%representing 34.4% and 16.9%10.7%, respectively, and construction/land loans were 21.7%representing 6.6% of the total loan portfolio. Consumer and business loans accounted for the remaining 2.9%8.0% of the total loan portfolio. IncludedDuring the years ended December 31, 2021 and 2020, the Company participated in the one-to-four family residential, multifamily, commercial real estate, construction/land, and businessU.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), a guaranteed unsecured loan portfolios at December 31, 2017 were $1.0 million, $10.7 million, $39.2 million, $27.4 million and $10.3 million, respectively,program enacted under the CARES Act to the Company’s five largest borrowing relationships.provide near-term relief to help small businesses impacted by COVID-19 sustain operations. Forgiveness

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

payments received from the SBA reduced the balance of PPP loans included in commercial business loans to $785,000 at December 31, 2022, all of which is fully guaranteed by the SBA. The Company’s five largest borrowing relationships had an aggregate total of $109.6 million at December 31, 2022, representing 9.3% of total loans receivable.

The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at December 31, 2017,2022 and 2016,2021, was as follows:
December 31, 2017
December 31, 2022December 31, 2022
Fixed RateFixed Rate Adjustable RateFixed RateAdjustable Rate
Term to Maturity Principal Balance Term to Rate Adjustment Principal BalanceTerm to MaturityPrincipal BalanceTerm to Rate AdjustmentPrincipal Balance
(In thousands)(In thousands)(In thousands)
Due within one year $37,472
 Due within one year $292,398
Due within one year$4,673 
Due within one year (1)
$329,764 
After one year through three years 102,630
 After one year through three years 51,520
After one year through three years56,461 After one year through three years72,362 
After three years through five years 80,811
 After three years through five years 127,973
After three years through five years68,783 After three years through five years224,852 
After five years through ten years 132,086
 After five years through ten years 95,091
After five years through ten years104,646 After five years through ten years108,557 
Thereafter 175,211
 Thereafter —
Thereafter212,061 Thereafter— 
 $528,210
   $566,982
 $446,624  $735,535 
 ____________ 
(1) Includes $158.5 million of prime based loans and $111.1 million in loans that adjust monthly based on LIBOR.
December 31, 2016
Fixed Rate Adjustable Rate
Term to Maturity Principal Balance Term to Rate Adjustment Principal Balance
(In thousands)
Due within one year $23,513
 Due within one year $214,794
After one year through three years 106,138
 After one year through three years 32,448
After three years through five years 71,251
 After three years through five years 118,350
After five years through ten years 145,063
 After five years through ten years 29,922
Thereafter 158,708
 Thereafter —
  $504,673
   $395,514


December 31, 2021
Fixed RateAdjustable Rate
Term to MaturityPrincipal BalanceTerm to Rate AdjustmentPrincipal Balance
(In thousands)
Due within one year$39,712 
Due within one year (1)
$284,631 
After one year through three years50,504 After one year through three years74,706 
After three years through five years92,824 After three years through five years177,607 
After five years through ten years118,310 After five years through ten years103,909 
Thereafter177,333 Thereafter— 
 $478,683  $640,853 
The majority____________ 
(1) Includes $117.0 million of theprime based loans and $114.8 million in loans that adjust monthly based on LIBOR.

Our adjustable-rate loans are tied to various indexes, including LIBOR, the prime rate as published in TheWall Street Journal,. The remaining adjustable-rateand the FHLB. Certain adjustable‑rate loans have interest rate adjustment limitations and are generally indexed to the FHLB Long-Term Bullet advance rates published by the FHLB. Future market factors may affect the correlation of the interest rate adjustment with the rates paid on short‑term deposits that have been primarily utilized to fund these loans.


    Credit Quality Indicators. The Company assigns a risk rating to all credit exposures based on the 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 Company. 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.

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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•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.
•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” have 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.

    As of both December 31, 2022, and 2021, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at December 31, 2022, and 2021 by type and risk category: 
 December 31, 2022
 One-to-Four
Family
Residential		MultifamilyCommercial
Real Estate		Construction/ 
Land		BusinessConsumerTotal
 (In thousands)
Risk Rating:       
   Pass, grade 1-4$473,700 $122,972 $342,827 $78,120 $31,371 $61,632 $1,110,622 
   Pass, grade 5
     (watch)		1,113 2,291 14,845 — — 27 18,276 
   Special mention1,023 — 4,668 — — 203 5,894 
   Substandard— 1,632 45,542 — — 193 47,367 
Total$475,836 $126,895 $407,882 $78,120 $31,371 $62,055 $1,182,159 
 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$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 Company will be able to collect all amounts due according to the contractual terms of the loan, it may establish a specific reserve in an amount deemed prudent to address the risk specifically or may allow the loss to be addressed in the general allowance.specifically. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional loss allowances.


Loan grades are used by the Company to identify and track potential problem loans which do not rise to the levels described for substandard, doubtful, or loss. The grades for watch and special mention are assigned to loans which have been criticized based upon known characteristics such as periodic payment delinquency 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.


The following tables summarize changes in the ALLL and loan portfolio by type of loan and reserve method for the periods indicated. The analysis of pooled loans excluded PPP loans as these loans are fully guaranteed by the SBA.
 At or For the Year Ended December 31, 2022
 One-to-Four
Family
Residential		MultifamilyCommercial 
Real Estate		Construction/
Land		BusinessConsumerTotal
ALLL:(In thousands)
Beginning balance$3,214 $1,279 $6,615 $2,064 $1,112 $1,373 $15,657 
Charge-offs— — — — — (37)(37)
Recoveries7 — — — — — 7 
Provision (recapture of provision)822 (69)(1,218)(347)(164)576 (400)
Ending balance$4,043 $1,210 $5,397 $1,717 $948 $1,912 $15,227 
General reserve$4,030 $1,210 $5,397 $1,717 $948 $1,912 $15,214 
Specific reserve13 — — — — — 13 
Loans: 
Total Loans$475,836 $126,895 $407,882 $78,120 $31,371 $62,055 $1,182,159 
Loans collectively evaluated for impairment (1) (3)
474,476 125,263 362,340 78,120 31,371 62,055 1,133,625 
Loans individually evaluated for impairment (2)
1,360 1,632 45,542 — — — 48,534 
____________ 
(1) Loans collectively evaluated for general reserves.
(2) Loans individually evaluated for specific reserves.
(3) PPP loans totaling $785,000 were excluded from the collectively evaluated pool when calculating the ALLL as payment on these loans is guaranteed by the SBA.
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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 At or For the Year Ended December 31, 2021
 One-to-Four Family ResidentialMultifamilyCommercial 
Real Estate		Construction/
Land		BusinessConsumerTotal
ALLL: (In thousands)
Beginning balance$3,181 $1,366 $6,127 $2,189 $1,242 $1,069 $15,174 
   Charge-offs— — — — — — — 
   Recoveries183 — — — — — 183 
   (Recapture)
     provision		(150)(87)488 (125)(130)304 300 
Ending balance$3,214 $1,279 $6,615 $2,064 $1,112 $1,373 $15,657 
General reserve$3,194 $1,279 $6,615 $2,064 $1,112 $1,373 $15,637 
Specific reserve20 — — — — — 20 
Loans:
Total Loans$385,116 $130,146 $419,417 $93,455 $46,590 $44,812 $1,119,536 
Loans collectively evaluated for impairment (1) (3)
383,009 130,146 385,387 93,455 46,590 44,812 1,083,399 
Loans individually evaluated for impairment (2)
2,107 — 34,030 — — — 36,137 
_____________ 
 At or For the Year Ended December 31, 2017
 
One-to-Four
Family
Residential
 Multifamily 
Commercial 
Real Estate
 
Construction/
Land
 Business Consumer Total
ALLL:(In thousands)
Beginning balance$2,551
 $1,199
 $3,893
 $2,792
 $237
 $279
 $10,951
   Charge-offs—
 —
 —
 —
 —
 —
 —
   Recoveries2,195
 —
 78
 —
 —
 58
 2,331
   (Recapture) provision(1,909) 621
 447
 24
 457
 (40) (400)
Ending balance$2,837
 $1,820
 $4,418
 $2,816
 $694
 $297
 $12,882
              
General reserve$2,721
 $1,820
 $4,399
 $2,816
 $694
 $297
 $12,747
Specific reserve116
 —
 19
 —
 —
 —
 135
              
Loans: (1)
             
Total Loans$278,655
 $184,902
 $361,299
 $145,618
 $23,087
 $9,133
 $1,002,694
General reserve (2)
265,093
 183,768
 358,105
 145,618
 23,087
 9,039
 984,710
Specific reserve (3)
13,562
 1,134
 3,194
 —
 —
 94
 17,984
____________ 
(1) Net of LIP.
(2)Loans collectively evaluated for impairment.general reserves.
(3)(2) Loans individually evaluated for impairment.specific reserves.
 At or For the Year Ended December 31, 2016
 One-to-Four Family Residential Multifamily 
Commercial 
Real Estate
 
Construction/
Land
 Business Consumer Total
ALLL: (In thousands)
Beginning balance$3,028
 $1,193
 $3,395
 $1,193
 $229
 $425
 $9,463
   Charge-offs—
 —
 —
 —
 —
 (83) (83)
   Recoveries165
 1
 104
 —
 —
 1
 271
   (Recapture) provision(642) 5
 394
 1,599
 8
 (64) 1,300
Ending balance$2,551
 $1,199
 $3,893
 $2,792
 $237
 $279
 $10,951
              
General reserve$2,349
 $1,199
 $3,867
 $2,711
 $237
 $279
 $10,642
Specific reserve202
 —
 26
 81
 —
 —
 309
              
Loans: (1)
             
Total Loans$249,435
 $123,250
 $303,694
 $136,922
 $7,938
 $6,922
 $828,161
General reserve (2)
224,363
 121,686
 299,987
 136,427
 7,938
 6,819
 797,220
Specific reserve (3)
25,072
 1,564
 3,707
 495
 —
 103
 30,941
_____________ 
(1) Net of LIP.
(2) Loans(3) PPP loans totaling $10.8 million were excluded from the collectively evaluated for impairment.pool when calculating the ALLL as payment on these loans is guaranteed by the SBA.
(3) Loans individually evaluated for impairment.



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FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 At or For the Year Ended December 31, 2015
 One-to-Four Family Residential Multifamily 
Commercial 
Real Estate
 
Construction/
Land
 Business Consumer Total
ALLL: (In thousands)
Beginning balance$3,691
 $1,606
 $4,476
 $519
 $47
 $152
 $10,491
   Charge-offs(27) (281) —
 —
 —
 (54) (362)
   Recoveries936
 78
 181
 —
 3
 336
 1,534
   (Recapture) provision(1,572) (210) (1,262) 674
 179
 (9) (2,200)
Ending balance$3,028
 $1,193
 $3,395
 $1,193
 $229
 $425
 $9,463
              
General reserve$2,516
 $1,190
 $3,270
 $1,140
 $229
 $386
 $8,731
Specific reserve512
 3
 125
 53
 —
 39
 732
              
Loans: (1)
 
  
  
  
  
  
  
Total Loans$253,772
 $122,747
 $244,211
 $62,103
 $7,604
 $6,979
 $697,416
General reserve (2)
217,677
 121,152
 239,765
 61,158
 7,604
 6,771
 654,127
Specific reserve (3)
36,095
 1,595
 4,896
 495
 —
 208
 43,289
______________
(1) Net of LIP.
(2) Loans collectively evaluated for impairment.
(3) Loans individually evaluated for impairment.

Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. At December 31, 2017, totalTotal past due loans comprised 0.01%0.02% of total loans net of LIP, as compared to 0.06% at both December 31, 2016.2022, and December 31, 2021.


The following tables represent a summary at December 31, 2017,2022, and 2016,2021, of the aging of loans by type: 

 Loans Past Due as of December 31, 2022  
 30-59 Days60-89 Days90 Days and GreaterTotalCurrent
Total 
Loans (1)
 (In thousands)
Real estate:      
One-to-four family residential:      
Owner occupied$— $— $— $— $233,785 $233,785 
Non-owner occupied27 — — 27 242,024 242,051 
Multifamily— — — — 126,895 126,895 
Commercial real estate— — — — 407,882 407,882 
Construction/land— — — — 78,120 78,120 
Total real estate27 — — 27 1,088,706 1,088,733 
Business— — — — 31,371 31,371 
Consumer— — 193 193 61,862 62,055 
Total$27 $— $193 $220 $1,181,939 $1,182,159 
_________________________
 Loans Past Due as of December 31, 2017    
 30-59 Days 60-89 Days 90 Days and Greater Total Current 
Total 
Loans (1) (2)
 (In thousands)
Real estate:           
One-to-four family residential:           
Owner occupied$101
 $—
 $—
 $101
 $148,203
 $148,304
Non-owner occupied—
 —
 —
 —
 130,351
 130,351
Multifamily—
 —
 —
 —
 184,902
 184,902
Commercial real estate—
 —
 —
 —
 361,299
 361,299
Construction/land—
 —
 —
 —
 145,618
 145,618
Total real estate101
 —
 —
 101
 970,373
 970,474
Business—
 —
 —
 —
 23,087
 23,087
Consumer—
 —
 —
 —
 9,133
 9,133
Total$101
 $—
 $—
 $101
 $1,002,593
 $1,002,694
_________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2017.2022.
(2) Net of LIP.

 Loans Past Due as of December 31, 2021  
 30-59 Days60-89 Days90 Days and GreaterTotalCurrent
Total 
Loans (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$255 $— $— $255 $1,119,281 $1,119,536 
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 Loans Past Due as of December 31, 2016    
 30-59 Days 60-89 Days 90 Days and Greater Total Current 
Total 
Loans (1) (2)
 (In thousands)
Real estate:           
One-to-four family residential:           
Owner occupied$304
 $—
 $169
 $473
 $137,361
 $137,834
Non-owner occupied—
 —
 —
 —
 111,601
 111,601
Multifamily—
 —
 —
 —
 123,250
 123,250
Commercial real estate—
 —
 —
 —
 303,694
 303,694
Construction/land—
 —
 —
 —
 136,922
 136,922
Total real estate304
 —
 169
 473
 812,828
 813,301
Business—
 —
 —
 —
 7,938
 7,938
Consumer—
 —
 —
 —
 6,922
 6,922
Total$304
 $—
 $169
 $473
 $827,688
 $828,161
________________________
(1) There were no loans 90 days past due and still accruing interest at December 31, 2016.2021.
(2) Net of LIP.


Nonaccrual Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual when they are 90 days delinquent or when, in management’s opinion, the borrower is unable to meet scheduled payment obligations.
93



In order to return a nonaccrual loan to accrual status, each loan is evaluated on a case-by-case basis. The Company evaluates the borrower’s financial condition to ensure that future loan payments are reasonably assured. The Company also takes into consideration the borrower’s willingness and ability to make the loan payments and historical repayment performance. The Company requires the borrower to make loan payments consistently for a period of at least six months as agreed to under the terms of the loan agreement before the Company will consider reclassifying the loan to accrual status.
The following table is a summary of nonaccrual loans at December 31, 2017, and 2016, by type of loan:    
 December 31,
 2017 2016
 (In thousands)
One-to-four family residential$128
 $798
Consumer51
 60
Total nonaccrual loans$179
 $858

Nonperforming loans, net of LIP, were $179,000 and $858,000 at December 31, 2017, and 2016, respectively. Foregone interest on nonaccrual loans for the years ended December 31, 2017, 2016, and 2015 were $26,000, $51,000 and $103,000, respectively.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nonaccrual Loans. At December 31, 2022, total nonaccrual loans were $193,000, comprised of one consumer loan and there were no nonaccrual loans at December 31, 2021.    
The following tables summarize the loan portfolio at December 31, 2017,2022, and 2016,2021, by type and payment activity:
December 31, 2017December 31, 2022
One-to-Four
Family
Residential
 Multifamily 
Commercial
Real Estate
 
Construction /
Land
 Business Consumer 
Total (3)
 One-to-Four
Family
Residential		MultifamilyCommercial
Real Estate		Construction /
Land		BusinessConsumerTotal
(In thousands) (In thousands)
Performing (1)
$278,527
 $184,902
 $361,299
 $145,618
 $23,087
 $9,082
 $1,002,515
Performing (1)
$475,836 $126,895 $407,882 $78,120 $31,371 $61,862 $1,181,966 
Nonperforming (2)
128
 —
 —
 —
 —
 51
 179
NonperformingNonperforming— — — — — 193 193 
Total$278,655
 $184,902
 $361,299
 $145,618
 $23,087
 $9,133
 $1,002,694
Total$475,836 $126,895 $407,882 $78,120 $31,371 $62,055 $1,182,159 
____________ 
(1) There were $148.2$233.8 million of owner-occupied one-to-four family residential loans and $130.3$242.1 million of non-owner occupied one-to-four family residential loans classified as performing.
(2) There were $128,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family residential loans classified as nonperforming.
(3) Net of LIP.

December 31, 2016 December 31, 2021
One-to-Four
Family
Residential
 Multifamily 
Commercial
Real Estate
 
Construction/
Land
 Business Consumer 
Total (3)
 One-to-Four
Family
Residential		MultifamilyCommercial
Real Estate		Construction/
Land		BusinessConsumerTotal
(In thousands) (In thousands)
Performing (1)
$248,637
 $123,250
 $303,694
 $136,922
 $7,938
 $6,862
 $827,303
Performing (1)
$385,116 $130,146 $419,417 $93,455 $46,590 $44,812 $1,119,536 
Nonperforming (2)
798
 —
 —
 —
 —
 60
 858
Nonperforming (2)
— — — — — — — 
Total$249,435
 $123,250
 $303,694
 $136,922
 $7,938
 $6,922
 $828,161
Total$385,116 $130,146 $419,417 $93,455 $46,590 $44,812 $1,119,536 
_____________ 
(1) There were $137.0$185.3 million of owner-occupied one-to-four family residential loans and $111.6$199.8 million of non-owner occupied one-to-four family residential loans classified as performing.
(2) There were $798,000 of owner-occupied one-to-four family residential loans and no non-owner occupied one-to-four family residential loans classified as nonperforming.
(3) Net of LIP.    

Impaired loans. The loan portfolio is constantly being monitored by management for delinquent loans and changes in the financial condition of each borrower. When an issue is identified with a borrower and it is determined that the loan needs to be classified as nonperforming and/or impaired, an evaluation of the collateral is performed prior to the end of the financial reporting period and, if necessary, an appraisal is ordered in accordance with the Company’s appraisal policy guidelines. Based on this evaluation, any additional provision for loan loss or charge-offs that may be needed is recorded prior to the end of the financial reporting period.


ThereAt both December 31, 2022, and 2021, there were no commitments to advance funds related to impaired loans at December 31, 2017, and 2016.loans.
94


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following tables present a summary of loans individually evaluated for impairment at December 31, 2017,2022, and 2016,2021, by the type of loan:
At December 31, 2017 At December 31, 2022
Recorded Investment (1)
 
Unpaid Principal Balance (2)
 Related Allowance
Recorded Investment (1)
Unpaid Principal Balance (2)
Related Allowance
(In thousands) (In thousands)
Loans with no related allowance:     Loans with no related allowance:   
One-to-four family residential:     One-to-four family residential:   
Owner occupied$1,321
 $1,516
 $—
Owner occupied$174 $175 $— 
Non-owner occupied8,409
 8,409
 —
Non-owner occupied188 188 — 
Multifamily1,134
 1,134
 —
Multifamily1,632 1,632 — 
Commercial real estate1,065
 1,065
 —
Commercial real estate45,542 45,542 — 
Consumer94
 144
 —
Total12,023
 12,268
 —
Total47,536 47,537 — 
Loans with an allowance: 
  
  
Loans with an allowance:   
One-to-four family residential: 
    
One-to-four family residential:  
Owner occupied522
 568
 5
Owner occupied486 533 12 
Non-owner occupied3,310
 3,332
 111
Non-owner occupied512 512 1 
Commercial real estate2,129
 2,129
 19
Total5,961
 6,029
 135
Total998 1,045 13 
Total impaired loans: 
  
  
Total impaired loans:   
One-to-four family residential: 
  
  
One-to-four family residential:   
Owner occupied1,843
 2,084
 5
Owner occupied660 708 12 
Non-owner occupied11,719
 11,741
 111
Non-owner occupied700 700 1 
Multifamily1,134
 1,134
 —
Multifamily1,632 1,632 — 
Commercial real estate3,194
 3,194
 19
Commercial real estate45,542 45,542 — 
Consumer94
 144
 —
Total$17,984
 $18,297
 $135
Total$48,534 $48,582 $13 
_________________ 
(1) Represents the loan balance less charge-offs.
(2) Contractual loan principal balance.
95


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2016 At December 31, 2021
Recorded Investment (1)
 
Unpaid Principal
Balance (2)
 Related Allowance
Recorded Investment (1)
Unpaid Principal
Balance (2)
Related Allowance
(In thousands) (In thousands)
Loans with no related allowance:     Loans with no related allowance:   
One-to-four family residential:     One-to-four family residential:   
Owner occupied$2,216
 $2,475
 $—
Owner occupied$178 $185 $— 
Non-owner occupied16,634
 16,652
 —
Non-owner occupied915 915 — 
Multifamily1,564
 1,564
 —
Commercial real estate2,952
 3,029
 —
Commercial real estate34,030 34,030 — 
Consumer103
 223
 —
Total23,469
 23,943
 —
Total35,123 35,130 — 
Loans with an allowance: 
  
  
Loans with an allowance:
One-to-four family residential: 
  
  
One-to-four family residential:
Owner occupied1,896
 1,965
 51
Owner occupied494 541 19 
Non-owner occupied4,326
 4,347
 151
Non-owner occupied520 520 1 
Commercial real estate755
 755
 26
Construction/land495
 495
 81
Total7,472
 7,562
 309
Total1,014 1,061 20 
Total impaired loans: 
  
  
Total impaired loans:   
One-to-four family residential: 
  
  
One-to-four family residential:   
Owner occupied4,112
 4,440
 51
Owner occupied672 726 19 
Non-owner occupied20,960
 20,999
 151
Non-owner occupied1,435 1,435 1 
Multifamily1,564
 1,564
 —
Commercial real estate3,707
 3,784
 26
Commercial real estate34,030 34,030 — 
Construction/land495
 495
 81
Consumer103
 223
 —
Total$30,941
 $31,505
 $309
Total$36,137 $36,191 $20 
_____________ 
(1)Represents the loan balance less charge-offs.
(2)Contractual loan principal balance.
 
96


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a summary of the average recorded investment in impaired loans, and interest income recognized on impaired loans for the years ended December 31, 2017, 20162022 and 2015,2021, by the type of loan:
Year Ended December 31,
20222021
Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
 (In thousands)
Loans with no related allowance:
   One-to-four family residential:
      Owner occupied$184 $11 $217 $12 
      Non-owner occupied712 23 947 62 
Multifamily1,317 69 828 — 
Commercial real estate41,102 2,054 23,994 1,329 
Total43,315 2,157 25,986 1,403 
Loans with an allowance:
   One-to-four family residential:
      Owner occupied490 28 498 31 
      Non-owner occupied516 36 756 37 
Total1,006 64 1,254 68 
Total impaired loans:
   One-to-four family residential:
      Owner occupied674 39 715 43 
      Non-owner occupied1,228 59 1,703 99 
Multifamily1,317 69 828 — 
Commercial real estate41,102 2,054 23,994 1,329 
Total$44,321 $2,221 $27,240 $1,471 

97
 Year Ended December 31,
 2017 2016 2015
 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
  (In thousands)
Loans with no related allowance:           
   One-to-four family residential:           
      Owner occupied$1,773
 $93
 $2,566
 $156
 $3,180
 $110
      Non-owner occupied12,438
 553
 20,653
 1,061
 25,350
 1,409
Multifamily1,227
 74
 1,344
 106
 1,575
 30
Commercial real estate2,467
 80
 2,295
 253
 4,180
 187
Consumer98
 8
 117
 12
 125
 2
Total18,003
 808
 26,975
 1,588
 34,410
 1,738
            
Loans with an allowance:           
   One-to-four family residential:           
      Owner occupied1,301
 32
 2,026
 104
 2,131
 89
      Non-owner occupied3,680
 170
 5,520
 236
 7,801
 415
Multifamily—
 —
 236
 —
 1,430
 77
Commercial real estate1,025
 139
 2,192
 42
 2,817
 129
Construction/land99
 —
 396
 17
 495
 18
Consumer—
 —
 30
 —
 77
 3
Total6,105
 341
 10,400
 399
 14,751
 731
            
Total impaired loans:           
   One-to-four family residential:           
      Owner occupied3,074

125

4,592

260

5,311
 199
      Non-owner occupied16,118

723

26,173

1,297

33,151
 1,824
Multifamily1,227

74

1,580

106

3,005
 107
Commercial real estate3,492

219

4,487

295

6,997
 316
Construction/land99

—

396

17

495
 18
Consumer98

8

147

12

202
 5
Total$24,108
 $1,149
 $37,375
 $1,987
 $49,161
 $2,469



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:TDRs at December 31, 2022 and 2021:
 December 31,
 20222021
 (In thousands)
Performing TDRs$1,360 $2,107 
Nonaccrual TDRs— — 
Total TDRs$1,360 $2,107 
 December 31,
 2017 2016
 (In thousands)
Performing TDRs$17,805
 $30,083
Nonaccrual TDRs—
 174
Total TDRs$17,805
 $30,257


The accrual status of a loan may change after it has been classified as a TDR. Management considers the following in determining the accrual status of restructured loans: (1) if the loan was on accrual status prior to the restructuring, the borrower has demonstrated performance under the previous terms, and a credit evaluation shows the borrower’s capacity to continue to perform under the restructured terms (both principal and interest payments), the loan will remain on accrual at the time of the restructuring; (2) if the loan was on nonaccrual status before the restructuring, and the Company’s credit evaluation shows the borrower’s capacity to meet the restructured terms, the loan would remain as nonaccrual for a minimum of six months until the borrower has demonstrated a reasonable period of sustained repayment performance (thereby providing reasonable assurance as to the ultimate collection of principal and interest in full under the modified terms).
    
    There were no TDR modifications during the year ended December 31, 2022. The following table presents forTDR modifications during the periods indicated TDRsyear ended December 31, 2021, and theirthe recorded investment prior to the modification and after the modification:
 Year Ended December 31, 2021
 Number of LoansPre-Modification Outstanding
Recorded Investment		Post-Modification Outstanding
Recorded Investment
 
TDRs that occurred during the period:   
One-to-four family residential:   
  Advancement of maturity date3 $1,353 $1,353 
Commercial real estate:
  Advancement of maturity date1 1,241 1,241 
Total4 $2,594 $2,594 
 Year Ended December 31,
 2017 2016
 
Number
of Loans
 
Pre-Modification Outstanding
Recorded
Investment
 
Post-Modification Outstanding
Recorded
Investment
 
Number
of Loans
 
Pre-Modification Outstanding
Recorded
Investment
 
Post-Modification Outstanding
Recorded
Investment
 (Dollars in thousands)
TDRs that occurred during the period:           
One-to-four family residential:           
Principal and interest with interest rate
  concession
8
 $2,492
 $2,492
 19
 $4,265
 $4,265
  Advancement of maturity date—
 —
 —
 5
 1,121
 1,121
Commercial real estate:           
  Advancement of maturity date1
 891
 891
 1
 511
 511
Interest-only payments with interest rate
  concession
—
 —
 —
 1
 495
 495
Total9
 $3,383
 $3,383
 26

$6,392

$6,392


At The CARES Act, signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. generally up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 20172019; and 2016,(3) executed between March 1, 2020, and January 1, 2022. At December 31, 2022, the Company had no loans that were on active short-term deferrals under the CARES Act and related regulatory guidance. Loan modifications made in accordance with the CARES Act are still subject to an impairment evaluation.

At December 31, 2022 and 2021, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in a TDR. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the ALLL.


TDRs resulted inThere were no charge-offs to the ALLL for the years ended December 31, 20172022 and 2016.2021, related to TDRs. For the years ended December 31, 20172022 and 2016,2021, there were no payment defaults on loans modified as TDRs within the previous 12 months.
98

Credit Quality Indicators. The Company utilizes a nine-point risk rating system and assigns a risk rating for all credit exposures. The risk rating system is designed to define the basic characteristics and identify risk elements of each credit extension. Credits risk rated 1 through 5 are considered to be “pass” credits. Pass credits can be 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, 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. Credits classified as special mention are risk rated 6 and possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. Substandard credits are risk rated 7. An asset is considered substandard if it is inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful are risk rated 8 and have all the weaknesses inherent in those credits classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as loss are risk rated 9 and are considered uncollectible and cannot be justified as a viable asset for the Company. As ofAt both December 31, 2017,2022, and 2016,2021, the Company had no loans rated as doubtful or loss.

        The following tables represent a summary of loans at December 31, 2017, and 2016 by type and risk category: 
 December 31, 2017
 
One-to-Four
Family
Residential
 Multifamily 
Commercial
Real Estate
 
Construction/ 
Land
 Business Consumer 
Total (1)
 (In thousands)
Risk Rating:             
   Pass$275,653
 $184,902
 $358,285
 $145,618
 $23,087
 $8,893
 $996,438
   Special mention2,329
 —
 2,459
 —
 —
 188
 4,976
   Substandard673
 —
 555
 —
 —
 52
 1,280
Total$278,655
 $184,902
 $361,299
 $145,618
 $23,087
 $9,133
 $1,002,694
 _____________ 
(1) Net of LIP.

 December 31, 2016
 
One-to-Four
Family
Residential
 Multifamily 
Commercial
Real Estate
 
Construction /
Land
 Business Consumer 
Total (1)
 (In thousands)
Risk Rating:             
   Pass$245,237
 $123,250
 $300,655
 $136,427
 $7,938
 $6,674
 $820,181
   Special mention2,847
 —
 3,039
 —
 —
 188
 6,074
   Substandard1,351
 —
 —
 495
 —
 60
 1,906
Total$249,435
 $123,250
 $303,694
 $136,922
 $7,938
 $6,922
 $828,161
______________ 
(1) Net of LIP.
Certainoutstanding with executive officers and directors have loans with the Bank. The aggregate dollar amount of these loans outstanding to related parties is summarized as follows:or directors.
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Balance at beginning of year$60
 $118
 $138
   Additions—
 —
 —
Change in director or executive status during year—
 (40) —
   Repayments(51) (18) (20)
Balance at end of year$9
 $60
 $118



Note 54 - Other Real Estate Owned
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table is a summary of OREO activity for the periods indicated: 
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Balance at beginning of year$2,331
 $3,663
 $9,283
   Loans transferred to OREO—
 —
 141
Gross proceeds from sale of OREO(1,908) (988) (6,246)
Gain (loss) on sale of OREO110
 (87) 526
   Market value adjustments(50) (257) (41)
Balance at end of year$483
 $2,331
 $3,663
 Year Ended December 31,
 20222021
 (In thousands)
Balance at beginning of year$— $454 
Net proceeds from sale of OREO— (247)
Loss on sale of OREO— (207)
Balance at end of year$— $— 
 
OREO at December 31, 2017, consisted of $483,000 in commercial real estate properties. At December 31, 2017,2022, there were no mortgage loans secured by residential real estate in the process of foreclosure.


Note 65 - Premises and Equipment


Premises and equipment consisted of the following at December 31, 2017,2022, and 2016:2021: 
 December 31,
 20222021
 (In thousands)
Land$2,226 $2,226 
Buildings and improvements21,873 21,617 
Leasehold improvements6,088 5,946 
Furniture and fixtures3,777 3,751 
Equipment2,342 2,323 
Computer hardware and software3,767 3,771 
 40,073 39,634 
Less accumulated depreciation and amortization(19,277)(17,194)
Construction in process396 — 
Total premises and equipment, net$21,192 $22,440 
 December 31,
 2017 2016
 (In thousands)
Land$2,226
 $1,914
Buildings and improvements19,436
 17,820
Leasehold improvements1,917
 1,352
Furniture, fixtures and equipment4,743
 3,832
Computer hardware and software2,323
 1,924
Construction in process67
 704
 30,712
 27,546
Less accumulated depreciation and amortization(10,098) (9,085)
Total premises and equipment, net$20,614
 $18,461


Depreciation and amortization expense was $1.3$2.2 million for the year ended December 31, 2017 and $1.1 million and $809,000 for the years ended December 31, 20162022 and 2015, respectively.2021.


Note 76 - Fair Value of Financial Instruments


The Company measures the fair value of financial instruments for reporting in accordance with ASC Topic 820, Fair valueValue Measurements. Fair values of assets or liabilities are based on estimates of the exit price, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction betweenliability. When available, observable market participants attransactions or market information is used. The fair value estimate of loans receivable was based on similar techniques, with the measurement date.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.


99


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 from an independent source. Unobservable inputs are assumptions based on the Company’s own information or estimate of assumptions used by market participants in pricing the asset or liability. Unobservable inputs are based on the best and most current information available on the measurement date.


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


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

•Level 3 - Instruments whose significant value drivers are unobservable.
 
The Company used the following methods to measure fair value on a recurring or nonrecurring basis.

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

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

•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.

100


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 during the periods presented):
 December 31, 2022
 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)
Available-for-sale investments:    
Mortgage-backed investments:    
Fannie Mae$9,940 $— $9,940 $— 
Freddie Mac11,889 736 11,153 — 
Ginnie Mae27,843 — 27,843 — 
Other32,389 — 32,389 — 
Municipal bonds30,883 — 30,883 — 
U.S. Government agencies74,354 38,450 35,904 — 
Corporate bonds30,480 — 30,480 — 
Total available-for-sale investments$217,778 $39,186 $178,592 $— 
Derivative fair value asset$10,485 $— $10,485 $— 
Total$228,263 $39,186 $189,077 $— 
December 31, 2017 December 31, 2021
Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value 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)
Available-for-sale investments:       Available-for-sale investments:    
Mortgage-backed investments:       Mortgage-backed investments:    
Fannie Mae$26,564
 $—
 $26,564
 $—
Fannie Mae$12,978 $— $12,978 $— 
Freddie Mac5,472
 —
 5,472
 —
Freddie Mac12,824 744 12,080 — 
Ginnie Mae21,576
 —
 21,576
 —
Ginnie Mae23,687 — 23,687 — 
OtherOther11,264 3,023 8,241 — 
Municipal bonds13,395
 —
 13,395
 —
Municipal bonds36,466 — 36,466 — 
U.S. Government agencies42,633
 —
 42,633
 —
U.S. Government agencies41,434 — 41,434 — 
Corporate bonds22,602
 —
 22,602
 —
Corporate bonds30,295 — 30,295 — 
Total available-for-sale investments132,242
 —
 132,242
 —
Total available-for-sale investments$168,948 $3,767 $165,181 $— 
Derivative fair value asset1,526
 —
 1,526
 —
Derivative fair value asset$1,491 $— $1,491 $— 
$133,768
 $—
 $133,768
 $—
TotalTotal$170,439 $3,767 $166,672 $— 
 
 December 31, 2016
 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)
Available-for-sale investments:       
Mortgage-backed investments:       
Fannie Mae$41,332
 $—
 $41,332
 $—
Freddie Mac18,009
 —
 18,009
 —
Ginnie Mae18,634
 —
 18,634
 —
Municipal bonds13,107
 —
 13,107
 —
U.S. Government agencies15,857
 —
 15,857
 —
Corporate bonds22,321
 —
 22,321
 —
Total available-for-sale investments$129,260
 $—
 $129,260
 $—
Derivative fair value asset1,333
 —
 1,333
 —
 130,593
 —
 130,593
 —

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.    


101


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the balances of assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2017,2022, and 2016.2021. 
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 December 31, 2022
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements		Quoted Prices in
Active Markets
for Identical
Assets (Level 1)		Significant
Other
Observable
Inputs (Level 2)		Significant
Unobservable
Inputs
(Level 3)
(In thousands) (In thousands)
Impaired loans (included in loans receivable, net)(1)
$17,849
 $—
 $—
 $17,849
Impaired loans (included in loans receivable, net)(1)
$48,521 $— $— $48,521 
OREO483
 —
 —
 483
Total$18,332
 $—
 $—
 $18,332
 Total$48,521 $— $— $48,521 
_______________ 
(1) Total value of impaired loans is net of $135,000$13,000 of specific reserves on performing TDRs.

December 31, 2016 December 31, 2021
Fair Value
Measurements
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Fair Value
Measurements
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)		Significant
Unobservable
Inputs
(Level 3)
(In thousands) (In thousands)
Impaired loans (included in loans receivable, net)(1)
$30,632
 $—
 $—
 $30,632
Impaired loans (included in loans receivable, net)(1)
$36,118 $— $— $36,118 
OREO2,331
 —
 —
 2,331
Total$32,963
 $—
 $—
 $32,963
 Total$36,118 $— $— $36,118 
________________ 
(1) Total value of impaired loans is net of $309,000$20,000 of specific reserves on performing TDRs.


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

The following tables present quantitative information about Level 3 fair value measurements for financial instrumentsassets measured at fair value on a nonrecurring basis at December 31, 20172022 and 2016.2021.
December 31, 2022
Fair ValueValuation Technique(s)Unobservable Input(s)Range (Weighted Average Change in Fair Value)
(Dollars in thousands)
Impaired Loans (1)
$48,521 Market approachAppraised value of collateral discounted by expected selling costs
0.0% - 6.91%
(0.06%)
_______________ 
(1) Total value of impaired loans is net of $13,000 of specific reserves on performing TDRs.

102
 December 31, 2017
 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average Change in Fair Value)
 (Dollars in thousands)
Impaired Loans$17,849
 Market approach 
Appraised value discounted by market or
borrower conditions
 0.0% (0.00%)
        
OREO$483
 Market approach Appraised value less selling costs 0.0% (0.00%)


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021
Fair ValueValuation Technique(s)Unobservable Input(s)Range (Weighted Average Change in Fair Value)
(Dollars in thousands)
Impaired Loans (1)
$36,118 Market approachAppraised value of collateral discounted by expected selling costs0.0% (0.00%)
________________ 
 December 31, 2016
 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average Change in Fair Value)
 (Dollars in thousands)
Impaired Loans$30,632
 Market approach 
Appraised value discounted by market or
borrower conditions
 0.0% (0.00%)
        
OREO$2,331
 Market approach Appraised value less selling costs 0.0% (0.00%)
(1) Total value of impaired loans is net of 20,000 of specific reserves on performing TDRs.


    The fair value calculation of the Company’s financial instruments attempts to incorporate market conditions at a specific point in time. The underlying assumptions are generally subjective and involve uncertainties. Therefore, these fair value estimates are not intended to represent the underlying value of the Company as a whole.

The carrying amounts and estimated fair values of financial instruments at December 31, 2017,2022, and 2016,2021, were as follows: 
 December 31, 2022Fair Value Measurements Using:
 Carrying ValueEstimated Fair ValueLevel 1Level 2Level 3
 (In thousands)
Financial Assets:   
Cash on hand and in banks7,722 $7,722 $7,722 $— $— 
Interest-earning deposits16,598 16,598 16,598 — — 
Investments available-for-sale217,778 217,778 39,186 178,592 — 
Investments held-to-maturity2,444 2,444 — 2,444 — 
Loans receivable, net1,167,083 1,120,403 — — 1,120,403 
FHLB stock7,512 7,512 — 7,512 — 
Accrued interest receivable6,513 6,513 — 6,513 — 
Derivative fair value asset10,485 10,485 — 10,485 — 
Financial Liabilities:  
Deposits782,600 782,600 782,600 — — 
Certificates of deposit, retail262,554 254,004 — 254,004 — 
Brokered deposits124,886 124,843 124,843 
Advances from the FHLB145,000 144,999 — 144,999 — 
Accrued interest payable328 328 — 328 — 
103
 December 31, 2017 Fair Value Measurements Using:
 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
 (In thousands)
Financial Assets:         
Cash on hand and in banks$9,189
 $9,189
 $9,189
 $—
 $—
Interest-earning deposits6,942
 6,942
 6,942
 —
 —
Investments available-for-sale132,242
 132,242
 —
 132,242
 —
Loans receivable, net988,662
 980,578
 —
 —
 980,578
FHLB stock9,882
 9,882
 —
 9,882
 —
Accrued interest receivable4,084
 4,084
 —
 4,084
 —
Derivative fair value asset1,526
 1,526
 —
 1,526
 —
          
Financial Liabilities:     
  
  
Deposits430,750
 430,750
 430,750
 —
 —
Certificates of deposit, retail333,264
 331,199
 —
 331,199
 —
Certificates of deposit, brokered75,488
 74,947
 —
 74,947
 —
Advances from the FHLB216,000
 214,477
 —
 214,477
 —
Accrued interest payable326
 326
 —
 326
 —



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 December 31, 2021Fair Value Measurements Using:
 Carrying ValueEstimated Fair ValueLevel 1Level 2Level 3
 (In thousands)
Financial Assets:    
Cash on hand and in banks$7,246 $7,246 $7,246 $— $— 
Interest-earning deposits66,145 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 — 
 December 31, 2016 Fair Value Measurements Using:
 Carrying Value Estimated Fair Value Level 1 Level 2 Level 3
 (In thousands)
Financial Assets:         
Cash on hand and in banks$5,779
 $5,779
 $5,779
 $—
 $—
Interest-earning deposits25,573
 25,573
 25,573
 —
 —
Investments available-for-sale129,260
 129,260
 —
 129,260
 —
Loans receivable, net815,043
 818,054
 —
 —
 818,054
FHLB stock8,031
 8,031
 —
 8,031
 —
Accrued interest receivable3,147
 3,147
 —
 3,147
 —
Derivative fair value asset1,333
 1,333
 —
 1,333
 —
          
Financial Liabilities:     
  
  
Deposits285,335
 285,335
 285,335
 —
 —
Certificates of deposit, retail356,653
 356,723
 —
 356,723
 —
Certificates of deposit, brokered75,488
 75,431
 —
 75,431
 —
Advances from the FHLB171,500
 170,221
 —
 170,221
 —
Accrued interest payable231
 231
 —
 231
 —

Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments:

Financial instruments with book value equal to fair value: The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. These instruments include cash on hand and in banks, interest-bearing deposits, accrued interest receivable, and accrued interest payable.

FHLB stock: FHLB stock is not publicly-traded, however, it may be redeemed on a dollar-for-dollar basis, for any amount the Bank is not required to hold, subject to the FHLB’s discretion. The fair value is therefore equal to the book value.

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

Loans receivable: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed-rate loans is estimated using discounted cash flow analysis, utilizing interest rates that would be offered for loans with similar terms to borrowers of similar credit quality. As a result of current market conditions, cash flow estimates have been further discounted to include a credit factor. The fair value of nonperforming loans is estimated using the fair value of the underlying collateral.

Derivatives: The fair value of derivatives is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation.

Liabilities: The fair value of deposits with no stated maturity, such as statement savings, interest bearing deposits, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using current interest rates for certificates of deposit with similar remaining maturities. The fair value of FHLB advances is estimated based on discounting the future cash flows using current interest rates for debt with similar remaining maturities.

Off balance sheet commitments: No fair value adjustment is necessary for commitments made to extend credit, which represents commitments for loan originations or for outstanding commitments to purchase loans. These commitments
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are at variable rates, last for a period of less than one year and have interest rates which approximate prevailing market rates, or are set at the time of loan closing.


Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business. The fair value has not been estimated for assets and liabilities that are not considered financial instruments.


Note 87 - Accrued Interest Receivable


Accrued interest receivable consisted of the following at December 31, 20172022 and 2016:2021:
 December 31,
 20222021
 (In thousands)
Loans receivable$5,290 $4,634 
Investments1,222 651 
Interest-earning deposits1 — 
 $6,513 $5,285 

104
 December 31,
 2017 2016
 (In thousands)
Loans receivable$3,492
 $2,665
Investments590
 478
Interest-earning deposits2
 4
 $4,084
 $3,147



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 98 - Deposits


Deposit accounts consisted of the following at December 31, 20172022 and 2016:2021:
 December 31,
 20222021
 (In thousands)
Noninterest-bearing$119,944 $117,751 
Interest-bearing demand96,632 97,907 
Savings23,636 23,146 
Money market542,388 624,543 
Certificates of deposit, retail262,554 294,127 
Brokered deposits124,886 — 
 $1,170,040 $1,157,474 
 December 31,
 2017 2016
 (In thousands)
Noninterest-bearing$45,434
 $33,422
Interest-bearing demand38,224
 18,532
Statement savings28,456
 28,383
Money market318,636
 204,998
Certificates of deposit, retail (1)
333,264
 356,653
Certificates of deposit, brokered75,488
 75,488
 $839,502
 $717,476

_______________
(1) Shown net of $107,000 fair value adjustment. 

At December 31, 2017,2022, scheduled maturities of certificates of deposit were as follows:
December 31,Amount
 (In thousands)
2023$238,146 
202482,384 
202516,784 
20267,032 
20277,976 
Total: (1)
$352,322 
December 31, Amount
  (In thousands)
2018 $165,883
2019 162,298
2020 43,568
2021 31,037
2022 5,966
thereafter —
  $408,752
_______________

(1) Includes $89.8 million of brokered certificates of deposit.

Deposits included public funds of $21.5$61.0 million and $23.7$60.6 million at December 31, 20172022 and 2016,2021, respectively.
Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at December 31, 20172022, and 2016,2021, were $84.3$89.6 million and $91.2$77.4 million,, respectively. Interest expense on certificates of deposit equal to or exceeding $250,000 totaled $1.1$1.2 million, $975,000, and $769,000 for both the years ended December 31, 2017, 2016,2022 and 2015, respectively.2021.


Included in total deposits are accounts of $2.7 million and $2.2 million at December 31, 2022, and 2021, respectively, which are controlled by related parties.

Interest expense on deposits for the periods indicated was as follows:
 Year Ended December 31,
 20222021
(In thousands)
Interest-bearing demand$478 $90 
Savings7 6 
Money market3,744 1,601 
Certificates of deposit, retail3,635 5,519 
Brokered deposits1,091 — 
 $8,955 $7,216 

105


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included in deposits are accounts of $7.6 million and $9.4 million at December 31, 2017, and 2016, respectively which are controlled by related parties.

Interest expense on deposits for the periods indicated was as follows:
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Interest-bearing demand$73
 $30
 $18
Statement savings42
 47
 40
Money market1,779
 870
 603
Certificates of deposit, retail4,362
 3,934
 3,574
Certificates of deposit, brokered1,261
 1,220
 1,243
 $7,517
 $6,101
 $5,478

Note 109 - Other Borrowings


At December 31, 2017, and 2016, the BankThe Company maintained credit facilities with the FHLB at December 31, 2022, and 2021, totaling $406.5$667.9 million and $375.1$648.1 million,, respectively. TheAt December 31, 2022, the credit facility was collateralized by $190.7$235.9 million of single-family residential mortgages, $161.8$163.8 million of commercial real estate loans, and $70.1$62.5 million of multifamily loans under a blanket lien arrangement at December 31, 2017.arrangement. At December 31, 2016,2021, the credit facility was collateralized by $188.8$223.0 million of single-family residential mortgages, $200.9$145.4 million of commercial real estate loans, and $82.4$54.1 million of multifamily loans under a blanket lien arrangement. The BankCompany also had $35.0$70.4 million of unused line-of-credit facilities with the FRB and $75.0 million with other financial institutions at December 31, 2017,2022, with interest payable at the then stated rate.


Outstanding    Summary information related to FHLB advances and other borrowings during the years ended December 31, 2022, and 2021 consisted of the following:
Year ended December 31,
20222021
(Dollars in thousands)
Maximum borrowing outstanding at any month end$159,000 $120,000 
Average borrowing outstanding during year113,890 115,466 
Balance outstanding at end of year145,000 95,000 
Average rate paid during the year1.70 %1.39 %
Weighted-average rate paid at end of year2.37 1.26 



Scheduled maturities of FHLB advances outstanding at December 31, 2022, were as follows:

Balance DueWeighted Average Interest Rate at December 31, 2022
(Dollars in thousands)
FHLB overnight Fed Funds$50,000 4.60 %
Fixed rate, maturing within two months95,000 1.20 
$145,000 


Note 10 - Leases

The Company follows ASC Topic 842, Leases, recognizing ROU assets and lease liabilities on the Company’s consolidated balance sheets. At December 31, 2022, the Company had thirteen operating leases for retail branch locations. The remaining initial lease terms range from one month to 8.1 years, with most leases carrying optional extensions of three to five years. The Company will include optional lease term extensions in the ROU assets and lease liabilities when management believes it is 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. Short term leases, having a term of one year or less, are expensed in the period of the lease. To calculate the present value of future lease payments, the Company uses the incremental borrowing rate, which is equal to the FHLB advance rate at the FHLBtime 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 December 31, 2022, the Company was committed to paying $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.

106


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    Total lease expense included in the Company’s consolidated income statement 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 Company’s consolidated balance sheet includes the ROU and lease liability. The following table includes details on these items at and for the years ended December 31, 2017,2022, and 2016 consisted of2021.

December 31, 2022December 31, 2021
(Dollars in thousands)
Lease expense, year-to-date$1,107$1,061
ROU3,2753,646
Lease liability3,4543,805
Weighted average remaining term (in years)5.166.26
Weighted average discount rate2.10%1.91%

    The following table provides a reconciliation between the following:
  Year ended December 31,
  2017 2016
  (Dollars in thousands)
Maximum borrowing outstanding at any month end $231,500
 251,500
Average borrowing outstanding during year 192,227
 163,893
Balance outstanding at end of year 216,000
 171,500
Average rate paid during the year 1.30% 0.87%
Weighted-average rate paid at end of year 1.60
 0.87
     

Scheduled maturities of Federal Home Loan Bank outstanding advancesundiscounted minimum lease payments at December 31, 2017, were as follows:2022 and the discounted lease liability at that date:
December 31, 2022
(In thousands)
Due through one year$844 
Due after one year through two years761 
Due after two years through three years669 
Due after three years through four years363 
Due after four years through five years298 
Due after five years730 
Total minimum lease payments3,665 
Less: present value discount211 
Lease liability$3,454 
Year Ended December 31, Balance Due Weighted Average Interest Rate at December 31, 2017
(Dollars in thousands)
FHLB overnight Fed Funds $24,500
 1.63%
2018 61,500
 1.41
2019 10,000
 1.70
2020 120,000
 1.68
  $216,000
  


Note 11 - Derivatives


The Company uses a derivative financial instrument,instruments in the form of interest rate swap agreements, which qualifiesare designated as a cash flow hedge,hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. TheAt December 31, 2022, the hedged instrument isitems have a $50.0total notional amount of $95.0 million, and consist of rolling one-month or three-month FHLB advanceadvances that will beare renewed every three months at the fixed interest rate at that time.each renewal date. The agreement has a fivehedging instruments have four to eight year termterms, with remaining terms ranging from 10 months to 6.8 years, and stipulatesstipulate 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 1.34%1.05% on the
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$50.0 notional amount of $10.0 million notional amount.to $15.0 million. The Company pays or receives the net interest amount quarterly based on the respective hedge agreement and includes this amount as part of FHLB advances interest expense on borrowings on the Consolidated Income Statement.


The    Quarterly, the effectiveness evaluation is based upon the fluctuation of the interest the Company pays to the FHLB for the debt as compared to the one-month or three-month LIBOR interest received from the counterparty. At December 31, 2022, the $10.5 million net fair value gain of the cash flow hedges were determined to be fully effective during all periods presented. As such, no ineffectiveness has beenwas reported with other assets. The tax effected amount of $8.3 million was included in net income.Accumulated Other Comprehensive Income. There were no amounts recorded in the Consolidated Income Statements for the years ended December 31, 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 derivative instruments as of December 31, 20172022 and 2016:2021:
107


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Balance Sheet Location  2017 Fair Value  2016 Fair Value
 (In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedgeOther assets $1,526
 $1,333
      
Total derivatives  $1,526
 $1,333
      
Balance Sheet LocationFair Value at December 31, 2022Fair Value at December 31, 2021
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedgesOther assets$10,485 $1,491 
The following table presents the net unrealized gains of(losses) on derivative instruments, recorded in accumulated other comprehensive income:net of tax, included on the Consolidated Statements of Comprehensive Income for the years ended December 31, 2022 and 2021:
Location 2022 Amount of Gain Recognized In OCI, net of tax2021 Amount of Loss Recognized In OCI, net of tax
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedgeOther Comprehensive Income$7,105 $3,410 
 Balance Sheet Location  2017 Amount of Gain Recognized In OCI  2016 Amount of Gain Recognized In OCI
 (In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedgeOther assets $125
 $866
      


Note 12 - Benefit Plans


Multi-employer Pension Plans


The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“The Pentegra(the “Pentegra DB Plan”), a tax-qualified defined-benefit pension plan that covers substantially all employees after one year of continuous employment. Pension benefits vest over a period of five years of credited service. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.


The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.


As of March 31, 2013, the Pentegra DB Plan was frozen, eliminating all future benefit accruals for employees. Each employee’s accrued benefit was determined as of March 31, 2013.
    
The funding target is the present value of all benefits that have accrued as of the first day of the current plan year (July 1). Because interest rates used to calculate the present value of all benefits (5.89%(5.39% for 20172022 and 6.09%5.56% for 2016)2021) is significantly higher than current market rates, the funding target does not represent the Company’s actual liability upon withdrawal from participation in the Pentegra DB Plan, which is significantly larger than the funding target. The table below presents the funded status (market value of plan assets divided by funding target) of the plan as of July 1:
2017 2016 20222021
SourceValuation Report Valuation ReportSourceValuation ReportValuation Report
First Financial Northwest’s Plan(1)
104.8% 103.7%
First Financial Northwest’s Plan(1)
101.9 %111.2 %
_________________ 
(1) Market value of plan assets reflects any contributions received through June 30, 2017, or 2016,2022 and 2021, respectively.


Total contributions made to the Pentegra DB Plan, as reported on Pentegra’s Form 5500, were $248.6 million and $253.2 million for the plan years ended June 30, 2021 and June 30, 2020, respectively. The Company’s contributions to the Pentegra DB Plan for the fiscal year ended December 31, 2022 are not more than 5% of the total contributions to the Pentegra DB Plan for the plan year ending June 30, 2021. The Company’s policy is to fund pension costs as accrued.
108


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total contributions made to the Pentegra DB Plan, as reported on Form 5500, equal $153.2 million and $163.1 million for the plan years ended June 30, 2016 and June 30, 2015 respectively. The Company’s contributions to the Pentegra DB Plan are not more than 5% ofby the total contributions to the Pentegra DB Plan. The Company’s policy is to fund pension costs as accrued.

Total contributionsCompany during the years ended December 31, 2017, 2016,2022 and 20152021 were: 
20222021
Date PaidAmountDate PaidAmount
(In thousands)
11/28/2022$92 11/18/2021$207 
Total$92 Total$207 
2017 2016 2015
Date Paid Amount Date Paid Amount Date Paid Amount
(in thousands)
10/12/2017 $38
 10/7/2016 $40
 11/25/2015 $540
11/30/2017 502
 11/23/2016 500
    
Total $540
 Total $540
 Total $540


Supplemental Executive Retirement Plan


The Company has entered into post-employment agreements with certain key officers to provide supplemental retirement benefits. The Company recorded $69,000, $36,000$177,000 and $101,000$175,000 of deferred compensation expense for the years ended December 31, 2017, 2016,2022, and 2015,2021, respectively. At December 31, 2022, a $1.0 million liability was included in other liabilities on the Company’s consolidated balance sheet in support of the expected current and future benefit payments on these agreements. In addition, in January 2020, the Company purchased three annuity contracts, totaling $2.4 million, to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements.


401(k) Plan


The Company has a savings plan under Section 401(k) of the Internal Revenue Code, covering substantially all employees after 9060 days of continuous employment. Under the plan, in 2022, employee contributions up to 6% will be were matched 50% by the Company. Such matching becomesbecame vested over a period of five years of credited service. Employees may make investments in various stock, money market, or fixed income plans. The Company contributed $261,000, $201,000$365,000 and $192,000$319,000 to the plan for the years ended December 31, 2017, 2016,2022, and 2015,2021, respectively. Effective January 1, 2023, the Company made changes to its 401(k) plan to qualify as a Safe Harbor plan. Under the revised plan, employee contributions up to 5% will be matched 100% by the Company and said matching contributions will be immediately vested to the employee. Separately, in an effort to replace the ESOP benefits that matured in 2022, as outlined below, the Company introduced a profit-sharing plan beginning in 2023, wherein a contribution will be made to every employee’s retirement account in an amount ranging from 5% to 8% annually, based on the Company’s profitability.


Employee Stock Ownership Plan


The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $16.9$16.9 million from First Financial Northwest and used those funds to acquire 1,692,800 shares of First Financial Northwest’s stock at the time of the initial public offering at a price of $10.00$10.00 per share. The loan matures on October 8, 2022 and haswhich had a fixed interest rate of 4.88%. matured on October 8, 2022.


Shares purchased by the ESOP with the loan proceeds arewere held in a suspense account and arewere allocated to ESOP participants on a pro rata basis as principal and interest payments arewere made by the ESOP to First Financial Northwest. The loan iswas secured by sharesFirst Financial Northwest’s common stock purchased with the loan proceeds and will bewas repaid by the ESOP with funds from the Company’sBank’s discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of $1.6$1.2 million and $1.6 million were made by the ESOP during 2017, 2016,2022 and 2015.2021 respectively.


As shares are committed to be released from collateral, the Company reports compensation expense equal to the daily average market prices of the shares and the shares become outstanding for EPS computations. The compensation expense is accrued throughout the year.


A summary of key transactions for the ESOP for the periods indicated follows:





109
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
ESOP contribution expense$1,941
 $1,605
 $1,400
Dividends on unallocated ESOP shares used to reduce ESOP contribution175
 183
 210



Shares held by the ESOP at December 31, 2017 and 2016, are as follows: 
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of key transactions for the ESOP for the years ended December 31, follows:
 
 20222021
 (In thousands)
ESOP contribution expense$1,372 $1,696 
Dividends on unallocated ESOP shares used to reduce ESOP contribution30 87 
 December 31,
 2017 2016
 (Dollars in thousands, except share data)
Allocated shares1,156,747
 1,043,893
Unallocated shares536,053
 648,907
Total ESOP shares1,692,800
 1,692,800
Fair value of unallocated shares$8,314
 $12,809
    Shares held by the ESOP at December 31, 2022 and 2021, are as follows: 
 December 31,
 20222021
 (Dollars in thousands, except share data)
Allocated shares1,692,800 1,608,160 
Unallocated shares— 84,640 
Total ESOP shares1,692,800 1,692,800 
Fair value of unallocated shares$— $1,369 
 
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. The 2016 Plan expires in 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 be awarded.


As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen andwith no additional awards will be made.being made under the 2008 plan. Restricted stock awards and stock options that were granted under the 2008 Plan will continue to vestare fully vested and be available for exercise,unexercised options remain exercisable, subject to the provision of the 2008 Plan provisions.and the respective award agreements. At December 31, 2017,2022, there were 1,351,028969,834 total shares available for future grant under the 2016 Plan, including 375,514184,197 shares available to be granted as restricted stock.


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.


Total compensation expense for the both2016 Plan for the year ended December 31, 2022, was $770,000. The final compensation expense for the 2008 Plan and the total compensation for the 2016 Plan for the year ended December 31, 2020, was $708,000. The related income tax benefit was $162,000 and $149,000 for the years ended December 31, 2017, 2016,2022, and 2015 was $574,000, $622,000, and $440,000,2021, respectively. The related income tax benefit was $201,000, $218,000 and $154,000 for the years ended December 31, 2017, 2016, and 2015, respectively.


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 awardsAt December 31, 2022, options granted under the 2008 Plan to purchase 217,519 shares were outstanding and fully vested and exercisable. Stock options have a vestingcontractual 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 will expire ten years after the grant date, or sooner in the event of the award recipient’s death, disability or termination of service with the Company.


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.

110


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.


The fair value of each option award is estimated on the grant date using a Black-Scholes model that uses the assumptions noted in the table below. 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 “simplified”“simplified�� method permitted by the U.S. Securities and Exchange Commission 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.
        
    
The fair value of options granted was determined using the following weighted-average assumptions as of the grant date for the periods indicated. There were no stock options granted in 20172022 or 2016.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 Year Ended December 31,
 2017 2016 2015
Annual dividend yieldN/A N/A 1.77%
Expected volatilityN/A N/A 35.30
Risk-free interest rateN/A N/A 2.23
Expected termN/A N/A 10.0 years
Weighted-average grant date fair value per option grantedN/A N/A $4.74
2021.
    
A summary of the Company’s stock option plan awards activity for the year ended December 31, 20172022 follows: 
 SharesWeighted-
Average
Exercise Price		Weighted-
Average
Remaining
Contractual
Term in Years		Aggregate
Intrinsic Value
Outstanding at January 1, 2022272,000 $10.63 $1,507,300 
Exercised(54,481)8.36 386,658 
Outstanding at December 31, 2022217,519 11.20 1.44$823,028 
Expected to vest assuming a 3% forfeiture rate over the vesting term217,519 11.20 1.44823,028 
Exercisable at December 31, 2022217,519 11.20 1.44823,028 
 Shares 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2016603,820
 $10.19
   

Granted—
 —
 
  
Exercised(134,880) 9.70
   

Forfeited or expired(16,000) 13.80
    
Outstanding at December 31, 2017452,940
 10.21
 4.48 $2,402,096
Expected to vest assuming a 3% forfeiture rate over the vesting term450,420
 10.20
 4.47 2,391,816
Exercisable at December 31, 2017368,940
 9.93
 3.97 2,059,436


As of December 31, 2017,2022, there was $279,000 of totalno unrecognized compensation cost related to nonvested stock options. The cost is expected to be recognized over the remaining weighted-average vesting period of 1.9 years.


Restricted Stock Awards


A summary of changes in nonvested restricted stock awards for the year ended December 31, 2017,2022, follows: 
Nonvested SharesSharesWeighted Average Grant Date  Fair Value
Nonvested at December 31, 202144,426 13.78 
Granted47,542 16.35 
Vested(58,698)14.07 
Forfeited(1,998)16.93 
Nonvested at December 31, 202231,272 16.93 
Expected to vest assuming a 3% forfeiture rate over the vesting term30,334 16.93 
Nonvested Shares Shares Weighted Average Grant Date  Fair Value
Nonvested at December 31, 2016 26,400
 $9.13
Granted 10,434
 

Vested (31,834) 8.72
Nonvested at December 31, 2017 5,000
 10.88
     
Expected to vest assuming a 3% forfeiture rate over the vesting term 4,850
  


As of December 31, 20172022, there was $28,000$84,000 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining weighted-average vesting period of 0.5 years.two months. The total fair value of shares vested during the years ended December 31, 2017,2022, and 20162021 were $187,000$790,000 and $367,000,$402,000, respectively.
111



FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 - Federal Income Taxes


The components of income tax expense for the years indicated are as follows: 
Year Ended December 31, Year Ended December 31,
2017 2016 2015 20222021
(In thousands) (In thousands)
Current$3,204
 $2,164
 $717
Current$2,952 $2,690 
Deferred1,738
 1,548
 4,170
Deferred217 235 
Total income tax expense$4,942
 $3,712
 $4,887
Total income tax expense$3,169 $2,925 
 
On December 22, 2017, the U.S. Government enacted the Tax Act. The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Tax Act reduces the corporate federal income tax rate from a maximum of 35% to a flat 21% rate. The corporate income tax rate reduction was effective January 1, 2018. The Tax Act required a revaluation of the Company’s deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the legislation. As a result of the Company’s revaluation, the DTA was reduced through a one-time increase to the provision for income tax of $807,000.

A reconciliation of the tax provision based on the statutory corporate rate of 35% during21% for the yearsyear ended December 31, 2017, 20162022, and 20152021, on pretax income is as follows:
 Year Ended December 31,
 20222021
 (In thousands)
Income tax expense at statutory rate$3,441 $3,187 
Income tax effect of:
   Tax exempt interest, net(50)(54)
BOLI income, net(207)(229)
   Other, net(15)21 
Total income tax expense$3,169 $2,925 



112
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Income tax expense at statutory rate$4,697
 $4,412
 $4,917
Income tax effect of:     
   Tax exempt interest, net(107) (103) (38)
   Change in valuation allowance—
 —
 (112)
Benefit of lower federal tax bracket(98) —
 (39)
DTA revaluation807
 —
 —
   Other, net(357) (597) 159
Total income tax expense$4,942
 $3,712
 $4,887


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The DTA,deferred tax assets and liabilities, included in the accompanying consolidated balance sheets, consisted of the following at the dates indicated: 
 December 31,
 20222021
 (In thousands)
Deferred tax assets:  
   Charitable contributions$— $— 
   ALLL$3,198 $3,288 
   Reserve for unfunded commitments52 59 
   Deferred compensation218 194 
   Net unrealized loss on investments available-for-sale3,811 — 
   Employee benefit plans273 385 
   Accrued expenses104 114 
Core deposit intangible63 53 
Expenses to facilitate branch acquisition18 20 
Split dollar life insurance101 87 
Lease liability725 799 
Total deferred tax assets8,563 4,999 
Deferred tax liabilities: 
FHLB stock dividends1 3 
Loan origination fees and costs1,246 1,098 
Net unrealized gain on derivative cash flow hedge2,201 312 
Net unrealized gain on investments available for sale— 42 
Fixed assets1,699 1,818 
Goodwill67 54 
Right of use asset688 766 
Other, net64 56 
Total deferred tax liabilities$5,966 $4,149 
Deferred tax assets, net$2,597 $850 
 December 31,
 2017 2016 2015
 (In thousands)
Deferred tax assets:     
   Charitable contributions$—
 $—
 $7
   ALLL2,700
 3,803
 3,257
   Reserve for unfunded commitments98
 131
 187
   Deferred compensation329
 592
 646
   Net unrealized loss on investments available-for-sale259
 557
 —
   Alternative minimum tax credit carryforward—
 45
 1,375
   Employee benefit plans533
 951
 1,051
   OREO market value adjustments4
 231
 213
   Accrued expenses112
 453
 510
Core deposit intangible5
 —
 —
Expenses to facilitate branch acquisition62
 —
 —
Total deferred tax assets$4,102
 $6,763
 $7,246
Deferred tax liabilities: 
  
  
FHLB stock dividends271
 552
 1,255
Loan origination fees and costs1,321
 1,477
 870
Net unrealized gain on investments available for sale—
 —
 44
Gain on fair value of cash flow hedge320
 467
 —
Fixed assets891
 869
 299
Goodwill4
 —
 —
Other, net84
 256
 222
Total deferred tax liabilities$2,891
 $3,621
 $2,690
Deferred tax assets, net$1,211
 $3,142
 $4,556


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


At December 31, 20172022 and 2016,2021, the Company had no net operating loss carryforward. During 2017, the remaining alternative tax credit carryforward of $45,000 was exhausted.


As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of approximately $4.5$4.5 million,, on which federal income taxes have not been provided. If, in the future, this portion of retained earnings is used for any purpose other than to absorb losses on loans or on property acquired through foreclosure, federal income taxes may be imposed at the then-prevailing corporate tax rates. The BankCompany does not contemplate that such amounts will be used for any purpose that would create a federal income tax liability; therefore no provision has been made.


113


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under GAAP, a valuation allowance is required to be recognized if it is “more likely than not” that a portion of the deferred tax asset will not be realized. In order to support a conclusion that a valuation allowance is not needed, management evaluates both positive and negative evidence under the “more likely than not” standard. The weight given to the potential effect
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of negative and positive evidence should be commensurate with the extent to which the strength of the evidence can be objectively verified. As of December 31, 2017,2022, it was determined the full deferred tax asset would be realized in future periods and a valuation allowance would not be necessary.


The Company had no unrecognized tax benefits at December 31, 2022 or 2021, and recognized no interest or tax penalties. The Company has filed U.S. federal income tax returns. Income tax returns filed are subject to examination by the U.S. federal, state, and local income tax authorities. While no income tax returns are currently being examined, the Company is no longer subject to tax examination by tax authorities for years prior to 2019.

Note 14 - Regulatory Capital Requirements


Under Federal regulations, pre-conversion retained earnings are restricted for the protection of pre-conversion depositors.


The Company is a bank holding company under the supervision of the Federal Reserve Bank of San Francisco.FRB. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve Board.Board, except that, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act, effective August 30, 2018, a bank holding company with consolidated assets of less than $3 billion is generally not subject to the Federal Reserve’s capital regulations, which parallel the FDIC’s capital regulations. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve Board capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Financial Northwest and the Bank must meet specific capital guidelinesregulations that involve quantitative measures of their assets, liabilities, and certain off-balance-off balance sheet items as calculated under regulatory accounting practices.practices, and until August 30, 2018, First Financial Northwest was subject to similar capital regulations. The Company was not subject to regulatory requirements for bank holding companies at December 31, 2022, and 2021, as its assets were less than the $3.0 billion threshold.


The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.


Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table that follows) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets.


As of December 31, 2017,2022, according to the most recent notification from the FDIC, the Bank was categorized as well‑capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category.

114


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

First Financial Northwest’s and theNorthwest Bank’s actual capital amounts and ratios at December 31, 2017,2022, and 2016,2021, are presented in the following table.
     To be Well Capitalized
   For Capital AdequacyUnder Prompt Corrective
 ActualPurposesAction Provisions
 AmountRatioAmountRatioAmountRatio
 (Dollars in thousands)
December 31, 2022:      
Total risk-based capital$169,755 15.62 %$86,942 8.00 %$108,678 10.00 %
Tier 1 risk-based capital156,147 14.37 65,207 6.00 86,942 8.00 
Common equity tier 1 capital (“CET1”)156,147 14.37 48,905 4.50 70,641 6.50 
Tier 1 leverage capital156,147 10.31 60,578 4.00 75,722 5.00 
December 31, 2021:      
Total risk-based capital$160,840 15.48 %$83,121 8.00 %$103,901 10.00 %
Tier 1 risk-based capital147,816 14.23 62,340 6.00 83,121 8.00 
Common equity tier 1 capital (“CET1”)147,816 14.23 46,755 4.50 67,536 6.50 
Tier 1 leverage capital147,816 10.34 57,191 4.00 71,489 5.00 
          To be Well Capitalized
      For Capital Adequacy Under Prompt Corrective
  Actual Purposes Action Provisions
  Amount Ratio Amount Ratio Amount Ratio
  (Dollars in thousands)
December 31, 2017:            
Total risk-based capital            
Bank only $134,292
 13.77% $78,006
 8.00% $97,507
 10.00%
Parent company 153,885
 15.75
 78,147
 8.00
 97,683
 10.00
             
Tier 1 risk-based capital            
Bank only 122,090
 12.52
 58,504
 6.00
 78,006
 8.00
Parent company 141,660
 14.50
 58,610
 6.00
 78,147
 8.00
             
Common equity tier 1 capital (“CET1”)            
Bank only 122,090
 12.52
 43,878
 4.50
 63,379
 6.50
Parent company 141,660
 14.50
 43,957
 4.50
 63,494
 6.50
             
Tier 1 leverage capital            
Bank only 122,090
 10.20
 47,874
 4.00
 59,843
 5.00
Parent company 141,660
 11.82
 47,955
 4.00
 59,944
 5.00
             
December 31, 2016:  
  
  
  
  
  
Total risk-based capital            
Bank only $130,078
 15.61% $66,662
 8.00% $83,328
 10.00%
Parent company 149,890
 17.93
 66,874
 8.00
 83,592
 10.00
             
Tier 1 risk-based capital            
Bank only 119,652
 14.36
 49,997
 6.00
 66,662
 8.00
Parent company 139,430
 16.68
 50,155
 6.00
 66,874
 8.00
             
Common equity tier 1 capital            
Bank only 119,652
 14.36
 37,498
 4.50
 54,163
 6.50
Parent company 139,430
 16.68
 37,616
 4.50
 54,335
 6.50
             
Tier 1 leverage capital            
Bank only 119,652
 11.17
 42,846
 4.00
 53,558
 5.00
Parent company 139,430
 13.02
 42,837
 4.00
 53,546
 5.00


In addition to the minimum CET1, Tier 1, total capital and leverage ratios, First Financial Northwest and the Bank now have tomust maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum 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. The capital conservation buffer requirement began to be phased in on January 1, 2016 when more than 0.625% of risk-weighted assets was required, and increases by 0.625% on each subsequent January 1, until fully implemented to an amount equal to 2.5% of risk-weighted assets in January 2019. As of December 31, 2017, the conservation buffer requirement was 1.25% and First Financial Northwest’s and2022, the Bank’s actualcapital conservation buffer was 7.75% and 5.77%, respectively.
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES7.62%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 15 - Commitments and Contingencies


Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Company makes loan commitments, typically unfunded loans and unused lines of credit, to accommodate the financial needs of its customers. These arrangements have credit risk essentially the same as that involved in extending loans to customers and are subject to the Company’s normal credit policies, including collateral requirements, where appropriate. Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual provisions. These commitments are for specific periods or, may contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements, in that commitments can expire without being drawn upon. Unfunded commitments to originate loans or extend credit totaled $126.4$74.0 million and $96.6 million at December 31, 2017,2022, and 2016, respectively.$77.4 million at December 31, 2021.


Lease Commitments. First Financial Northwest Bank The Company has entered into lease commitments for its branches located in Mill Creek, Edmonds, Renton, Bellevue, Woodinville, Smokey Point, Lake Stevens, Bothell, Kent, Kirkland, University Place, Gig Harbor, and Bothell,Issaquah, all in Washington. The following table sets forth, at December 31, 2017,For more information on the Bank’s commitment for futureCompany’s lease payments under our operating leases:commitments, see Note 10 - Leases.

115


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ending December 31,Future Minimum Lease Payments
 (In thousands)
2018$455
2019483
2020460
2021283
2022248
Thereafter245
Total$2,174

Legal Proceedings. The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from their regular business activities. Management, after consulting with legal counsel, is of the opinion that the ultimate liability, if any, resulting from these pending or threatened actions and proceedings will not have a material effect on the consolidated financial statements of the Company.


Employment Contracts and Severance Agreements. The Company has change in control severance agreements with key officers that offer specified terms of salary coverage. In addition, the Company has employment contracts with certain executives that include specified terms of salary coverage as a result of involuntary termination due to change in control or other circumstances.


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 16 - Parent Company Only Financial Statements


Presented below are the condensed balance sheets, income statements and statements of cash flows for First Financial Northwest.


FIRST FINANCIAL NORTHWEST, INC.
Condensed Balance Sheets 
December 31, December 31,
2017 2016 20222021
(In thousands) (In thousands)
Assets   Assets  
Cash and cash equivalents$151
 $106
Cash and cash equivalents$223 $74 
Interest-bearing deposits14,309
 13,299
Interest-bearing deposits9,612 6,887 
Investment in subsidiaries125,530
 123,267
Investment in subsidiaries150,522 150,822 
Receivable from subsidiaries2,933
 1,558
Receivable from subsidiaries3 363 
Deferred tax assets, netDeferred tax assets, net— 2 
Other assets47
 102
Other assets236 25 
Total assets$142,970
 $138,332
Total assets$160,596 $158,173 
   
Liabilities and Stockholders’ Equity 
  
Liabilities and Stockholders’ Equity 
Liabilities: 
  
Liabilities: 
Payable to subsidiaries$97
 $58
Payable to subsidiaries$64 $170 
Deferred tax liability, net9
 17
Deferred tax liability, net6 — 
Other liabilities230
 132
Other liabilities166 124 
Total liabilities336
 207
Total liabilities236 294 
Stockholders’ equity142,634
 138,125
Stockholders’ equity160,360 157,879 
Total liabilities and stockholders’ equity$142,970
 $138,332
Total liabilities and stockholders’ equity$160,596 $158,173 

FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements









116
 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Operating income:     
Interest income:     
  Interest-bearing deposits with banks$47
 $92
 $143
  Other income—
 —
 2
   Total operating income47
 92
 145
Operating expenses: 
  
  
   Other expenses1,534
 1,913
 1,440
Total operating expenses1,534
 1,913
 1,440
Loss before provision for federal income taxes and equity in undistributed
  earnings of subsidiaries
(1,487) (1,821) (1,295)
Federal income tax benefit(565) (701) (601)
Loss before equity in undistributed loss of subsidiaries(922) (1,120) (694)
Equity in undistributed earnings of subsidiaries9,401
 10,012
 9,854
Net income$8,479
 $8,892
 $9,160




FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRST FINANCIAL NORTHWEST, INC.
Condensed Income Statements of Cash Flows
 Year Ended December 31,
 20222021
 (In thousands)
Operating income:  
Interest income: 
  Interest-bearing deposits with banks$13 $15 
   Total interest income13 15 
Noninterest income:
   Other income$25 — 
Total noninterest income$25 $— 
Total operating income$38 $15 
Operating expenses: 
   Other expenses1,942 1,721 
Total operating expenses1,942 1,721 
Loss before benefit for federal income taxes and equity in undistributed
  earnings of subsidiaries		(1,904)(1,706)
Federal income tax benefit(411)(376)
Loss before equity in undistributed loss of subsidiaries(1,493)(1,330)
Equity in undistributed earnings of subsidiaries14,733 13,579 
Net income$13,240 $12,249 




























 Year Ended December 31,
 2017 2016 2015
 (In thousands)
Cash flows from operating activities:     
   Net income$8,479
 $8,892
 $9,160
   Adjustments to reconcile net income to net cash from operating     
      activities:     
     Equity in undistributed earnings of subsidiaries(9,401) (10,012) (9,854)
     Dividends received from subsidiary8,528
 4,417
 6,785
ESOP, stock options, and restricted stock compensation27
 27
 —
     Change in deferred tax assets, net(8) 40
 1,101
     Change in receivables from subsidiaries(1,518) 1,578
 (1,608)
     Change in payables to subsidiaries39
 (26) (32)
     Change in other assets55
 4
 (55)
     Changes in other liabilities98
 21
 (8)
Net cash provided by operating activities6,299
 4,941
 5,489
Cash flows from investing activities: 
  
  
   Investments in subsidiaries—
 —
 —
   ESOP loan repayment1,229
 1,171
 1,115
Net cash provided in investing activities1,229
 1,171
 1,115
Cash flows from financing activities: 
  
  
   Proceeds from exercise of stock options1,309
 298
 935
   Proceeds for vested awards371
 370
 282
   Net share settlement of stock awards(138) (98) —
   Repurchase and retirement of common stock(5,238) (40,812) (18,717)
   Dividends paid(2,777) (2,803) (3,237)
Net cash used by financing activities(6,473) (43,045) (20,737)
Net increase (decrease) in cash1,055
 (36,933) (14,133)
Cash and cash equivalents at beginning of year13,405
 50,338
 64,471
Cash and cash equivalents at end of year$14,460
 $13,405
 $50,338
117




FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





FIRST FINANCIAL NORTHWEST, INC.
Condensed Statements of Cash Flows
 Year Ended December 31,
 20222021
 (In thousands)
Cash flows from operating activities:  
   Net income$13,240 $12,249 
   Adjustments to reconcile net income to net cash from operating
      activities:
     Equity in undistributed earnings of subsidiaries(14,733)(13,579)
     Dividends received from subsidiary8,198 6,708 
 Restricted stock compensation6 25 
     Change in deferred tax liability, net8 — 
     Change in receivables from subsidiaries33 (37)
     Change in payables to subsidiaries(106)106 
     Change in other assets(211)3 
     Changes in other liabilities42 (33)
Net cash provided by operating activities6,477 5,442 
Cash flows from investing activities: 
   ESOP loan repayment1,173 1,492 
Net cash provided by investing activities1,173 1,492 
Cash flows from financing activities: 
   Proceeds from exercise of stock options454 344 
   Proceeds for vested awards737 767 
   Net share settlement of stock awards(226)(38)
   Repurchase and retirement of common stock(1,398)(11,384)
   Dividends paid(4,343)(4,090)
Net cash used in financing activities(4,776)(14,401)
Net decrease in cash2,874 (7,467)
Cash and cash equivalents at beginning of year6,961 14,428 
Cash and cash equivalents at end of year$9,835 $6,961 


118


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 - Earnings Per Share


The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods indicated. 
 Year Ended December 31,
 20222021
 (Dollars in thousands, except share data)
Net income$13,240 $12,249 
Earnings allocated to participating securities(44)(58)
Earnings allocated to common shareholders$13,196 $12,191 
Basic weighted-average common shares outstanding9,006,369 9,340,997 
Dilutive effect of stock options81,480 95,584 
Dilutive effect of restricted stock grants14,434 17,914 
Diluted weighted-average common shares outstanding9,102,283 9,454,495 
Basic earnings per share$1.47 $1.31 
Diluted earnings per share$1.45 $1.29 
 Year Ended December 31,
 2017 2016 2015
 (Dollars in thousands, except share data)
Net income$8,479
 $8,892
 $9,160
Earnings allocated to participating securities(4) (21) (31)
Earnings allocated to common shareholders$8,475
 $8,871
 $9,129
      
Basic weighted-average common shares outstanding10,289,049
 11,868,278
 13,528,393
Dilutive effect of stock options137,950
 143,605
 136,670
Dilutive effect of restricted stock grants10,450
 16,545
 20,919
Diluted weighted-average common shares outstanding10,437,449
 12,028,428
 13,685,982
      
Basic earnings per share$0.82
 $0.75
 $0.67
Diluted earnings per share$0.81
 $0.74
 $0.67


Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. For the year ended December 31, 2017, there were no anti-dilutive shares outstanding related to options to acquire common stock. For the years ended December 31, 20162022 and 2015, anti-dilutive shares outstanding related to2021 there were no options to acquirepurchase shares of common stock totaled 60,000, and 225,000, respectively,that were omitted from the computation of diluted earnings per share because the incremental shares under the treasury stock method of calculation resulted in them being antidilutive.their effect would be anti-dilutive.


Note 18 - Summarized Consolidated Quarterly Financial Data (Unaudited)Revenue Recognition


The    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 table presents summarized consolidated quarterly data for eachfive 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 last three years.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.


119


FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregation of Revenue

 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 (Dollars in thousands, except share data)
2017       
Total interest income$10,998
 $11,343
 $12,003
 $13,300
Total interest expense2,136
 2,346
 2,628
 2,912
Net interest income8,862
 8,997
 9,375
 10,388
Provision (recapture of provision) for loan losses200
 100
 500
 (1,200)
Net interest income after provision (recapture of provision) for loan losses8,662
 8,897
 8,875
 11,588
Total noninterest income535
 731
 731
 211
Total noninterest expense6,068
 6,836
 6,836
 7,069
Income before provision for income taxes3,129
 2,792
 2,770
 4,730
Provision for federal income tax expense785
 924
 909
 2,324
Net income$2,344
 $1,868
 $1,861
 $2,406
        
Basic earnings per share (1)
$0.23
 $0.18
 $0.18
 $0.24
Diluted earnings per share$0.22
 $0.18
 $0.18
 $0.23
        
2016 
  
  
  
Total interest income$9,562
 $9,896
 $10,842
 $11,409
Total interest expense1,781
 1,713
 1,908
 2,105
Net interest income7,781
 8,183
 8,934
 9,304
(Recapture of provision) provision for loan losses(100) 600
 900
 (100)
Net interest income after (recapture of provision) provision for loan losses7,881
 7,583
 8,034
 9,404
Total noninterest income480
 708
 673
 790
Total noninterest expense5,773
 6,072
 5,254
 5,850
Income before provision for income taxes2,588
 2,219
 3,453
 4,344
Provision for federal income tax expense763
 779
 847
 1,323
Net income$1,825
 $1,440
 $2,606
 $3,021
        
Basic earnings per share (1)
$0.14
 $0.12
 $0.22
 $0.29
Diluted earnings per share (1)
$0.14
 $0.11
 $0.22
 $0.29
        
2015 
  
  
  
Total interest income$9,154
 $9,221
 $9,358
 $9,464
Total interest expense1,632
 1,653
 1,694
 1,772
Net interest income7,522
 7,568
 7,664
 7,692
Recapture of provision for loan losses(100) (500) (700) (900)
Net interest income after recapture of provision for loan losses7,622
 8,068
 8,364
 8,592
Total noninterest income91
 357
 447
 384
Total noninterest expense4,290
 4,874
 5,381
 5,333
Income before provision (benefit) for income taxes3,423
 3,551
 3,430
 3,643
Provision for federal income tax expense1,194
 1,183
 984
 1,526
Net income$2,229
 $2,368
 $2,446
 $2,117
        
Basic earnings per share$0.16
 $0.17
 $0.18
 $0.16
Diluted earnings per share$0.16
 $0.17
 $0.18
 $0.16
(1) Basic and diluted quarterly earnings per share may not equal total for year due to rounding.
    The following table includes the Company’s noninterest income disaggregated by type of service for the years ended December 31, 2022 and 2021:
FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES
Year Ended December 31,
20222021
(In thousands)
Gain on sales of investment securities (1)
$27 $32 
BOLI income (1)
1,004 1,107 
Wealth management revenue312 494 
Deposit related fees311 289 
Debit card and ATM fees625 583 
Loan related fees919 1,265 
Other49 92 
Total noninterest income$3,247 $3,862 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
____________

(1) Not in scope of Topic 606


    For the year ended December 31, 2022, substantially all of the Company’s revenues under the scope of Topic 606 are for performance obligations satisfied at a specified date.
Note 19 - Subsequent Events

Revenues recognized within scope of Topic 606
On January 24, 2018, we
Wealth management revenue: Our wealth management revenue consists of commissions received on the investment portfolio managed by Bank personnel but held by a $20.0 million paymentthird 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 largest loan. This construction/landdeposit accounts for various products or services performed for our customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box, and others. These fees are recognized on a daily, monthly or annual basis, depending on the type of service.

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

Loan related fees: Noninterest fee income is earned on our loans for servicing or annual fees on certain loan had a balancetypes. Fees are also earned on the prepayment of $22.0 millioncertain 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 December 31, 2017.2022, 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.     

On February 21, 2018, we received a $4.0 million payment from a borrower for the remaining balances of previously charged off loans, resulting in a $3.1 million recovery and the recognition of $914,000 of interest income.





120

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


None.


Item 9A. Controls and Procedures


(i) Disclosure Controls and Procedures.


An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was carried out as of December 31, 20172022, under the supervision and with the participation of our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and several other members of our senior management. The CEO (Principal Executive Officer) and CFO (Principal Financial Officer) concluded that, as of December 31, 2017, First Financial Northwest’s2022, The Company’s disclosure controls and procedures were effective in ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to First Financial Northwest management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, specified in the SEC’s rules and forms.


(a) Management’s report on internal control over financial reporting.


First Financial Northwest’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. First Financial Northwest’sThe Company’s internal control system is designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.


This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of First Financial Northwest;the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of First Financial Northwestthe Company are being made only in accordance with authorizations of management and directors of First Financial Northwest; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of First Financial Northwest’sthe Company’s assets that could have a material effect on the financial statements. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.


First Financial Northwest’s management assessed the effectiveness of First Financial Northwest’sthe Company’s internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on that assessment, First Financial Northwest’s management believes that, as of December 31, 2016, First Financial Northwest’s2022, the Company’s internal control over financial reporting is effective based on those criteria.



Moss Adams LLP, an independent registered public accounting firm, has audited the Company’s consolidated financial statements and the effectiveness of our internal control over financial reporting as of December 31, 2017,2022, which is included in Item 8. Financial Statements and Supplementary Data.


(b)Attestation report of the registered public accounting firm.


The “Report of Independent Registered Public Accounting Firm” included in Item 8 of this Annual Report on Form 10‑K is incorporated herein by reference.Not applicable.

121


(c) Changes in internal control over financial reporting.


There were no significant changes in First Financial Northwest’sAs required by Rule 13a-15(d), our management, including our CEO and CFO, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during First Financial Northwest’s most recent fiscal quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, First Financial Northwest’sthe Company’s internal control over financial reporting. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.




Item 9B. Other Information


There was no information to be disclosed by us in a report on Form 8-K during the fourth quarter of fiscal 20172022 that was not so disclosed.


Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.


PART III


Item 10. Directors, Executive Officers and Corporate Governance


The information required under the section captioned “Proposal 1 - Election of Directors” in First Financial Northwest’s Definitive Proxy Statementdefinitive proxy statement for the 2017 Annual Meeting of Shareholders (“Proxyto be held in May 11, 2023 (the “Proxy Statement”) is incorporated herein by reference.


For information regarding the executive officers of First Financial Northwest and the Bank,Company, see the information contained herein under the section captioned “Item 1. Business - Personnel - Executive Officers of the Registrant.”


Nominating Procedures

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since last disclosed to stockholders.

Audit Committee Financial Expert


AtThe Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act December 31, 20172022, our Audit Committee was composed of Directors Roger H. Molvar (Chairman), Joann E. Lee (Chairman), Cindy L. Runger and Richard M. Riccobono.Ralph C. Sabin. Each member of the Audit Committee is “independent”, as independence is defined for audit committee members in the listing standards of The Nasdaq Stock Market LLC. Our Board of Directors has designated Directors Roger H. Molvar, Joann E. Lee, Cindy L. Runger and Richard M. RiccobonoRalph C. Sabin as the Audit Committee financial experts, as defined in the SEC’s Regulation S-K. Directors Roger H. Molvar, Joann E. Lee and Richard M. Riccobono are independent as that term is used in Item 407(d)(5)(i)(B) of SEC’s Regulation S-K.

Code of Business Conduct and Ethics


A copy of the Code of Business Conduct and Ethics is available on our website at www.ffnwb.com under Investor Relations – Corporate Overview – Governance Documents. Additionally, any material amendments to, or waiver from a provision of the Code of Business Conduct and Ethics will be posted to the same website.

122

Compliance with Section 16(a) of the Exchange Act
The information required by this item under the section captioned “Section 16 (a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.

Item 11. Executive Compensation


The information required by this item under the sections captioned “Executive Compensation” and “Directors’ Compensation” in the Proxy Statement are incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
(a)Security Ownership of Certain Beneficial Owners and Management.

(a)Security Ownership of Certain Beneficial Owners and Management.

The information required by this item under the section captioned “Security Ownership of Certain Beneficial Owners and

Management” in the Proxy Statement is incorporated herein by reference.


(b)     Security Ownership of Management.


The information required by this item under the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.
    
(c)    Change In Control
    
First Financial Northwest is not aware of any arrangements, including any pledge by any person of securities of First Financial Northwest, the operation of which may at a subsequent date result in a change in control of First Financial Northwest.the Company.


(d)    Equity Compensation Plan Information


The following table summarizes share and exercise price information about First Financial Northwest’s equity compensation plans as of December 31, 2017.2022.

Plan categoryNumber of securities to be issued upon exercise of outstanding options, warrants, and rightsWeighted-average exercise price of outstanding options, warrants, and rightsNumber of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a)(b)(c)
Equity compensation plans approved by security holders:
2008 Equity Incentive Plan217,519 $11.20 — 
2016 Equity Incentive Plan (1)
— — 969,834 
Equity compensation plans not approved by security holdersN/AN/AN/A
Total217,519 $11.20 969,834 
Plan category Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted-average exercise price of outstanding options, warrants, and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
  (a) (b) (c)
Equity compensation plans (stock options) approved by security holders:      
2008 Equity Incentive Plan(1)
 452,940
 $10.21
 —
2016 Equity Incentive Plan (2)
 —
 —
 1,351,028
Equity compensation plans not approved by security holders N/A
 N/A
 N/A
Total 452,940
 $10.21
 1,351.028
___________________
(1) The restricted shares granted under the 2008 Equity Incentive Plan were purchased by First Financial Northwest in open market transactions and subsequently issued to First Financial Northwest’s directors and certain employees. As of December 31, 2017, there were 839,634 restricted shares granted pursuant to the 2008 Equity Incentive Plan.
(2) The shares available for future grant under the 2016 Equity Incentive Plan include 375,514184,917 shares of restricted stock.which may be granted as stock awards. Each share granted as restricted stock award reduces the total available shares for grant by two shares.



Item 13. Certain Relationships and Related Transactions and Director Independence


The information required by this item under the sections captioned “Meetings and Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Transactions with Related Persons,” and “Meetings and Committees of the Board of Directors and Corporate Governance Matters - Corporate Governance - Director Independence” in the Proxy Statement are incorporated herein by reference.    


123


Item 14. Principal Accounting Fees and Services


The information required by this item under the section captioned "Proposal 4-3- Ratification of the appointmentAppointment of Moss Adams as our independent auditor for 2018”Independent Registered Public Accounting Firm in the Proxy Statement is incorporated herein by reference.




PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)       Exhibits
3.1
Articles of Incorporation of First Financial Northwest (1)
3.2
Amended and Restated Bylaws of First Financial Northwest (2)
4.04.1
10.14.2
+10.1
+10.2
+10.3
+10.4
2008 Equity Incentive Plan (6)(7)
+10.5
+10.6
+10.7
+10.8
+10.9
+10.10
+10.11
+10.12
+10.13
+10.14
+10.15
+10.16
+10.17
+10.18
2314
21
23
31.1
31.2
32.1
32.2
101The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended December 31, 2016,2022, 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) Notes to Consolidated Financial Statements.
104Cover Page Interactive Date File

124

______________
(1)
Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-1 (333-143539)
(2)
Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated June 15, 2017.
(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 July 11, 2017.
(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 Current Report on Form 8-K dated September, 8, 2017.
(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)    File as an exhibit to First Financial Northwest’s Annual Report on Form 10-K for December 31, 2020 filed on March 12, 2021.
(4)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 5, 2013.
(5)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 9, 2014.
(6)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(7)    Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.
(8)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated June 15, 2016.
(9)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.
(10)    Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for March 31, 2018 filed on May 8, 2018.
(11)    Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-8 on June 15, 2016 (333-212029).
(12)    Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for September 30, 2018 filed November 7, 2018.
(13)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 20, 2018.
(14)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 3, 2019.
(15)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(16)    Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.
(17)Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 21, 2020.
“+” indicates management contract, compensatory plan, or arrangement.

Item 16. Form 10-K Summary.
None.



125

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL NORTHWEST, INC. 
 
 
 
Date: March 9, 201813, 2023By:/s/ Joseph W. Kiley III
Joseph W. Kiley III
President and Chief Executive Officer
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ Ralph C. SabinChairman of the Board and DirectorMarch 13, 2023
Ralph C. Sabin
/s/ Joseph W. Kiley IIIPresident, Chief Executive Officer and DirectorMarch 13, 2023
Joseph W. Kiley III(Principal Executive Officer)
/s/ Richard P. JacobsonChief Financial Officer and DirectorMarch 13, 2023
Richard P. Jacobson(Principal Financial Officer)
/s/ Eva Q. NguVice President and ControllerMarch 13, 2023
Eva Q. Ngu(Principal Accounting Officer)
Signature/s/ Diane C. DavisTitleDirectorDateMarch 13, 2023
Diane C. Davis
/s/ Joann E. LeeDirectorMarch 13, 2023
Joann E. Lee
/s/ Roger H. MolvarChairman of the Board and DirectorMarch 9, 201813, 2023
Roger H. Molvar
/s/ Joseph W. Kiley IIIPresident, Chief Executive Officer and DirectorMarch 9, 2018
Joseph W. Kiley III(Principal Executive Officer)
/s/ Richard P. JacobsonChief Financial Officer and DirectorMarch 9, 2018
Richard P. Jacobson(Principal Financial Officer)
/s/ Christine A. HuestisVice President and ControllerMarch 9, 2018
Christine A. Huestis(Principal Accounting Officer)
/s/ Gary F. FaullDirectorMarch 9, 2018
Gary F. Faull
/s/ Joann E. LeeDirectorMarch 9, 2018
Joann E. Lee
/s/ Kevin D. PadrickDirectorMarch 9, 2018
Kevin D. Padrick
/s/ Daniel L. StevensDirectorMarch 9, 2018
Daniel L. Stevens
/s/ Richard M. RiccobonoDirectorMarch 9, 201813, 2023
Richard M. Riccobono

Exhibit Index
Exhibit No.Description
21/s/ Cindy L. Runger
Subsidiaries of the Registrant
DirectorMarch 13, 2023
23Cindy L. Runger
Consent of Independent Registered Public Accounting Firm- Moss Adams LLP
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended December 31, 2017, 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) Notes to Consolidated Financial Statements.

126