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

FORM 10-K

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

	For the Fiscal Year Ended December 31, ~~2020~~2021

☐	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)

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

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

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

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

Common Stock, $0.01 par value per share		The 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 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 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 X No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

Indicate by check mark whether the registrant 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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). 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, ~~2020,~~2021, was ~~$85,122,386 (8,784,560~~$127,362,869 (8,406,790 shares at ~~$9.69~~$15.15 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 8, ~~2021,~~2022, the Registrant had ~~9,655,614 shares~~9,128,460 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Registrant’s ~~Definitive~~definitive Proxy Statement for the ~~2020~~2022 Annual Meeting of Shareholders ~~(Part III).~~are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2022 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.

~~2020~~2021 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


			Page
Forward-Looking Statements			iii
Internet Website			v

PART I.
	Item 1.	Business	1
		General	1
		Market Area	12
		Lending Activities	2
		Asset Quality	1513
		Investment Activities	2118
		Deposit Activities and Other Sources of Funds	2521
		Subsidiaries and Other Activities	2824
		Competition	2824
		Human Capital	2924
		How We Are Regulated	2925
		Taxation	3833
		Executive Officers of First Financial Northwest, Inc.	3934
	Item 1A.	Risk Factors	4035
	Item 1B.	Unresolved Staff Comments	5473
	Item 2.	Properties	5447
	Item 3.	Legal Proceedings	5448
	Item 4.	Mine Safety Disclosures	5448
PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	5448
	Item 6.	~~Selected Financial Data~~[Reserved]	5749
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5849
		Overview	5849
		Business Strategy	6251
		Critical Accounting Policies	6352
		Comparison of Financial Condition at December 31, ~~2020,~~2021, and December 31, ~~2019~~2020	6554
		Comparison of Operating Results for the Years Ended December 31, 20~~20,~~21, and ~~2019~~2020	6857
		Average Balances, Interest and Average Yields/Costs	7362
		Yields Earned and Rates Paid	7463
		Rate/Volume Analysis	7464
		Asset and Liability Management and Market Risk	7564
		Liquidity and Capital Resources	7767
		~~Capital~~	78
		~~Commitments and Off-Balance Sheet Arrangements~~	79
		~~Impact of Inflation~~	80
		Recent Accounting Pronouncements	8069
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	8069
	Item 8.	Financial Statements and Supplementary Data	8069
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~129~~121
	Item 9A.	Controls and Procedures	~~129~~121
	Item 9B.	Other Information	~~130~~122
	Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	122

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

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

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

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

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

•results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve 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;

•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;

iii

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

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

•adverse changes in the securities markets;

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

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

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

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

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

Internet Website

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. All of our reports, proxy statements, and other SEC filings are posted as soon as reasonably practicable after they are electronically filed with the SEC and are also available free of charge at the SEC’s website at www.sec.gov.

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”) 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, ~~2020~~2021, the Company had total assets of ~~$1.4~~$1.43 billion, net loans of ~~$1.1~~$1.10 billion, deposits of ~~$1.1~~$1.16 billion and stockholders’ equity of ~~$156.3~~$157.9 million. First Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in First Financial Northwest Bank. Accordingly, the information set forth in this report, including consolidated financial statements and related data, relates primarily to First Financial Northwest 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 Savings 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 Savings Bank changed its name to First Savings Bank Northwest. Subsequently, 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.

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 Northwest Bank’s shift in focus from a traditional savings and loan association towards a full service, commercial bank. Additionally, First Financial Northwest Bank is examined and regulated by the DFI and by the ~~FDIC.~~FDIC. First Financial Northwest 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 Bank has additional smaller branches in King County located in Bellevue, Woodinville, Bothell, Kent, and ~~Kirkland.~~Kirkland, and opened a new smaller branch in Issaquah in March 2021. In Snohomish County, Washington, the Bank has five additional smaller branches located in Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In addition, the Bank ~~opened~~has two Pierce County, Washington smaller branches, ~~with~~located in University Place ~~in March 2020~~ and Gig ~~Harbor in October 2020. The Bank’s fifteenth branch opened in Issaquah, in King County, Washington, in March 2021.~~Harbor. These smaller branches are focused on efficiency through the extensive use of the latest banking technology. First Financial Northwest 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.

During the last two years the Bank 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 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, 2021, there were 67 PPP loans outstanding totaling $10.8 million, as compared to 372 PPP loans totaling $41.3 million at December 31, 2020.

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

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, Kitsap counties. During ~~2020,~~2021, the region experienced ~~stronger~~continued strong appreciation in residential real estate ~~prices compared to the increases experienced in 2019.~~prices. Price appreciation was strongest in areas outside the Seattle core and in less expensive areas. Price appreciation in more expensive areas of King County such as ~~Seattle~~Kirkland and Bellevue have also strengthened over ~~2020~~2021 due to low interest rates and population growth. Home prices in King, Pierce, Snohomish and Kitsap counties have continued to experience price appreciation ~~higher than~~similar to the national ~~average.~~trend. Lower mortgage rates helped stimulate demand in ~~the fourth quarter of 2020~~2021 with sales up ~~over last year and a decline in housing inventory at the end of the~~

~~year.~~compared to 2020. The number of homes listed for sale in King, Pierce, Snohomish and Kitsap counties ~~has~~ continued to drop throughout 2021 and at year end are down from ~~the end of 2019.~~December 31, 2020. The declines range from ~~14%~~10% in ~~King~~Pierce County to a decline of ~~63%~~64% in ~~Snohomish~~King County, and all four counties have less than one month of 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 ~~2.25~~2.27 million residents and a median household income of approximately $95,000, 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 3.2% at December 31, 2021, compared to 6.8% at December 31, 2020, ~~compared to 2.1% at December 31, 2019,~~ and the national average of ~~6.7%~~3.9% at December 31, ~~2020.~~2021. The median sales price of a residential home in King County for December ~~2020~~of 2021 was ~~$676,000,~~$749,000, an increase of ~~9.9%~~10.8% from December ~~2019,~~2020, according to the Northwest Multiple Listing Service ("MLS"). Residential sales volumes increased ~~4.9%~~15.6% in ~~2020~~2021 compared to ~~2019~~2020 and inventory levels as of December 31, ~~2020~~2021 were at ~~0.6~~0.3 months according to the MLS.

Pierce County, covering approximately 1,700 square miles, has the second largest population of any county in the state of Washington. It has approximately ~~905,000~~921,000 residents and a median household income of approximately $72,100, 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 ~~7.6%~~4.1% in December ~~2020,~~2021, compared to ~~4.8%~~7.6% at year-end ~~2019.~~2020. The median sales price of a residential home in Pierce County was ~~$430,000~~$515,000 for December ~~2020,~~of 2021, a ~~16.5%~~19.8% increase compared to December ~~2019,~~2020, according to the MLS. Residential sales volumes ~~decreased~~increased by ~~0.4%~~12.3% in ~~2020~~2021 compared to ~~2019~~2020 and inventory levels as of December 31, ~~2020~~2021 were at 0.3 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 ~~822,000~~828,000 residents and a median household income of approximately $86,700, 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 3.8% in December 2021 compared to 7.8% in December ~~2020 compared to 2.4% in December 2019.~~2020. The median sales price of a residential home in Snohomish County was ~~$535,000~~$680,000 for December ~~2020, an 8.1%~~of 2021, a 27.1% increase compared to December ~~2019,~~of 2020, according to the MLS. Residential sales volumes rose by ~~4.3%~~9.4% in ~~2020~~2021 compared to ~~2019~~2020 and inventory levels as of December 31, ~~2020~~2021 were at ~~0.3~~0.2 months according to the MLS.

Kitsap County has the seventh largest population of any county in the state of Washington and covers approximately 395 square miles. It has approximately ~~271,000~~276,000 residents and a median household income of approximately $75,400, 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 ~~6.3%~~3.3% in December ~~2020,~~2021, compared to ~~4.1%~~6.3% for December ~~2019.~~of 2020. The median sales price of a residential home was ~~$426,000~~$500,000 for December ~~2020~~of 2021, an increase of ~~10.6%~~17.4% over December ~~2019,~~of 2020, according to the MLS. Residential sales volumes increased by ~~0.6%~~11.0% in ~~2020~~2021 compared to ~~2019~~2020 and inventory levels as of December 31, ~~2020~~2021 were at ~~0.5~~0.4 months according to the MLS.

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

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 business lending. We offer a 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, ~~2020,~~2021, our net loan portfolio totaled $1.1 billion and represented ~~79.3%~~77.4% of our total assets.

During the year ended December 31, 2020, the Bank 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 deadline for PPP loan applications to the SBA was initially August 8, 2020. Under this program we funded 462 applications totaling $52.1 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020. As of December 31, 2020, we were approved for SBA forgiveness ~~on 146 PPP loans totaling $11.2 million resulting in~~ ~~372 PPP loans with an aggregate balance of $41.3 million outstanding. The CAA, 2021 enacted in December 2020 renewed and extended the PPP until March 31, 2021 by~~

~~authorizing an additional $284.5 billion for the program for eligible small businesses and nonprofits. As a result, the Bank began originating PPP loans again in January 2021.~~

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 and surplus, or ~~$22.9~~$24.5 million at December 31, ~~2020.~~2021. 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 ~~plus the balance of the allowance for loan~~ and ~~lease losses (“ALLL”),~~surplus, or ~~$31.2~~$32.7 million, at December 31, ~~2020.~~2021. At ~~this~~this date, our single largest lending relationship, totaled ~~$26.8 million.~~$26.2 million.

~~During~~ Loan Maturity and Repricing~~2020, the concentration of loans to our five largest lending relationships increased. At December 31,~~ ~~2020, loans to our five largest lending relationships totaled~~ ~~$96.3~~ ~~million compared to $86.9 million~~. The following table sets forth certain information at December 31, ~~2019, an increase of $9.4 million, or 10.8%.~~ ~~In addition to~~2021, regarding the ~~increase in the total of these relationships during 2020, their percentage~~amount of total loans ~~net of loans~~ in ~~process (“LIP”) also increased t~~our portfolio based on their contractual terms to maturity, not including prepayments.~~o 8.6% at December 31, 2020, from 7.7% at 2019. However, the total number of loans comprising these relationships decreased slightly to~~ ~~13 at December 31, 2020 from 16 at December 31, 2019.~~


	Within One Year		After One Year Through Five Years		After Five Years Through Fifteen Years		Beyond Fifteen Years		Total
	(In thousands)
Real estate:
One-to-four family residential	$	8,390	$	6,976	$	20,353	$	349,397	$	385,116
Multifamily	5,975		36,176		66,544		21,451		130,146
Commercial	36,778		141,954		228,466		12,219		419,417
Construction/land	40,567		52,888		—		—		93,455
Total real estate	91,710		237,994		315,363		383,067		1,028,134
Business	9,502		32,350		4,738		—		46,590
Consumer	7		2,307		42,496		2		44,812
Total Loans	$	101,219	$	272,651	$	362,597	$	383,069	$	1,119,536

The following table ~~details~~sets forth the ~~types~~amount of total loans ~~to our five largest lending relationships at~~due after December 31, ~~2020~~.2022, with fixed or adjustable interest rates.

Borrower (1)
Number of Loans
One-to-Four Family Residential(2)
Multifamily
Commercial Real Estate(2)
Business Aggregate Balance of Loans
(Dollars in thousands)
Real estate investor 2 $ — $ 12,250 $ 14,500 $ — $ 26,750
Real estate investor 7 420 — 20,191 — 20,611
Real estate investor 2 — — 18,366 — 18,366
Real estate investor 1 — — 15,426 — 15,426
Real estate investor 1 — — — 15,110 15,110
Total 13 $ 420 $ 12,250 $ 68,483 $ 15,110 $ 96,263

~~________~~

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

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

The composition of loans to our five largest borrowers has changed at December 31, 2020, as compared to December 31, 2019, with an increase in multifamily loans of $3.8 million and an increase in business loans of $15.1 million. Partially offsetting this increase, one-to-four family loans decreased by $12,000 and commercial real estate loans decreased by $9.5 million. At December 31, 2020, all of the borrowers listed in the table above were in compliance with the original repayment terms of their respective loans.


	Fixed-Rate		Adjustable-Rate		Total
	(In thousands)
Real estate:
One-to-four family residential	$	143,719	$	233,007	$	376,726
Multifamily	38,682		85,489		124,171
Commercial	163,215		219,424		382,639
Construction/land	39,041		13,847		52,888
Total real estate	384,657		551,767		936,424
Business	18,065		19,023		37,088
Consumer	36,249		8,556		44,805
Total Loans	$	438,971	$	579,346	$	1,018,317

~~Loan Portfolio Analysis.~~ ~~The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.~~

December 31,
2020 2019 2018 2017 2016
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
One-to-four family residential:
Permanent owner occupied $ 206,323 18.5 % $ 210,898 18.8 % $ 194,141 18.7 % $ 148,304 14.8 % $ 137,834 16.6 %
Permanent non-owner occupied 175,637 15.7 161,630 14.4 147,825 14.3 130,351 13.0 111,601 13.5
381,960 34.2 372,528 33.2 341,966 33.0 278,655 27.8 249,435 30.1
Multifamily real estate 136,694 12.2 172,915 15.4 169,355 16.3 184,902 18.5 123,250 14.9
Commercial real estate 385,265 34.5 395,152 35.2 373,798 36.0 361,299 36.0 303,694 36.7
Construction/land: (1)
One-to-four family residential 33,396 3.0 44,491 4.0 51,747 5.0 40,522 4.0 34,909 4.2
Multifamily 51,215 4.6 40,954 3.6 40,502 3.9 66,210 6.6 72,030 8.7
Commercial real estate 5,783 0.5 19,550 1.7 9,976 1.0 2,481 0.3 — —
Land 1,813 0.2 8,670 0.8 6,629 0.6 36,405 3.6 29,983 3.6
92,207 8.3 113,665 10.1 108,854 10.5 145,618 14.5 136,922 16.5
Business 80,663 7.2 37,779 3.4 30,486 3.0 23,087 2.3 7,938 1.0
Consumer 40,621 3.6 30,199 2.7 12,970 1.2 9,133 0.9 6,922 0.8
Total loans 1,117,410 100.0 % 1,122,238 100.0 % 1,037,429 100.0 % 1,002,694 100.0 % 828,161 100.0 %
Less:
Deferred loan fees, net 1,654 558 1,178 1,150 2,167
ALLL 15,174 13,218 13,347 12,882 10,951
Loans receivable, net $ 1,100,582 $ 1,108,462 $ 1,022,904 $ 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 December 31, 2020, we included rollover loans of $51.2 million of multifamily loans and $5.8 million of commercial real estate loans in the construction/land category. In addition, the construction/land category included $1.8 million of loans for raw land or buildable lots where the Company does not intend to finance the construction.

~~The following table shows the composition of our loan portfolio by fixed- and adjustable-rate loans at the dates indicated.~~

December 31,
2020 2019 2018 2017 2016
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
FIXED-RATE LOANS (Dollars in thousands)
Real estate:
  One-to-four family residential $ 169,560 15.2 % $ 184,174 16.4 % $ 185,755 18.0 % $ 177,086 17.7 % $ 169,523 20.5 %
  Multifamily 45,441 4.1 54,762 4.9 68,737 6.6 77,824 7.8 72,593 8.7
  Commercial real estate 177,000 15.8 185,503 16.5 179,838 17.3 208,899 20.8 211,054 25.5
  Construction/land 55,123 4.9 32,880 2.9 22,552 2.2 29,516 2.9 28,287 3.4
Total real estate 447,124 40.0 457,319 40.7 456,882 44.1 493,325 49.2 481,457 58.1
Business 64,398 5.8 18,787 1.7 13,760 1.3 9,097 0.9 640 0.1
Consumer 30,724 2.7 19,422 1.7 1,018 0.1 136 — 432 0.1
Total fixed-rate loans 542,246 48.5 495,528 44.1 471,660 45.5 502,558 50.1 482,529 58.3
ADJUSTABLE-RATE LOANS
Real estate:
  One-to-four family residential 212,400 19.0 188,354 16.8 156,211 15.1 101,569 10.1 79,912 9.6
  Multifamily 91,253 8.2 118,153 10.5 100,618 9.7 107,078 10.7 50,657 6.1
  Commercial real estate 208,265 18.6 209,649 18.7 193,960 18.7 152,400 15.2 92,640 11.2
  Construction/land 37,084 3.3 80,785 7.2 86,302 8.3 116,102 11.6 108,635 13.1
Total real estate 549,002 49.1 596,941 53.2 537,091 51.8 477,149 47.6 331,844 40.0
Business 16,265 1.5 18,992 1.7 16,726 1.5 13,990 1.4 7,298 0.9
Consumer 9,897 0.9 10,777 1.0 11,952 1.2 8,997 0.9 6,490 0.8
Total adjustable-rate loans 575,164 51.5 626,710 55.9 565,769 54.5 500,136 49.9 345,632 41.7
Total loans 1,117,410 100.0 % 1,122,238 100.0 % 1,037,429 100.0 % 1,002,694 100.0 % 828,161 100.0 %
Less:
   Deferred loan fees, net 1,654 558 1,178 1,150 2,167
   ALLL 15,174 13,218 13,347 12,882 10,951
Loans receivable, net $ 1,100,582 $ 1,108,462 $ 1,022,904 $ 988,662 $ 815,043

Geographic Distribution of our Loans. The following table shows the geographic distribution of our loan portfolio in dollar amounts and percentages at December 31, ~~2020.~~2021.


		Puget Sound Region (1)				Other Washington Counties				Total in Washington State				All Other States (2)				Total					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			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:	Real estate:	(Dollars in thousands)																				Real estate:	(Dollars in thousands)
One-to-four family residential	One-to-four family residential	$	367,541	96.2	%	$	11,358	3.0	%	$	378,899	99.2	%	$	3,061	0.8	%	$	381,960	100.0	%	One-to-four family residential	$	365,044	94.8	%	$	15,908	4.1	%	$	380,952	98.9	%	$	4,164	1.1	%	$	385,116	100.0	%
Multifamily	Multifamily	90,184		66.0		23,382		17.1		113,566		83.1		23,128		16.9		136,694		100.0	%	Multifamily	83,362		64.1		31,501		24.2		114,863		88.3		15,283		11.7		130,146		100.0	%
Commercial	Commercial	260,822		67.7		48,812		12.7		309,634		80.4		75,631		19.6		385,265		100.0	%	Commercial	293,403		70.0		41,684		9.9		335,087		79.9		84,330		20.1		419,417		100.0	%
Construction/land	Construction/land	92,207		100.0		—		—		92,207		100.0		—		—		92,207		100.0	%	Construction/land	93,455		100.0		—		—		93,455		100.0		—		—		93,455		100.0	%
Total real estate	Total real estate	810,754		81.4		83,552		8.4		894,306		89.8		101,820		10.2		996,126		100.0	%	Total real estate	835,264		81.2		89,093		8.7		924,357		89.9		103,777		10.1		1,028,134		100.0	%
Business	Business	68,921		85.3		758		0.9		69,679		86.4		10,984		13.6		80,663		100.0	%	Business	39,826		85.4		674		1.4		40,500		86.9		6,090		13.1		46,590		100.0	%
Consumer	Consumer	12,672		31.2		86		0.2		12,758		31.4		27,863		68.6		40,621		100.0	%	Consumer	10,191		22.7		424		0.9		10,615		23.7		34,197		76.3		44,812		100.0	%
Total Loans	Total Loans	$	892,347	79.8	%	$	84,396	7.6	%	$	976,743	87.4	%	$	140,667	12.6	%	$	1,117,410	100.0	%	Total Loans	$	885,281	79.0	%	$	90,191	8.1	%	$	975,472	87.1	%	$	144,064	12.9	%	$	1,119,536	100.0	%

____________

(1) Includes King, Snohomish, Pierce and Kitsap counties.

(2) Includes loans in California, ~~Utah,~~ Oregon, ~~Georgia,~~Texas, Florida, Alabama, 38 other states and ~~39 other states.~~Washington, D.C.

One-to-Four Family Residential Lending. As of December 31, ~~2020~~2021, ~~$382.0~~$385.1 million, or ~~34.2%~~34.4% of our total loan portfolio consisted of loans secured by one-to-four family residences.

First Financial Northwest Bank is a traditional portfolio lender when it comes to financing residential home loans. In ~~2020~~2021, we originated ~~$107.6~~$124.2 million and purchased ~~$1.5~~$1.7 million in one-to-four family residential loans. At December 31, ~~2020~~2021, ~~$206.3~~$185.3 million, or ~~54.0%~~48.1% of our one-to-four family residential portfolio consisted of owner occupied loans with the remaining ~~$175.6~~$199.8 million, or ~~46.0%~~51.9% consisting of non-owner occupied loans. In addition, at December 31, ~~2020~~2021, ~~$169.6~~$146.4 million, or ~~44.4%~~38.0% 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. 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 the~~purchase 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 due 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, ~~2020,~~2021, there were no one-to-four family loans in nonaccrual status.

Multifamily and Commercial Real Estate Lending. As of December 31, ~~2020~~2021, ~~$136.7~~$130.1 million, or ~~12.2%~~11.6% of our total loan portfolio was secured by multifamily and ~~$385.3~~$419.4 million, or ~~34.5%~~37.5% 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 buildings~~mobile 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.

The following table presents a breakdown of our multifamily and commercial real estate loan portfolio at December 31, ~~2020,~~2021, and ~~2019:~~2020:


		December 31, 2020				December 31, 2019					December 31, 2021				December 31, 2020
		Amount		% of Total in Portfolio		Amount		% of Total in Portfolio			Amount		% of Total in Portfolio		Amount		% of Total in Portfolio
		(Dollars in thousands)									(Dollars in thousands)
Multifamily real estate:	Multifamily real estate:									Multifamily real estate:
Multifamily, general	Multifamily, general	$	125,328	91.7	%	$	159,106	92.0	%	Multifamily, general	$	130,146	100.0	%	$	125,328	91.7	%
Micro-unit apartments	Micro-unit apartments	11,366		8.3		13,809		8.0		Micro-unit apartments	—		—		11,366		8.3
Total multifamily	Total multifamily	$	136,694	100.0	%	$	172,915	100.0	%	Total multifamily	$	130,146	100.0	%	$	136,694	100.0	%

Commercial real estate:	Commercial real estate:									Commercial real estate:
Retail	Retail	$	114,117	29.6	%	$	133,094	33.7	%	Retail	$	138,463	33.0	%	$	114,117	29.6	%
Office	Office	84,311		22.0		100,744		25.5		Office	90,727		21.6		84,311		22.0
Hotel / motel	Hotel / motel	69,304		18.0		42,971		10.9		Hotel / motel	64,854		15.5		69,304		18.0
Storage	Storage	33,671		8.7		37,190		9.4		Storage	32,990		7.9		33,671		8.7
Mobile home park	Mobile home park	28,094		7.3		26,099		6.6		Mobile home park	20,636		4.9		28,094		7.3
Warehouse	Warehouse	17,484		4.5		17,595		4.4		Warehouse	17,724		4.2		17,484		4.5
Nursing home	Nursing home	12,868		3.3		11,831		3.0		Nursing home	12,713		3.0		12,868		3.3
Other non-residential	Other non-residential	25,416		6.6		25,628		6.5		Other non-residential	41,310		9.9		25,416		6.6
Total non-residential	Total non-residential	$	385,265	100.0	%	$	395,152	100.0	%	Total non-residential	$	419,417	100.0	%	$	385,265	100.0	%

The average loan size in our multifamily and commercial real estate loan portfolios was ~~$917,000~~$904,000 and ~~$1.9~~$2.0 million, respectively, as of December 31, ~~2020~~2021. At this date, ~~$46.5~~$46.8 million, or ~~34.0%~~35.9%, of our multifamily loans and ~~$124.4~~$126.0 million, or ~~32.3%~~30.0%, of our commercial real estate loans were located outside of 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, ~~2020~~2021, was a 74-unit apartment complex with a net outstanding principal balance of ~~$12.3~~$12.0 million located in King County, Washington, which was performing in accordance with its loan repayment terms at that date. As of December 31, ~~2020~~2021, the largest commercial real estate loan had a net outstanding balance of ~~$15.4~~$15.5 million that was secured by a ~~hotel~~retail facility located in King County, ~~Washington. This commercial loan is on impaired status but~~Washington, which was performing in accordance with its loan repayment terms at ~~December 31, 2020.~~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, ~~2020~~2021, there were no commercial real estate loans ~~and a~~or multifamily loans on nonaccrual status. The $2.1 million multifamily loan inon nonaccrual ~~status. Subsequent to~~status at December 31, 2020, ~~the borrower entered into a purchase~~was paid off in 2021 and ~~sale agreement on the property, which is expected to close in March 2021. The Bank does~~we did not ~~expect to~~ incur a loss on this loan. There were no multifamily or commercial real estate loans past due 90 days or more and still accruing interest at December 31, ~~2020.~~2021. In addition, there were no multifamily or commercial real estate loans charged-off during the years ended December 31, ~~2020,~~2021, and ~~2019.~~2020.

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 Bank and a proven record of successful projects. At December 31, ~~2020~~2021, our total construction/land loans ~~decreased~~increased to $93.5 million, or 8.4% of our total loan portfolio, from $92.2 million, or 8.3% of our total ~~loan portfolio, from $113.7 million, or 10.1% of our total~~ loans, at December 31, ~~2019.~~2020. The Company’s strategic plan projects slight growth in construction loan origination activity in ~~2021~~2022 in support of our loan growth. The Bank’s lending policy sets forth the guideline that the 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 Bank was in compliance with this policy at December 31, ~~2020,~~2021, with a balance equal to ~~61.6%~~59.7% of the Bank’s ~~risk-based capital.~~total capital plus surplus. Management intends to maintain levels near below this guideline, however the uncertainty of the timing associated with construction loan draws occasionally results in the actual concentration exceeding the guideline. There were no construction/land loans classified as nonaccrual at either December 31, ~~2020~~2021 or ~~2019.~~2020. There were no construction/land loan charge-offs during the years ended December 31, ~~2020,~~2021, and ~~2019.~~2020. At December 31, ~~2020,~~2021, the ~~LIP~~loans in process (“LIP”) balance on construction/land loans was ~~$59.8~~$43.3 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,
		2020		2019				2021		2020
		(In thousands)				(In thousands)
Construction speculative:	Construction speculative:						Construction speculative:
One-to-four family residential	One-to-four family residential	$	33,396	$	40,993		One-to-four family residential	$	34,677	$	33,396
Multifamily		—		2,394
Commercial real estate		—		1,227

Total construction speculative	Total construction speculative	33,396		44,614			Total construction speculative	34,677		33,396
Construction permanent: (1)	Construction permanent: (1)						Construction permanent: (1)
One-to-four family residential		—		3,498

Multifamily	Multifamily	51,215		38,560			Multifamily	37,194		51,215
Commercial real estate	Commercial real estate	5,783		18,323			Commercial real estate	6,189		5,783
Total construction permanent	Total construction permanent	56,998		60,381			Total construction permanent	43,383		56,998
Land:	Land:						Land:

Land development							Land development	2,485		—
Land non-development	Land non-development	1,813		8,670			Land non-development	12,910		1,813
Total land	Total land	1,813		8,670			Total land	15,395		1,813
Total construction/land loans	Total construction/land loans	$	92,207	$	113,665		Total construction/land loans	$	93,455	$	92,207

_____________

(1) Includes loans where the builder does not intend to sell the property after the construction phase is completed.

The following table includes construction/land loans by county at December 31, ~~2020~~2021:


County	County	Loan Balance		Percent of Construction/Land Loan Balance		County	Loan Balance		Percent of Construction/Land Loan Balance
		(Dollars in thousands)					(Dollars in thousands)
King	King	$	83,130	90.2	%	King	$	90,373	96.7	%
Snohomish	Snohomish	1,300		1.4		Snohomish	2,253		2.4
Pierce		5,527		6.0

Kitsap	Kitsap	2,250		2.4		Kitsap	829		0.9

Total	Total	$	92,207	100.0	%	Total	$	93,455	100.0	%

Loans to finance the construction of single-family homes, 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 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, ~~2020,~~2021, the LIP balance on construction/land loans included ~~$5.0~~$4.4 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, ~~2020,~~2021, our three largest construction/land loans consisted of multifamily construction/land loans of ~~$12.1~~$14.4 million, ~~$8.3~~$8.4 million, and ~~$6.9~~$6.3 million. All three loans will rollover to a permanent loan upon completion of the construction period and all three properties are located in King County.

Certain of our residential construction loans to borrowers for one-to-four family, non-owner occupied residences 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 lasts~~may 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. At December 31, ~~2020,~~2021, there were no loans requiring a rollover to a permanent loan with the Bank at the completion of the construction phase.

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, ~~2020~~2021, ~~$51.2~~$37.2 million and ~~$5.8~~$6.2 million of multifamily and commercial real estate construction loans, respectively, will rollover to permanent loans with the Bank at the end of their construction period.

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 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 (including PPP loans) totaled ~~$80.7~~$46.6 million, or ~~7.2%~~4.1% of the loan portfolio at December 31, ~~2020~~2021. 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 ~~$15.1~~$18.1 million at December 31, ~~2020~~2021 and was performing according to its repayment terms. At December 31, ~~2020~~2021, we did not have any business loans delinquent in excess of 90 days or in nonaccrual status.

As a result of the COVID-19 pandemic, the CARES Act was enacted and authorized the SBA to temporarily guarantee loans under a new loan program called the Paycheck Protection Program.The CAA, 2021, which was signed into law on December 27, 2020 renewed and extended the PPP until May 31, 2021, the final expiration date for PPP lending. Beginning in the second quarter of 2020, we began to offer PPP loans which are fully guaranteed by the SBA, to existing customers and ~~new customers as~~those in the community who have not had a ~~result~~banking relationship with us in the past. The SBA guarantees 100% of the ~~COVID-19 pandemic. These~~ PPP loans ~~are subject~~made to ~~the provisions of the CARES Act as well as complex and evolving rules and guidance issued by the SBA and the U.S. Department of the Treasury.~~eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA if the borrower meets the PPP conditions. ~~Under this program, as~~The great majority of ~~December 31, 2020, there were 372~~our SBA PPP loans ~~outstanding totaling $41.3 million. As~~have been forgiven by the SBA in accordance with the terms of ~~December 31, 2020, a total of 146 PPP loans totaling $11.2 million had~~ been approved for forgiveness, with $434,000 of this amount included in our outstanding balance at December 31, 2020. The CAA, 2021 renewed and extended the PPP until March 31, 2021 by authorizing an additional $284.5 billion for the program. We earn~~As a result, in January 2021, the Bank began accepting and processing loan applications under this second PPP program. The Bank earns~~ 1% interest on PPP loans as well as a fee from the SBA to cover processing costs, which is amortized over the life of the ~~loan.~~loan and recognized fully at payoff or forgiveness. The maturity date of the SBA PPP loan is either two or five years from the date of loan origination. Under this program, as of December 31, 2021, there were 67 PPP loans outstanding totaling $10.8 million. As of December 31, 2021, a total of 661 PPP loans totaling $66.6 million had been approved for forgiveness. The Bank expects the majority of its remaining PPP borrowers will seek full or partial forgiveness of their loan obligations. For additional information regarding these loans, see Item 1A. Risk Factors- “Risks Related to Our Lending- Loans originated under the SBA Paycheck Protection Program subject us to credit, forgiveness and guarantee risk.” The Bank also originates loans under other SBA lending programs, which are partially guaranteed by the SBA. At December 31, ~~2020,~~2021, the Bank’s portfolio included ~~$928,000~~$839,000 of these SBA loans, of which ~~$729,000~~$659,000 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.

At December 31, ~~2020,~~2021, the Bank’s aircraft loan portfolio had an outstanding balance of ~~$10.8~~$6.1 million, or ~~13.4%~~13.0% of total business loans. These loans are collateralized by new or used, single‑engine piston aircraft to light jets for business or personal use. Our aircraft loans will generally 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. The average loan size in our aircraft loan portfolio was ~~$601,000~~$553,000 at December 31, 2021, and the largest loan was ~~$2.7 million at December 31, 2020.~~$2.2 million. For additional information regarding these loans, see Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic 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, ~~2020~~2021, consumer loans were ~~$40.6~~$44.8 million, or ~~3.6%~~4.0% of the total loan portfolio.

At December 31, ~~2020~~2021, the largest component of the consumer loan portfolio consisted of purchased indirect consumer loans to finance classic and collectible cars with a balance of ~~$29.4~~$35.9 million, or ~~72.3%~~80.0% of the total consumer loan portfolio. ~~The Bank will lend up to 90% of the estimated value of the car.~~ Due to the unique nature of these cars, the estimated value often does not align with listed values, therefore, approval of the loan ~~purchase~~ is based on the borrower’s ability to repay. These fixed rate loans typically have maturity periods of ~~five~~three to ~~twelve~~fifteen years. The Bank intends to grow this portfolio of loans up to an internal limit of ~~$40.0~~$50.0 million. 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. At December 31, ~~2020,~~2021, our largest car loan was ~~$592,000~~$755,000 and the average loan size was ~~$81,000.~~$80,000. For additional information regarding these loans see Item 1A. Risk Factors- “Risks Related to Our Lending - We engage in aircraft and classic or 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, ~~2020,~~2021, home equity loans, primarily home equity lines of credit totaled ~~$9.8~~$8.5 million, or ~~24.1%~~18.9% of the total consumer loan portfolio. The home equity lines of credit include ~~$1.3~~$2.0 million of equity lines of credit in first lien position and ~~$8.5~~$6.4 million of second liens on residential properties. At December 31, ~~2020,~~2021, unfunded commitments on our home equity lines of credit totaled ~~$15.5~~$15.0 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 10 to ~~30-~~30 year term, with a ~~10-~~10 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. 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. Classic car loans have greater risk than other consumer loans primarily due to their high value which may fluctuate significantly. 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, ~~2020~~2021, no consumer loans were in nonaccrual status. At that date, a ~~$38,000~~$179,000 classic auto loan was delinquent between 30-59 days. During the year ended December 31, 2021, less than $1,000 of consumer loans were charged off. For the year ended December 31, 2020, a $2,000 unsecured line of credit was charged off. ~~For the years ended December 31, 2019, and 2018, there were no consumer loans charged-off.~~

1210

~~Loan Maturity and Repricing~~. The following table sets forth certain information at December 31, 2020, 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 $ 9,892 $ 4,903 $ 1,830 $ 14,002 $ 351,333 $ 381,960
   Multifamily 5,067 7,017 21,529 61,782 41,299 136,694
   Commercial 28,080 19,862 92,137 204,712 40,474 385,265
   Construction/land 25,646 34,487 31,074 1,000 — 92,207
Total real estate 68,685 66,269 146,570 281,496 433,106 996,126
Business 21,537 48,024 5,325 5,777 — 80,663
Consumer 1,013 241 743 8,656 29,968 40,621
Total $ 91,235 $ 114,534 $ 152,638 $ 295,929 $ 463,074 $ 1,117,410

~~The following table sets forth the amount of total loans due after December 31, 2021, with fixed or adjustable interest rates.~~

Fixed-Rate Adjustable-Rate Total
(In thousands)
Real estate:
   One-to-four family residential $ 167,620 $ 204,448 $ 372,068
   Multifamily 42,267 89,360 131,627
   Commercial 160,958 196,227 357,185
Construction/land 52,873 13,688 66,561
Total real estate 423,718 503,723 927,441
Business 58,188 938 59,126
Consumer 29,713 9,895 39,608
Total $ 511,619 $ 514,556 $ 1,026,175

Loan Solicitation and Processing. ~~The majority of our~~Our 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 approval 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.

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 ~~$22.9~~$24.5 million at December 31, ~~2020.~~2021. 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 ~~$30.5~~$32.7 million at December 31, ~~2020.~~2021.

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 $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 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, ~~2020~~2021, ~~2019,~~2020, and ~~2018,~~2019, our total loan originations and purchases were $363.0 million, $317.9 million, ~~$396.8 million,~~ and ~~$370.8~~$396.8 million, respectively.

One-to-four family residential loans are generally originated in accordance with ~~the~~FDIC 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.

The following table shows total loans originated, purchased, repaid and other changes during the years indicated.


		Year Ended December 31,								Year Ended December 31,
		2020			2019		2018			2021			2020			2019
		(In thousands)								(In thousands)
Loan originations:	Loan originations:								Loan originations:
Real estate:	Real estate:								Real estate:
One-to-four family residential	One-to-four family residential	$	107,609		$	91,811	$	119,946	One-to-four family residential	$	124,220		$	107,609		$	91,811
Multifamily	Multifamily	27,873			39,967		8,363		Multifamily	20,976			27,873			39,967
Commercial	Commercial	33,588			74,283		47,332		Commercial	62,552			33,588			74,283
Construction/land	Construction/land	62,444			109,989		118,237		Construction/land	72,825			62,444			109,989
Total real estate	Total real estate	231,514			316,050		293,878		Total real estate	280,573			231,514			316,050
Business ~~(2)~~(1)	Business ~~(2)~~(1)	59,001			10,031		21,361		Business ~~(2)~~(1)	26,029			59,001			10,031
Consumer	Consumer	5,308			24,325		14,524		Consumer	1,852			5,308			24,325
Total loans originated	Total loans originated	295,823			350,406		329,763		Total loans originated	308,454			295,823			350,406
Loan purchases and participations:	Loan purchases and participations:								Loan purchases and participations:
One-to-four family residential	One-to-four family residential	1,467			653		1,230		One-to-four family residential	1,665			1,467			653
Multifamily	Multifamily	—			28		3,705		Multifamily	251			—			28
Commercial	Commercial	1,208			17,408		21,546		Commercial	32,374			1,208			17,408
Construction/land	Construction/land	—			8,727		4,582		Construction/land	—			—			8,727
Business	Business	—			—		10,000		Business	—			—			—
Consumer	Consumer	19,390			19,553		—		Consumer	20,290			19,390			19,553
Total loan purchases and participations ~~(1)~~(2)	Total loan purchases and participations ~~(1)~~(2)	22,065			46,369		41,063		Total loan purchases and participations ~~(1)~~(2)	54,580			22,065			46,369
Principal repayments	Principal repayments	(352,460)			(308,849)		(342,136)		Principal repayments	(342,945)			(352,460)			(308,849)
Charge-offs	Charge-offs	(2)			—		—		Charge-offs	—			(2)			—
Loans transferred to other real estate owned (“OREO”)	Loans transferred to other real estate owned (“OREO”)	—			—		—		Loans transferred to other real estate owned (“OREO”)	—			—			—
Change in LIP	Change in LIP	29,746			(3,117)		6,045		Change in LIP	(16,457)			29,746			(3,117)
Change in net deferred fees, and ALLL	Change in net deferred fees, and ALLL	(3,052)			749		(493)		Change in net deferred fees, and ALLL	(753)			(3,052)			749
Net (decrease) increase in loans		$	(7,880)	-7880000	$	85,558	$	34,242
Net increase (decrease) in loans									Net increase (decrease) in loans	$	2,879	2879000	$	(7,880)	-7880000	$	85,558

_______________

(1) ~~There were no loan participations in 2020. Totals include $8.4~~Includes $25.6 million and ~~$21.2 million in loan participations during 2019, and 2018, respectively.~~

~~(2)~~ ~~Includes~~ $52.1 million in PPP loans originated during ~~2020.~~2021 and 2020, respectively.

(2) Totals include $8.2 million, $0 and $8.4 million in loan participations during 2021, 2020 and 2019, 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 ~~pays~~paid processing fees for PPP loans of either 1%, 3%, or 5%, based on the size of the loan. Banks ~~may~~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 $418,000 and $1.7 million ~~and $558,000~~ of net deferred loan fees at December 31, ~~2020~~2021, and ~~2019,~~2020, respectively.

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 ~~2020,~~2021, total premiums of $1.6 million, or 3.4% of the purchased principal, were paid on purchased loans. In comparison, premiums of $790,000, or 3.6% of the purchased principal were paid on purchased ~~loans. In comparison, premiums of $1.4 million, or 2.9% of the purchased principal were paid on purchased~~ loans during ~~2019.~~2020.

One-to-four family residential and consumer loans are generally originated without a prepayment penalty. ~~The~~However, 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

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, ~~2020~~2021, we had ~~$2.7 million~~$255,000 of loans past due 30 days or more. These loans represented ~~0.24%~~0.02% of total loans 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 ~~non-performing~~non performing 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 loans by the type of loan and the number of days delinquent at December 31,~~ ~~2020~~:

Loans Delinquent Total
30-59 Days 90 Days and Greater Delinquent Loans
Number
of Loans Principal
Balance Number
of Loans Principal
Balance Number
of Loans Principal
Balance
(Dollars in thousands)
One-to-four family residential:
Owner occupied 2 $ 77 — $ — 2 $ 77
Non-owner occupied 1 159 — — 1 159
Multifamily — — 1 2,104 1 2,104
Total real estate 3 236 1 2,104 4 2,340
Business 1 275 — — 1 275
Consumer 1 38 — — 1 38
Total 5 $ 549 1 $ 2,104 6 $ 2,653

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. ~~Loans~~During 2020, the CARES Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were ~~modified in accordance with~~current as defined by the CARES Act and related regulatory guidance prior to any relief are not ~~considered~~troubled debt restructured loans (“TDRs”) through January 1, 2022. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program were not reported as delinquent or as a TDR during the forbearance time period. As of December 31, 2021, there were no loans on active deferral, compared to $45.2 million, or 4.0% of total loans outstanding at December 31, 2020. All loans that had previously been granted modifications have returned to regular scheduled payments. 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 decline, including as a result of COVID-19.

~~The following table sets forth information with respect to our nonperforming assets and troubled debt restructured loans (“TDRs”) for the years indicated:~~

December 31,
2020 2019 2018 2017 2016
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
   One-to-four family residential $ — $ 95 $ 382 $ 128 $ 798
   Commercial — — 326 — —
Multifamily 2,104 — — — —
Consumer — — 44 51 60
Total loans accounted for on a nonaccrual basis 2,104 95 752 179 858
Total nonperforming loans 2,104 95 752 179 858
OREO 454 454 483 483 2,331
Total nonperforming assets $ 2,558 $ 549 $ 1,235 $ 662 $ 3,189
TDRs:
   Nonaccrual (1)
$ — $ — $ — $ — $ 174
   Performing 3,869 5,246 9,399 17,805 30,083
Total TDRs $ 3,869 $ 5,246 $ 9,399 $ 17,805 $ 30,257
Nonperforming loans as a percent of total loans 0.19 % 0.01 % 0.07 % 0.02 % 0.10 %
Nonperforming loans as a percent of total assets 0.15 0.01 0.06 0.01 0.08
Nonperforming assets as a percent of total assets 0.18 0.04 0.10 0.05 0.31
Total loans $ 1,117,410 $ 1,122,238 $ 1,037,429 $ 1,002,694 $ 828,161
Foregone interest on nonaccrual loans 82 12 18 26 51

~~_______~~

~~(1)~~ ~~These loans are also included in the appropriate loan category above under the caption: “Loans accounted for on a nonaccrual basis.”~~

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. WeAt December 31, 2021, we had ~~one nonperforming loan of~~no nonaccrual loans, as the $2.1 million nonaccrual multifamily loan at December 31, 2020, ~~as compared to $95,000 at December 31, 2019. This loan is currently in foreclosure, however,~~paid off during 2021 with no loss incurred by the ~~process is on hold as there is a purchase and sale agreement on the underlying collateralized property, which is expected to close in March 2021. The Bank does not expect to incur a loss on this loan.~~Bank.

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. We had no OREO properties at December 31, 2021, as the $454,000 of OREO at ~~both~~ December 31, 2020,~~, and 2019, comprised of undeveloped lots.~~ was sold in 2021, resulting in a $207,000 loss on sale reported on the Company’s Consolidated Income Statement. 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 ~~2020~~2021 and ~~2019,~~2020, we did not foreclose or accept deeds-in-lieu of foreclosure on any loans. 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.

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, ~~2020~~2021, we had ~~$3.9~~$2.1 million in TDRs as compared to ~~$5.2~~$3.9 million at December 31, 2019. In late March 2020, the Bank announced loan modification programs to support and provide relief for its borrowers during the COVID-19 pandemic. The Company has followed the CARES Act and interagency guidance from the federal banking agencies when determining if a borrower's modification is subject to TDR classification. Loans subject to payment forbearance under the Bank's COVID-19 loan modification program are not reported as delinquent or as a TDR during the forbearance time period. For additional information, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – “COVID-19 Related Information,” and Note 3 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.2020.

The largest TDR relationship at December 31, ~~2020~~2021 was a ~~$1.2 million commercial~~$915,000 one-to-four family rental property located in ~~King~~Pierce County. At December 31, ~~2020~~2021, there was no LIP in connection with our TDRs.

The following table summarizes our total TDRs:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)

Performing TDRs:	Performing TDRs:					Performing TDRs:
One-to-four family residential	One-to-four family residential	$	2,627	$	3,979	One-to-four family residential	$	2,107	$	2,627

Commercial real estate	Commercial real estate	1,242		1,267		Commercial real estate	—		1,242

Total performing TDRs	Total performing TDRs	3,869		5,246		Total performing TDRs	2,107		3,869
Total TDRs	Total TDRs	$	3,869	$	5,246	Total TDRs	$	2,107	$	3,869

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, ~~2020,~~2021, special mention loans totaled ~~$16.5 million~~$12.3 million including a ~~$15.9~~$4.7 million ~~commercial real estate loan~~office building and $6.4 million in loans to one borrower for two rehabilitation facilities that ~~was previously classified as a construction loan.~~were all downgraded during 2021. The ~~Bank~~impact to these businesses from the COVID-19 pandemic is ~~closely monitoring~~expected to be temporary. As vacancies are filled at the ~~loan, however, it is well collateralized~~office building and patient volumes at the ~~Bank does not expect to incur a loss.~~rehabilitation facilities return, we believe these businesses will stabilize. At December 31, ~~2020, the loan was~~2021, these loans were current on ~~its~~their payments and ~~was~~were in compliance with ~~the~~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 increase in our classified loans during the year ended December 31, ~~2020~~2021 was primarily the result of $34.0 million of commercial real estate loans downgraded to substandard, partially offset by the payoff of a $2.1 million multifamily loan that iswas on nonaccrual status at December 31, 2020. The downgrades included a $15.0 million hotel loan that was previously changed to impaired status when it was downgraded to special mention in December 2020. Continued reduced occupancy due to the COVID-19 pandemic warranted further downgrade to substandard in 2021. In addition, downgrades included an $8.4 million office building loan, and ~~is currently in foreclosure, however, the process is~~two loans to one borrower including a $6.6 million loan secured by a hostel business and a $4.0 million loan secured by a facility housing bowling, roller skating and restaurant operations. All substandard loans at December 31, 2021, were classified as impaired and evaluated for a specific allowance. The impairment analysis on ~~hold pending the borrower’s sale of the underlying collateral~~these properties showed no anticipated loss on ~~this loan.~~these loans.

1714

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

December 31,
2020 2019
(In thousands)
One-to-four family residential $ 527 $ 629
Multifamily 2,104 —
Total classified loans $ 2,631 $ 629

~~With the exception of these substandard loans, of which $2.1 million was accounted for as a nonaccrual loan at December 31,~~ ~~2020, management is not aware of any loans as of December 31,~~ ~~2020~~, 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.


	December 31,
	2021		2020
	(In thousands)
One-to-four family residential	$	—	$	527
Multifamily	—		2,104
Commercial real estate	34,030		—

Consumer	179		—
Total classified loans	$	34,209	$	2,631

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Management reviews the adequacy of the ALLL on a quarterly basis. Our methodology for analyzing the ALLL consists of two components: general and specific allowances. The general allowance is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, ~~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 loans~~loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. ~~The specific allowance component is created~~Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Specific allowances result when management performs an impairment analysis on a loan when management believes that all contractual amounts of principal and interest will not be paid as scheduled. Based on this impairment analysis, if the ~~collectability~~recorded 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 loss~~reserve is ~~probable.~~established in the ALLL for the loan. The amount of the specific ~~reserves are~~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 ~~evaluation~~analysis is inherently subjective as it ~~requires~~relies 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 upon~~Loans classified as a ~~loan’s restructuring, based on~~TDR due to the borrower being granted a rate concession are analyzed by 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 of~~recorded investment in the loan.

When determining the appropriate ALLL during ~~2020,~~2021, management took into consideration the continued impact of the COVID-19 pandemic on such factors as the national and state unemployment rates and related trends, the ~~amount~~expiration of ~~and timing of~~previous financial assistance provided by the government, consumer spending levels and trends, industries significantly impacted by the COVID-19 pandemic, a review of the Bank's largest commercial loan relationships, and the Bank's COVID-19 loan modification program. See also “Allowance for Loan Losses” in Item 7. Critical Accounting Policies, and Item 8. Note 1 - Summary of Significant Accounting Policies later in this report.

Based on this review, management ~~increased~~decreased historical loss factors and qualitative factors for ~~all~~certain loan categories during the year ended December 31, ~~2020 and increased qualitative factors to~~2021, as the ~~Bank's loan portfolio, due to deterioration of~~ economic ~~conditions~~impact as a result of the COVD-19 ~~pandemic. The increase in the factors resulted in an increase in the allowance for loan losses during the current year.~~pandemic was not as severe as previously expected. Management will continue to closely monitor economic conditions and will work with borrowers as necessary to assist them through this challenging economic climate. If economic conditions worsen, ~~or do not improve in the near term,~~ and if ~~future~~ government programs ~~if any,~~ do not provide adequate relief to borrowers, it is possible the Bank's ALLL will need to increase in future periods. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Item 1A. Risk Factors- “Risks Related to Macroeconomic Conditions-The COVID-19 pandemic has impacted the way we conduct business which may adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.”

Quarterly, our Board of Directors’ Internal Asset Review Committee reviews and recommends approval of the allowance for loan 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 ALLL 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 ~~loss~~losses is added to current period earnings.

For the year ended December 31, ~~2020,~~2021, we recorded a ~~$1.9 million~~$300,000 provision for loan losses, as compared to a ~~$300,000 recapture of~~$1.9 million provision for loan losses for the year ended December 31, ~~2019.~~2020. The provision for loan losses in ~~2020~~2021 was primarily a result of the downgrade of $61.0 million of commercial real estate loans combined with increases in forecasted credit deterioration for all loan categories in response to the economic disruption caused by the COVID-19 pandemic, with higher potential impact allocated to commercial real estate and construction/land portfolios. The $41.3 million balance of PPP

1815

primarily a result of a $2.1 million increase in net loans receivable, and a change in composition of our loan portfolio as $30.4 million in repaid PPP loans omitted from our loan loss allowance analysis were replaced with other loans included in the analysis, which offset the decreased historical loss factors and qualitative factors for certain loan categories discussed above. At December 31, 2021, the $10.8 million remaining balance of PPP loans was omitted from the ALLL calculation ~~at December 31, 2020,~~ as these loans are fully guaranteed by the SBA and management expects that the ~~great~~ majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven. In addition, the ~~risk classification~~provision for loan losses was impacted by the $14.7 million increase during 2021 in impaired loans evaluated for specific reserves and omitted from the general reserve calculation used to calculate the ALLL and provision for loan losses. As noted above, our individual evaluation of our impaired loans ~~totaling $61.0~~indicated no additional specific reserve was needed. This reduction to the general allowance was partially offset by the downgrade to special mention of $11.1 million ~~receiving additional COVID-19 related loan payment deferrals were downgraded during the year ended December 31, 2020. The majority of the downgrades were~~in loans, as discussed above, resulting in a slight increase to ~~a lower “pass” grade and therefore were not classified as potential problem loans.~~our ALLL. The ALLL was ~~$15.2~~$15.7 million, or ~~1.36%~~1.40% of total loans at December 31, ~~2020~~2021, as compared to ~~$13.2~~$15.2 million, or ~~1.18%~~1.36% at December 31, ~~2019.~~2020. 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, ~~2020~~2021 and ~~2019,~~2020, impaired loans were ~~$21.4~~$36.1 million and ~~$20.0~~$21.4 million, respectively. The increase in ~~2020~~2021 was primarily due to $19.0 million of the $34.0 million of commercial real estate loans downgraded to substandard in 2021. The $15.0 million hotel loan was classified as impaired prior to 2021. These increases were partially offset by the payoff in 2021 of the $2.1 million multifamily impaired loan ~~placed~~ on nonaccrual status ~~during the year.~~at December 31, 2020. At December 31, ~~2020, the loan was~~2021, these impaired loans were well collateralized and the Bank does not expect to incur ~~a loss~~losses on ~~this loan.~~these loans.

The following table summarizes the distribution of the ALLL by loan category, at the dates indicated.


		December 31,																									December 31,
		2020						2019						2018						2017											2016											2021									2020							2019
		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				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:	Real estate:	(Dollars in thousands)																							Real estate:		(Dollars in thousands)
One-to-four family
residential		$	381,960	$	3,181	34.2	%	$	372,528	$	3,034	33.2	%	$	341,966	$	3,387	33.0	%	$	278,655	$	2,837				27.8	%			$	249,435		$	2,551			30.1	%
One-to-four family residential																								One-to-four family residential	$	385,116			$	3,214			34.4	%		$	381,960				$	3,181		34.2		%	$	372,528		$	3,034		33.2		%
Multifamily	Multifamily	136,694		1,366		12.2		172,915		1,607		15.4		169,355		1,680		16.3		184,902		1,820					18.5				123,250			1,199				14.9		Multifamily		130,146			1,279			11.6			136,694			1,366		12.2		172,915		1,607		15.4
Commercial real estate	Commercial real estate	385,265		6,127		34.5		395,152		4,559		35.2		373,798		4,777		36.0		361,299		4,418					36.0				303,694			3,893				36.7		Commercial real estate		419,417			6,615			37.5			385,265			6,127		34.5		395,152		4,559		35.2
Construction/land	Construction/land	92,207		2,189		8.3		113,665		2,222		10.1		108,854		2,331		10.5		145,618		2,816					14.5				136,922			2,792				16.5		Construction/land		93,455			2,064			8.3			92,207			2,189		8.3		113,665		2,222		10.1
Total real estate	Total real estate	996,126		12,863		89.2		1,054,260		11,422		93.9		993,973		12,175		95.8		970,474		11,891					96.8				813,301			10,435				98.2		Total real estate		1,028,134			13,172			91.8			996,126			12,863		89.2		1,054,260		11,422		93.9
Business	Business	80,663		1,242		7.2		37,779		1,140		3.4		30,486		936		3.0		23,087		694					2.3				7,938			237				1.0		Business		46,590			1,112			4.2			80,663			1,242		7.2		37,779		1,140		3.4
Consumer	Consumer	40,621		1,069		3.6		30,199		656		2.7		12,970		236		1.2		9,133		297					0.9				6,922			279				0.8		Consumer		44,812			1,373			4.0			40,621			1,069		3.6		30,199		656		2.7
Total	Total	$	1,117,410	$	15,174	100.0	%	$	1,122,238	$	13,218	100.0	%	$	1,037,429	$	13,347	100.0	%	$	1,002,694	$	12,882				100.0	%			$	828,161		$	10,951			100.0	%	Total		$	1,119,536		$	15,657		100.0	%		$	1,117,410		$	15,174	100.0	%	$	1,122,238	$	13,218	100.0	%

Based on its comprehensive analysis, management believes that the ALLL as of December 31, ~~2020~~2021 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 losses and may adversely affect the Company’s financial condition and results of operations.

The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations.


	At or For the Year Ended December 31,
	2021			2020			2019
	(Dollars in thousands)
ALLL as a percent of total loans	1.40		%	1.36		%	1.18		%
ALLL at period end	$	15,657		$	15,174		$	13,218
Total loans outstanding	1,119,536			1,117,410			1,122,238

Non-accrual loans as a percentage of total loans outstanding at period end	—		%	0.19		%	0.01		%
Total non-accrual loans	$	—		$	2,104		$	95
Total loans outstanding	1,119,536			1,117,410			1,122,238

ALLL as a percent of non-accrual loans at period end	n/a			721.20		%	13,913.68		%
ALLL at period end	$	15,657		$	15,174		$	13,218
Total non-accrual loans	—			2,104			95

Net recoveries during period to average loans outstanding:
One-to-four family residential:	0.05%			0.05%			0.05%
Net recoveries during period	$	183		$	28		$	73
Average loans receivable, net (1)	374,796			379,068			356,075
Multifamily:	—		%	—		%	—		%
Net recoveries during period	$	—		$	—		$	45
Average loans receivable, net (1)	139,298			83,825			166,672
Commercial:	—		%	0.01		%	—		%
Net recoveries during period	$	—		$	30		$	—
Average loans receivable, net (1)	382,341			383,807			377,120
Construction/land development:	—		%	—		%	—		%
Net recoveries during period	$	—		$	—		$	—
Average loans receivable, net (1)	97,494			167,445			106,856
Business:	—		%	—		%	—		%
Net recoveries during period	$	—		$	—		$	—
Average loans receivable, net (1)	63,263			68,118			34,244
Consumer:	—		%	(0.01)		%	0.26		%
Net recoveries during period	$	—		$	(2)		$	53
Average loans receivable, net (1)	41,580			38,626			20,400
Total loans:	0.02		%	—		%	0.02		%
Net recoveries during period	$	183		$	56		$	171
Average loans receivable, net (1)	1,098,772			1,120,889			1,061,367

_______________

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

~~The following table sets forth an analysis of our ALLL at the dates and for the years indicated.~~

At or For the Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in thousands)
ALLL at beginning of period $ 13,218 $ 13,347 $ 12,882 $ 10,951 $ 9,463
Provision (recapture of provision) for loan losses 1,900 (300) (4,000) (400) 1,300
Charge-offs:
Consumer (2) — — — (83)
Total charge-offs (2) — — — (83)
Total recoveries 58 171 4,465 2,331 271
Net recoveries (charge-offs) 56 171 4,465 2,331 188
ALLL at end of period $ 15,174 $ 13,218 $ 13,347 $ 12,882 $ 10,951
ALLL as a percent of total loans 1.36 % 1.18 % 1.29 % 1.28 % 1.32 %
Net recoveries to average loans receivable — % (0.02) % (0.45) % (0.27) % (0.02) %
ALLL as a percent of nonperforming loans 721.17 % 13,913.68 % 1,774.87 % 7,196.65 % 1,276.34 %

Investment Activities

General. Under Washington State law, commercial banks are permitted to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, banker’s acceptances, repurchase agreements, federal funds, commercial paper, investment grade corporate debt 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, ~~2020,~~2021, 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, ~~2020, we did not hold securities of any single issuer (other than government-sponsored entities) that exceeded 10% of our shareholders’ equity. At December 31,~~2021, and 2020, 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. At December 31, 2019, ~~and 2018,~~ there were no investments held to maturity.

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. These issuers guarantee the timely payment of principal and interest in the event of default. In addition, at December 31, ~~2020,~~2021, our mortgage-backed securities included ~~$10.7~~$11.3 million of other “private label” mortgage-backed securities. The mortgage-backed securities portfolio had a weighted-average yield of ~~2.69%~~1.73% at December 31, ~~2020.~~2021.

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, ~~2020~~2021, the portfolio of government agency securities had a weighted-average yield of ~~1.44%~~1.00%.

The guarantees of the SBA, as a U.S. government agency and Ginnie Mae, as part of a U.S. government agency 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 primarily~~is comprised of both fixed and variable rate securities issued by various financial institutions. At December 31, ~~2020,~~2021, the corporate bond portfolio had a weighted-average yield of ~~5.70%~~3.78%.

Municipal Bonds. The municipal bond portfolio is comprised of taxable and tax-exempt municipal bonds. The pre-tax weighted-average yield on the municipal bond portfolio was ~~2.56%~~2.06% at December 31, ~~2020.~~2021.

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. During ~~2020,~~2021, our FHLB of Des Moines stock holdings decreased by ~~$599,000,~~$945,000, primarily as a result of the ~~$17.7~~$25.0 million decrease in our FHLB advances during ~~2020.~~

2021. The carrying value of our FHLB of Des Moines stock totaled ~~$6.4~~$5.5 million at December 31, ~~2020~~2021. During the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, we received FHLB of Des Moines cash dividends of ~~$320,000~~$332,000 and ~~$362,000,~~$320,000, respectively.

~~The following table sets forth the composition of our investment securities available-for-sale at the dates indicated.~~

December 31,
2020 2019 2018
Amortized
Cost Fair
Value Amortized
Cost Fair
Value Amortized Cost Fair
Value
(In thousands)
Available-for-sale:
Mortgage-backed securities:
   Fannie Mae $ 12,797 $ 13,288 $ 15,605 $ 15,629 $ 24,276 $ 23,643
   Freddie Mac 4,116 4,316 4,196 4,292 6,351 6,287
   Ginnie Mae 16,513 17,127 23,239 23,050 23,311 22,061
   Other 10,691 10,729 11,407 11,448 8,983 8,979
Municipal bonds 16,483 17,446 10,675 10,911 10,615 10,544
U.S. government agencies 41,084 40,635 46,672 45,750 48,190 47,438
Corporate bonds 24,001 24,010 25,500 25,521 23,490 23,218
Total available-for-sale $ 125,685 $ 127,551 $ 137,294 $ 136,601 145,216 142,170

During the year ended December 31, ~~2020,~~2021, gross proceeds from the call, maturity and sale of investments was ~~$12.1~~$20.0 million, with net realized gains of ~~$86,000.~~$32,000.

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, ~~2020~~2021 and ~~2019.~~2020. For additional information regarding our investments, see Note 2 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

2319

The table below sets forth information regarding the carrying value and weighted-average yield by contractual maturity of our investment portfolio at December 31, ~~2020~~2021. Mortgage-backed securities are presented 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, 2020																					December 31, 2021
		Within One Year				After One Year Through Five Years				After Five Through Ten Years				Thereafter				Totals					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			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)																					(Dollars in thousands)
Available-for-sale:	Available-for-sale:																					Available-for-sale:
Mortgage-backed securities	Mortgage-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	—	—	%	$	45,460	2.69	%	Mortgage-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	—	—	%	$	60,753	1.73	%
Municipal bonds	Municipal bonds	—		—		—		—		1,947		2.47		15,499		2.57		17,446		2.56		Municipal bonds	—		—		—		—		3,862		2.21		32,604		2.05		36,466		2.06
U.S. government agencies	U.S. government agencies	—		—		496		8.24		2,907		1.16		37,232		1.44		40,635		1.44		U.S. government agencies	404		2.62		50		5.77		2,169		1.09		38,811		0.97		41,434		1.00
Corporate bonds	Corporate bonds	—		—		8,409		2.55		13,615		4.65		1,986		1.96		24,010		5.70		Corporate bonds	—		—		8,542		4.29		21,753		3.58		—		—		30,295		3.78
Total available-for-sale	Total available-for-sale	$	—	—	%	$	8,905	7.93	%	$	18,469	3.92	%	$	54,717	1.76	%	$	127,551	2.86	%	Total available-for-sale	$	404	2.62	%	$	8,592	4.30	%	$	27,784	3.21	%	$	71,415	1.44	%	$	168,948	1.99	%

2420

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 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 national brokered certificates of deposit. The ~~Bank’s portfolio of~~Bank had no brokered certificates of deposits ~~were reduced to zero~~ at both December 31, 2021 and 2020, ~~from~~as compared to $94.5 million at December 31, 2019. Continued growth in retail deposits with our expanded branch network allowed the Bank to reduce brokered deposits upon maturity as a source of funds. ~~In addition, $24.5 million of callable brokered certificates of deposit were redeemed early.~~ In the future, the Bank may utilize brokered deposits again to supplement our retail deposits and assist in our interest rate risk management efforts.

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


		Year Ended December 31,							Year Ended December 31,
		2020		2019		2018			2021	2020	2019
		(In thousands)							(In thousands)
Total deposits, beginning balance	Total deposits, beginning balance	$	1,033,534	$	939,032	$	839,502	Total deposits, beginning balance	$1,093,633	$1,033,534	$939,032
Increase in retail deposits	Increase in retail deposits	154,571		97,855		77,193		Increase in retail deposits	63,841	154,571	97,855
(Decrease) increase in brokered funds		(94,472)		(3,353)		22,337
Decrease in brokered funds								Decrease in brokered funds	—	(94,472)	(3,353)
Net increase in deposits	Net increase in deposits	60,099		94,502		99,530		Net increase in deposits	63,841	60,099	94,502
Total deposits, ending balance	Total deposits, ending balance	$	1,093,633	$	1,033,534	$	939,032	Total deposits, ending balance	$1,157,474	$1,093,633	$1,033,534

At December 31, ~~2020,~~2021, deposits totaled ~~$1.1~~$1.2 billion. We had ~~$345.0~~$637.1 million of ~~jumbo (greater~~deposit accounts greater than the FDIC insurance amount of $250,000, or ~~equal to $100,000)~~55.0% of our total deposits. Of this amount, $75.9 million were retail certificates of ~~deposit, which were 31.5% of total deposits at~~deposit. At December 31, ~~2020. Of these jumbo deposits, $135.6~~2020, $543.0 million, or 49.7%, of deposit accounts were greater than ~~or equal to~~ $250,000. At ~~that date, included~~December 31, 2021, we held $60.6 million in ~~the jumbo certificates of deposit, were~~ public funds, ~~totaling $31.7 million, or 2.9% of total deposits,~~ of which ~~$30.6~~$42.8 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.

The following table sets forth information regarding our certificates of deposit and other deposits at December 31, ~~2020.~~2021. Certificates of deposit are categorized by their original term.

Weighted-Average Interest Rate Term Category Amount Percentage
of Total
Deposits
(Dollars in thousands)
— % N/A Noninterest bearing demand deposits $ 91,285 8.3 %
0.06 N/A Interest-bearing demand 108,182 9.9
0.04 N/A Statement savings 19,221 1.8
0.37 N/A Money market 465,369 42.6
Certificates of deposit, retail
1.28 Three months or less 1,322 0.1
0.60 Over three through six months 310 —
0.47 Over six through twelve months 57,739 5.3
2.27 Over twelve months 350,217 32.0
Retail certificates of deposit, fair value adjustment (12) —
2.01 Total certificates of deposit, retail 409,576 37.4
Total deposits $ 1,093,633 100.0 %


Weighted-Average Interest Rate		Product Term	Category	Amount		Percentage of Total Deposits
(Dollars in thousands)
—	%	N/A	Noninterest bearing demand deposits	$	117,751	10.2	%
0.08		N/A	Interest-bearing demand	97,907		8.5
0.03		N/A	Savings	23,146		2.0
0.25		N/A	Money market	624,543		54.0

			Certificates of deposit, retail
0.34		Three months or less		256		—
—		Over three through six months		60		—
0.18		Over six through twelve months		55,768		4.8
1.50		Over twelve months		238,043		20.5
1.25			Total certificates of deposit, retail	294,127		25.3



			Total deposits	$	1,157,474	100.0	%

Certificates of Deposit. The following table sets forth the amount and remaining maturities of certificates of deposit at December 31, ~~2020.~~2021.


		Within One Year		After One Year Through Two Years		After Two Years Through Three Years		After Three Years Through Four Years		Thereafter		Total			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)													(In thousands)
0.00 - 1.00%	0.00 - 1.00%	$	69,326	$	13,289	$	7,821	$	2,794	$	352	$	93,582	0.00 - 1.00%	$	95,905	$	44,911	$	26,632	$	6,163	$	2,765	$	176,376
1.01 - 2.00%	1.01 - 2.00%	64,426		12,700		4,575		3,206		1,238		86,145		1.01 - 2.00%	12,335		4,456		3,109		1,364		—		21,264
2.01 - 3.00%	2.01 - 3.00%	123,519		29,257		16,378		11,579		—		180,733		2.01 - 3.00%	29,361		16,436		11,712		—		—		57,509
3.01 - 4.00%	3.01 - 4.00%	10,359		8,045		29,781		943		—		49,128		3.01 - 4.00%	7,736		30,184		1,058		—		—		38,978

Retail certificates of deposit, fair value adjustment		(9)		(3)		—		—		—		(12)
Total	Total	$	267,621	$	63,288	$	58,555	$	18,522	$	1,590	$	409,576	Total	$	145,337	$	95,987	$	42,511	$	7,527	$	2,765	$	294,127

The following table ~~sets forth~~provides the ~~amount~~uninsured portion by account of our ~~jumbo~~ certificates of deposit at December 31, 2021, by their remaining maturity ~~as of December 31, 2020.~~period.


Maturity Period	Certificates of Deposit
	(In thousands)
Three months or less	$	~~73,991~~5,176
Over three months through six months	~~70,851~~9,749
Over six months through twelve months	~~84,607~~23,003
Over twelve months	~~115,587~~37,956
Total	$	~~345,036~~75,884

Deposits by Type. The following table sets forth the deposit balances by the types of accounts we offered at the dates indicated.


		December 31,													December 31,
		2020				2019				2018					2021				2020				2019
		Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total			Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
		(Dollars in thousands)													(Dollars in thousands)
Noninterest bearing	Noninterest bearing	$	91,285	8.3	%	$	52,849	5.1	%	$	46,108	4.9	%	Noninterest bearing	$	117,751	10.2	%	$	91,285	8.3	%	$	52,849	5.1	%
Interest-bearing demand	Interest-bearing demand	108,182		9.9		65,897		6.4		40,079		4.3		Interest-bearing demand	97,907		8.5		108,182		9.9		65,897		6.4
Statement savings		19,221		1.8		17,447		1.7		24,799		2.6
Savings														Savings	23,146		2.0		19,221		1.8		17,447		1.7
Money market	Money market	465,369		42.5		377,766		36.6		339,047		36.1		Money market	624,543		54.0		465,369		42.5		377,766		36.6
Certificates of deposit, retail:	Certificates of deposit, retail:													Certificates of deposit, retail:
0.00 - 1.00%	0.00 - 1.00%	93,582		8.6		7,428		0.7		15,790		1.7		0.00 - 1.00%	176,376		15.2		93,570		8.6		7,400		0.7
1.01 - 2.00%	1.01 - 2.00%	86,145		7.9		131,252		12.7		191,294		20.4		1.01 - 2.00%	21,264		1.8		86,145		7.9		131,252		12.7
2.01 - 3.00%	2.01 - 3.00%	180,733		16.5		230,405		22.3		131,328		14.0		2.01 - 3.00%	57,509		4.9		180,733		16.5		230,405		22.3
3.01 - 4.00%	3.01 - 4.00%	49,128		4.5		56,046		5.4		52,820		5.6		3.01 - 4.00%	38,978		3.4		49,128		4.5		56,046		5.4

Retail certificates of deposit, fair value adjustment		(12)		—		(28)		—		(58)		—
Total certificates of deposit, retail	Total certificates of deposit, retail	409,576		37.5		425,103		41.1		391,174		41.7		Total certificates of deposit, retail	294,127		25.3		409,576		37.5		425,103		41.1
Certificates of deposit, brokered	Certificates of deposit, brokered													Certificates of deposit, brokered
0.00 - 1.00%	0.00 - 1.00%	—		—		—		—		121		—		0.00 - 1.00%	—		—		—		—		—		—
1.01 - 2.00%	1.01 - 2.00%	—		—		70,510		6.8		43,221		4.6		1.01 - 2.00%	—		—		—		—		70,510		6.8
2.01 - 3.00%	2.01 - 3.00%	—		—		23,962		2.3		45,835		4.9		2.01 - 3.00%	—		—		—		—		23,962		2.3
3.01 - 4.00%		—		—		—		—		8,648		0.9

Total certificates of deposit, brokered	Total certificates of deposit, brokered	—		—		94,472		9.1		97,825		10.4		Total certificates of deposit, brokered	—		—		—		—		94,472		9.1
Total deposits	Total deposits	$	1,093,633	100.0	%	$	1,033,534	100.0	%	$	939,032	100.0	%	Total deposits	$	1,157,474	100.0	%	$	1,093,633	100.0	%	$	1,033,534	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 assist in the management of our interest rate risk by matching the duration of selected loan and investment maturities.

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, ~~2020,~~2021, our remaining FHLB credit capacity was ~~$494.4~~$553.1 million and outstanding advances from the FHLB totaled ~~$120.0~~$95.0 million. In addition, at December 31, ~~2020,~~2021, we had supplemental funding sources of ~~$82.2~~$84.8 million available at the FRB and $75.0 million available between two ~~other~~correspondent financial institutions.

~~The following table sets forth information regarding FHLB advances at the end of and during the years indicated. The table includes both long- and short-term borrowings.~~

At or for the Year Ended December 31,
2020 2019 2018
(Dollars in thousands)
Maximum amount of borrowings outstanding at any month end $ 160,000 $ 184,500 $ 224,000
Average borrowings outstanding 125,392 129,899 183,667
Average rate paid during the year 1.31 % 2.09 % 1.92 %
Balance outstanding at end of the year $ 120,000 $ 137,700 $ 146,500
Weighted-average rate paid at end of the year 0.36 % 1.84 % 2.62 %

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. As of December 31, ~~2020,~~2021, we had seven interest rate swaps with an aggregate notional amount of $95.0 million and a fair value gain of $1.5 million as compared to six interest rate swaps with an aggregate notional amount of $120.0 million and a fair value loss of $2.9 ~~million.~~million at December 31, 2020. In ~~addition, during 2020, the Company entered into~~October 2021, a $50.0 million interest rate swap agreement matured and was partially replaced with two ~~forward-starting~~interest rate swap agreements ~~to commence in October 2021~~ with an aggregate notional ~~amount~~ of $25.0 million ~~and a~~that were included in the fair value loss reported at December 31, ~~2020 of $64,000.~~2020. For additional information, see Item 1A. 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 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 1011 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 Northwest Bank and First Financial Diversified Corporation. First Financial Diversified previously held a small portfolio of loans. Subsequent to these loans paying off in 2019, the company has had minimal activity.

First Financial Northwest Bank. First Financial Northwest Bank is a community-based commercial bank. The Bank 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 ~~thirteen~~fourteen additional branches in King, Pierce and Snohomish Counties, Washington. ~~In addition, the Bank opened a new branch office in Issaquah, Washington in March 2021.~~ 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 consistently delivering high-quality personal service to our customers ~~seeking to achieve~~that 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, ~~2020,~~2021, the top five banks in the Seattle-Tacoma-Bellevue metropolitan statistical area (comprised of Bank of America, JP Morgan Chase, Wells Fargo, US Bancorp and KeyBank) controlled 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 data, the~~The Bank’s share of aggregate deposits in the market area is 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.

Human Capital

First Financial Northwest Bank continually strives to recruit the most talented, motivated employees in their respective fields. By providing opportunities for personal and professional growth ~~plus~~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, ~~2020,~~2021, we had ~~151~~144 full-time employees. Our employees are not represented by any collective bargaining group. First Financial Northwest Bank 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, 2021, our workforce was 59.7% female and 40.3% male, and women held 55.4% of the Bank’s management roles. The average tenure of mid-level officers and managers is 4.7 years and the average tenure of executive / senior level officers is 8.7 years. The ethnicity of our workforce was 57.6% White, 24.3% Asian, 3.5% Black, 0.7% Native Hawaiian or Other Pacific Islander, 0.7% Two or More Races, and 13.2% undisclosed.

The following chart depicts the percentage of self-identified females and minorities in our workforce at December 31, ~~2020,~~2021, by job classification as defined by the Equal Employment Opportunity Commission (“EEOC”):

Female Minority Distribution by EEOC Job Classification
Executive / Senior level officers 35.7 % 28.6 % 9.3 %
Mid-level officers and managers 62.2 27.5 30.0
Professionals 56.7 26.7 20.0
Sales workers 40.0 44.4 6.7
Administrative support 80.4 42.6 34.0
Total 64.7 % 33.1 % 100.0 %


Job Classification	Female	Minority (1)	Distribution by EEOC Job Classification

Executive / Senior level officers	38.5%	25.0%	9.0%
Mid-level officers and managers	59.6	31.3	36.1
Professionals	46.4	37.5	19.4
Sales workers	57.1	66.7	4.9
Technicians	—	33.3	2.1
Administrative support	80.5	31.3	28.5
Total	59.7%	33.6%	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, employee stock ownership plan, health and life insurance, employee assistance program, paid holidays, paid time off, and other leave as applicable.

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. As an essential business, the Company responded quickly to implement procedures to assist employees in navigating the challenging impact from the pandemic, as well as protect the safety of both employees and customers. ~~In response~~The Company has transitioned to ~~Washington State’s stay at home order, the Company moved~~a hybrid remote work model where eligible positions may arrange with their manager to ~~remote~~ work ~~status.~~partially or fully remote. Safety measures ~~were promptly~~ implemented early in the COVID-19 pandemic continue to be followed to protect employees working on site, which included installation of protective partitions and fully equipping locations with personal safety supplies. Employees who experienced a reduction in hours due to reduced branch operating hours continued to receive their full pay. Additional sick time was authorized for employees impacted directly by the COVID-19 virus. AsThe Company will continue to follow any Washington state mandates ~~change, the Company will continue to~~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 Northwest Bank. On March 31, 2015, First Financial Northwest 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 Northwest 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 Northwest 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 governing us may be amended from time to time by the relevant legislative bodies and regulators. Any such legislative action or regulatory changes in the future could adversely affect us. We cannot predict whether any such changes may occur.

Regulation and Supervision of First Financial Northwest Bank

General. As a state-chartered commercial bank, First Financial Northwest 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 System. State law and regulations govern First Financial Northwest 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 Northwest Bank is subject to periodic examination by and reporting requirements of the DFI.

Insurance of Accounts and Regulation by the FDIC. First Financial Northwest Bank’s deposits are insured up to $250,000 per separately insured deposit 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 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 DIF. The FDIC also has the authority to initiate enforcement actions against commercial institutions and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

~~Under the FDIC’s rules, the assessment base for a bank is equal~~The FDIC assesses deposit insurance premiums quarterly on each FDIC-insured institution applied to its ~~total~~deposit base, which is its average consolidated total assets ~~less average tangible equity~~minus its Tier 1 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. Total base assessment rates currently range from 3 to 30 basis points subject to certain adjustments. The FDIC has authority to increase insurance assessments, and any significant increases may have an adverse effect on the operating expenses and results of operations of the Company. Management cannot predict what assessment rates will be in the future. In a banking industry emergency, the FDIC may also impose a special assessment.

The FDIC announced that the DIF reserve ratio surpassed 1.35% as of September 30, 2018 which triggered two changes under the regulations: surcharges on large banks (total consolidated assets of $10 billion or more) ended and small banks (total consolidated assets of less than $10 billion, which includes the Bank) were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35% to be applied when the reserve ratio is at least 1.35%. The Bank applied the $282,000 small bank credits received to its quarterly deposit insurance assessments paid during 2019, reducing the Bank’s FDIC expense for the year to $307,000. The Bank paid ~~$561,000~~$476,000 in FDIC assessments for the year ending December 31, ~~2020.~~2021.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. ItThe FDIC also may prohibit any ~~FDIC-insured~~insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious ~~threat~~risk to the DIF. The FDIC also has the authority to take enforcement actions against banks and savings associations. Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.

Standards for Safety and Soundness. ~~The~~Each federal banking ~~regulatory agencies have prescribed, by regulation,~~agency, including the FDIC, has adopted guidelines ~~for all insured depository institutions~~establishing 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, earnings~~quality; earnings; and compensation, fees and benefits. ~~The~~In general, the guidelines ~~set forth the safety~~require, among other things, appropriate systems and ~~soundness standards that the federal banking agencies use~~practices 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 appropriate~~exposures 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 are~~Management of the Bank is not aware of any conditions relating to these safety and soundness standards ~~that~~which would require submission of a plan of ~~compliance by First Financial Northwest Bank.~~compliance.

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

First Financial Northwest Bank is subject to capital regulations adopted by 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 ~~and~~to 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 purposes~~maintenance of the ~~risk-based~~following minimum capital ~~ratios, require an additional~~ratios: (i) a CET1 capital ~~conservation buffer over the minimum risk-based ratios’~~ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and ~~define what qualifies as capital for purposes~~(iv) a Tier 1 leverage ratio of ~~meeting the capital requirements.~~4%. Consolidated regulatory capital requirements identical to those applicable to subsidiary banks generally apply to bank holding companies.However, the Federal Reserve ~~Board~~ 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 Board.~~Reserve.

~~Under~~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 ~~regulations,~~meeting or exceeding the ~~minimum~~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 ~~ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total~~requirements, including the risk-based ~~capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of~~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~~assets, effective January 1, 2020. A qualifying institution ~~has elected to exclude AOCI from regulatory capital,~~may opt in 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.

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 ~~inclusion~~community 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 in~~8% 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, 2021, 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 in~~margin 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. These risk weights include, for example, a 150% risk weight 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; and a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable.

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.

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, ~~2020,~~2021, First Financial Northwest Bank met the requirements to be “well capitalized” and met the fully phased-in capital conservation buffer requirement.

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” 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 community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community 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 8% or greater requires the institution to comply with the generally applicable capital requirements. Although the Bank qualified to make this election, on January 1, 2020, management did not

~~elect the community bank leverage ratio as the Bank’s margin above the current minimum levels to be well-capitalized is greater than our margin would be under the community bank leverage ratio.~~

The table below sets forth First Financial Northwest Bank’s capital position at December 31, ~~2020~~2021 and ~~2019,~~2020, based on FDIC thresholds to be well-capitalized.


		December 31,									December 31,
		2020				2019					2021				2020
		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio
		(Dollars in thousands)									(Dollars in thousands)
Bank equity capital under U.S. Generally Accepted Accounting Principles (“GAAP”)		$	140,114			$	135,656
Bank equity capital under GAAP										Bank equity capital under GAAP	$	149,563			$	140,114

Tier 1 leverage capital	Tier 1 leverage capital	$	140,319	10.29	%	$	135,170	10.27	%	Tier 1 leverage capital	$	147,816	10.34	%	$	140,319	10.29	%
Tier 1 leverage capital requirement	Tier 1 leverage capital requirement	68,189		5.00		65,787		5.00		Tier 1 leverage capital requirement	71,489		5.00		68,189		5.00
Excess	Excess	$	72,130	5.29	%	$	69,383	5.27	%	Excess	$	76,327	5.34	%	$	72,130	5.29	%

Common equity tier 1	Common equity tier 1	$	140,319	14.32	%	$	135,170	13.13	%	Common equity tier 1	$	147,816	14.23	%	$	140,319	14.32	%
Common equity tier 1 capital requirement	Common equity tier 1 capital requirement	63,705		6.50		66,917		6.50		Common equity tier 1 capital requirement	67,536		6.50		63,705		6.50
Excess	Excess	$	76,614	7.82	%	$	68,253	6.63	%	Excess	$	80,280	7.73	%	$	76,614	7.82	%

Tier 1 risk-based capital	Tier 1 risk-based capital	$	140,319	14.32	%	$	135,170	13.13	%	Tier 1 risk-based capital	$	147,816	14.23	%	$	140,319	14.32	%
Tier 1 risk-based capital requirement	Tier 1 risk-based capital requirement	78,406		8.00		82,359		8.00		Tier 1 risk-based capital requirement	83,121		8.00		78,406		8.00
Excess	Excess	$	61,913	6.32	%	$	52,811	5.13	%	Excess	$	64,695	6.23	%	$	61,913	6.32	%

Total risk-based capital	Total risk-based capital	$	152,610	15.57	%	$	148,048	14.38	%	Total risk-based capital	$	160,840	15.48	%	$	152,610	15.57	%
Total risk-based capital requirement	Total risk-based capital requirement	98,008		10.00		102,949		10.00		Total risk-based capital requirement	103,901		10.00		98,008		10.00
Excess	Excess	$	54,602	5.57	%	$	45,099	4.38	%	Excess	$	56,939	5.48	%	$	54,602	5.57	%

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.

For a complete description of First Financial Northwest Bank’s required and actual capital levels on December 31, ~~2020,~~2021, see Note 14 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

The Financial Accounting Standards Board has adopted a new accounting standard for ~~US Generally Accepted Accounting Principles~~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 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 Northwest 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, ~~2020,~~2021, First Financial Northwest 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 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 make 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 of Des Moines are required to be fully secured by sufficient collateral as determined by the FHLB of Des Moines. 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, ~~2020,~~2021, the Bank held ~~$6.4~~$5.5 million in FHLB of Des Moines stock that was in compliance with the holding requirements. The FHLB pays dividends quarterly, and First Financial Northwest Bank received ~~$320,000~~$332,000 in dividends during the year ended December 31, ~~2020.~~2021.

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 of Des Moines stock in the future. A reduction in value of First Financial Northwest Bank’s FHLB of Des Moines 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 land represent 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, ~~2020,~~2021, First Financial Northwest Bank’s aggregate recorded loan balances for construction, land development and land loans were ~~61.6%~~59.7% of regulatory capital. In addition, at December 31, ~~2020,~~2021, First Financial Northwest Bank’s loans on commercial real estate, as defined by the FDIC, were ~~390.1%~~384.0% 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 ~~commercial~~savings banks may exercise any of the powers ~~that the Federal Reserve has determined to be closely related to the business~~ of ~~banking~~Washington-chartered commercial banks, national banks and ~~the powers of national~~federally-chartered savings banks, subject to the approval of the Director of the DFI in certain situations. ~~Finally, the law provides additional flexibility for~~In 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 Northwest 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 ~~Act authorizes~~requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve Board to establish cash reserve requirements on depository institutions based on transaction accounts and non-personal time deposits. These reserves may be in 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. On March 15, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent effective on March 26, 2020, ~~thereby eliminating~~to support lending to households and businesses. At December 31, 2021, the Bank was in compliance with the reserve requirements ~~for all depository institutions.~~in place at that time.

Affiliate Transactions. First Financial Northwest and First Financial Northwest 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 Northwest 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 ~~and~~plus surplus and, with respect to all affiliates, to an aggregate of 20% of the

bank’s capital ~~and~~plus 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, 15% of the institution’s unimpaired capital ~~and~~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 ~~and~~plus surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, ~~2020,~~2021, First Financial Northwest Bank was in compliance with these restrictions.

Community Reinvestment Act. First Financial Northwest 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 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. An unsatisfactory rating may be the basis for denial of certain applications. First Financial Northwest Bank received ~~a “satisfactory”~~an “outstanding” rating during its most recent CRA examination.

Dividends. The amount of dividends payable by First Financial Northwest Bank to First Financial Northwest depends upon First Financial Northwest Bank’s earnings and capital position, and is limited by federal and state laws, regulations and policies. According to Washington law, First Financial Northwest 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 Northwest Bank is in default in payment of any assessments due to the FDIC. Dividends on First Financial Northwest Bank’s capital stock may not be paid in an aggregate amount greater than the aggregate retained earnings of First Financial Northwest 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 Northwest 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. ~~First Financial Northwest Bank is subject to FDIC regulations implementing the privacy protection provisions of the~~The Gramm-Leach-Bliley Financial Services Modernization Act of ~~1999.~~1999 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. Federal banking agencies, including the FDIC, have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the 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 Northwest 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 First Financial Northwest 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 is 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 ~~CFPB~~Consumer Financial Protection Bureau (“CFPB”) and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. First Financial Northwest 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 Northwest 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 Northwest 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 Northwest 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 Northwest 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 semi-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 Northwest 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. The Federal Reserve must approve the acquisition (or acquisition of control) of a bank or other FDIC-insured depository institution by a bank holding company, and the appropriate federal banking regulator must approve a bank’s acquisition (or acquisition of control) of another bank or other FDIC-insured institution.

Acquisition of Control of a Bank Holding Company. Under federal law, a notice or application must be submitted to the appropriate 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 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. 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 conservation buffer requirement can also limit dividends. For additional information, see Item 1.A. “Risk Factors – Risks Related to Regulatory and Compliance Matters-Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions” 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, ~~2020,~~2021, First Financial Northwest repurchased ~~544,626~~704,950 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.

~~Recent Regulatory Reform.~~COVID-19 Legislation. In response to the COVID-19 pandemic, ~~the United States~~ Congress, through the enactment of the CARES Act and ~~the~~ CAA, ~~2021,~~ and the federal banking agencies, though rulemaking, interpretive guidance and modifications to agency policies and procedures, have taken a series of actions to provide national emergency economic relief measures including, among others, the ~~following:~~

•~~The~~ CARES Act ~~as amended by the~~and CAA, 2021, allows banks to elect to suspend requirements under GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a TDR, including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or, January 1, 2022. The suspension of GAAP is applicable for the entire term of the modification. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 by providing that short-term modifications made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification is implemented is not a TDR. The Bank is applying this guidance to qualifying COVID-19 modifications. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – COVID-19 Related Information” for further information about the COVID-19 modifications completed by the Bank.

•2021.The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund payroll and operational costs of eligible businesses, organizations and self-employed persons during COVID-19. The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans and are eligible for SBA repayment and loan forgiveness if the

borrower meets the PPP conditions. The application period for a PPP loan closed on August 8, 2020. The SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders on October 2, 2020. The CAA, 2021 which was signed into law on December 27, 2020, renews and extends the PPP until March 31, 2021. As a result, as a participating lender, the Bank began originating PPP loans again in January 2021 and will continue to monitor legislative, regulatory, and supervisory developments related to the PPP.

•Pursuant to the CARES Act, the federal banking agencies authorities adopted in April 2020 an interim rule, effective until the earlier of the termination of the coronavirus emergency declaration by the president and December 31, 2020, to (i) reduce the minimum CBLR from 9% to 8%, and (ii) give community banks a two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%. Effective October 1, 2020, the final rule adopted by the federal banking agencies authorities lowers the CBLR as set forth in the interim rule and provides a gradual transition back to the prior level. Under the final rule, the CBLR was 8% for 2020, and will be 8.5% for 2021, and 9% beginning January 1, 2022. The final rule also retains the grace period. A community banking organization that falls below the CBLR will still be deemed to be well capitalized during a two-quarter grace period so long as the banking organization maintains a CBLR greater than 7.5% during 2021, and greater than 8% thereafter .

As the on-going COVID-19 pandemic evolves, federal and state regulatory authorities continue to issue additional guidance with respect to ~~the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for~~ COVID-19.In addition, it is possible that ~~the United States~~ Congress will enact ~~supplementary~~additional COVID-19 response legislation. ~~The Company continues~~We will continue to assess the impact of the CARES Act, CAA, 2021 and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.

Taxation

Federal Taxation

General. First Financial Northwest and First Financial Northwest Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to First Financial Northwest or First Financial Northwest Bank. The tax years still open for review by the Internal Revenue Service ~~are 2017~~are 2018 through ~~2020.~~2021.

First Financial Northwest files a consolidated federal income tax return with First Financial Northwest 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.

Method of Accounting. For federal income tax purposes, First Financial Northwest 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.

Net Operating Loss Carryovers. A financial institution may carryforward net operating losses indefinitely. The Company had no net operating loss carryforwards at December 31, ~~2020.~~2021.

Corporate Dividends-Received Deduction. First Financial Northwest may eliminate from its income dividends received from First Financial Northwest Bank as a wholly-owned subsidiary of First Financial Northwest that files a consolidated return with First Financial Northwest 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 1213 of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

State Taxation

First Financial Northwest and its subsidiaries are subject to a business and occupation tax imposed under Washington state law at the rate of 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. The Company no longer had employees or real estate located in California in 2018, so therefore, filed its final California state tax return for 2018.

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 Bank is set forth below.

Joseph W. Kiley III, age ~~65,~~66, has served as President and Chief Executive Officer of First Financial and First Financial Diversified since September 2013; as director of First Financial and First Financial Diversified since December 2012; and as President, Chief Executive Officer and director of First Financial Northwest Bank since September 2012. He previously served as President, Chief Executive Officer, and director of Frontier Bank, F.S.B., Palm Desert, California, and its holding company, Western Community Bancshares, Inc. Mr. Kiley has over 30 years of executive experience at banks, thrifts and their holding companies that includes, 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 past Chair of the Board of Directors of the Renton Chamber of Commerce. He is the Chairman of the Board of Directors of the Washington Bankers ~~Association (WBA).~~Association. In addition, Mr. Kiley currently serves on the Board of Directors of the Western Bankers ~~Association~~ and its Executive Committee.

Richard P. Jacobson, age ~~57,~~58, has served as Chief Operating Officer of First Financial Northwest Bank since July 2013, and as Chief Financial Officer of First Financial Northwest, First Financial Diversified, and the Bank since August 2013. He was appointed as a director of First Financial, First Financial Diversified and the Bank effective September 2013. Mr. Jacobson served as a consultant to First Financial from April 2010 to April 2012. Subsequently, he worked as a mortgage loan originator in Palm Desert, California from July 2012 to July 2013. Previously, he had been employed by Horizon Financial Corp. and Horizon Bank, Bellingham, Washington, for 23 years, and had served as President, Chief Executive Officer and a director of Horizon Financial Corp. and Horizon Bank from January 2008 to January 2010. Mr. Jacobson also served as Chief Financial Officer of Horizon Financial Corp. 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 state 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 Bankers Association’s National School of Banking. Mr. Jacobson is a past president of the Whatcom County North Rotary Club and has served on the boards of his church, the United Way, Boys and Girls Club, and Junior Achievement.

Simon Soh, age 5657, was appointed Senior Vice President and Chief Credit Officer of First Financial Northwest Bank 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 from October 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. 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 30 years of experience in commercial banking.

Ronnie J. Clariza, age 4041, was appointed Senior Vice President and Chief Risk Officer 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 ~~Washington Bankers’ Association Education Committee. He is also a past member of the Washington Bankers’ Association~~ Enterprise Risk Management ~~Committee,~~ and Education Committees for the Western Bankers and Washington Bankers Associations, respectively. He also served as a Volunteer Compliance Manager for the Seattle Children’s Hospital Guild Association.

Dalen D. Harrison, age ~~61,~~62, was promoted to ~~appointed~~ 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 from March 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 Saint Mary’s College in Moraga, California. Ms. Harrison has served on the boards of Rainier Pacific Foundation, First Place for Children, Gig Harbor Rotary Foundation, Renton Downtown Partnership, and Renton Area Youth and Family Services.

Christine A. Huestis, age 5556, is First Vice President, Controller and Principal Accounting Officer 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

The COVID-19 pandemic has adversely impacted our ability to conduct business which has adversely impacted our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The ~~worldwide~~ COVID-19 pandemic ~~has caused major~~continues to negatively impact economic ~~disruption~~ and ~~volatility in the~~commercial activity and financial markets, both inglobally and within the United States and globally and has negatively affected our operations and the banking and financial services we provide, primarily to businesses and individuals in the states of Washington where all of our branches are located.States. In our market areas, stay-at-home orders, ~~social distancing~~travel restrictions and ~~travel restrictions,~~closure of non-essential businesses and similar orders imposed across the United States to restrict the spread of COVID-19 in 2020 resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs. ~~While the~~Although local jurisdictions have subsequently lifted stay-at-home orders ~~have terminated or been phased-out along with reopening~~and moved to the opening of businesses, ~~in certain markets, most localities in which we operate still apply capacity restrictions~~worker shortages, vaccine and testing requirements, new variants of COVID-19 and other health and safety recommendations ~~that encourage continued social distancing and working remotely, limiting~~have impacted the ability of businesses to return to pre-pandemic levels of ~~activity. As an essential business, we~~activity and employment. While the overall economy has improved, disruptions to supply chains continue ~~to provide banking~~ and ~~financial services to~~significant inflation has been seen in the market. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our customers at all of our branch locations. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. To further the well-being of staff and customers, we have implemented measures to allow employees to work from home to the extent practicable. Despite these efforts, if the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

Currently some of our employees are working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may, however, result from these work-from-home arrangements. We alsoForm 10-K could be ~~adversely affected if key personnel or a significant number~~exacerbated, including the following risks of ~~employees were to become unavailable due to the effects and restrictions of the~~ COVID-19, ~~pandemic. Further, we also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If~~ any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. We have business continuity plans and other safeguards in place, however, there is no assurance that such plans and safeguards will be effective.

To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the PPP, and has impacted both deposit availability and market interest rates and negatively impacted many of our business and consumer borrowers’ ability to make their loan payments. Because the length of the pandemic and the efficacy of the extraordinary measures being put in place to address the economic consequences are

~~unknown, including a continued low targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will continue to be adversely affected.~~

The impact of the pandemic is expected to continue to adversely affect us during 2021 as the ability of many of our borrowers to make loan payments has been significantly affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as revenue declined precipitously, especially in businesses related to travel, hospitality, leisure, and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. If COVID-19 continues to spread or the responses to contain it are unsuccessful, it may result in increased loan delinquencies, adversely classified loans and loan charge-offs. As a result, our ALLL may prove to be insufficient to absorb losses in our loan portfolio, which ~~would cause our results of operations, liquidity and financial condition to be adversely affected.~~

In accordance with GAAP, we record assets acquired and liabilities assumed at their fair value with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. If adverse economic conditions or the related decrease in our stock price and market capitalization as a result of the pandemic were to be deemed sustained rather than temporary, it may significantly affect the fair value of our goodwill and may trigger impairment charges. Any impairment charge could have a material, adverse effect on our business, financial condition, liquidity, and results of operations ~~and financial condition.~~of the Company:

~~The ultimate impact~~•effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating our financial reporting and internal controls;

•declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by us;

•if the economy is unable to remain open in an efficient manner, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•our ALLL may increase if borrowers experience financial difficulties, which will adversely affect net income;

•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

•as long as the Federal Reserve Board’s target federal funds rate remains near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;

•higher operating costs, increased cybersecurity risks and potential loss of productivity as the result of an increase in the number of employees working remotely;

•increasing or protracted volatility in the price of the ~~COVID-19 pandemic~~Company’s common stock, which may also impair our goodwill; and

•risks to the capital markets that may impact the performance of our investment securities portfolio, as well as limit our access to capital markets and other funding sources.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, ~~results of~~ operations, ~~and financial condition,~~or the global economy as ~~well as our regulatory capital and liquidity ratios,~~a whole. Any future development will ~~depend on future developments, which are~~be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, possible future virus variants, the effectiveness of our work-from-home arrangements, third party providers’ ability to support our operations, and any actions taken by governmental authorities and other third parties in response to the ~~pandemic, including recent vaccination efforts. Even after the COVID-19 pandemic subsides, the U.S. economy may experience a recession, and we anticipate our business would be~~pandemic. The uncertain future development of this crisis could materially and adversely ~~affected by a prolonged recession. To the extent the COVID-19 pandemic adversely affects~~affect our business, operations, operating results, financial condition, liquidity or ~~results of operations, it may also have the effect of heightening many of the other risk factors described in this section.~~capital levels.

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 ~~87.4%~~87.1% of loans to borrowers or secured by properties located in Washington and ~~12.6%~~12.9% of loans to borrowers or secured by properties in other states. Through our efforts to geographically diversify our loan portfolio, at December 31, 2021, our portfolio includes ~~$140.7~~$144.1 million of loans to borrowers or secured by properties located in 43 other states and Washington, D.C., including ~~at December 31, 2020, $34.8~~$38.7 million, or ~~3.1%~~3.5% 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 has adversely affected many businesses operating in our markets that are dependent upon international trade 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.

A deterioration in economic conditions in the market areas we serve, 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 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.

In this regard, The Boeing Company has a significant presence in our market area and the production facility for the 737 MAX commercial jet aircraft is located in Renton. The 2019 grounding and decline in production of the 737 MAX commercial jet aircraft (production of which was suspended entirely in January 2020), has adversely affected Boeing, its employees and its suppliers, as well as other local businesses and their employees. Although production and new orders have resumed, until volumes return to pre-grounding levels, there may be an adverse impact on the ability of those borrowers impacted by the suspension of the production of the 737 MAX commercial jet to repay their existing loans to the Bank and demand for new loans may be reduced which could adversely affect the level of our nonperforming loans, deposits, financial condition and profitability.

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.

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, ~~2020,~~2021, construction/land loans totaled ~~$92.2~~$93.5 million, or ~~8.3%~~8.4% of our total loan portfolio, ~~a decrease~~an increase of ~~$21.5~~$1.2 million or ~~18.9%~~1.4% since December 31, ~~2019.~~2020. At December 31, ~~2020, $33.4~~2021, $34.7 million were one-to-four family construction loans, ~~$51.2~~$37.2 million were multifamily construction loans, and ~~$5.8~~$6.2 million were commercial construction loans. Land loans, which are loans made with land as security, totaled ~~$1.8~~$15.4 million, or ~~less than one percent~~1.4% of our total loan portfolio at December 31, ~~2020.~~2021. 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. The 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 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 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, ~~2020, $33.4~~2021, $37.2 million of our construction/land loans were for speculative construction loans. All of our permanent construction loans have a take-out commitment for a permanent loan with us. At December 31, ~~2020,~~2021, 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, ~~2020,~~2021, we had ~~$385.3~~$419.4 million of commercial real estate loans, representing ~~34.5%~~37.5% of our total loan portfolio and ~~$136.7~~$130.1 million of multifamily loans, representing ~~12.2%~~11.6% 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‑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, 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 has a concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land represented ~~390.1%~~384.0% of total ~~risk-based~~ capital at December 31, ~~2020.~~2021. 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, ~~2020, $175.6~~2021, $199.8 million, or ~~46.0%~~51.9% of our one-to-four family residential loan portfolio and ~~15.7%~~17.8% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. ~~At December 31, 2020, one of our non-owner occupied one-to-four family residential loans, with a balance of $159,000, was past due 30-59 days.~~ 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, ~~2020,~~2021, we had 95116 non-owner occupied residential loan relationships with an outstanding balance over $500,000 and an aggregate balance of ~~$141.4~~$166.9 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.

~~Loans originated under the SBA Paycheck Protection Program subject us to credit, forgiveness and guarantee risk.~~

As of December 31, 2020, we hold and service a portfolio of 372 loans originated under the PPP with a balance of $41.3 million. The PPP loans are subject to the provisions of the CARES Act and CAA, 2021 and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We have credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. We could face additional risks in our administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness, depending on the final procedures for determining loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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

At December 31, ~~2020, $382.0~~2021, $385.1 million, or ~~34.2%~~34.4% of our total loan portfolio, was secured by first liens on one‑to‑four family residential loans. In addition, at December 31, ~~2020,~~2021, our home equity lines of credit totaled ~~$9.8~~$8.5 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 ~~$548,000~~$647,000 to ~~$776,000~~ $891,000 for single‑family homes in our primary market areas in ~~2021)~~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

potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.

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, ~~2020,~~2021, our loan portfolio included ~~$84.4~~$90.2 million, or ~~7.6%~~8.1% of total loans, located in counties within Washington State that are outside of our primary market area. In addition, our portfolio included ~~$140.1~~$144.1 million, or ~~12.6%~~12.9% 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.

We engage in aircraft, classic and collectible car financing transactions, in which high-value collateral is susceptible to potential catastrophic loss. Consequently, if any of these transactions becomes nonperforming, we could suffer a loss on 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 these loans ultimately may be dependent on the value of the 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. Classic and collectible car values are similarly affected by availability and ~~demand. As a result of~~demand, however, due to the unique nature of ~~classic and collectible~~these cars, ~~their~~the estimated value often does not align with ~~their~~ listed ~~values.~~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 of 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 loan. Moreover, a relatively small number of nonperforming loans could have a significant negative impact on the value of our loan portfolio. If we are required to liquidate a significant amount of aircraft or classic car collateral during a period of reduced values, our financial condition and profitability could be adversely affected. At December 31, ~~2020,~~2021, our loan portfolio included ~~$29.4~~$35.9 million in classic and collectible car loans and ~~$10.8~~$6.1 million in aircraft loans.

Our ALLL 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.

Our 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 loan 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 which is charged against income. Deterioration in economic conditions, including as a result of COVID-19, 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 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 a new accounting 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 only when they have been incurred and are probable, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. This accounting pronouncement is expected to be applicable to us for our first fiscal year after December 15, 2022. We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a ~~onetime~~one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations. 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 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. In March 2020, in response to the COVID-19 pandemic, the Federal Open Market Committee (“FOMC”) of the Federal Reserve reduced the targeted federal funds rate 150 basis points to a range of 0.00% to 0.25%. The reduction in the targeted federal funds rate has resulted in a decline in overall interest rates which has negatively impacted our net interest income. However, the FOMC has recently indicated it expects to increase rates starting in 2022, by implementing three one quarter point increases. If the Federal Reserve continues to hold the targeted federal funds rates at the current level, overall interest rates will likely decline, which may additionally negatively impact our net interest income. If the Federal ReserveFOMC increases the targeted federal funds rates, overall interest rates will likely rise, which will positively impact our net interest income but may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy. In addition, deflationary pressures, while possibly lowering our operational costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans which could negatively affect our financial performance.

We principally manage interest rate risk by managing ~~our~~the volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect (i) our ability to originate and/or sell loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, which could negatively impact shareholders’ equity, and our ability to realize gains from the sale of such assets, (iii) our ability to obtain and retain deposits in competition with other available investment alternatives, (iv) the ability of our borrowers to repay adjustable or

variable rate loans, and (v) the average duration of our investment securities portfolio and other interest-earning assets. 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. 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.~~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 ~~decline,~~increase, the yield we earn on our assets may ~~decline faster than~~not rise as fast as our funding costs, causing our net interest margin to contract until the ~~funding costs~~asset yields catch up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, 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,~~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 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, ~~2020, 51.5%~~2021, 57.2% of our net loans were comprised of adjustable-rate loans. At that date, ~~$362.8~~$444.0 million, or ~~63.1%~~69.3%, of these loans with an average interest rate of ~~4.54%~~4.27% 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 and in particular 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 our results of operations, 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.

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.

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 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, ~~2020,~~2021, we had interest rate swaps outstanding with an aggregate notional amount of ~~$120.0~~$95.0 million. At December 31, ~~2020,~~2021, the fair value of our interest rate swaps was a ~~$2.8~~$1.5 million ~~loss.~~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.

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, and changes in market interest rates and continued instability in the capital markets. 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. 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, ~~2020,~~2021, we did not incur any other-than-temporary impairments on our securities portfolio.

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. During 2020, the Company liquidated the portfolio of brokered certificates of deposit through calls and maturities and carried a zero balance at December 31, 2020. However, the Company may utilize these deposits in the future to meet our funding needs. 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 fourteen branch locations in operation during 2020, 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, 2020, $409.6 million, or 37.4%, of our total deposits were retail certificates of deposit and, of that amount, $345.0 million were “jumbo” certificates greater than or equal to $100,000, with $135.6 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.

Risks Related to our Business Strategy

Our branching strategy may cause our expenses to increase faster than revenues.

During ~~2020,~~2021, we opened ~~two~~one new branch ~~offices in University Place, Washington and Gig Harbor, Washington. In addition, the Bank opened our fifteenth branch in March 2021,~~office in Issaquah, Washington. Our current business strategy includes continued similar branch expansion in areas to enhance our market presence. These offices are much smaller than traditional bank branch offices, utilizing the improved technology available with our core data processor. This allows us to maintain management’s focus on efficiency, while working to expand the Bank’s 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 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 ~~the~~any additional branch properties. Further, the projected time line and the estimated dollar amounts involved in opening de novo branches could differ significantly from actual results. The success of our acquired 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

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. 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.

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 designed 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.

Risks Related to Cybersecurity, Data and 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.

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 compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our ~~clients~~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. Although 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 losses 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, financial condition and results of operations.

Our security measures may not protect us from system 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.

We 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 not 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.

The board of directors oversees the risk management process including the risk of cybersecurity and engages with management on cybersecurity issues.

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.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us 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 our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other 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.

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 ~~our~~their vendors’ performance, including aspects which they delegate to third parties.

~~Uncertainty relating~~We will be required to transition from the ~~LIBOR calculation process and potential phasing out~~use of ~~LIBOR may adversely affect our results of operations.~~

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. The continued availability of the LIBOR index is not guaranteed after ~~2021.~~2021 and by June 2023, LIBOR is scheduled to be eliminated entirely. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. 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) and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question and the future of LIBOR remains uncertain at this time. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. 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 ~~LIBOR~~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 ~~are no longer available, and we are required~~ to ~~implement~~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 we may ~~incur~~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 ~~be subject to~~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. Although we have historically been able to replace maturing deposits and borrowings if desired, 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.

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, we 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.

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 an entity separate and distinct from our principal subsidiary, First Financial Northwest Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. First Financial Northwest Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements, including the capital conservation buffer requirement. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock or continue our stock repurchases. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

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. These factors could impair our working relationships with government agencies, regulators, investors, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers and employees, significantly harm our stock price and ability to raise capital, and adversely affect our results of operations.

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.

Item 2. Properties

The corporate office for First Financial Northwest and First Financial Northwest Bank 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. In addition, the Bank owns a retail office located at 17424 SR 9, Snohomish, Washington. At December 31, ~~2020,~~2021, the Bank had ~~twelve~~thirteen leased locations in Washington currently in operation: Mill Creek, Edmonds, “The Landing” in Renton, Bellevue, Bothell, Woodinville, Smokey Point, Lake Stevens, Kent, Kirkland, University Place, Gig Harbor, and ~~Gig Harbor. In addition, the Bank opened a location in Issaquah, Washington, in March 2021.~~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 ~~14-~~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, ~~2020,~~2021, 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, ~~2020,~~2021, there ~~were 9.7~~were 9.1 million shares of common stock issued and outstanding and we had ~~502~~484 shareholders of record, excluding persons or entities that hold ~~stock~~stock in nominee or “street name” accounts with brokers. Our cash dividend payout policy is reviewed regularly by management and the Board of Directors. As of December 31, ~~2020,~~2021, our board of directors had declared ~~31 consecutive~~ 35 consecutive quarterly cash dividends on our common stock. 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 future payment of dividends may depend, in part, upon receipt of dividends from the Bank, which are restricted by federal regulations.

Stock Repurchases

The Company’s Board of Directors authorized a stock repurchase plan that began on ~~January 27, 2020,~~February 1, 2021 and expired on ~~July 27, 2020.~~August 13, 2021. The plan authorized the repurchase of up to ~~513,000~~486,000 shares of the Company’s common stock. At the expiration of the plan, the Company had repurchased ~~214,845~~268,286 shares authorized at an average price of ~~$11.13~~$14.97 per share.

In addition, the Company’s Board of Directors authorized on August 16, 2021, a stock repurchase plan that ~~began~~commenced on ~~July 30, 2020~~August 16, 2021 and expired on ~~January 31, 2021.~~February 15, 2022. The plan authorized the repurchase of up to 476,000 shares of the Company’s common stock. At the expiration of this plan, the Company had repurchased ~~329,781~~459,732 shares at an average price of ~~$9.98~~$16.83 per share.

The following table represents the share repurchased during the fourth quarter ended December 31, ~~2020.~~2021.

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, 2020 — $ — — 353,951
November 1 - November 30, 2020 156,392 10.30 156,392 197,559
December 1 - December 31, 2020 18,340 11.10 18,340 179,219
Total 174,732 10.38 174,732 179,219


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, 2021	—	$	—	—	431,658
November 1 - November 30, 2021	349,677	16.88		349,677	81,981
December 1 - December 31, 2021	42,645	16.87		42,645	39,336
Total	392,322	16.88		392,322	39,336

On ~~December 21, 2020,~~February 11, 2022, the Company’s Board of Directors authorized the repurchase of up to ~~five percent (5%)~~5.0% of the Company’s outstanding common stock, or approximately ~~486,000~~455,000 shares beginning no earlier than February ~~1, 2021,~~18, 2022, and ~~ending~~expiring no later

than August ~~13, 2021.~~17, 2022. The Company will purchase the shares from time to time in the open market or through privately negotiated transactions depending on market conditions and other corporate considerations.

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.

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, 2015, and is the base amount used in the graph. The closing price of First Financial Northwest’s common stock on December 31, 2020 was $11.40.

Period Ended
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
First Financial Northwest, Inc. 100.00 143.83 114.81 116.59 115.30 91.48
Russell 2000 Index 100.00 121.31 139.08 123.76 155.35 186.36
SNL Thrift Index 100.00 122.49 121.60 102.42 126.10 116.21
SNL Micro Cap U.S. Bank Index 100.00 122.94 150.40 142.71 159.37 119.72

Item 6. ~~Selected Financial Data~~

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,
2020 2019 2018 2017 2016
FINANCIAL CONDITION DATA: (In thousands, except share data)
Total assets $ 1,387,669 $ 1,341,885 $ 1,252,424 $ 1,210,229 $ 1,037,584
Investments available-for-sale 127,551 136,601 142,170 132,242 129,260
Loans receivable, net (1)
1,100,582 1,108,462 1,022,904 988,662 815,043
Deposits 1,093,633 1,033,534 939,032 839,502 717,476
Advances from the FHLB 120,000 137,700 146,500 216,000 171,500
Stockholders’ equity 156,302 156,319 153,738 142,634 138,125
OPERATING DATA:
Interest income $ 56,114 $ 59,620 $ 55,913 $ 47,644 $ 41,709
Interest expense 15,645 20,712 14,738 10,022 7,507
Net interest income 40,469 38,908 41,175 37,622 34,202
Provision (Recapture of provision) for loan losses 1,900 (300) (4,000) (400) 1,300
Net interest income after provision (recapture of provision) for loan losses 38,569 39,208 45,175 38,022 32,902
Noninterest income 4,442 4,141 2,878 2,208 2,651
Noninterest expense 32,513 30,418 29,461 26,809 22,949
Income before provision for federal income taxes 10,498 12,931 18,592 13,421 12,604
Provision for federal income taxes 1,942 2,562 3,693 4,942 3,712
Net income $ 8,556 $ 10,369 $ 14,899 $ 8,479 $ 8,892
Basic earnings per share $ 0.88 $ 1.04 $ 1.44 $ 0.82 $ 0.75
Diluted earnings per share $ 0.88 $ 1.03 $ 1.43 $ 0.81 $ 0.74

~~___________________~~

~~(1)~~ ~~Net of ALLL, LIP and deferred loan fees and costs.~~

At or For the Year Ended December 31,
KEY FINANCIAL RATIOS: 2020 2019 2018 2017 2016
Performance Ratios:
Return on assets 0.63 % 0.80 % 1.21 % 0.76 % 0.88 %
Return on equity 5.50 6.73 9.86 5.94 5.55
Dividend payout ratio 45.45 33.65 21.53 32.93 32.02
Equity-to-assets ratio 11.26 11.65 12.28 11.79 13.31
Net interest margin 3.15 3.19 3.56 3.60 3.60
Average interest-earning assets to average interest-bearing
liabilities 115.62 113.44 114.28 114.07 117.11
Efficiency ratio 72.39 70.66 66.88 67.31 62.27
Noninterest expense as a percent of average total assets 2.39 2.35 2.40 2.42 2.27
Book value per common share $ 16.05 $ 15.25 $ 14.35 $ 13.27 $ 12.63
Capital Ratios: (1)
Tier 1 leverage 10.29 % 10.27 % 10.37 % 10.20 % 11.17 %
Common equity tier 1 14.32 13.13 13.43 12.52 14.36
Tier 1 capital ratio 14.32 13.13 13.43 12.52 14.36
Total capital ratio 15.57 14.38 14.68 13.77 15.61
Asset Quality Ratios: (2)
Nonperforming loans as a percent of total loans 0.19 0.01 0.07 0.02 0.10
Nonperforming assets as a percent of total assets 0.18 0.04 0.10 0.05 0.31
ALLL as a percent of total loans 1.36 1.18 1.29 1.28 1.32
ALLL as a percent of nonperforming loans 721.20 13,913.68 1,774.87 7,196.65 1,276.34
Net recoveries to average loans receivable, net — (0.02) (0.45) (0.27) (0.02)

~~_______________~~

~~(1)~~ ~~Capital ratios are for First Financial Northwest Bank only.~~

~~(2)~~ ~~Loans are reported net of LIP.~~Reserved

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, ~~2020~~2021 and ~~2019,~~2020, 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, ~~2019~~2020 and ~~2018~~2019 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, ~~2019.~~2020.

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 Northwest 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 and Kitsap counties, Washington through its full-service banking office and headquarters in Renton, Washington, as well as ~~six~~seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington at December 31, ~~2020.~~2021. The Bank purchased four of these branches in 2017 and acquired $74.7 million in deposits (the “Branch 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 opened a new branch office in Issaquah, Washington in March 2021.~~

The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the ~~Federal Home Loan Bank~~FHLB of Des Moines ~~(“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~~During 2021, loan originations, refinances and ~~loans with adjustable interest rates. During 2020,~~purchases moderately outpaced repayments of loans, ~~moderately outpaced originations~~resulting in a small increase of ~~new loans and refinances, resulting in~~$2.9 million to net loans receivable with ending balances of $1.10 billion at December 31, ~~2020, as compared to $1.11 billion at December 31, 2019.~~2021, and 2020. Originations of construction/land loans were $72.8 million in 2021 as compared to $62.4 million in 2020, ~~as compared to $110.0 million in 2019,~~ resulting in this portfolio ~~decreasing~~increasing to $93.5 million at December 31, 2021, as compared to $92.2 million at December 31, ~~2020 as compared to $113.7 million at December 31, 2019.~~2020. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in ~~six~~12 to ~~eighteen~~24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term.

We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans, as well as consumer classic car loans, that are outside of our primary market area. Through our efforts to geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes ~~$140.7~~$144.1 million of loans to borrowers or secured by properties located in 43 other states, ~~including~~plus Washington, D.C., with the largest concentrations ~~in California, Utah, Oregon, Georgia and Florida of $34.8 million, $16.0 million, $11.4 million, $8.4 million and $8.0 million, respectively~~ at December 31, ~~2020.~~2021, in California, Oregon, Texas, Florida, and Alabama of $38.7 million, $12.1 million, $10.8 million, $9.2 million and $8.1 million, respectively.

The Bank has also created an SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the investment in necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans or equipment financing. 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, ~~2020,~~2021, was ~~$8.6~~$12.2 million, or ~~$0.88~~$1.29 per diluted share, compared to ~~$10.4~~$8.6 million, or ~~$1.03~~$0.88 per diluted share, for the year ended December 31, ~~2019.~~2020. The ~~most significant~~primary contributor to this ~~decrease~~increase was a ~~$2.2~~$4.5 million increase in net interest income as our decrease in interest expense exceeded the decrease in interest income. In addition, the provision for loan losses in ~~2020.~~2021 decreased $1.6 million to $300,000 as compared to 2020 primarily as a result of a $2.1 million increase in net loans receivable, changes in the composition of our loan portfolio and decreased historical loss factors and qualitative factors for certain loan categories as the expected economic factors utilized to calculate our general reserves for the ALLL and declines in the risk grades on certain loans, reflecting the probable loan losses due to the COVID-19 pandemic based upon the financial conditions and economic outlook that existed as of December 31, 2020. Net interest income increased by $1.6 million, primarilyimpact as a result of ~~reductions~~the COVID-19 pandemic to the credit quality of our loan portfolio has diminished this year. For the year ended December 31, 2020, we had a provision of $1.9 million, primarily the result of the downgrade in the ~~cost~~loan risk ratings of ~~our deposit liabilities. Noninterest~~$61.0 million of loans, primarily loans receiving an additional COVID-19 related payment deferral under the CARES Act combined with increases in probable loan losses for all loan categories in response to the economic disruption caused by the COVID-19 pandemic, with higher potential impact allocated to commercial real estate and construction/land portfolios. Partially offsetting these improvements, noninterest income decreased $580,000 and noninterest expenses increased ~~by $2.1 million, reflecting continued growth in our operations.~~$854,000.

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income. First Financial Northwest Bank is ~~generally liability-sensitive,~~currently slightly asset-sensitive, meaning our ~~interest-bearing liabilities~~interest-earning assets reprice at a faster rate than our ~~interest-earning assets.~~interest-bearing liabilities. The ~~significant 150 basis point reduction~~Bank had a modest improvement in the ~~targeted federal funds rate during the quarter ended March 31, 2020 resulted in a larger impact to our interest-earning assets than to our interest-bearing liabilities, thereby decreasing our~~ net interest margin over the last year. The cost of funds has declined substantially due to ~~3.15% for~~ the ~~year ended December 31, 2020,~~higher levels of noninterest-bearing deposits, the repricing of retail certificates of deposit at much lower market rates, and the payoff of all brokered certificates of deposit in 2020. Loan yields in 2021 were impacted favorably as ~~compared to 3.19% for the year ended December 31, 2019. In addition, our net interest margin was adversely impacted~~a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the ~~low loan yields from~~SBA. If market interest rates remain near historic lows, the ~~PPP loan portfolio. The ongoing low interest rate environment is expected to continue to put~~Company expects continued downward pressure on loan ~~yields and the yields on other floating rate interest earning assets as well.~~yields. Further, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures put in place to address its economic consequences are unknown, until the pandemic subsides, the ~~Company expects its~~Company’s net interest income and net interest margin may be adversely affected in the near term, if not longer.

An offset to net interest income is the provision for loan losses, or the recapture of the provision for loan losses, that is required to establish the ALLL at a level that adequately provides for probable losses inherent in our loan portfolio. As our loan portfolio increases, or due to an increase for probable losses inherent in our loan portfolio, our ALLL may increase, resulting in a decrease to net interest income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ALLL due to loan growth or an increase in probable loan losses. For the year ended December 31, 2020, we had a provision of $1.9 million as compared to a recapture of provision of $300,000 for the year ended December 31, 2019. The provision was primarily the result of ~~the downgrade in the loan risk ratings of~~ ~~$61.0 million of loans, primarily loans receiving an additional COVID-19 related~~

payment deferral under the CARES Act combined with increases in probable loan losses for all loan categories in response to the economic disruption caused by the COVID-19 pandemic, with higher potential impact allocated to commercial real estate and construction/land portfolios. The recapture of provision for loan losses in 2019 was primarily the result of a construction/land loan with a balance of $12.5 million at December 31, 2019, that was technically in default and classified as impaired, however, the Bank’s impairment analysis concluded there were no anticipated losses from the loan at that time, and therefore, funds previously allocated in the ALLL to this loan were recaptured. The construction portion of this loan was fully funded and completed in 2020, and was rolled into a permanent commercial real estate loan. At December 31, 2020, this loan was current on its payments and was performing according to the terms of the loan. We will continue to monitor our loan portfolio and make adjustments to our ALLL as we deem necessary.

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 income is increased or partially offset by any net gain or loss on sales of investment securities. Our noninterest income ~~increased $301,000~~decreased $580,000 during the year ended December 31, ~~2020~~2021, as compared to ~~2019. The increase was~~2020, primarily attributable to a ~~$603,000 increase~~$682,000 decrease in loan related ~~fees, partially offset by a $216,000 decrease in the wealth management revenue and a $65,000 decrease in net gain on sales of investments.~~fees.

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 ~~$2.1 million~~$854,000 during the year ended December 31, ~~2020~~2021, as compared to ~~2019.~~2020. The increase was primarily attributable to a ~~$791,000 increase in data processing expenses, a $525,000~~$320,000 increase in occupancy and equipment, a $202,000 increase in other noninterest expenses, a $200,000 increase in OREO, and a ~~$444,000~~$198,000 increase in salaries and employee ~~benefits.~~benefits, partially offset by a $130,000 decrease in data processing expense.

COVID-19 Related Information

In response to the COVID-19 pandemic, the Bank is committed to providing assistance to its customers. Under the CARES Act, the Bank ~~is providing~~provided certain short-term loan modifications. In addition, the Bank ~~is participating~~participated in the Paycheck Protection Program (“PPP”) as a lender. Some of the PPP loans we originated were for our existing customers, however we also provided PPP loans to those in our community who have not had a banking relationship with us in the past. The initial deadline for PPP loan applications to the SBA was August 8, 2020. Under this program, we funded 462 applications totaling $52.1 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020. As of December 31, 2020, we had received approval for forgiveness on 146 PPP loans totaling $11.2 million. At December 31, 2020, the Bank held 372 PPP loans totaling $41.3 million to qualifying businesses in its market areas, which included $434,000 of forgiven loans awaiting payments from the SBA. The CAA, 2021 renewed and extended the PPP, ~~until March~~which ended on May 31, 2021. Under the second round of PPP funding, the Bank originated 261 PPP loans with an aggregate balance of $25.6 million. As of December 31, 2021, ~~by authorizing an additional $284.5 billion for the program. As a result, in January 2021, the Bank began accepting and processing loan applications under this second~~there were 67 PPP ~~program.~~loans outstanding totaling $10.8 million as compared to 372 PPP loans totaling $41.3 million at December 31, 2020. The SBA ~~has recently~~ released a simplified forgiveness process for PPP loans of $150,000 or less. At December 31, ~~2020the Bank held 307~~2021, 39 PPP loans have an outstanding balance of $150,000 or less, ~~with~~totaling $2.0 million, or 18.3% of PPP loans outstanding. Of these PPP loans, 24 loans totaling $484,000, 4.5% of PPP loans, have a ~~combined~~ balance of ~~$13.5 million.~~$50,000 or less. We will also continue working with our customers to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as appropriate.

The CARES Act and related bank regulatory guidance provided that short-term modifications of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications (e.g. generally up to 6 months) such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and ~~the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B)~~ January 1, 2022.

The primary method of relief granted by the Company iswas to allow the borrower to defer their loan payments for three to six months. Certain borrowers ~~are~~were allowed to pay interest only or have payment deferrals for periods longer than six months depending upon their specific circumstances. Deferred principal and interest amounts ~~are~~were added as a balloon payment due at the original maturity date or payoff of the loan.

At December 31, ~~2020, total~~2021, the Bank had no loans ~~with modifications granted were $45.2 million, or 4.0% of total~~still in deferral status and all loans ~~outstanding. At that date, $90.8 million of total loans receivable~~ that previously received a loan ~~modification had resumed making normal scheduled loan payments. As of December 31, 2020, $44.4 million in loans had been granted~~ modifications of greater than six months, of which $30.5 million were for loans in the hotel/motel category. In addition, eight loans, totaling $14.2 million, had been granted a second, third, or fourth payment deferment period.

~~The following table shows the balance of loans remaining on COVID-19 payment deferral modification at December 31, 2020, in accordance with the CARES Act:~~

Balance of loans deferred 4 to 6 months Balance of loans deferred longer than 6 months Total deferrals Total loans 12/31/20 % of loans on deferral as of 12/31/20
(Dollars in thousands)
One-to-four family residential $ 745 $ 1,027 $ 1,772 $ 381,960 0.5 %
Multifamily — 2,347 2,347 136,694 1.7 %
Commercial:
Office — — — 84,311 — %
Retail — 3,972 3,972 114,117 3.5 %
Mobile home park — 28,094 — %
Hotel/motel — 30,501 30,501 69,304 44.0 %
Nursing home — 6,368 6,368 12,868 49.5 %
Warehouse — — — 17,484 — %
Storage — — — 33,671 — %
Other non-residential — — — 25,416 — %
Total Commercial — 40,841 40,841 385,265 10.6 %
Construction/land — — — 92,207 — %
Business:
Aircraft — — — 10,811 — %
SBA — — — 928 — %
PPP — — — 41,251 — %
Other business — — — 27,673 — %
Total business — — — 80,663 — %
Consumer:
Classic/collectible auto — 190 190 29,359 0.6 %
Other consumer — — — 11,262 — %
Total consumer — 190 190 40,621 0.5 %
Total loans with COVID-19 pandemic modifications $ 745 $ 44,405 $ 45,150 $ 1,117,410 4.0 %

Total loans with modifications granted were $45.2 million, or 4.0% of total loans outstanding, at December 31, 2020, including $44.4 million in loans that had been granted modifications of greater than six months, of which $30.5 million were for loans in the hotel/motel category. Prior to their modifications, the loans included in the above table were current on their loan payments. ~~The Bank is monitoring its loan portfolio for delinquencies of loans that have not requested modifications under the CARES Act.~~

Business Strategy

Our long-term business strategy is to operate and grow First Financial Northwest 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.

As noted above, one of the Bank’s strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities consistent with its current risk tolerance levels and asset/liability objectives. The Bank has created an SBA department, with the goal of achieving SBA preferred lender status in 2021, which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans, equipment financing, and a focus on industry specific loans, such as green energy financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.

Critical Accounting Policies

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. The following are our critical accounting policies.

Allowance for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. 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 loans~~loan type concentrations, and other external factors such as competition, legal, and regulatory requirements in assessing the ALLL. Loans classified as substandard or placed on nonaccrual status are deemed to be collateral based loans. Specific allowances result when management performs an impairment analysis on a loan when ~~it determines it is probable~~management believes that all contractual amounts of principal and interest will not be paid as scheduled. ~~The~~Based on this impairment analysis, ~~usually occurs when a~~if the recorded investment in the loan ~~has been classified as substandard or placed on nonaccrual status or~~ is ~~a TDR because the borrower has been granted a rate concession. If~~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 ~~evaluation~~analysis is inherently subjective as it ~~requires~~relies 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 upon~~Loans classified as a ~~loan’s restructuring, based on~~TDR due to the borrower being granted a rate concession analyzed by 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 of~~recorded investment in the loan.

Our Board of Directors’ Internal Asset Review Committee reviews and recommends for approval the allowance for loan 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 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 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 1213 of the Notes to Consolidated Financial Statements contained in Item 8.

Other-Than-Temporary Impairments on 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 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. Financial Accounting Standards Board (“FASB”) 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 6 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 swaps as cash flow hedge derivative 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 derivatives are marked to their fair value through other comprehensive income. The net gain or loss on derivatives is reclassified into earnings in the same income statement line item that is used to present the earnings effect of hedged 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 is evaluated annually for

impairment, with any impairment recognized as noninterest expense. The ~~core deposit intangible~~CDI is amortized into noninterest expense.

Comparison of Financial Condition at December 31, ~~2020~~2021 and December 31, ~~2019~~2020

Assets. The following table details the changes in the composition of our assets at December 31, ~~2020~~2021 from December 31, ~~2019.~~2020.


		Balance at December 31, 2020		Change from December 31, 2019		Percentage Change			Balance at December 31, 2021		Balance at December 31, 2020		Change from December 31, 2020		Percentage Change
		(Dollars in thousands)							(Dollars in thousands)
Cash on hand and in banks	Cash on hand and in banks	$	7,995	$	(2,099)	(20.8)	%	Cash on hand and in banks	$	7,246	$	7,995	$	(749)	(9.4)	%
Interest-earning deposits	Interest-earning deposits	72,494		59,598		462.1		Interest-earning deposits	66,145		72,494		(6,349)		(8.8)
Investments available-for-sale, at fair value	Investments available-for-sale, at fair value	127,551		(9,050)		(6.6)		Investments available-for-sale, at fair value	168,948		127,551		41,397		32.5
Investments held-to-maturity		2,418		2,418		n/a
Investments held-to-maturity, at amortized cost								Investments held-to-maturity, at amortized cost	2,432		2,418		14		0.6
Loans receivable, net	Loans receivable, net	1,100,582		(7,880)		(0.7)		Loans receivable, net	1,103,461		1,100,582		2,879		0.3
FHLB stock, at cost	FHLB stock, at cost	6,410		(599)		(8.5)		FHLB stock, at cost	5,465		6,410		(945)		(14.7)
Accrued interest receivable	Accrued interest receivable	5,508		1,370		33.1		Accrued interest receivable	5,285		5,508		(223)		(4.0)
Deferred tax assets, net	Deferred tax assets, net	1,641		140		9.3		Deferred tax assets, net	850		1,641		(791)		(48.2)
OREO	OREO	454		—		—		OREO	—		454		(454)		(100.0)
Premises and equipment, net	Premises and equipment, net	22,579		113		0.5		Premises and equipment, net	22,440		22,579		(139)		(0.6)
BOLI	BOLI	33,034		1,052		3.3		BOLI	35,210		33,034		2,176		6.6
Prepaid expenses and other assets	Prepaid expenses and other assets	1,643		(573)		(25.9)		Prepaid expenses and other assets	3,628		1,643		1,985		120.8
ROU		3,647		1,438		65.1
Right of use asset (“ROU”), net								Right of use asset (“ROU”), net	3,646		3,647		(1)		—
Goodwill	Goodwill	889		—		—		Goodwill	889		889		—		—
Core deposit intangible		824		(144)		(14.9)
Core deposit intangible, net								Core deposit intangible, net	684		824		(140)		(17.0)
Total assets	Total assets	$	1,387,669	$	45,784	3.4	%	Total assets	$	1,426,329	$	1,387,669	$	38,660	2.8	%

The ~~$45.8~~$38.7 million increase in total assets during ~~2020~~2021 was primarily a result ~~$60.1~~of $63.8 million of deposit growth providing excess liquidity invested in ~~interest-earning deposits.~~investments available-for-sale. Additional factors in our asset growth are described below.

Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco, ~~increased~~decreased by ~~$59.6~~$6.3 million to ~~$72.5~~$66.1 million at December 31, ~~2020~~2021 from December 31, ~~2019. Loan repayments and deposit growth late in 2020 resulted in~~2020. During 2021, a portion of our cash surplus ~~funds~~ held at the Federal Reserve ~~at year end.~~was reinvested into higher earning assets. We monitor the balance of these funds daily in relation to our expected funding ~~needs and will reinvest the excess in higher interest-earning assets in 2021.~~needs.

Investments available-for-sale. ~~Our~~During 2021, investments available-for-sale ~~decreased by $9.1~~increased $41.4 million, or ~~6.6%~~32.5%, ~~during 2020.~~as excess liquidity generated by retail deposit growth was reinvested into higher yielding available-for-sale securities. During the year ended December 31, ~~2020,~~2021, we ~~had sales and maturities on $12.1~~purchased $37.3 million of ~~our~~fixed rate securities and $43.1 million of variable rate securities, with an average yield of ~~2.88%~~1.58%. ~~The~~Purchases included $34.7 million of mortgage-backed securities, $21.1 million of municipal securities, $12.7 million of U.S. government agency securities, and $12.0 million of corporate bonds. These purchases were partially offset by $20.0 million in proceeds from sales, calls and maturities of ~~investments available-for-sale generated~~securities with an average yield of 2.06%, generating a net gain of $86,000 for the year ended December 31, 2020. The proceeds were partially reinvested in $13.4 million of investments with an expected yield of 3.34%. The decrease in the targeted federal funds rate in the second half of 2019 and first quarter of 2020 contributed to a decrease in the average yield on investment securities to 2.42% for 2020 from 3.11% in 2019. Securities purchased in 2020 included $7.9 million in fixed rate and $5.5 million in variable rate securities.$32,000. In addition to the purchase and ~~redemption~~sale activity, we received principal repayments of ~~$12.8~~$20.0 million on our investments available-for-sale during ~~2020.~~2021.

The effective duration of our securities portfolio increased to ~~2.55%~~3.54% at December 31, ~~2020~~2021 as compared to ~~2.54%~~2.55% at December 31, ~~2019.~~2020. Effective duration ~~is a measure that attempts to quantify~~measures 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.

6554

Loans receivable. Net loans receivable ~~decreased~~increased by ~~$7.9~~$2.9 million during ~~2020~~2021 to $1.10 billion. During the year ended December 31, ~~2020, multifamily loans decreased $36.2 million, construction/land loans decreased $21.5 million and~~2021, commercial real estate loans ~~decreased $9.9 million. Partially offsetting these declines, business~~increased $34.2 million, one-to-four family loans increased ~~by $42.9~~$3.2 million, ~~or 113.5% increase, as a result of PPP~~and construction/land loans ~~originated during the year. The Bank originated PPP loans to both new and existing customers, and held $41.3 million of these loans at December 31, 2020.~~increased $1.2 million. In addition, consumer loans increased ~~$10.4~~$4.2 million ~~or 34.5%,~~ as the Bank ~~increased~~continued to increase its portfolio of classic or collectible car loans. Partially offsetting these increases, business loans decreased $34.1 million, primarily due to a $30.4 million decrease in PPP loans and $4.7 million decrease in aircraft loans. In addition, multifamily loans decreased $6.5 million.

During ~~2020,~~2021, we supplemented our loan originations and participations by purchasing ~~$22.1~~$46.4 million in loans, ~~which~~at an average premium of 3.4%. Loans purchased included ~~$19.4~~$20.3 million of performing classic or collectible car loans and $1.7 million of one-to-four family loans. ~~The~~In addition, a pool of 12 loans ~~were~~was purchased, ~~at an average premium of 3.6% and included $1.2~~totaling $24.4 million of loans secured by commercial real estate ~~property located~~ in ~~Connecticut, reflecting~~nine other states, further supporting our efforts to geographically diversify our loan portfolio with loans meeting our investment and credit quality objectives.

~~During 2020, our~~At December 31, 2021, the Bank had no nonaccrual loans as the $2.1 million nonperforming ~~loans increased to $2.1 million~~loan included at December 31, 2020, ~~from $95,000 at December 31, 2019. as a result~~was paid off in the second quarter of ~~one $2.1 million multifamily loan that was placed on nonaccrual status during 2020. Foreclosure proceedings~~2021. Included in the payoff settlement were ~~started during 2020, but~~$288,000 in past due interest and $106,000 in late charges, both reported in interest income. In addition, $84,000 of legal fees were ~~subsequently placed on hold as~~reimbursed to the ~~borrower has a purchase and sale agreement on the underlying collateralized property that is expected to close in March 2021. The Bank does not expect to incur a loss on this loan.~~Bank. Nonperforming loans as a percent of our total loans ~~increased~~decreased to 0.0% at December 31, 2021, from 0.19% at December 31, ~~2020, from 0.01% at December 31, 2019.~~2020. Adversely classified loans, defined as substandard or below, increased to $34.2 million at December 31, 2021, from $2.6 million at December 31, ~~2020,~~2020. These impaired loans have certain weaknesses as a result of ongoing negative impact from ~~$629,000 at December 31, 2019.~~ the COVID-19 pandemic to the businesses operating in the underlying collateral. The Bank is monitoring these loans closely and does not expect to incur any loss.

The following table presents a breakdown of our nonperforming assets:


		December 31,				Amount of Change		Percent of Change			December 31,				Amount of Change		Percent of Change
		2020		2019							2021		2020
		(Dollars in thousands)									(Dollars in thousands)
Nonperforming loans:	Nonperforming loans:									Nonperforming loans:
One-to-four family residential		$	—	$	95	$	(95)	(100.0)	%

Multifamily	Multifamily	2,104		—		2,104		100.0		Multifamily	$	—	$	2,104	$	(2,104)	(100.0)	%

Total nonperforming loans	Total nonperforming loans	2,104		95		2,009		2,114.7		Total nonperforming loans	—		2,104		(2,104)		(100.0)
OREO	OREO	454		454		—		—		OREO	—		454		(454)		(100.0)
Total nonperforming assets	Total nonperforming assets	$	2,558	$	549	$	2,009	365.9	%	Total nonperforming assets	$	—	$	2,558	$	(2,558)	(100.0)	%

We continued to focus on reducing our nonperforming assets through loan work outs or pursuing foreclosure. ~~Foregone~~The Bank had no foregone interest during the year ended December 31, ~~2020 relating to nonperforming loans totaled $82,000.~~2021, as the payoff of the $2.1 million loan during 2021 included all past due interest. There was no LIP related to nonperforming loans at December 31, ~~2020~~2021 or ~~2019.~~2020. During 2021, two properties that comprised our $454,000 OREO ~~remained~~balance at ~~$454,000 at both~~ December 31, 2020, ~~and 2019.~~were sold, resulting in a loss on sale of $207,000. We did not foreclose on any properties during either ~~2020~~2021 or ~~2019.~~2020. The ~~stability in~~level of our nonperforming assets reflects the ~~quality~~modest 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, ~~2020~~2021 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. Uncertainties relating to our ALLL are heightened as a result of the risks related to the COVID-19 pandemic.

The ALLL was $15.7 million, or 1.40% of total loans receivable at December 31, 2021, as compared to $15.2 million, or 1.36% of total loans receivable at December 31, ~~2020, as compared to $13.2 million, or 1.18% of total loans receivable at December 31, 2019.~~2020. The following table details activity and information related to the ALLL for the years ended December 31, ~~2020~~2021 and ~~2019.~~2020.


		At or For the Years Ended December 31,							At or For the Years Ended December 31,
		2020			2019				2021			2020
		(Dollars in thousands)							(Dollars in thousands)
ALLL balance at beginning of year	ALLL balance at beginning of year	$	13,218		$	13,347		ALLL balance at beginning of year	$	15,174		$	13,218
Provision (recapture of provision) for loan losses		1,900			(300)
Provision for loan losses								Provision for loan losses	300			1,900
Charge-offs	Charge-offs	(2)			—			Charge-offs	—			(2)
Recoveries	Recoveries	58			171			Recoveries	183			58
ALLL balance at end of year	ALLL balance at end of year	$	15,174		$	13,218		ALLL balance at end of year	$	15,657		$	15,174

ALLL as a percent of total loans	ALLL as a percent of total loans	1.36		%	1.18		%	ALLL as a percent of total loans	1.40		%	1.36		%
ALLL as a percent of nonperforming loans	ALLL as a percent of nonperforming loans	721.17		%	13,913.68		%	ALLL as a percent of nonperforming loans	—		%	721.17		%
Total nonperforming loans	Total nonperforming loans	$	2,104		$	95		Total nonperforming loans	$	—		$	2,104
Nonperforming loans as a percent of total loans	Nonperforming loans as a percent of total loans	0.19		%	0.01		%	Nonperforming loans as a percent of total loans	—		%	0.19		%
Total loans receivable	Total loans receivable	$	1,117,410		$	1,122,238		Total loans receivable	$	1,119,536		$	1,117,410
Total loans originated	Total loans originated	295,823			350,406			Total loans originated	308,454			295,823

Intangible assets. As a result of our Branch Acquisition in 2017, the Bank 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, ~~2020,~~2021, 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 as a result of the COVID-19 pandemic 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 party~~third-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 amortize into noninterest expense on an accelerated basis over ten years and had a balance of ~~$824,000~~$684,000 at December 31, ~~2020.~~2021.

Deposits. During the year ended December 31, ~~2020,~~2021, deposits increased ~~$60.1~~$63.8 million from December 31, ~~2019.~~2020. Details of deposit balances and their concentrations are as follows:


		December 31,									December 31,
		2020				2019					2021				2020
		(Dollars in thousands)									(Dollars in thousands)
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	91,285	8.3	%	$	52,849	5.1	%	Noninterest-bearing demand deposits	$	117,751	10.2	%	$	91,285	8.3	%
Interest-bearing demand	Interest-bearing demand	108,182		9.9		65,897		6.4		Interest-bearing demand	97,907		8.5		108,182		9.9
Statement savings		19,221		1.8		17,447		1.7
Savings										Savings	23,146		2.0		19,221		1.8
Money market	Money market	465,369		42.6		377,766		36.6		Money market	624,543		54.0		465,369		42.6
Certificates of deposit, retail	Certificates of deposit, retail	409,576		37.4		425,103		41.1		Certificates of deposit, retail	294,127		25.3		409,576		37.4
Certificates of deposit, brokered		—		—		94,472		9.1
Total deposits	Total deposits	$	1,093,633	100.0	%	$	1,033,534	100.0	%	Total deposits	$	1,157,474	100.0	%	$	1,093,633	100.0	%

The ~~$60.1~~$63.8 million growth in retail deposits during ~~2020~~2021 was primarily the result of ~~PPP disbursed funds remaining unused in borrower deposit accounts and due to~~ organic deposit growth as we continued to focus on core deposit growth. Money market accounts grew by $87.6 million as the Bank competitively priced these products to increase these funding sources. In addition, interest-bearing demand accounts grew by $42.3 million and noninterest-bearing demand accounts grew by $38.4$159.2 million, due in part to ~~deposits related~~a portion of our retail certificate of deposit customers opting for money market accounts compared to ~~PPP loans, as well as changes~~the other options available to them at the maturity of their certificate of deposit. Noninterest-bearing demand accounts grew by $26.5 million due primarily to growth in ~~customer spending habits as a result of COVID-19.~~business checking accounts, and interest-bearing demand accounts decreased by $10.3 million. Partially offsetting this growth, certificates of deposit decreased $15.5 million as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed runoff of these funds.

6756

~~During 2020,~~retail certificates of deposit decreased $115.4 million as continued growth in ~~retail deposits with our expanded branch network~~money market accounts allowed ~~the Bank~~us to reduce our dependence on the higher priced certificates of deposit in an effort to improve our cost of funds and overall deposit mix by becoming less reliant on certificates of deposit.

During 2021, retail deposit balances met our funding needs, therefore we did not need to utilize brokered certificates of deposit as a source of funds. In addition, the Bank exercised its call option on $24.5 million of brokered certificates of deposit, thereby reducing these brokered certificates of deposit to zero at December 31, 2020 from $94.4 million at December 31, 2019.deposit. While brokered certificates of deposit may carry a higher cost than our retail certificates, the Bank may utilize this source of funding in the future due to the enhanced call features on some of these deposits that assists us in our efforts to manage our cost of funds and our interest rate ~~risk.~~risk profile.

At December 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we held ~~$59.2~~$60.6 million and ~~$34.0~~$59.2 million in public funds, respectively, of which ~~$31.7~~$21.9 million were retail certificates of deposit. These funds were secured at December 31, ~~2020~~2021 with the Washington State Public Deposit Protection Commission by ~~$23.4.~~$23.1 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. Total FHLB advances at December 31, ~~2020~~2021 were ~~$120.0~~$95.0 million as compared to ~~$137.7~~$120.0 million at December 31, ~~2019.~~2020. At December 31, ~~2020,~~2021, our FHLB advances consisted of ~~$60.0~~$35.0 million of fixed-rate three-month advances that renew quarterly, and $60.0 million of fixed-rate one-month advances that renew monthly, that are utilized in cash flow hedge agreements, as described below. At December 31, ~~2020,~~2021, the Bank did not hold any purchased Fed Funds. The ~~short-term nature~~availability of ~~our advances and~~ overnight FHLB advances provides us flexibility to adjust the level of our borrowings as our ~~customer deposit balances~~funding needs change consistent with our asset/liability objectives. Our average borrowings during ~~2020~~2021 were ~~$125.4~~$115.5 million. At December 31, ~~2020,~~2021, all of our FHLB advances were due to mature in less than two months.

Cash Flow Hedge. To assist in managing interest rate risk, the Bank entered into ~~six~~seven interest rate swap agreements with qualified institutions designated as cash flow hedge instruments. The agreements have an aggregate notional amount of ~~$120.0~~$95.0 million, ~~are for terms ranging from one to eight years~~ with individual notional amounts ranging from $10.0 million to ~~$50.0~~$15.0 million, a weighted-average remaining term of 4.9 years and a weighted-average fixed rate of ~~1.22%~~1.05%. The remaining maturity of these agreements is from 1022 months to ~~seven~~eight years. ~~In addition, the Bank entered into~~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 agreements ~~with an effective date of October 25, 2021, notional amounts~~ of $15.0 million and $10.0 million, ~~for seven and eight~~effective on that date. These swaps had an original weighted-average term of 7.4 years ~~respectively,~~ and a weighted-average fixed rate of 0.80%.

Under the terms of the interest rate swap agreements, the Bank pays a fixed interest rate and in return receives an interest payment based on the corresponding LIBOR index, which resets quarterly or monthly, depending on the hedge term. Concurrently, the Bank borrowed a fixed rate 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, ~~2020,~~2021, we recognized a ~~$2.8~~$1.5 million fair value ~~liability~~asset as a result of the increase in market value of the interest rate swap agreements.

The Bank has confirmed our adherence to the International Swaps and Derivatives Association (“ISDA”) 2020 ~~IBOR~~LIBOR Fallbacks Protocol (“Protocol”) to prepare for the cessation of LIBOR by ~~the end of 2021.~~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~~LIBOR to SOFR.

Stockholders’ Equity. Total stockholders’ equity ~~remained stable~~increased to $157.9 million at December 31, 2021, from $156.3 million at December 31, ~~2020 and 2019.~~2020. Increases to stockholders’ equity for the year ended December 31, ~~2020,~~2021, included ~~$8.6~~$12.2 million of net income and ~~$1.6~~$2.4 million in net stock-based compensation. These increases were more than offset by a decrease to additional paid-in-capital of $5.7 million for the repurchase of 544,626 shares of stock, at an average price of $10.44 per share, and $3.9 million in shareholder cash dividends. In addition, ~~accumulated other comprehensive loss, net of tax, decreased by $547,000 as a result of declines~~improvements in the fair value of our derivatives and available-for-sale ~~investments. Further, additional~~investments resulted in $2.1 million in other comprehensive income. The exercise of stock options resulted in the issuance of 41,000 shares of common stock and a $344,000 increase to additional paid-in capital.

These increases were ~~issued from authorized shares due to restricted stock awards in 2020 totaling 28,548 shares, resulting in a~~partially offset by an $11.4 million decrease to additional paid-in-capital from the repurchase and retirement of ~~$73,000.~~704,950 shares at an average price of $16.11 per share. In addition, shareholder cash dividends of $0.44 per share were paid during 2021, reducing retained earnings by $4.1 million.

Comparison of Operating Results for the Years Ended December 31, ~~2020~~2021 and December 31, ~~2019~~2020

Net Interest Income. Net interest income in ~~2020~~2021 was $45.0 million, a $4.5 million or 11.1% increase from $40.5 million ~~a $1.6 million or 4.0% increase from $38.9 million~~ in ~~2019,~~2020, due primarily to ~~an $5.1~~a $6.8 million decrease in interest expense partially offset by a ~~$3.5~~$2.3 million decrease in

interest income. Interest income decreased during the year ended December 31, ~~2020,~~2021, primarily as a result of the decrease in average yield ofon interest-earning assets to 4.01% for the year ended December 31, 2021 from 4.36% for the year ended December 31, 2020, ~~from 4.88% for the year ended December 31, 2019,~~ ~~primarily~~ as ~~a result of the significant 150 basis point decrease in the targeted federal funds rate in March~~

~~2020 in response to the COVID-19 pandemic, and~~ the ongoing historically low interest rate environment ~~putting~~continues to put downward pressure on ~~adjustable rate instruments combined with the impact of the low loan yields of the PPP loan portfolio.~~asset yields. Average interest-earning assets increased ~~$65.1~~$55.5 million, partially funded by a ~~$36.1~~$18.9 million increase in average interest-bearing liabilities. The average cost of these funds decreased to 0.78% for the year ended December 31, 2021 from 1.41% for the year ended December 31, 2020, ~~from 1.92% for the year ended December 31, 2019,~~ primarily as a result of the ~~lower~~low interest rate environment ~~for much of 2020~~ and an improvement in the Company’s deposit ~~mix. Specifically,~~mix as the average balance of our higher cost certificate of deposit declined by $88.0 million. Average balances in lower cost ~~interest bearing~~money market accounts, interest-bearing demand ~~deposits~~and statement savings accounts increased ~~to $92.8~~by $130.1 million, ~~in 2020 compared to $50.5~~$13.8 million ~~in 2019.~~and $3.3 million, respectively. In addition, average balances in ~~noninterest bearing liabilities~~noninterest-bearing accounts increased to $93.6 million from $63.7 million in 2019. These increases allowed the Company to reduce its higher cost brokered certificates of deposit, with average balances declining to $30.5 million in 2020 from $134.0 million in 2019. Our interest-bearing liabilities reprice faster than our interest‑earning assets in response to changes in market interest rates, mitigating the four basis point reductionby $37.1 million. The resulting impact was an improvement in our net interest margin to 3.35% for the year ended December 31, 2021, from 3.15% for the year ended December 31, ~~2020, from 3.19% for the year ended December 31, 2019.~~2020. For more information, see ~~“ Asset~~“Asset and Liability Management and 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, ~~2020~~2021 and ~~2019:~~2020:


		Year Ended December 31,											Year Ended December 31,
		2020				2019				Change in Interest and Dividend Income			2021				2020				Change in Interest and Dividend Income
		Average Balance		Yield		Average Balance		Yield					Average Balance		Yield		Average Balance		Yield
		(Dollars in thousands)											(Dollars in thousands)
Loans receivable, net	Loans receivable, net	$	1,120,889	4.69	%	$	1,061,367	5.15	%	$	(2,090)	Loans receivable, net	$	1,098,772	4.57	%	$	1,120,889	4.69	%	$	(2,376)
Investments available-for-sale	Investments available-for-sale	131,272		2.42		139,354		3.11		(1,156)		Investments available-for-sale	173,691		1.84		131,272		2.42		27
Investments held-to-maturity	Investments held-to-maturity	2,312		0.99		—		—		23		Investments held-to-maturity	2,419		0.99		2,312		0.99		1
Interest-earning deposits	Interest-earning deposits	25,108		0.21		13,634		2.15		(241)		Interest-earning deposits	60,482		0.12		25,108		0.21		20
FHLB stock	FHLB stock	6,600		4.85		6,684		5.42		(42)		FHLB stock	6,271		5.29		6,600		4.85		12
Total interest-earning assets	Total interest-earning assets	$	1,286,181	4.36	%	$	1,221,039	4.88	%	$	(3,506)	Total interest-earning assets	$	1,341,635	4.01	%	$	1,286,181	4.36	%	$	(2,316)

During the year ended December 31, ~~2020,~~2021, the ~~$2.1~~$2.4 million decrease in loan interest income ~~was~~reflects decreases in both the ~~result~~average yield and balance of ~~a decrease in the~~loans. The average loan yield decreased to 4.57% from 4.69% ~~for the year ended December 31, 2020, from 5.15% for the prior year. Partially offsetting the decrease in yield,~~and the average balance of loans receivable ~~increased $59.5~~decreased $22.1 million for the year ended December 31, ~~2020~~2021, as compared to the year ended December 31, ~~2019. However, a large portion~~2020, primarily due to PPP loan repayments. Yields on loans continue to decline as loans are originated or refinanced at lower rates or adjust downward in this continued low interest rate environment, however, prepayments of ~~this increase was the result of $52.1 million~~ PPP loans ~~originated during~~and amounts forgiven by the SBA had a favorable increase to the loan yield for the year ended December 31, ~~2020. Prepayments~~2021, due to recognition of ~~these loans or amounts forgiven by the SBA may increase the loan yield in periods of payoff with recognition~~$2.0 million of unamortized fees and costs. ~~The impact~~At December 31, 2021, the balance of net deferred loan fees relating to ~~our loan yields is expected~~PPP loans to ~~cease completely after the payoff or maturity of these loans.~~be recognized in future periods totaled $258,000.

Interest income from investments available-for-sale ~~decreased $1.2 million~~was stable with a $27,000 increase during ~~2020 primarily~~2021, as a ~~result of a decrease~~$42.4 million increase in the average balance of ~~our~~these investments ~~and a decrease~~compensated for the reduction in ~~the~~ average yield to 1.84% from 2.42% ~~from 3.11% as approximately~~for the prior year. Over half of our investment portfolio was comprised of variable rate securities which repriced during the ~~lower~~continued low interest rate environment ~~existing throughout most of 2020. In addition, the average balance of these investments decreased $8.1 million for the year ended December 31, 2020, as compared to last year.~~during 2021.

Interest income on interest-earning deposits ~~decreased $241,000~~increased $20,000 during the year ended December 31, ~~2020, primarily~~2021, as a result of a ~~decrease in the average yield to 0.21% for the year ended December 31, 2020, from 2.15% for the year ended December 31, 2019, partially offset by an $11.5~~$35.4 million increase in the average balance of these ~~deposits.~~deposits, partially offset by a reduction in their yield to 0.12% for the year ended December 31, 2021, from 0.21% for the year ended December 31, 2020.

The following table details average balances, cost of funds and the resulting increase in interest expense for the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:


		Year Ended December 31,											Year Ended December 31,
		2020				2019				Change in Interest Expense			2021				2020				Change in Interest Expense
		Average Balance		Cost		Average Balance		Cost					Average Balance		Cost		Average Balance		Cost
		(Dollars in thousands)											(Dollars in thousands)
Interest-bearing demand accounts	Interest-bearing demand accounts	$	92,839	0.31	%	$	50,519	0.21	%	$	184	Interest-bearing demand accounts	$	106,684	0.08	%	$	92,839	0.31	%	$	(202)
Statement savings accounts		18,369		0.08		21,920		0.13		(14)
Savings accounts												Savings accounts	21,715		0.03		18,369		0.08		(9)
Money market accounts	Money market accounts	415,190		0.84		329,008		1.53		(1,530)		Money market accounts	545,306		0.29		415,190		0.84		(1,896)
Certificates of deposit, retail	Certificates of deposit, retail	430,179		2.20		410,992		2.32		(75)		Certificates of deposit, retail	342,147		1.61		430,179		2.20		(3,955)
Certificates of deposit, brokered	Certificates of deposit, brokered	30,492		2.38		134,045		2.45		(2,556)		Certificates of deposit, brokered	—		—		30,492		2.38		(727)
Advances from the FHLB		125,392		1.31		129,899		2.09		(1,076)
FHLB advances and other borrowings												FHLB advances and other borrowings	115,466		1.39		125,392		1.31		(37)
Total interest-bearing liabilities	Total interest-bearing liabilities	$	1,112,461	1.41	%	$	1,076,383	1.92	%	$	(5,067)	Total interest-bearing liabilities	$	1,131,318	0.78	%	$	1,112,461	1.41	%	$	(6,826)

Interest expense decreased ~~$5.1~~$6.8 million to $8.8 million for the year ended December 31, 2021 from $15.6 million for the year ended December 31, ~~2020 from $20.7 million for the year ended December 31, 2019.~~2020. The decrease in interest expense during ~~2020~~2021 was primarily a result of the decrease in the average cost of interest-bearing deposits ~~of 48 basis points and~~to 0.71% for the ~~decrease in~~year ended December 31, 2021, as compared to 1.42% for the year ended December 31, 2020. In addition, although the average ~~cost~~balance of our FHLB borrowings of 78 basis points reflecting lower market interest rates. The cost of interest-bearing deposits decreased between the periods, as a combined result of the declining interest rate environment and an increase in lower-cost demand deposits. The average balances of interest-bearing deposits increased ~~by $40.6~~$28.8 million ~~although~~during 2021, the growth in ~~our branch network~~lower cost deposits, primarily money market accounts, allowed us to ~~repay substantially all of~~reduce our reliance on higher cost ~~brokered certificate~~retail certificates of ~~deposit.~~deposit and reduce our overall interest expense

~~The average cost of our retail deposits decreased as a result of a lower interest rate environment and the improvement in the Company’s deposit mix noted earlier.~~ Money market interest expense decreased by ~~$1.5~~$1.9 million as a result of a 6955 basis point decrease in the average cost of these funds partially offset by ~~an $86.2~~a $130.1 million increase in the average balance. The cost of retail ~~and brokered~~ certificates of deposit decreased by ~~12 and 7~~59 basis points ~~respectively,~~ as maturing deposits repriced down in the ~~lower~~continued low interest rate ~~environment that existed during~~environment.

Our FHLB advances are all short-term and matched to fixed rate interest rate swap agreements, resulting in a relatively stable average cost of these funds of 1.39% and 1.31% for the ~~final three quarters~~years ended December 31, 2021, and 2020, respectively. This slight increase in average cost was offset by the repayment of ~~2020. Our average balance~~$25.0 million in FHLB advances in October 2021 as a result of ~~brokered certificates of deposit decreased by $103.6 million during 2020 as reduced loan demand allowed these balances to be replaced by lower cost alternatives, including noninterest bearing and~~a corresponding reduction in related interest ~~bearing demand accounts. Likewise, this growth in our lower cost demand deposits allowed the Bank to pay down certain FHLB advances,~~rate swap agreements, resulting in a ~~$4.5 million~~$37,000 decrease in ~~the average balance of these borrowings for 2020. The average cost of FHLB advances declined 78 basis points between the years, resulting in borrowing~~total interest expense ~~decreasing by $1.1 million~~ for ~~the year ended December 31, 2020 as compared to prior year.~~borrowings.

Provision for Loan Losses. Our provision for loan losses was $300,000 for the year ended December 31, 2021, compared to $1.9 million for the year ended December 31, ~~2020, compared to~~2020. This provision, combined with recoveries of $183,000, resulted in a ~~recapture of provision of $300,000 for the year ended December 31, 2019, resulting in an~~$483,000 increase in the ALLL to total loans to 1.40% at December 31, 2021, from 1.36% at December 31, ~~2020,~~2020. The provision for loan losses in 2021 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 ~~1.18% at~~our loan loss allowance 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 COVD-19 pandemic to the credit quality of our loan portfolio has diminished this year. At December 31, ~~2019. The~~2021, the $10.8 million balance of PPP loans was omitted from the ALLL calculation as these loans are fully guaranteed by the SBA and management expects that the majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which will in turn reimburse the Bank for the amount forgiven. 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 reserves and omitted from the general reserve calculations used to calculate the ALLL and provision for loan losses. As noted above, our individual evaluation of our impaired loans indicated no additional specific reserve was needed.

In comparison, for the year ended December 31, 2020, ~~was~~we had a provision of $1.9 million, primarily the result of ~~COVID-19 related adjustments to qualitative economic factors considered in evaluating~~ the ~~ALLL against the probable losses inherent~~downgrade in the loan ~~portfolio, along with reduction in loan grades on a portion~~risk ratings of ~~our commercial real estate portfolio, including~~ $61.0 million of loans, primarily loans receiving an additional COVID-19 related payment deferral under the CARES Act combined with increases in ~~loans that were downgraded due~~probable loan losses for all loan categories in ~~large part~~response to the ~~ongoing~~economic disruption caused by the COVID-19 pandemic. In addition, any relationship that requested a COVID-19 related second loan payment deferral received additional scrutiny which resulted in some of these loans being downgraded. Higher adjustments were also made for ourpandemic, with higher potential impact allocated to commercial real estate and construction/land ~~portfolios to reflect the impact from the COVID-19 pandemic.~~

In comparison, the recapture of provision in 2019 was primarily the result of a construction/land loan with a balance of $12.5 million at December 31, 2019, that was in default and classified as impaired, however, the Bank’s impairment analysis concluded there were no anticipated losses from the loan at that time, and therefore funds previously allocated in the ALLL to this loan were recaptured. In addition, although total loans increased in 2019, the impact to the provision from this loan growth was offset by a shift in our loan concentrations to lower risk categories and a reduction in the historical risk loss factor related to the collateral on certain loan types.portfolios.

7059

Noninterest Income. Noninterest income ~~increased $301,000~~decreased $580,000 to $3.9 million for the year ended December 31, 2021 from $4.4 million for the year ended December 31, ~~2020 from $4.1 million for the year ended December 31, 2019.~~2020. The following table provides a detailed analysis of the changes in the components of noninterest income:


		Year Ended December 31, 2020		Change from December 31, 2019		Percentage Change			Year Ended December 31, 2021		Change from December 31, 2020		Percentage Change
		(Dollars in thousands)							(Dollars in thousands)
Deposit related fees		$	755	$	22	3.0	%
Loan related fees		1,947		603		44.9
Gain on sale of investments, net	Gain on sale of investments, net	86		(65)		(43.0)		Gain on sale of investments, net	$	32	$	(54)	(62.8)	%
BOLI change in cash surrender value	BOLI change in cash surrender value	982		(12)		(1.2)		BOLI change in cash surrender value	1,107		125		12.7
Wealth management revenue	Wealth management revenue	663		(216)		(24.6)		Wealth management revenue	494		(169)		(25.5)
Deposit related fees								Deposit related fees	872		117		15.5
Loan related fees								Loan related fees	1,265		(682)		(35.0)
Other	Other	9		(31)		(77.5)		Other	92		83		922.2
Total noninterest income	Total noninterest income	$	4,442	$	301	7.3	%	Total noninterest income	$	3,862	$	(580)	(13.1)	%

The largest change to our noninterest income was the ~~$603,000 increase~~$682,000 decrease on loan related fees ~~primarily as a result of loan prepayment penalties that increased by $838,000~~ for the year ended December 31, ~~2020, as compared~~2021, primarily due to ~~the year ended December 31, 2019. Partially offsetting this increase was~~ a ~~$233,000 decline~~$430,000 decrease in fees on loan ~~related~~ interest rate swap ~~servicing fees.~~agreements. The Bank has an interest rate swap program for commercial loan customers, under which the customer participates in an interest rate swap with a ~~third party broker~~third-party institution for which the Bank receives a fee that is recognized at the time the loan is originated. ~~The decline in 2020 was primarily due~~Due to the reduced customer demand for these interest rate swaps, there were no new agreements originated in ~~2020 compared to 2019.~~2021. In addition, fees collected on the early payoff of certain loans decreased $215,000 during the year ended December 31, 2021.

Wealth management revenue decreased by ~~$216,000~~$169,000 in ~~2020,~~2021, primarily as a result of ~~a significant decline~~reduced sales staff during much of 2021 and timing differences in ~~face-to-face meetings during the ongoing COVID-19 pandemic, reducing opportunities for additional income.~~revenue recognition. This line of business assists the Bank with providing options to our customers to more fully support their financial needs. Total assets managed by our wealth management division ~~decreased~~increased to $112.7 million at December 31, 2021, from $88.0 million at December 31, ~~2020, from $96.0 million at December 31, 2019.~~2020.

~~Our BOLI noninterest income remained stable with a slight decrease~~In addition, sales of $12,000 for the year ended December 31, 2020. We recognized the net $982,000 increase in cash surrender value of these policies as noninterest income, which assists in offsetting expenses for employee benefits.

~~The Bank sold certain available-for-sale~~investment securities during the year ended December 31, ~~2020, resulting~~2021, resulted in ~~an $86,000 gain.~~a gain of $32,000. In comparison, sales of investments for the year ended December 31, ~~2019,~~2020, resulted in ~~a $151,000~~an $86,000 gain. During 2020, selected securities were strategically sold, with the funds reinvested in securities and loans that were expected to improve the Company’s total return on investments. These sales resulted in net gains at the time of sale and were impacted favorably in part by the Federal Reserve’s aggressive purchases of mortgage backed securities, which in turn resulted in more favorable pricing on securities sold in 2020.

Partially offsetting these decreases, d

~~Deposit~~eposit related fees of ~~$755,000~~$872,000 were recorded for the year ended December 31, ~~2020,~~2021, a ~~$22,000~~$117,000 increase over the prior ~~year. As a result~~year, primarily from debit card related service fees reflecting increased usage as the economy improves in our markets. In addition, our BOLI noninterest income increased $125,000 for the year ended December 31, 2021, primarily due to $161,000 in death benefits proceeds. The $1.1 million of ~~our deposit growth and corresponding~~noninterest BOLI income also included the net increase in ~~customer transactions, our transactional based fee revenue also increased.~~cash surrender value of these policies, which assists in offsetting expenses for employee benefits.

Noninterest Expense. Noninterest expense increased ~~$2.1~~$854,000 to $33.4 million tofor the year ended December 31, 2021 from $32.5 million for the year ended December 31, ~~2020 from $30.4 million for the year ended December 31, 2019.~~2020. The following table provides a detailed analysis of the changes in the components of noninterest expense:


	Year Ended December 31, 2021		Change from December 31, 2020		Percentage Change
	(Dollars in thousands)
Salaries and employee benefits	$	20,237	$	198	1.0	%
Occupancy and equipment	4,557		320		7.6
Professional fees	1,899		192		11.2
Data processing	2,692		(130)		(4.6)
OREO related expenses, net	209		200		2,222.2
Regulatory assessments	456		(91)		(16.6)
Insurance and bond premiums	451		6		1.3
Marketing	154		(43)		(21.8)
Other general and administrative	2,712		202		8.0
Total noninterest expense	$	33,367	$	854	2.6	%

Year Ended
December 31, 2020 Change from
December 31, 2019 Percentage
Change
(Dollars in thousands)
Salaries and employee benefits $ 20,039 $ 444 2.3 %
Occupancy and equipment                                            4,237 525 14.1
Professional fees                                 1,707 17 1.0
Data processing                                 2,822 791 38.9
OREO related expenses, net 9 (25) (73.5)
Regulatory assessments 547 240 78.2
Insurance and bond premiums                                            445 70 18.7
Marketing 197 (142) (41.9)
Other general and administrative 2,510 175 7.5
Total noninterest expense                                            $ 32,513 $ 2,095 6.9 %

The primary contributor to the increase in noninterest expense ~~was our continued focus on product and branch expansion, including the implementation of a new online banking platform. For~~for the year ended December 31, ~~2020, salary~~2021, was a $320,000 increase in occupancy and equipment expense. Lease expense increased $125,000 primarily due to our most recent branch opening in March 2021 and two branches opened late in 2020. In addition, depreciation expense increased $115,000 and facilities and equipment maintenance increased $102,000 as a result of maintenance and improvements at branch locations.

Salary and employee benefits increased by ~~$444,000~~$198,000 to ~~$20.0~~$20.2 million due in part to a ~~$1.3 million~~$779,000 net increase ~~from salaries, commissions and employees incentives reflecting~~ in ~~large part increased staffing at our new branches. Partially offsetting these increases,~~ stock based compensation ~~decreased $574,000, primarily due to~~as a result of the ~~lower~~increase in common stock ~~price~~priced used to calculate the expense for ESOP shares allocated to employees for ~~2020. In addition, retirement benefit related expenses declined $184,000 from~~2021 and restricted stock awards granted during the ~~prior~~ year. Partially offsetting this increase, salaries, commissions and employee incentives decreased $555,000 for the year ended December 31, 2021, reflecting a decrease in staffing.

~~Occupancy~~Further contributing to the increase in noninterest expense for the year ended December 31, 2021, professional fees increased $192,000. The primary factor was a $319,000 increase in other professional services as we outsourced recruiting and ~~equipment expense increased $525,000~~other services. Partially offsetting this increase, legal fees decreased $129,000, primarily due to ~~$4.2~~the receipt of $84,000 of reimbursed legal fees at the payoff of a $2.1 million during 2020 primarily as a result of the addition of two new branch locations in 2020 and additional expenses relating to COVID-19 enhancements made throughout our branch network. Lease expense increased by $185,000 and depreciation expense increased by $178,000, primarily as a result of additional leasehold improvements and fixed assets related to opening the new branches.nonaccrual loan.

~~Data~~The sale of two OREO properties during 2021 resulted in a $207,000 loss on sale included in noninterest expense, a $200,000 increase as compared to the year ended December 31, 2020.

Partially offsetting these increases, data processing expense ~~increased by $791,000 primarily~~decreased $130,000 for the year ended December 31, 2021, as ~~a combined result of increased loan and deposit transaction volume, and the implementation~~additional expense was incurred during 2020 in support of a new online banking ~~platform, as discussed above.~~

~~Regulatory~~platform. In addition, regulatory assessments increased by $240,000 during 2020, as compared to 2019, as the application of $282,000 in FDIC small bank assessment credits reduced expenses in 2019. Partially offsetting these increases, marketing expenses decreased ~~$142,000 during 2020,~~$91,000, primarily due to ~~a reduction~~the change in ~~sponsored events due to the stay-at-home orders and other meeting limitations imposed in response to the COVID-19 pandemic.~~composition of our loan portfolio, as PPP loans are excluded from our asset base for calculation of our FDIC assessment.

Federal Income Tax Expense. We recorded a ~~$1.9~~$2.9 million federal income tax provision for ~~2020,~~2021, compared to ~~$2.6~~$1.9 million for ~~2019.~~2020. The ~~decrease~~increase in federal income tax provision for ~~2020~~2021 was primarily the result of a ~~$2.4~~$4.7 million ~~decrease~~increase in pretax net income.

7261

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,
		2020							2019							2018								2021							2020							2019
		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 Dividends			Yield/Cost		Average Balance (1)		Interest and Dividends			Yield/Cost		Average Balance (1)			Interest and Dividends		Yield/Cost
		(Dollars in thousands)																						(Dollars in thousands)
Interest-earnings assets:	Interest-earnings assets:																						Interest-earnings assets:
Loans receivable, net	Loans receivable, net	$	1,120,889	$	52,546		4.69	%	$	1,061,367		$	54,636	5.15	%	$	995,810		$	51,127	5.13	%	Loans receivable, net	$	1,098,772	$	50,170		4.57	%	$	1,120,889	$	52,546		4.69	%	$	1,061,367		$	54,636	5.15	%
Investments available-for-sale		131,272		3,173			2.42		139,354			4,329		3.11		141,100			4,126		2.92
Investments available-for-sale, taxable																							Investments available-for-sale, taxable	149,349		2,741			1.84		121,850		2,937			2.41		131,671			4,118		3.13
Investments available-for-sale, non-taxable																							Investments available-for-sale, non-taxable	24,342		459			1.89		9,422		236			2.50		7,683			211		2.75
Investments held-to-maturity	Investments held-to-maturity	2,312		23			0.99		—			—		—		—			—		—		Investments held-to-maturity	2,419		24			0.99		2,312		23			0.99		—			—		—
Interest-earning deposits	Interest-earning deposits	25,108		52			0.21		13,634			293		2.15		11,628			202		1.74		Interest-earning deposits	60,482		72			0.12		25,108		52			0.21		13,634			293		2.15
FHLB stock	FHLB stock	6,600		320			4.85		6,684			362		5.42		8,748			458		5.24		FHLB stock	6,271		332			5.29		6,600		320			4.85		6,684			362		5.42
Total interest-earning assets	Total interest-earning assets	1,286,181		56,114			4.36		1,221,039			59,620		4.88		1,157,286			55,913		4.83		Total interest-earning assets	1,341,635		53,798			4.01		1,286,181		56,114			4.36		1,221,039			59,620		4.88
Noninterest earning assets	Noninterest earning assets	75,423							73,125							70,110							Noninterest earning assets	79,841							75,423							73,125
Total average assets	Total average assets	$	1,361,604						$	1,294,164						$	1,227,396						Total average assets	$	1,421,476						$	1,361,604						$	1,294,164
Interest-bearing liabilities:	Interest-bearing liabilities:																						Interest-bearing liabilities:
Interest-bearing demand accounts	Interest-bearing demand accounts	$	92,839	$	292		0.31	%	$	50,519		$	108	0.21	%	$	40,360		$	79	0.20	%	Interest-bearing demand accounts	$	106,684	$	90		0.08	%	$	92,839	$	292		0.31	%	$	50,519		$	108	0.21	%
Statement savings accounts		18,369		15			0.08		21,920			29		0.13		25,724			34		0.13
Savings accounts																							Savings accounts	21,715		6			0.03		18,369		15			0.08		21,920			29		0.13
Money market accounts	Money market accounts	415,190		3,497			0.84		329,008			5,027		1.53		326,075			3,550		1.09		Money market accounts	545,306		1,601			0.29		415,190		3,497			0.84		329,008			5,027		1.53
Certificates of deposit, retail	Certificates of deposit, retail	430,179		9,474			2.20		410,992			9,549		2.32		350,603			5,825		1.66		Certificates of deposit, retail	342,147		5,519			1.61		430,179		9,474			2.20		410,992			9,549		2.32
Certificates of deposit, brokered	Certificates of deposit, brokered	30,492		727			2.38		134,045			3,283		2.45		86,203			1,730		2.01		Certificates of deposit, brokered	—		—			—		30,492		727			2.38		134,045			3,283		2.45
Total deposits	Total deposits	987,069		14,005			1.42		946,484			17,996		1.90		828,965			11,218		1.35		Total deposits	1,015,852		7,216			0.71		987,069		14,005			1.42		946,484			17,996		1.90
Advances from the FHLB and other borrowings	Advances from the FHLB and other borrowings	125,392		1,640			1.31		129,899			2,716		2.09		183,667			3,520		1.92		Advances from the FHLB and other borrowings	115,466		1,603			1.39		125,392		1,640			1.31		129,899			2,716		2.09
Total interest-bearing liabilities	Total interest-bearing liabilities	1,112,461		15,645			1.41		1,076,383			20,712		1.92		1,012,632			14,738		1.46		Total interest-bearing liabilities	1,131,318		8,819			0.78		1,112,461		15,645			1.41		1,076,383			20,712		1.92
Noninterest bearing liabilities	Noninterest bearing liabilities	93,556							63,689							63,619							Noninterest bearing liabilities	130,117							93,556							63,689
Average equity	Average equity	155,587							154,092							151,145							Average equity	160,041							155,587							154,092
Total average liabilities and equity	Total average liabilities and equity	$	1,361,604						$	1,294,164						$	1,227,396						Total average liabilities and equity	$	1,421,476						$	1,361,604						$	1,294,164
Net interest income	Net interest income			$	40,469							$	38,908						$	41,175			Net interest income			$	44,979						$	40,469							$	38,908

Net interest margin	Net interest margin						3.15	%						3.19	%						3.56	%	Net interest margin						3.35	%						3.15	%						3.19	%
Ratio of average interest-	Ratio of average interest-																						Ratio of average interest-
earning assets to average	earning assets to average																						earning assets to average
interest-bearing liabilities	interest-bearing liabilities			115.62		%			113.44		%					114.28		%					interest-bearing liabilities			118.59		%					115.62		%			113.44		%

________________

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

7362

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 the net yield on interest-earning assets and liabilities, for the dates indicated.


		Weighted Average Yield at December 31, 2020		Net Yield Year Ended December 31,							Weighted Average Yield at December 31, 2021		Net Yield Year Ended December 31,
				2020		2019		2018					2021		2020		2019
Yield on interest-earning assets:	Yield on interest-earning assets:									Yield on interest-earning assets:
Loans receivable, net ��		4.27	%	4.69	%	5.15	%	5.13	%
Investments available-for-sale		2.34		2.42		3.11		2.92
Loans receivable, net										Loans receivable, net	4.21	%	4.57	%	4.69	%	5.15	%
Investments available-for-sale, taxable										Investments available-for-sale, taxable	1.96		1.84		2.41		3.13
Investments available-for-sale, non taxable										Investments available-for-sale, non taxable	1.91		1.89		2.50		2.75
Investments held-to-maturity	Investments held-to-maturity	0.99		0.99		n/a		n/a		Investments held-to-maturity	0.99		0.99		0.99		n/a
Interest-earning deposits	Interest-earning deposits	0.10		0.21		2.15		1.74		Interest-earning deposits	0.13		0.12		0.21		2.15
FHLB stock	FHLB stock	—		4.85		5.42		5.24		FHLB stock	4.85		5.29		4.85		5.42
Total interest-earning assets	Total interest-earning assets	3.83		4.36		4.88		4.83		Total interest-earning assets	3.72		4.01		4.36		4.88
Rate paid on interest-bearing liabilities:	Rate paid on interest-bearing liabilities:									Rate paid on interest-bearing liabilities:
Interest-bearing demand accounts	Interest-bearing demand accounts	0.14		0.31		0.21		0.20		Interest-bearing demand accounts	0.08		0.08		0.31		0.21
Statement savings accounts		0.04		0.08		0.13		0.13
Savings accounts										Savings accounts	0.03		0.03		0.08		0.13
Money market accounts	Money market accounts	0.37		0.84		1.53		1.09		Money market accounts	0.25		0.29		0.84		1.53
Certificates of deposit, retail	Certificates of deposit, retail	2.01		2.20		2.32		1.66		Certificates of deposit, retail	1.25		1.61		2.20		2.32
Certificates of deposit, brokered	Certificates of deposit, brokered	—		2.38		2.45		2.01		Certificates of deposit, brokered	—		—		2.38		2.45
Total interest-bearing deposits	Total interest-bearing deposits	1.01		1.42		1.90		1.35		Total interest-bearing deposits	0.51		0.71		1.42		1.90
Advances from the FHLB and other borrowings	Advances from the FHLB and other borrowings	1.40		1.31		2.09		1.92		Advances from the FHLB and other borrowings	1.26		1.39		1.31		2.09
Total interest-bearing liabilities	Total interest-bearing liabilities	1.05		1.41		1.92		1.46		Total interest-bearing liabilities	0.57		0.78		1.41		1.92
Interest rate spread	Interest rate spread	2.78		2.95		2.96		3.37		Interest rate spread	3.15		3.23		2.95		2.96
Net interest margin	Net interest margin	n/a		3.15		3.19		3.56		Net interest margin	n/a		3.35		3.15		3.19

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, 2020 Compared to December 31, 2019 Change in Interest						Year Ended December 31, 2019 Compared to December 31, 2018 Change in Interest							Year Ended December 31, 2021 Compared to December 31, 2020 Change in Interest						Year Ended December 31, 2020 Compared to December 31, 2019 Change in Interest
		2020						2019							2021						2020
		Rate		Volume		Total		Rate		Volume		Total			Rate		Volume		Total		Rate		Volume		Total
		(In thousands)													(In thousands)
Interest-earning assets:	Interest-earning assets:													Interest-earning assets:
Loans receivable, net	Loans receivable, net	$	(5,154)	$	3,064	$	(2,090)	$	143	$	3,366	$	3,509	Loans receivable, net	$	(1,339)	$	(1,037)	$	(2,376)	$	(5,154)	$	3,064	$	(2,090)
Investments available-for-sale		(905)		(251)		(1,156)		254		(51)		$	203
Investments available-for-sale, taxable														Investments available-for-sale, taxable	(859)		663		(196)		(874)		(307)		(1,181)
Investments available-for-sale, non taxable														Investments available-for-sale, non taxable	(151)		374		223		(23)		48		25
Investments held-to-maturity	Investments held-to-maturity	23		—		23		—		—		$	—	Investments held-to-maturity	—		1		1		23		—		23
Interest-earning deposits	Interest-earning deposits	(488)		247		(241)		56		35		$	91	Interest-earning deposits	(53)		73		20		(488)		247		(241)
FHLB stock	FHLB stock	(37)		(5)		(42)		12		(108)		$	(96)	FHLB stock	28		(16)		12		(37)		(5)		(42)
Net change in interest income	Net change in interest income	(6,561)		3,055		(3,506)		465		3,242		3,707		Net change in interest income	(2,374)		58		(2,316)		(6,553)		3,047		(3,506)

Interest-bearing liabilities:	Interest-bearing liabilities:													Interest-bearing liabilities:
Interest-bearing demand accounts	Interest-bearing demand accounts	94		90		184		9		20		29		Interest-bearing demand accounts	(246)		44		(202)		94		90		184
Statement savings accounts		(9)		(5)		(14)		—		(5)		$	(5)
Savings accounts														Savings accounts	(12)		3		(9)		(9)		(5)		(14)
Money market accounts	Money market accounts	(2,847)		1,317		(1,530)		1,445		32		$	1,477	Money market accounts	(2,992)		1,096		(1,896)		(2,847)		1,317		(1,530)
Certificates of deposit, retail	Certificates of deposit, retail	(521)		446		(75)		2,721		1,003		$	3,724	Certificates of deposit, retail	(2,016)		(1,939)		(3,955)		(521)		446		(75)
Certificates of deposit, brokered	Certificates of deposit, brokered	(20)		(2,536)		(2,556)		593		960		$	1,553	Certificates of deposit, brokered	—		(727)		(727)		(20)		(2,536)		(2,556)
Advances from the FHLB		(982)		(94)		(1,076)		226		(1,030)		$	(804)
Advances from FHLB and other borrowings														Advances from FHLB and other borrowings	93		(130)		(37)		(982)		(94)		(1,076)
Net change in interest expense	Net change in interest expense	(4,285)		(782)		(5,067)		4,994		980		5,974		Net change in interest expense	(5,173)		(1,653)		(6,826)		(4,285)		(782)		(5,067)
Net change in net interest income	Net change in net interest income	$	(2,276)	$	3,837	$	1,561	$	(4,529)	$	2,262	$	(2,267)	Net change in net interest income	$	2,799	$	1,711	$	4,510	$	(2,268)	$	3,829	$	1,561

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.

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 increase balances of non-maturity deposits 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 added~~may utilize brokered certificates of deposit with a call option as a funding source; and

•we have utilized interest rate swaps to effectively fix the rate on ~~$120.0~~$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 party~~third-party consultant with over 30 years of experience in asset-liability management to assist in its interest rate risk and asset-liability management. Management uses various assumptions to evaluate the sensitivity of our operations to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust. Approximately ~~51.5%~~57.2% of our net loans were adjustable-rate loans at December 31, ~~2020.~~2021. At that date, ~~$362.8~~$444.0 million, or ~~63.1%~~69.3%, of these loans with a weighted-average interest rate of ~~4.54%~~4.27% 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, 2021, the Bank’s net loans receivable included $117.0 million of prime based loans, of which $104.4 million were at a floor rate that exceeded their fully indexed rate.

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


	December 31, 2021
	(in thousands)
0 - 25 bps	$	7,991
26 - 50 bps	16,260
51 - 75 bps	12,608
76 - 100 bps	38,620
101 - 150 bps	22,305
151 - 200 bps	1,368
> 200 bps	5,247
	$	104,399

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 observed in the past that our deposit accounts during changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base, competitive factors, and historical experience.

Our income simulation model examines changes in net interest income in scenarios 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. A decline by 200 and 300 basis points is not reported as the current targeted federal funds rate is between 0.00% and 0.25%.

The following table illustrates the estimated change in our net interest income over the next 12 months from December 31, ~~2020,~~2021, 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. The net interest income in an up 100 basis point move would decline slightly in year one and increase under larger immediate increases in interest rates. The slight decline would be due to the level of adjustable-rate loans that are currently at their floor rate. The $444.0 million of loans at their floor rate would not experience the full impact of a 100 basis point increase in rates because the fully-indexed rate is below the floor rate that is currently in effect for many of these loans.


Interest Rate Simulation Impact on Net Interest Income for the year ended December 31, 2021
Basis Point Change in Rates	Net Interest Income		% Change
(Dollars in thousands)
+300	$	45,388	1.43	%
+200	44,971		0.50
+100	44,612		(0.31)
Base	44,749		—
(100)	44,069		(1.52)

The following table illustrates the change in our net portfolio value (“NPV”) at December 31, 2021 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, 2020
Basis Point Change in Rates Net Interest Income % Change
(Dollars in thousands)
+300 $ 43,333 4.33 %
+200 42,496 2.32
+100 41,814 0.68
Base 41,533 —
(100) 41,698 0.40

The following table illustrates the change in our net portfolio value (“NPV”) at December 31, 2020 that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.


Basis Point Change in Rates (1)	Basis Point Change in Rates (1)	Net Portfolio Value (2)						Net Portfolio as % of Portfolio Value of Assets				Market Value of Assets (6)		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)					Amount		$ Change (3)		% Change		NPV Ratio (4)		% Change (5)
		(Dollars in thousands)													(Dollars in thousands)
+300	+300	$	161,119	$	(14,063)	(8.03)	%	12.29	%	(1.01)	%	$	1,310,550	+300	$	191,829	$	(10,861)	(5.36)	%	14.38	%	(0.76)	%	$	1,334,248
+200	+200	166,000		(9,182)		(5.24)		12.41		(0.66)		1,337,494		+200	195,731		(6,959)		(3.43)		14.34		(0.49)		1,364,984
+100	+100	171,637		(3,545)		(2.02)		12.56		(0.25)		1,366,620		+100	200,751		(1,939)		(0.96)		14.35		(0.14)		1,398,640
Base	Base	175,182		—		—		12.56		—		1,395,211		Base	202,690		—		—		14.16		—		1,431,182
(100)	(100)	162,158		(13,024)		(7.43)		11.57		(0.93)		1,401,710		(100)	194,151		(8,539)		(4.21)		13.30		(0.60)		1,459,271

__________

(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 tables presented above are predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as 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 securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments.

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

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, ~~2020,~~2021, the undisbursed portion of construction LIP totaled ~~$59.8~~$43.4 million and unused lines of credit

were ~~$34.8~~$34.0 million. ~~In addition, we had commitments to originate loans of $6.0 million that includes a $3.9 million financial letter of credit.~~ We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. Certificates of deposit scheduled to mature in one year or less at December 31, ~~2020~~2021, totaled ~~$267.6~~$145.3 million. Management’s policy is to maintain deposit rates at levels that are competitive with other local financial institutions. Based on historical experience, we believe that a significant portion of maturing certificates of deposit will remain with First Financial Northwest Bank. As further funding sources, we had the ability at December 31, ~~2020~~2021 to borrow an additional ~~$494.4~~$327.5 million from the FHLB, ~~$82.2~~based on our collateral capacity, $84.8 million from the FRB, and $75.0 million from unused lines of credit with other financial institutions to meet commitments and for liquidity purposes. See the Consolidated Statements of Cash Flows in Item 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 sufficient to provide the funds for our assets, or if other sources are available with more favorable rates or structure, we use alternative funding sources. These sources include, but are not limited to, advances from the FHLB, wholesale funding, brokered deposits, federal funds purchased, and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs.

On a monthly basis, we estimate our liquidity sources and needs for the next twelve months. Also, we determine funding concentrations and our need for sources of funds other than deposits. This information is used by our Asset/Liability Management Committee in forecasting funding needs and investing opportunities.

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 2022 we expect cash expenditures of $1.3 million for capital investment in property, plant and equipment. In addition, we currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.12per share, as approved by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2022 at this rate of $0.12per share, our average total dividend paid each quarter would be approximately $1.1 million, based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards).

For the fiscal year ending December 31, 2022, we project that our fixed commitments will include (i) $840,000 of operating lease payments and (ii) other future obligations and accrued expenses of $12.2million. At December 31, 2021, our $95.0million in FHLB borrowings are all short-term and tied to interest rate swap agreements and are expected to be renewed as they mature during 2022. We believe that our liquid assets combined with the 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 ~~$156.3~~$157.9 million at December 31, ~~2020.~~2021. 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, ~~2020,~~2021, First Financial Northwest Bank exceeded all regulatory capital requirements. Regulatory capital ratios for First Financial Northwest Bank were as follows as of December 31, ~~2020:~~2021: Total capital to risk-weighted assets was ~~15.57%~~15.48%; Tier 1 capital and Common equity tier 1 capital to risk-weighted assets was ~~14.32%~~14.23%; and Tier 1 capital to total assets was ~~10.29%~~10.34%. At December 31, ~~2020,~~2021, First Financial Northwest 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.”

~~Commitments and Off-Balance Sheet Arrangements~~

~~We are~~The Accumulated Other Comprehensive Income (“AOCI”) component of capital includes a ~~party to financial instruments with off-balance sheet risk in~~variety of items, including the ~~normal course of business to meet the financing needs~~value of our ~~customers. These financial instruments include commitments to extend credit~~available-for-sale investment securities portfolio and the ~~unused portions~~value of ~~lines~~our derivative instruments, net of ~~credit. These instruments involve, to varying degrees,~~tax. We model various interest rate scenarios that could impact these elements of ~~credit~~AOCI and 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, 2020 and 2019, we had no commitments to originate loans for sale.

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, 2020.

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 $ 5,990 $ 2,090 $ 3,900 $ — $ —
Unused portion of lines of credit 34,820 11,445 1,794 4,573 17,008
Undisbursed portion of construction loans 59,824 38,019 21,805 — —
Total commitments $ 100,634 $ 51,554 $ 27,499 $ 4,573 $ 17,008

First Financial Northwest and its subsidiaries from time to time are involved in various claims and legal actions arising in the ordinary course of business. There are currently no 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 of December 31, 2020, maturing as indicated:~~

Less Than One Year One to Three Years Three to Five Years More Than Five Years Total
(In thousands)
Deposits (1)
$ 951,688 $ 121,846 $ 20,111 $ — $ 1,093,645
Term debt 120,000 — — — 120,000
Other long-term liabilities (2)
138 276 309 738 1,461
Lease commitments 713 1,258 824 1,286 4,081
Total contractual obligations $ 1,072,539 $ 123,380 $ 21,244 $ 2,024 $ 1,219,187

~~___________~~

~~(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 loansbelieve that we have ~~made. Our management is unable~~sufficient capital to ~~determine~~withstand the ~~extent, if any, to which properties securing loans have appreciated~~estimated potential fluctuations in ~~dollar value due to inflation.~~a variety of interest rate environments.

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)			8170
Consolidated Balance Sheets as of December 31, ~~2020,~~2021, and ~~2019~~2020			8372
Consolidated Income Statements for the Years Ended December 31, ~~2020,~~2021, and ~~2019~~2020			8473
Consolidated Statements of Comprehensive Income for the Years Ended December 31, ~~2020,~~2021, and ~~2019~~2020			8574
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, ~~2020,~~2021, and ~~2019~~2020			8675
Consolidated Statements of Cash Flows ~~For~~for the Years Ended December 31, ~~2020,~~2021, and ~~2019~~2020			8776
Notes to Consolidated Financial Statements			8978

8069

[Letterhead of Moss ~~Adams LLP]~~Adams]

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

First Financial Northwest, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Financial Northwest, Inc. and Subsidiaries’ (the “Company”) as of December 31, ~~2020~~2021 and ~~2019,~~2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, ~~2020~~2021 and ~~2019,~~2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s ~~consolidated~~ allowance for loan losses balance was ~~$15.2~~$15.7 million at December 31, ~~2020.~~2021. The allowance for loan losses is maintained to provide for 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 losses calculation, as a critical audit matter. 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 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 determination of risk ratings and qualitative factors applied to the allowance for loan losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

a.•Obtained an understanding of the design and implementation of internal controls over the accuracy of risk ratings of loans and the determination of the qualitative factors used in the allowance for loan loss calculation.

b.•Tested a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately risk rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable based on the current facts and circumstances.

c.•Obtained management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the supporting documentation provided by management.

d.•Tested the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, evaluating the completeness and accuracy of the data used in the calculation, application of the risk ratings determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.

/s/ Moss Adams LLP

Everett, Washington

March ~~12, 2021~~11, 2022

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

8271

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)


		December 31,					December 31,
		2020		2019			2021		2020
Assets	Assets					Assets
Cash on hand and in banks	Cash on hand and in banks	$	7,995	$	10,094	Cash on hand and in banks	$	7,246	$	7,995
Interest-earning deposits with banks	Interest-earning deposits with banks	72,494		12,896		Interest-earning deposits with banks	66,145		72,494
Investments available-for-sale, at fair value	Investments available-for-sale, at fair value	127,551		136,601		Investments available-for-sale, at fair value	168,948		127,551
Investments held-to-maturity, at amortized cost	Investments held-to-maturity, at amortized cost	2,418		0		Investments held-to-maturity, at amortized cost	2,432		2,418
Loans receivable, net of allowance of $15,174 and $13,218		1,100,582		1,108,462
Loans receivable, net of allowance of $15,657 and $15,174						Loans receivable, net of allowance of $15,657 and $15,174	1,103,461		1,100,582
Federal Home Loan Bank (“FHLB”) stock, at cost	Federal Home Loan Bank (“FHLB”) stock, at cost	6,410		7,009		Federal Home Loan Bank (“FHLB”) stock, at cost	5,465		6,410
Accrued interest receivable	Accrued interest receivable	5,508		4,138		Accrued interest receivable	5,285		5,508
Deferred tax assets, net	Deferred tax assets, net	1,641		1,501		Deferred tax assets, net	850		1,641
Other real estate owned (“OREO”)	Other real estate owned (“OREO”)	454		454		Other real estate owned (“OREO”)	—		454
Premises and equipment, net	Premises and equipment, net	22,579		22,466		Premises and equipment, net	22,440		22,579
Bank owned life insurance (“BOLI”)	Bank owned life insurance (“BOLI”)	33,034		31,982		Bank owned life insurance (“BOLI”)	35,210		33,034
Prepaid expenses and other assets	Prepaid expenses and other assets	1,643		2,216		Prepaid expenses and other assets	3,628		1,643
Right of use asset (“ROU”), net	Right of use asset (“ROU”), net	3,647		2,209		Right of use asset (“ROU”), net	3,646		3,647
Goodwill	Goodwill	889		889		Goodwill	889		889
Core deposit intangible, net	Core deposit intangible, net	824		968		Core deposit intangible, net	684		824
Total assets	Total assets	$	1,387,669	$	1,341,885	Total assets	$	1,426,329	$	1,387,669

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Deposits	Deposits					Deposits
Noninterest-bearing deposits	Noninterest-bearing deposits	$	91,285	$	52,849	Noninterest-bearing deposits	$	117,751	$	91,285
Interest-bearing deposits	Interest-bearing deposits	1,002,348		980,685		Interest-bearing deposits	1,039,723		1,002,348
Total deposits	Total deposits	1,093,633		1,033,534		Total deposits	1,157,474		1,093,633
FHLB advances	FHLB advances	120,000		137,700		FHLB advances	95,000		120,000
Advance payments from borrowers for taxes and insurance	Advance payments from borrowers for taxes and insurance	2,498		2,921		Advance payments from borrowers for taxes and insurance	2,909		2,498
Lease liability, net	Lease liability, net	3,783		2,279		Lease liability, net	3,805		3,783
Accrued interest payable	Accrued interest payable	211		285		Accrued interest payable	112		211
Other liabilities	Other liabilities	11,242		8,847		Other liabilities	9,150		11,242
Total liabilities	Total liabilities	1,231,367		1,185,566		Total liabilities	1,268,450		1,231,367

Commitments and contingencies (Note 15)	Commitments and contingencies (Note 15)					Commitments and contingencies (Note 15)
Stockholders’ Equity	Stockholders’ Equity					Stockholders’ Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares, 0 shares issued or outstanding		0		0
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,736,875 shares at December 31, 2020, and 10,252,953 shares at December 31, 2019		97		103
Preferred stock, $0.01 par value; authorized 10,000,000 shares, no shares issued or outstanding						Preferred stock, $0.01 par value; authorized 10,000,000 shares, no shares issued or outstanding	—		—
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,125,759 shares at December 31, 2021, and 9,736,875 shares at December 31, 2020						Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,125,759 shares at December 31, 2021, and 9,736,875 shares at December 31, 2020	91		97
Additional paid-in capital	Additional paid-in capital	82,095		87,370		Additional paid-in capital	72,298		82,095
Retained earnings, substantially restricted	Retained earnings, substantially restricted	78,003		73,321		Retained earnings, substantially restricted	86,162		78,003
Accumulated other comprehensive loss, net of tax benefit		(1,918)		(1,371)
Accumulated other comprehensive income (loss), net of tax						Accumulated other comprehensive income (loss), net of tax	174		(1,918)
Unearned Employee Stock Ownership Plan (“ESOP”) shares	Unearned Employee Stock Ownership Plan (“ESOP”) shares	(1,975)		(3,104)		Unearned Employee Stock Ownership Plan (“ESOP”) shares	(846)		(1,975)
Total stockholders’ equity	Total stockholders’ equity	$	156,302	$	156,319	Total stockholders’ equity	$	157,879	$	156,302
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,387,669	$	1,341,885	Total liabilities and stockholders’ equity	$	1,426,329	$	1,387,669

See accompanying notes to consolidated financial statements.

8372

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Income Statements

(Dollars in thousands, except share data)


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
Interest income	Interest income					Interest income
Loans, including fees	Loans, including fees	$	52,546	$	54,636	Loans, including fees	$	50,170	$	52,546
Investments available-for-sale	Investments available-for-sale	3,173		4,329		Investments available-for-sale	3,200		3,173
Investments held-to-maturity	Investments held-to-maturity	23		0		Investments held-to-maturity	24		23
Interest-earning deposits	Interest-earning deposits	52		293		Interest-earning deposits	72		52
Dividends on FHLB stock	Dividends on FHLB stock	320		362		Dividends on FHLB stock	332		320
Total interest income	Total interest income	$	56,114	$	59,620	Total interest income	$	53,798	$	56,114
Interest expense	Interest expense					Interest expense
Deposits	Deposits	14,005		17,996		Deposits	7,216		14,005
FHLB advances		1,640		2,716
FHLB advances and other borrowings						FHLB advances and other borrowings	1,603		1,640
Total interest expense	Total interest expense	$	15,645	$	20,712	Total interest expense	$	8,819	$	15,645
Net interest income	Net interest income	40,469		38,908		Net interest income	44,979		40,469
Provision (recapture of provision) for loan losses		1,900		(300)
Net interest income after provision (recapture of provision) for loan losses		$	38,569	$	39,208
Provision for loan losses						Provision for loan losses	300		1,900
Net interest income after provision for loan losses						Net interest income after provision for loan losses	$	44,679	$	38,569
Noninterest income	Noninterest income					Noninterest income
Net gain on sale of investments	Net gain on sale of investments	86		151		Net gain on sale of investments	32		86
BOLI income	BOLI income	982		994		BOLI income	1,107		982
Wealth management revenue		663		879
Wealth management revenue, net						Wealth management revenue, net	494		663
Deposit related fees	Deposit related fees	755		733		Deposit related fees	872		755
Loan related fees	Loan related fees	1,947		1,344		Loan related fees	1,265		1,947
Other	Other	9		40		Other	92		9
Total noninterest income	Total noninterest income	$	4,442	$	4,141	Total noninterest income	$	3,862	$	4,442
Noninterest expense	Noninterest expense					Noninterest expense
Salaries and employee benefits	Salaries and employee benefits	20,039		19,595		Salaries and employee benefits	20,237		20,039
Occupancy and equipment	Occupancy and equipment	4,237		3,712		Occupancy and equipment	4,557		4,237
Professional fees	Professional fees	1,707		1,690		Professional fees	1,899		1,707
Data processing	Data processing	2,822		2,031		Data processing	2,692		2,822
OREO related expenses, net	OREO related expenses, net	9		34		OREO related expenses, net	209		9
Regulatory assessments	Regulatory assessments	547		307		Regulatory assessments	456		547
Insurance and bond premiums	Insurance and bond premiums	445		375		Insurance and bond premiums	451		445

Marketing	Marketing	197		339		Marketing	154		197

Other general and administrative	Other general and administrative	2,510		2,335		Other general and administrative	2,712		2,510
Total noninterest expense	Total noninterest expense	$	32,513	$	30,418	Total noninterest expense	$	33,367	$	32,513
Income before provision for federal income taxes	Income before provision for federal income taxes	10,498		12,931		Income before provision for federal income taxes	15,174		10,498
Federal income tax provision	Federal income tax provision	1,942		2,562		Federal income tax provision	2,925		1,942
Net income	Net income	$	8,556	$	10,369	Net income	$	12,249	$	8,556

Basic earnings per common share	Basic earnings per common share	$	0.88	$	1.04	Basic earnings per common share	$	1.31	$	0.88
Diluted earnings per common share	Diluted earnings per common share	$	0.88	$	1.03	Diluted earnings per common share	$	1.29	$	0.88
Basic weighted average number of common shares outstanding	Basic weighted average number of common shares outstanding	9,734,493		9,976,056		Basic weighted average number of common shares outstanding	9,340,997		9,734,493
Diluted weighted average number of common shares outstanding	Diluted weighted average number of common shares outstanding	9,758,644		10,075,906		Diluted weighted average number of common shares outstanding	9,454,495		9,758,644

See accompanying notes to consolidated financial statements.

8473

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

Year Ended December 31,
2020 2019
(In thousands)
Net income $ 8,556 $ 10,369
Other comprehensive (loss) income, net of tax:
Unrealized holding gains on available-for-sale securities 2,645 2,504
Tax provision (556) (526)
Reclassification adjustment for net gains realized in income (86) (151)
Tax benefit 18 32
Losses on cash flow hedges (3,251) (1,237)
Tax benefit 683 260
Other comprehensive (loss) income, net of tax $ (547) $ 882
Total comprehensive income $ 8,009 $ 11,251



	Year Ended December 31,
	2021		2020
	(In thousands)
Net income	$	12,249	$	8,556
Other comprehensive income (loss), net of tax:
Unrealized holding (losses) gains on available-for-sale securities	(1,636)		2,645
Tax effect	343		(556)
Reclassification adjustment for net gains realized in income	(32)		(86)
Tax effect	7		18
Gains (losses) on cash flow hedges	4,316		(3,251)
Tax effect	(906)		683
Other comprehensive income (loss), net of tax	$	2,092	$	(547)
Total comprehensive income	$	14,341	$	8,009

See accompanying notes to consolidated financial statements.

8574

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)


		Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity			Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at December 31, 2018		10,710,656	$	107	$	93,773	$	66,343	$	(2,253)	$	(4,232)	$	153,738
Net income		—	—		—		10,369		—		—		10,369
Other comprehensive income		—	—		—		—		882		—		882
Exercise of stock options		2,000	0		21		—		—		—		21
Issuance of common stock - restricted stock awards, net		25,278	0		(93)		—		—		—		(93)
Compensation related to stock options and restricted stock awards		—	—		501		—		—		—		501
Allocation of 112,853 ESOP shares		—	—		570		—		—		1,128		1,698
Repurchase and retirement of common stock		(479,052)	(4)		(7,402)		—		—		—		(7,406)
Canceled common stock - restricted stock awards		(5,929)	—		—		—		—		—		0
Cash dividends declared and paid ($0.35 per share)		—	—		—		(3,478)		—		—		(3,478)
Beginning balance adjustment from adoption of Topic 842		—	—		—		87		—		—		87
Balances at December 31, 2019	Balances at December 31, 2019	10,252,953	103		87,370		73,321		(1,371)		(3,104)		156,319		Balances at December 31, 2019	10,252,953	$	103	$	87,370	$	73,321	$	(1,371)	$	(3,104)	$	156,319
Net income	Net income	—	—		—		8,556		—		—		8,556		Net income	—	—		—		8,556		—		—		8,556
Other comprehensive loss	Other comprehensive loss	—	—		—		—		(547)		—		(547)		Other comprehensive loss	—	—		—		—		(547)		—		(547)

Issuance of common stock - restricted stock awards, net	Issuance of common stock - restricted stock awards, net	33,923	—		(73)		—		—		—		(73)		Issuance of common stock - restricted stock awards, net	33,923	—		—		—		—		—		—
Compensation related to stock options and restricted stock awards	Compensation related to stock options and restricted stock awards	—	—		427		—		—		—		427		Compensation related to stock options and restricted stock awards	—	—		427		—		—		—		427
Allocation of 112,854 ESOP shares	Allocation of 112,854 ESOP shares	—	—		71		—		—		1,129		1,200		Allocation of 112,854 ESOP shares	—	—		71		—		—		1,129		1,200
Repurchase and retirement of common stock	Repurchase and retirement of common stock	(544,626)	(6)		(5,700)		—		—		—		(5,706)		Repurchase and retirement of common stock	(544,626)	(6)		(5,700)		—		—		—		(5,706)
Canceled common stock - restricted stock awards	Canceled common stock - restricted stock awards	(5,375)	—		—		—		—		—		0		Canceled common stock - restricted stock awards	(5,375)	—		(73)		—		—		—		(73)
Cash dividends declared and paid ($0.40 per share)	Cash dividends declared and paid ($0.40 per share)	—	—		—		(3,874)		—		—		(3,874)		Cash dividends declared and paid ($0.40 per share)	—	—		—		(3,874)		—		—		(3,874)

Balances at December 31, 2020	Balances at December 31, 2020	9,736,875	$	97	$	82,095	$	78,003	$	(1,918)	$	(1,975)	$	156,302	Balances at December 31, 2020	9,736,875	97		82,095		78,003		(1,918)		(1,975)		156,302
Net income															Net income	—	—		—		12,249		—		—		12,249
Other comprehensive income															Other comprehensive income	—	—		—		—		2,092		—		2,092
Exercise of stock options															Exercise of stock options	41,000	—		344		—		—		—		344
Issuance of common stock - restricted stock awards, net															Issuance of common stock - restricted stock awards, net	55,673	1		—		—		—		—		1
Compensation related to stock options and restricted stock awards															Compensation related to stock options and restricted stock awards	—	—		708		—		—		—		708
Allocation of 112,853 ESOP shares															Allocation of 112,853 ESOP shares	—	—		567		—		—		1,129		1,696
Repurchase and retirement of common stock															Repurchase and retirement of common stock	(704,950)	(7)		(11,377)		—		—		—		(11,384)
Canceled common stock - restricted stock awards															Canceled common stock - restricted stock awards	(2,839)	—		(39)		—		—		—		(39)
Cash dividends declared and paid ($0.44 per share)															Cash dividends declared and paid ($0.44 per share)	—	—		—		(4,090)		—		—		(4,090)

Balances at December 31, 2021															Balances at December 31, 2021	9,125,759	$	91	$	72,298	$	86,162	$	174	$	(846)	$	157,879

See accompanying notes to consolidated financial statements.

8675

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,
2020 2019
Cash flows from operating activities:
Net income $ 8,556 $ 10,369
Adjustments to reconcile net income to net cash provided by operating activities
Provision (recapture of provision) for loan losses 1,900 (300)
OREO market value adjustments 0 29
Net amortization of premiums and discounts on investments 767 835
Gain on sale of investments available-for-sale (86) (151)
Depreciation of premises and equipment 2,170 1,840
Loss on sale of premises and equipment 0 5
Decrease in deferred federal income taxes 5 109
Allocation of ESOP shares 1,200 1,698
Stock compensation expense 427 501
Increase in cash surrender value of BOLI (982) (994)
Annuity income (43) 0
Changes in operating assets and liabilities:
Prepaid expenses and other assets 291 153
Right of use asset 678 553
Advance payments from borrowers for taxes and insurance (423) (12)
Accrued interest receivable (1,370) (70)
Lease liability (612) (483)
Accrued interest payable (74) (193)
Other liabilities (430) (809)
Net cash provided by operating activities 11,974 13,080
Cash flows from investing activities:
Proceeds from sales and call of investments 12,082 14,260
Principal repayments on investments 12,809 7,395
Purchases of investments available-for-sale (13,963) (14,417)
Purchases of investments held-to-maturity (2,375) 0
Net decrease (increase) in loans receivable 5,980 (85,258)
Purchases of premises and equipment (2,283) (2,980)
Redemption of FHLB stock 599 301
Proceeds from BOLI 0 310
Purchase of BOLI (70) (1,457)
Net cash provided by (used in) investing activities 12,779 (81,846)
Cash flows from financing activities:
Net increase in deposits 60,099 94,502
Advances from the FHLB 267,000 350,200
Repayments of advances from the FHLB (284,700) (359,000)
Proceeds from stock options exercises 0 21
Net share settlement of stock awards (73) (93)
Repurchase and retirement of common stock (5,706) (7,406)
Dividends paid (3,874) (3,478)
Net cash provided by financing activities $ 32,746 $ 74,746

~~continued~~



	Year Ended December 31,
	2021		2020
Cash flows from operating activities:
Net income	$	12,249	$	8,556
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	300		1,900

Loss on sale of OREO property, net	207		—
Net amortization of premiums and discounts on investments	1,100		767
Gain on sale of investments available-for-sale	(32)		(86)
Depreciation of premises and equipment	2,158		2,170
Loss on disposal of premises and equipment	1		—
Deferred federal income taxes	235		5
Allocation of ESOP shares	1,696		1,200
Stock compensation expense	708		427
BOLI income	(1,107)		(982)
Annuity income	(24)		(43)
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other assets	(354)		291
Decrease in right of use asset	759		678
Increase (decrease) in advance payments from borrowers for taxes and insurance	411		(423)
Decrease (increase) in accrued interest receivable	223		(1,370)
Decrease in lease liability	(736)		(612)
Decrease in accrued interest payable	(99)		(74)
Increase (decrease) in other liabilities	743		(430)
Net cash provided by operating activities	18,438		11,974
Cash flows from investing activities:
Proceeds from sales and call of investments	20,042		12,082
Principal repayments on investments	20,028		12,809
Purchases of investments available-for-sale	(84,203)		(13,963)
Purchases of investments held-to-maturity	—		(2,375)
Net (increase) decrease in loans receivable	(3,179)		5,980

Proceeds from sales of OREO properties	247		—

Purchases of premises and equipment	(2,020)		(2,283)
Sale of FHLB stock	945		599
Proceeds from BOLI death benefit settlement	1,086		—
Purchase of BOLI	(2,155)		(70)

Net cash (used by) provided by investing activities	(49,209)		12,779





continued

8776

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,
2020 2019
Net increase in cash and cash equivalents $ 57,499 $ 5,980
Cash and cash equivalents at beginning of year 22,990 17,010
Cash and cash equivalents at end of year $ 80,489 $ 22,990
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 15,720 $ 21,383
Federal income taxes 1,655 2,175
Noncash transactions:
Change in unrealized gain on investments available-for-sale 2,559 2,353
Change in unrealized losses on cash flow hedge (3,251) (1,237)
Initial recognition of right-of-use asset for new leases 2,116 2,762
Initial recognition of lease liability for new leases 2,116 2,762


	Year Ended December 31,
	2021		2020
Cash flows from financing activities:
Net increase in deposits	63,841		60,099
Advances from the FHLB	25,000		267,000
Repayments of advances from the FHLB	(50,000)		(284,700)
Proceeds from stock options exercises	344		—
Net share settlement of stock awards	(38)		(73)
Repurchase and retirement of common stock	(11,384)		(5,706)
Dividends paid	(4,090)		(3,874)
Net cash provided by financing activities	$	23,673	$	32,746


Net (decrease) increase in cash and cash equivalents	$	(7,098)	$	57,499
Cash and cash equivalents at beginning of year	80,489		22,990
Cash and cash equivalents at end of year	$	73,391	$	80,489

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	8,918	$	15,720
Federal income taxes	3,190		1,655



Noncash transactions:

Change in unrealized gain on investments available-for-sale	(1,668)		2,559
Change in unrealized losses on cash flow hedge	4,316		(3,251)
Initial recognition of right-of-use asset for new leases	758		2,116
Initial recognition of lease liability for new leases	758		2,116

See accompanying notes to consolidated financial statements.

8877

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

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”) in connection with the conversion from a mutual holding company structure to a stock holding company structure completed on October 9, 2007. First Financial Northwest’s business activities generally are limited to passive investment activities and oversight of its investment in First Financial Northwest Bank. Accordingly, the information presented in the consolidated financial statements and related data, relates primarily to First Financial Northwest 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 Bank of San Francisco (“FRB”). First Financial Northwest Bank is regulated by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“DFI”).

First Financial Northwest 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 converted to a Washington state-chartered mutual savings bank in 1992. In 2002, First Financial Northwest 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. In February 2016, the Bank changed its charter from a Washington chartered stock savings bank to a Washington chartered commercial bank.

First Financial Northwest 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 ~~Kirkland.~~Issaquah. In ~~Snohomish~~Snohomish County, five additional branch offices serve Mill Creek, Edmonds, Clearview, Smokey Point, and Lake Stevens. In Pierce County, two branch offices serve Gig Harbor and University Place. First Financial Northwest 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, held a portfolio of one-to-four family, land and consumer loans that were serviced by the Bank, however, in 2019, FFD’s loan portfolio had been fully paid off.

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 subsidiaries 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 events and transactions subsequent to December 31, ~~2020~~2021 for potential recognition or disclosure.

8978

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

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 Company is required to maintain an average reserve balance with the FRB or maintain such reserve balance in the form of cash. Effective March 26, 2020 the Federal Reserve lowered the reserve ratios on transaction accounts maintained at a depository institution to zero percent. There was 0no required reserve balance at December 31, ~~2020,~~2021 and ~~a required balance of $750,000 at December 31, 2019, that was met by holding cash and maintaining an average balance with the FRB.~~2020.

Investments

Investments in debt securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading. At December 31, 2021 and 2020, we had held-to-maturity and available-for-sale, but no ~~trading securities. At December 31, 2019, we had no held-to-maturity or~~ 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 fair value, which is the 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

9079

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.

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. 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-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.

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”) 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.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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. Additional analysis was completed on the ALLL during 2021 and 2020 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance.

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.

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 Bank 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’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, (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 Bank 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 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 are 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

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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 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.

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

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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.

Advertising Expenses

Advertising costs are generally expensed as 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

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 change in fair value recorded as other comprehensive income or loss. The gain or loss on the derivative is reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged 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.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Core Deposit Intangible

A core deposit intangible (“CDI”) asset is recognized from the assumption of core deposit liabilities in connection with the acquisition of four branches from Opus Bank, a California state-chartered commercial bank (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.

Recent Accounting Pronouncements Adopted in ~~2020~~2021

In ~~August 2018,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2018-13,~~2019-12, ~~Fair Value Measurement~~Income Taxes (Topic ~~820) - Disclosure Framework - Changes~~740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing (i) the exception to the ~~Disclosure Requirements~~incremental approach for ~~Fair Value Measurement.~~ ~~The amendments~~intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (ii) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and (iii) the general methodology for calculating income taxes in ~~this ASU remove certain disclosure requirements regarding transfers between Level 1 and Level 2 of~~an interim period when a year-to-date loss exceeds the ~~fair value hierarchy and changes in unrealized gains and losses~~anticipated loss for ~~recurring Level 3 fair value measurements. In addition,~~ the ~~amendments modified and added certain disclosure requirements for Level 3 fair value measurements.~~year. The Company adopted ~~ASU 2018-13~~ this ASU ~~as of~~in January ~~1, 2020,~~2021 with no material impact on ~~the Company’s~~its consolidated financial statements.

In ~~March~~October 2020, the FASB issued ASU ~~No. 2020-04,~~2020-08, ~~Reference Rate Reform (Topic 848): Facilitation~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of ~~the Effects of reference Rate Reform on Financial Reporting.~~ This ASU applies to contracts, hedging relationships and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. For a cash flow hedge, a change in the method used to assess hedge effectiveness will not result in de-designation of the hedging relationship if certain criteria are met.paragraph 310-20-35-33 for each reporting period. The Company ~~is party to interest rate swap arrangements where the reference rate is LIBOR. This ASU was effective when issued, with elective adoption. The Company has~~ adopted this ASU in January 2021 with no material impact on its consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services —Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946). This ASU outlines the changes in the presentation of information on the balance sheet due to SEC Regulation S-X. This rule was put into place to better identify various items and whether they should appear on the face of the balance sheet or the accompanying notes. The Company adopted ASU 2021-06 in the fourth quarter of 2021 with no material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

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~~.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 ~~(“ACL”)~~ 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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

beginning of the first reporting period in which the ASU is adopted. This ASU is effective for smaller reporting companies, such as the Company, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption ~~permitted for smaller reporting companies, such as the Company.~~permitted. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard and expects a change in the processes and procedures to calculate the ~~ACL~~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 ~~in converting~~to the ALLL ~~to the ACL for the loan~~ or investment ~~portfolios~~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 ~~with~~that have certain financial instruments measured at amortized cost that ~~have~~has credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. This ASU is effective upon adoption of ASU 2016-13, and should be applied on a modified-retrospective basis as a cumulative-effect adjustment to the opening balance of retained earnings in the statement of financial condition as of the adoption date. The Company is in the process of compiling historical and industry data that will be used to calculate expected credit losses on the loan portfolio to ensure that it is fully compliant with the ASU at the adoption date and is evaluating the potential impact adoption of this ASU will have on its consolidated financial statements. ~~Until the evaluation is complete, however, any potential increase to our allowance for credit losses will not be known.~~ The Company intends to adopt ASU 2016-13 in the first quarter of ~~2023.~~2023, and as a result, the ALLL may increase. Until the evaluation is complete, however, the magnitude of the increase will not be known.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In ~~April 2019,~~January 2021, the FASB issued ASU ~~2019-05,~~No. 2021-01, ~~Financial Instruments--Credit Losses~~Reference Rate Reform (Topic ~~326), Targeted Transition Relief.~~ 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 ~~provide~~are elective and apply to all entities that have ~~certain financial~~derivative instruments ~~measured at amortized cost~~ that ~~have 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.~~use an interest rate that will be modified by reference rate reform. This ASU ~~is effective when ASU 2016-13 is adopted,~~provides implementation guidance to clarify that certain optional expedients and ~~will~~exceptions in Topic 848 may be applied to derivative instruments. This ASU may be elected on a ~~modified-retrospective~~full retrospective basis asfor any interim period subsequent to March 12, 2020, or on a ~~cumulative-effect adjustment~~prospective basis to new modifications from any date subsequent to the ~~opening balance~~date of ~~retained earnings in the statement~~issuance. As of ~~financial condition as of the adoption date. Adoption of ASU 2019-05 is not expected to have a material impact on~~December 31, 2021, the Company’s ~~consolidated financial statements.~~

~~In December 2019, FASB issued~~derivative instruments continued to use LIBOR as the basis for interest-rate swap calculations. The Company is evaluating the optional election of this ASU ~~No. 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12).~~ This ASU simplifies the accounting for income taxes by removing the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items, removing the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and removing the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the ~~year. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect the adoption of ASU 2019-12~~transition from LIBOR to ~~have~~ a ~~material impact on its consolidated financial statements.~~

~~In October 2020, FASB issued ASU 2020-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (subtopic 310-20)~~. ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.new reference rate.

Note 2 - Investments

The following tables summarize the amortized cost and fair value of investments available-for-sale at December 31, ~~2020~~2021 and ~~2019,~~2020, and the corresponding amounts of gross unrealized gains and losses.


		December 31, 2020									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:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	12,797	$	491	$	0	$	13,288	Fannie Mae	$	12,920	$	146	$	(88)	$	12,978
Freddie Mac	Freddie Mac	4,116		200		0		4,316		Freddie Mac	13,039		115		(330)		12,824
Ginnie Mae	Ginnie Mae	16,513		617		(3)		17,127		Ginnie Mae	23,728		105		(146)		23,687
Other	Other	10,691		100		(62)		10,729		Other	11,278		47		(61)		11,264
Municipal bonds	Municipal bonds	16,483		963		0		17,446		Municipal bonds	36,078		677		(289)		36,466
U.S. Government agencies	U.S. Government agencies	41,084		88		(537)		40,635		U.S. Government agencies	41,711		61		(338)		41,434
Corporate bonds	Corporate bonds	24,001		221		(212)		24,010		Corporate bonds	29,997		505		(207)		30,295
		$	125,685	$	2,680	$	(814)	$	127,551		$	168,751	$	1,656	$	(1,459)	$	168,948

9685

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		December 31, 2019									December 31, 2020
		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:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	15,605	$	128	$	(104)	$	15,629	Fannie Mae	$	12,797	$	491	$	—	$	13,288
Freddie Mac	Freddie Mac	4,196		96		0		4,292		Freddie Mac	4,116		200		—		4,316
Ginnie Mae	Ginnie Mae	23,239		140		(329)		23,050		Ginnie Mae	16,513		617		(3)		17,127
Other	Other	11,407		66		(25)		11,448		Other	10,691		100		(62)		10,729
Municipal bonds	Municipal bonds	10,675		272		(36)		10,911		Municipal bonds	16,483		963		—		17,446
U.S. Government agencies	U.S. Government agencies	46,672		13		(935)		45,750		U.S. Government agencies	41,084		88		(537)		40,635
Corporate bonds	Corporate bonds	25,500		372		(351)		25,521		Corporate bonds	24,001		221		(212)		24,010
		$	137,294	$	1,087	$	(1,780)	$	136,601		$	125,685	$	2,680	$	(814)	$	127,551

There were $2.4 million of investments classified as held-to-maturity at both December 31, ~~2020,~~2021, and ~~NaN at December 31, 2019.~~2020. In January 2020, the Bank 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.~~consolidated balance sheet. The amortized cost ~~is considered the fair value of the investment.~~includes increases from interest income.

The amortized cost and estimated fair value of investments available-for-sale at December 31, ~~2020,~~2021, 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.


		December 31, 2020					December 31, 2021
		Amortized Cost		Fair Value			Amortized Cost		Fair Value
		(In thousands)					(In thousands)
Due within one year	Due within one year	$	0	$	0	Due within one year	$	399	$	404
Due after one year through five years	Due after one year through five years	8,977		8,905		Due after one year through five years	8,547		8,592
Due after five years through ten years	Due after five years through ten years	18,259		18,469		Due after five years through ten years	27,501		27,784
Due after ten years	Due after ten years	54,332		54,717		Due after ten years	71,339		71,415
		81,568		82,091			107,786		108,195
Mortgage-backed investments	Mortgage-backed investments	44,117		45,460		Mortgage-backed investments	60,965		60,753
		$	125,685	$	127,551		$	168,751	$	168,948

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 ~~$23.4~~$23.1 million and ~~$19.0~~$23.4 million were pledged as collateral for public deposits at December 31, ~~2020,~~2021, and ~~2019,~~2020, respectively, both of which exceeded the minimum collateral requirements established by the Washington Public Deposit Protection Commission. At both December 31, ~~2020,~~2021, and ~~2019,~~2020, there were 0no investments pledged as collateral for FHLB advances.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sales and other redemptions of available-for-sale investments were as follows:

Year Ended December 31,
2020 2019
(In thousands)
Proceeds $ 12,082 $ 14,260
Gross gains 189 190
Gross losses (103) (39)

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~


	Year Ended December 31,
	2021		2020
	(In thousands)
Proceeds	$	20,042	$	12,082
Gross gains	104		189
Gross losses	(72)		(103)

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, ~~2020~~2021 and ~~2019.~~2020.


		December 31, 2020													December 31, 2021
		Less Than 12 Months				12 Months or Longer				Total					Less Than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
		(In thousands)													(In thousands)
Mortgage-backed investments:	Mortgage-backed investments:													Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	0	$	0	$	0	$	0	$	0	$	0	Fannie Mae	$	6,279	$	(88)	$	—	$	—	$	6,279	$	(88)
Freddie Mac	Freddie Mac	0		0		0		0		0		0		Freddie Mac	4,709		(233)		3,214		(97)		7,923		(330)
Ginnie Mae	Ginnie Mae	0		0		1,311		(3)		1,311		(3)		Ginnie Mae	18,539		(146)		—		—		18,539		(146)
Other	Other	0		0		5,942		(62)		5,942		(62)		Other	4,815		(61)		—		—		4,815		(61)
Municipal bonds	Municipal bonds	0		0		0		0		0		0		Municipal bonds	18,805		(264)		1,059		(25)		19,864		(289)
U.S. Government agencies	U.S. Government agencies	1,716		(11)		30,991		(526)		32,707		(537)		U.S. Government agencies	10,123		(34)		21,682		(304)		31,805		(338)
Corporate bonds	Corporate bonds	0		0		5,794		(212)		5,794		(212)		Corporate bonds	985		(15)		3,809		(192)		4,794		(207)
		$	1,716	$	(11)	$	44,038	$	(803)	$	45,754	$	(814)		$	64,255	$	(841)	$	29,764	$	(618)	$	94,019	$	(1,459)


		December 31, 2019													December 31, 2020
		Less Than 12 Months				12 Months or Longer				Total					Less Than 12 Months				12 Months or Longer				Total
		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
		(In thousands)													(In thousands)
Mortgage-backed investments:	Mortgage-backed investments:													Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	8,340	$	(104)	$	0	$	0	$	8,340	$	(104)	Fannie Mae	$	—	$	—	$	—	$	—	$	—	$	—
Freddie Mac	Freddie Mac	0		0		0		0		0		0		Freddie Mac	—		—		—		—		—		—
Ginnie Mae	Ginnie Mae	156		0		12,921		(329)		13,077		(329)		Ginnie Mae	—		—		1,311		(3)		1,311		(3)
Other	Other	2,843		(7)		6,000		(18)		8,843		(25)		Other	—		—		5,942		(62)		5,942		(62)
Municipal bonds	Municipal bonds	3,257		(36)		0		0		3,257		(36)		Municipal bonds	—		—		—		—		—		—
U.S. Government agencies	U.S. Government agencies	12,266		(201)		31,490		(734)		43,756		(935)		U.S. Government agencies	1,716		(11)		30,991		(526)		32,707		(537)
Corporate bonds	Corporate bonds	1,996		(12)		7,161		(339)		9,157		(351)		Corporate bonds	—		—		5,794		(212)		5,794		(212)
		$	28,858	$	(360)	$	57,572	$	(1,420)	$	86,430	$	(1,780)		$	1,716	$	(11)	$	44,038	$	(803)	$	45,754	$	(814)

At December 31, ~~2020,~~2021, and ~~2019,~~2020, the Company had 2051 and 3720 securities, respectively, with a gross unrealized loss position. Management reviewed the financial condition of the entities underlying the securities at both December 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, 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, ~~2020~~2021 and ~~2019,~~2020, 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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Loans Receivable

Loans receivable net of loans in process (“LIP”) at December 31, ~~2020,~~2021, and ~~2019~~2020 are summarized as follows:

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
One-to-four family residential:	One-to-four family residential:					One-to-four family residential:
Permanent owner occupied	Permanent owner occupied	$	206,323	$	210,898	Permanent owner occupied	$	185,320	$	206,323
Permanent non-owner occupied	Permanent non-owner occupied	175,637		161,630		Permanent non-owner occupied	199,796		175,637
		381,960		372,528			385,116		381,960
Multifamily:
Permanent		136,694		172,915
		136,694		172,915
Commercial real estate:
Permanent		385,265		395,152
Multifamily						Multifamily	130,146		136,694

Commercial real estate						Commercial real estate	419,417		385,265
		385,265		395,152
Construction/land: (1)	Construction/land: (1)					Construction/land: (1)
One-to-four family residential	One-to-four family residential	33,396		44,491		One-to-four family residential	34,677		33,396
Multifamily	Multifamily	51,215		40,954		Multifamily	37,194		51,215
Commercial	Commercial	5,783		19,550		Commercial	6,189		5,783
Land	Land	1,813		8,670		Land	15,395		1,813
		92,207		113,665			93,455		92,207

Business	Business	80,663		37,779		Business	46,590		80,663
Consumer	Consumer	40,621		30,199		Consumer	44,812		40,621
Total loans	Total loans	1,117,410		1,122,238		Total loans	1,119,536		1,117,410
Less:	Less:					Less:
Deferred loan fees, net		1,654		558
Deferred loan fees, net (2)						Deferred loan fees, net (2)	418		1,654
ALLL	ALLL	15,174		13,218		ALLL	15,657		15,174
Loans receivable, net	Loans receivable, net	$	1,100,582	$	1,108,462	Loans receivable, net	$	1,103,461	$	1,100,582

____________

(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 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, 2021, the Company classified $37.2 million of multifamily loans, $12.9 million of commercial land loans and $6.2 million of commercial real estate loans as construction/land loans to facilitate the review of the composition of its loan portfolio. At December 31, 2020, ~~we classified~~ $51.2 million of multifamily loans, $1.8 million of commercial land loans, and $5.8 million of commercial real estate loans as construction/land loans to facilitate the review of the composition of our loan portfolio. At December 31, 2019, $38.6 million of multifamily loans, $8.7 million of commercial land loans, $3.5 million one-to-four family residential and $18.3 million of commercial real estate loans were reclassified to the construction/land category.

(2)Deferred loan fees, net, include $3.3 million of unamortized loan purchase premiums.

At both December 31, ~~2020,~~2021, and ~~2019,~~2020, there were no loans classified as held for sale.

Concentrations of credit. Most of the Bank’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, ~~2020,~~2021, the Company’s loan portfolio consists of one-to-four family residential loans which comprised ~~34.2%~~34.4%, commercial real estate and multifamily loans were ~~34.5%~~37.5% and ~~12.2%~~11.6%, respectively, and construction/land loans were ~~8.3%~~8.4% of the total loan portfolio. Consumer and business loans accounted for the remaining ~~10.8%~~8.1% of the loan portfolio. During the ~~year~~years ended December 31, 2021, and 2020, the Bank 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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

COVID-19 sustain operations. Forgiveness payments received from the SBA reduced the balance of PPP loans included in commercial business loans ~~totaled $41.3~~to $10.8 million at December 31, 2021, all of which ~~are~~is fully guaranteed by the SBA. The Bank expects that the ~~great~~ majority of remaining PPP borrowers will seek full or partial forgiveness of their loan obligations in accordance with the CARES Act. Included in the one-to-four family residential, multifamily, commercial real estate, and business loan portfolios at December 31, 2020 were $420,000, $12.3 million, $68.5 million, and $15.1 million respectively, to theThe Company’s five largest borrowing ~~relationships.~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

relationships had an aggregate total of $106.6 million at December 31, 2021, representing 9.5% of total loans receivable.

The Company originates both adjustable and fixed interest rate loans. The composition of loans receivable at December 31, ~~2020,~~2021, and ~~2019,~~2020, was as follows:


December 31, 2020
December 31, 2021							December 31, 2021
Fixed Rate	Fixed Rate			Adjustable Rate			Fixed Rate			Adjustable Rate
Term to Maturity	Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance		Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)	(In thousands)						(In thousands)
Due within one year	Due within one year	$	30,627	Due within one year	$	294,220	Due within one year	$	39,712	Due within one year	$	284,631
After one year through three years	After one year through three years	92,301		After one year through three years	82,153		After one year through three years	50,504		After one year through three years	74,706
After three years through five years	After three years through five years	106,298		After three years through five years	98,296		After three years through five years	92,824		After three years through five years	177,607
After five years through ten years	After five years through ten years	107,788		After five years through ten years	100,495		After five years through ten years	118,310		After five years through ten years	103,909
Thereafter	Thereafter	205,232		Thereafter	0		Thereafter	177,333		Thereafter	—
		$	542,246		$	575,164		$	478,683		$	640,853


December 31, 2019
December 31, 2020							December 31, 2020
Fixed Rate	Fixed Rate			Adjustable Rate			Fixed Rate			Adjustable Rate
Term to Maturity	Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance		Term to Maturity	Principal Balance		Term to Rate Adjustment	Principal Balance
(In thousands)	(In thousands)						(In thousands)
Due within one year	Due within one year	$	29,997	Due within one year	$	297,221	Due within one year	$	30,627	Due within one year	$	294,220
After one year through three years	After one year through three years	63,055		After one year through three years	102,248		After one year through three years	92,301		After one year through three years	82,153
After three years through five years	After three years through five years	68,659		After three years through five years	137,487		After three years through five years	106,298		After three years through five years	98,296
After five years through ten years	After five years through ten years	126,762		After five years through ten years	86,404		After five years through ten years	107,788		After five years through ten years	100,495
Thereafter	Thereafter	207,055		Thereafter	3,350		Thereafter	205,232		Thereafter	—
		$	495,528		$	626,710		$	542,246		$	575,164

Our adjustable-rate loans are tied to various indexes, including LIBOR, the prime rate as published in The Wall Street Journal, and 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 Bank. Pass credits also include credits that are on the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future.

•Grade 6: These credits, classified as ”special mention”, possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

~~100~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

•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, ~~2020,~~2021, and ~~2019,~~2020, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at December 31, ~~2020,~~2021, and ~~2019~~2020 by type and risk category:


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


		December 31, 2019															December 31, 2020
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction / Land		Business		Consumer		Total
		(In thousands)															(In thousands)
Risk Rating:	Risk Rating:															Risk Rating:
Pass, grade 1-4	Pass, grade 1-4	$	366,472	$	170,810	$	386,620	$	98,892	$	37,779	$	30,157	$	1,090,730	Pass, grade 1-4	$	376,918	$	132,243	$	316,955	$	89,957	$	80,208	$	40,477	$	1,036,758
Pass, grade 5 (watch)	Pass, grade 5 (watch)	4,891		0		8,007		2,249		0		42		15,189		Pass, grade 5 (watch)	3,914		2,347		52,375		2,250		455		144		61,485
Special mention	Special mention	536		2,105		525		12,524		0		0		15,690		Special mention	601		—		15,935		—		—		—		16,536
Substandard	Substandard	629		0		0		0		0		0		629		Substandard	527		2,104		—		—		—		—		2,631
Total	Total	$	372,528	$	172,915	$	395,152	$	113,665	$	37,779	$	30,199	$	1,122,238	Total	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410

ALLL. When the Company classifies problem assets as either substandard or doubtful, pursuant to Federal regulations, or identifies a loan where it is uncertain if the Bank will be able to collect all amounts due according to the contractual terms of the loan, it may establish a specific reserve 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 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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

~~101~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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 the Bank expects the majority of PPP borrowers will seek full or partial forgiveness of their loan obligations in accordance with the CARES Act.


		At or For the Year Ended December 31, 2020															At or For the Year Ended December 31, 2021
		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
ALLL:	ALLL:	(In thousands)														ALLL:	(In thousands)
Beginning balance	Beginning balance	$	3,034	$	1,607	$	4,559	$	2,222	$	1,140	$	656	$	13,218	Beginning balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174
Charge-offs	Charge-offs	0		0		0		0		0		(2)		(2)		Charge-offs	—		—		—		—		—		—		—
Recoveries	Recoveries	28		0		30		0		0		0		58		Recoveries	183		—		—		—		—		—		183
(Recapture) provision	(Recapture) provision	119		(241)		1,538		(33)		102		415		1,900		(Recapture) provision	(150)		(87)		488		(125)		(130)		304		300
Ending balance	Ending balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174	Ending balance	$	3,214	$	1,279	$	6,615	$	2,064	$	1,112	$	1,373	$	15,657

General reserve	General reserve	$	3,173	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,166	General reserve	$	3,194	$	1,279	$	6,615	$	2,064	$	1,112	$	1,373	$	15,637
Specific reserve	Specific reserve	8		0		0		0		0		0		8		Specific reserve	20		—		—		—		—		—		20

Loans:	Loans:															Loans:
Total Loans	Total Loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410	Total Loans	$	385,116	$	130,146	$	419,417	$	93,455	$	46,590	$	44,812	$	1,119,536
Loans collectively evaluated for impairment (1) (3)	Loans collectively evaluated for impairment (1) (3)	$	379,333	134,590		368,596		92,207		80,663		40,621		1,096,010		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)	Loans individually evaluated for impairment (2)	2,627		2,104		16,669		0		0		0		21,400		Loans individually evaluated for impairment (2)	2,107		—		34,030		—		—		—		36,137

____________

(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

(3) PPP loans totaling $10.8 million were excluded from the collectively evaluated pool when calculating the ALLL as payment on these loans is guaranteed by the SBA.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	At or For the Year Ended December 31, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
ALLL:	(In thousands)
Beginning balance	$	3,034	$	1,607	$	4,559	$	2,222	$	1,140	$	656	$	13,218
Charge-offs	—		—		—		—		—		(2)		(2)
Recoveries	28		—		30		—		—		—		58
(Recapture) provision	119		(241)		1,538		(33)		102		415		1,900
Ending balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174

General reserve	$	3,173	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,166
Specific reserve	8		—		—		—		—		—		8

Loans:
Total Loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410
Loans collectively evaluated for impairment (1) (3)	$	379,333	134,590		368,596		92,207		80,663		40,621		1,096,010
Loans individually evaluated for impairment (2)	2,627		2,104		16,669		—		—		—		21,400

_____________

(1) Loans collectively evaluated for general reserves.

(2) Loans individually evaluated for specific reserves.

(3) PPP loans totaling $41.3 million were excluded from the collectively evaluated pool when calculating the ALLL as payment on these loans is guaranteed by the SBA.

~~102~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At or For the Year Ended December 31, 2019
One-to-Four Family Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
ALLL: (In thousands)
Beginning balance $ 3,387 $ 1,680 $ 4,777 $ 2,331 $ 936 $ 236 $ 13,347
   Charge-offs 0 0 0 0 0 0 0
   Recoveries 73 45 0 0 0 53 171
   (Recapture)
provision (426) (118) (218) (109) 204 367 (300)
Ending balance $ 3,034 $ 1,607 $ 4,559 $ 2,222 $ 1,140 $ 656 $ 13,218
General reserve $ 3,003 $ 1,607 $ 4,559 $ 2,222 $ 1,140 $ 656 $ 13,187
Specific reserve 31 0 0 0 0 0 31
Loans:
Total Loans $ 372,528 $ 172,915 $ 395,152 $ 113,665 $ 37,779 $ 30,199 $ 1,122,238
Loans collectively evaluated for impairment (1)
$ 368,453 170,810 393,886 101,141 37,779 30,199 1,102,268
Loans individually evaluated for impairment (2)
4,075 2,105 1,266 12,524 0 0 19,970

~~_____________~~

~~(1)~~ ~~Loans collectively evaluated for general reserves.~~

~~(2)~~ ~~Loans individually evaluated for specific reserves.~~

Past Due Loans. At December 31, ~~2020,~~2021, total past due loans comprised ~~0.24%~~0.02% of total loans as compared to ~~0.19%~~0.24% at December 31, ~~2019.~~2020.

The following tables represent a summary at December 31, ~~2020,~~2021, and ~~2019,~~2020, of the aging of loans by type:


		Loans Past Due as of December 31, 2020													Loans Past Due as of December 31, 2021
		30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans (1)			30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans (1)
		(In thousands)													(In thousands)
Real estate:	Real estate:													Real estate:
One-to-four family residential:	One-to-four family residential:													One-to-four family residential:
Owner occupied	Owner occupied	$	77	$	0	$	0	$	77	$	206,246	$	206,323	Owner occupied	$	—	$	—	$	—	$	—	$	185,320	$	185,320
Non-owner occupied	Non-owner occupied	159		0		0		159		175,478		175,637		Non-owner occupied	—		—		—		—		199,796		199,796
Multifamily	Multifamily	0		0		2,104		2,104		134,590		136,694		Multifamily	—		—		—		—		130,146		130,146
Commercial real estate	Commercial real estate	0		0		0		0		385,265		385,265		Commercial real estate	—		—		—		—		419,417		419,417
Construction/land	Construction/land	0		0		0		0		92,207		92,207		Construction/land	—		—		—		—		93,455		93,455
Total real estate	Total real estate	236		0		2,104		2,340		993,786		996,126		Total real estate	—		—		—		—		1,028,134		1,028,134
Business	Business	275		0		0		275		80,388		80,663		Business	76		—		—		76		46,514		46,590
Consumer	Consumer	38		0		0		38		40,583		40,621		Consumer	179		—		—		179		44,633		44,812
Total	Total	$	549	$	0	$	2,104	$	2,653	$	1,114,757	$	1,117,410	Total	$	255	$	—	$	—	$	255	$	1,119,281	$	1,119,536

_________________________

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


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

________________________

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

~~103~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans Past Due as of December 31, 2019
30-59 Days 60-89 Days 90 Days and Greater Total Current
Total
Loans (1)
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ 79 $ 0 $ 0 $ 79 $ 210,819 $ 210,898
Non-owner occupied 0 0 0 0 161,630 161,630
Multifamily 2,105 0 0 2,105 170,810 172,915
Commercial real estate 0 0 0 0 395,152 395,152
Construction/land 0 0 0 0 113,665 113,665
Total real estate 2,184 0 0 2,184 1,052,076 1,054,260
Business 0 0 0 0 37,779 37,779
Consumer 0 0 0 0 30,199 30,199
Total $ 2,184 $ 0 $ 0 $ 2,184 $ 1,120,054 $ 1,122,238

~~________________________~~

~~(1)~~ ~~There were 0 loans 90 days past due and still accruing interest at December 31, 2019.~~

Nonaccrual Loans. The following table is a summary of nonaccrual loans at December 31, ~~2020,~~2021, and ~~2019,~~2020, by type of loan:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
One-to-four family residential		$	0	$	95

Multifamily	Multifamily	2,104		0		Multifamily	$	—	$	2,104

Total nonaccrual loans	Total nonaccrual loans	$	2,104	$	95	Total nonaccrual loans	$	—	$	2,104

~~Nonperforming loans were~~During 2021, the $2.1 million ~~and $95,000~~nonaccrual loan at December 31, 2020, paid off, resulting in no nonaccrual loans at December 31, 2021. The payoff of this loan included all past due interest, and ~~2019, respectively. Foregone~~as a result the Company had no foregone interest on nonaccrual loans for the ~~years~~year ended December 31, ~~2020, and 2019, were~~2021, as compared to $82,000 ~~and $12,000, respectively.~~of foregone interest for the year ended December 31, 2020.

The following tables summarize the loan portfolio at December 31, ~~2020,~~2021, and ~~2019,~~2020, by type and payment activity:


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

____________

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


	December 31, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing (1)	$	381,960	$	134,590	$	385,265	$	92,207	$	80,663	$	40,621	$	1,115,306
Nonperforming (2)	—		2,104		—		—		—		—		2,104
Total	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410

_____________

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

~~104~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

December 31, 2019
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
Performing (1)
$ 372,433 $ 172,915 $ 395,152 $ 113,665 $ 37,779 $ 30,199 $ 1,122,143
Nonperforming (2)
95 0 0 0 0 0 95
Total $ 372,528 $ 172,915 $ 395,152 $ 113,665 $ 37,779 $ 30,199 $ 1,122,238

~~_____________~~

~~(1)~~ ~~There were $210.8 million of owner-occupied one-to-four family residential loans and $161.6 million of non-owner occupied one-to-four family residential loans classified as performing.~~

~~(2)~~ ~~There were $95,000 of owner-occupied one-to-four family residential loans and 0 non-owner occupied one-to-four family residential loans classified as nonperforming.~~

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.

At both December 31, 2021, and 2020, there were 0no commitments to advance funds related to impaired loans.

~~At December 31, 2019, there was $3.1 million committed to be advanced on an impaired $12.5 million construction loan.~~

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, ~~2020,~~2021, and ~~2019,~~2020, by the type of loan:


		At December 31, 2020							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:							Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	$	274	$	365	$	—	Owner occupied	$	178	$	185	$	—
Non-owner occupied	Non-owner occupied	1,031		1,031		—		Non-owner occupied	915		915		—
Multifamily		2,104		2,104		—

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

Total	Total	20,078		20,169		—		Total	35,123		35,130		—
Loans with an allowance:	Loans with an allowance:							Loans with an allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	502		549		6		Owner occupied	494		541		19
Non-owner occupied	Non-owner occupied	820		820		2		Non-owner occupied	520		520		1

Total	Total	1,322		1,369		8		Total	1,014		1,061		20
Total impaired loans:	Total impaired loans:							Total impaired loans:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	776		914		6		Owner occupied	672		726		19
Non-owner occupied	Non-owner occupied	1,851		1,851		2		Non-owner occupied	1,435		1,435		1
Multifamily		2,104		2,104		0

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

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

_________________

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

(2) Contractual loan principal balance.

~~105~~95

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		At December 31, 2019							At December 31, 2020
		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance			Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
		(In thousands)							(In thousands)
Loans with no related allowance:	Loans with no related allowance:							Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	$	437	$	582	$	—	Owner occupied	$	274	$	365	$	—
Non-owner occupied	Non-owner occupied	1,486		1,486		—		Non-owner occupied	1,031		1,031		—
Multifamily	Multifamily	2,105		2,105		—		Multifamily	2,104		2,104		—
Commercial real estate	Commercial real estate	1,266		1,266		—		Commercial real estate	16,669		16,669		—
Construction/land		12,524		15,650		—

Total	Total	17,818		21,089		—		Total	20,078		20,169		—
Loans with an allowance:	Loans with an allowance:							Loans with an allowance:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	505		552		13		Owner occupied	502		549		6
Non-owner occupied	Non-owner occupied	1,647		1,647		18		Non-owner occupied	820		820		2

Total	Total	2,152		2,199		31		Total	1,322		1,369		8
Total impaired loans:	Total impaired loans:							Total impaired loans:
One-to-four family residential:	One-to-four family residential:							One-to-four family residential:
Owner occupied	Owner occupied	942		1,134		13		Owner occupied	776		914		6
Non-owner occupied	Non-owner occupied	3,133		3,133		18		Non-owner occupied	1,851		1,851		2
Multifamily	Multifamily	2,105		2,105		0		Multifamily	2,104		2,104		—
Commercial real estate	Commercial real estate	1,266		1,266		0		Commercial real estate	16,669		16,669		—
Construction/land		12,524		15,650		0

Total	Total	$	19,970	$	23,288	$	31	Total	$	21,400	$	21,538	$	8

_____________

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

(2) Contractual loan principal balance.

~~106~~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, ~~2020~~2021 and ~~2019,~~2020, by the type of loan:


		Year Ended December 31,									Year Ended December 31,
		2020				2019					2021				2020
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
		(In thousands)									(In thousands)
Loans with no related allowance:	Loans with no related allowance:									Loans with no related allowance:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	$	380	$	18	$	852	$	36	Owner occupied	$	217	$	12	$	380	$	18
Non-owner occupied	Non-owner occupied	1,207		69		1,833		94		Non-owner occupied	947		62		1,207		69
Multifamily	Multifamily	2,104		186		421		111		Multifamily	828		—		2,104		186
Commercial real estate	Commercial real estate	10,568		684		2,038		90		Commercial real estate	23,994		1,329		10,568		684
Construction/land	Construction/land	5,635		0		7,143		834		Construction/land	—		—		5,635		—
Consumer		0		0		43		0

Total	Total	19,894		957		12,330		1,165		Total	25,986		1,403		19,894		957

Loans with an allowance:	Loans with an allowance:									Loans with an allowance:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	503		9		509		34		Owner occupied	498		31		503		9
Non-owner occupied	Non-owner occupied	1,206		52		2,092		93		Non-owner occupied	756		37		1,206		52

Commercial real estate		0		0		48		0

Total	Total	1,709		61		2,649		127		Total	1,254		68		1,709		61

Total impaired loans:	Total impaired loans:									Total impaired loans:
One-to-four family residential:	One-to-four family residential:									One-to-four family residential:
Owner occupied	Owner occupied	883		27		1,361		70		Owner occupied	715		43		883		27
Non-owner occupied	Non-owner occupied	2,413		121		3,925		187		Non-owner occupied	1,703		99		2,413		121
Multifamily	Multifamily	2,104		186		421		111		Multifamily	828		—		2,104		186
Commercial real estate	Commercial real estate	10,568		684		2,086		90		Commercial real estate	23,994		1,329		10,568		684
Construction/land	Construction/land	5,635		0		7,143		834		Construction/land	—		—		5,635		—
Consumer		0		0		43		0

Total	Total	$	21,603	$	1,018	$	14,979	$	1,292	Total	$	27,240	$	1,471	$	21,603	$	1,018

~~107~~97

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructurings. The following is a summary of information pertaining to TDRs:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)

Performing TDRs	Performing TDRs	$	3,869	$	5,246	Performing TDRs	$	2,107	$	3,869
Nonaccrual TDRs	Nonaccrual TDRs	0		0		Nonaccrual TDRs	—		—
Total TDRs	Total TDRs	$	3,869	$	5,246	Total TDRs	$	2,107	$	3,869

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).

The following table presents for the periods indicated TDRs and their recorded investment prior to the modification and after the modification:


		Year Ended December 31,											Year Ended December 31,
		2020					2019						2021					2020
		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			Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
		(Dollars in thousands)											(Dollars in thousands)
TDRs that occurred during the period:	TDRs that occurred during the period:											TDRs that occurred during the period:
One-to-four family residential:	One-to-four family residential:											One-to-four family residential:

Principal and interest with interest rate concession	Principal and interest with interest rate concession	0	$	0	$	0	7	$	1,360	$	1,360	Principal and interest with interest rate concession	—	$	—	$	—	—	$	—	$	—
Advancement of maturity date	Advancement of maturity date	0	0		0		3	694		694		Advancement of maturity date	3	1,353		1,353		—	—		—
Commercial real estate:	Commercial real estate:											Commercial real estate:

Advancement of maturity date	Advancement of maturity date	1	1,249		1,249		1	855		855		Advancement of maturity date	1	1,241		1,241		1	1,249		1,249

Total	Total	1	$	1,249	$	1,249	11	$	2,909	$	2,909	Total	4	$	2,594	$	2,594	1	$	1,249	$	1,249

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, 2019; and (3) executed between March 1, 2020, and ~~the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B)~~ January 1, 2022. At December 31, ~~2020, total loans receivable included $45.2 million of~~2021, 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, ~~2020~~2021 and ~~2019,~~2020, the Company had 0no 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.

~~108~~98

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~TDRs resulted in 0~~There were no charge-offs to the ALLL for the years ended December 31, 2021 and 2020, ~~and 2019.~~related to TDRs. For the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, there were no payment defaults on loans modified as TDRs within the previous 12 months.

At both December 31, ~~2020,~~2021, and ~~2019,~~2020, the Bank had 0no loans outstanding with executive officers or directors.

Note 4 - Other Real Estate Owned

The following table is a summary of OREO activity for the periods indicated:


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Balance at beginning of year	Balance at beginning of year	$	454	$	483	Balance at beginning of year	$	454	$	454

Net proceeds from sale of OREO						Net proceeds from sale of OREO	(247)		—
Loss on sale of OREO						Loss on sale of OREO	(207)		—

Market value adjustments		0		(29)
Balance at end of year	Balance at end of year	$	454	$	454	Balance at end of year	$	—	$	454

During the year ended December 31, 2021, the two commercial properties comprising the $454,000 balance of OREO at December 31, 2020, ~~consisted~~were sold, resulting in a loss on sale of ~~$454,000~~$207,000 that was included in ~~commercial real estate properties.~~ OREO related expenses, net, on the Company’s Consolidated Income Statements. Prior to the sale, there were no market value adjustments taken on the properties in OREO.

At December 31, ~~2020,~~2021, there ~~was one $2.1 million multifamily loan and 0~~were no mortgage loans secured by residential real estate in the process of foreclosure.

Note 5 - Premises and Equipment

Premises and equipment consisted of the following at December 31, ~~2020,~~2021, and ~~2019:~~2020:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Land	Land	$	2,226	$	2,226	Land	$	2,226	$	2,226
Buildings and improvements	Buildings and improvements	20,213		20,213		Buildings and improvements	21,617		20,213
Leasehold improvements	Leasehold improvements	5,273		4,040		Leasehold improvements	5,946		5,273
Furniture, fixtures and equipment		5,847		5,506
Furniture and fixtures						Furniture and fixtures	3,751		3,737
Equipment						Equipment	2,323		2,110
Computer hardware and software	Computer hardware and software	3,703		3,297		Computer hardware and software	3,771		3,703
		37,262		35,282			39,634		37,262
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	(15,168)		(13,043)		Less accumulated depreciation and amortization	(17,194)		(15,168)
Construction in process	Construction in process	485		227		Construction in process	—		485
Total premises and equipment, net	Total premises and equipment, net	$	22,579	$	22,466	Total premises and equipment, net	$	22,440	$	22,579

Depreciation and amortization expense was $2.2 million ~~and $1.8 million~~ for the years ended December 31, ~~2020~~2021 and ~~2019, respectively.~~2020.

Note 6 - Fair Value of Financial Instruments

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

~~109~~

~~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:

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

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

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

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

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

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

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

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

~~110~~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, 2020									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)
Available-for-sale investments:	Available-for-sale investments:									Available-for-sale investments:
Mortgage-backed investments:	Mortgage-backed investments:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	13,288	$	—	$	13,288	$	—	Fannie Mae	$	12,978	$	—	$	12,978	$	—
Freddie Mac	Freddie Mac	4,316		—		4,316		—		Freddie Mac	12,824		744		12,080		—
Ginnie Mae	Ginnie Mae	17,127		—		17,127		—		Ginnie Mae	23,687		—		23,687		—
Other	Other	10,729		—		10,729		—		Other	11,264		3,023		8,241		—
Municipal bonds	Municipal bonds	17,446		—		17,446		—		Municipal bonds	36,466		—		36,466		—
U.S. Government agencies	U.S. Government agencies	40,635		—		40,635		—		U.S. Government agencies	41,434		—		41,434		—
Corporate bonds	Corporate bonds	24,010		—		24,010		—		Corporate bonds	30,295		—		30,295		—
Total available-for-sale investments	Total available-for-sale investments	$	127,551	$	—	$	127,551	$	—	Total available-for-sale investments	$	168,948	$	3,767	$	165,181	$	—

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


		December 31, 2019									December 31, 2020
		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)
Available-for-sale investments:	Available-for-sale investments:									Available-for-sale investments:
Mortgage-backed investments:	Mortgage-backed investments:									Mortgage-backed investments:
Fannie Mae	Fannie Mae	$	15,629	$	—	$	15,629	$	—	Fannie Mae	$	13,288	$	—	$	13,288	$	—
Freddie Mac	Freddie Mac	4,292		—		4,292		—		Freddie Mac	4,316		—		4,316		—
Ginnie Mae	Ginnie Mae	23,050		—		23,050		—		Ginnie Mae	17,127		—		17,127		—
Other	Other	11,448		—		11,448				Other	10,729		—		10,729		0
Municipal bonds	Municipal bonds	10,911		—		10,911		—		Municipal bonds	17,446		—		17,446		—
U.S. Government agencies	U.S. Government agencies	45,750		—		45,750		—		U.S. Government agencies	40,635		—		40,635		—
Corporate bonds	Corporate bonds	25,521		—		25,521		—		Corporate bonds	24,010		—		24,010		—
Total available-for-sale investments	Total available-for-sale investments	136,601		—		136,601		$	—	Total available-for-sale investments	127,551		—		127,551		$	—
Derivative fair value asset		426		—		426		—
Total fair value assets		$	137,027	$	—	$	137,027	—

Liabilities:										Liabilities:
Derivative fair value liability										Derivative fair value liability	$	2,825	$	—	$	2,825	$	—

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.

~~111~~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, ~~2020,~~2021, and ~~2019.~~2020.


		December 31, 2020									December 31, 2021
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net)(1)	Impaired loans (included in loans receivable, net)(1)	$	21,392	$	—	$	—	$	21,392	Impaired loans (included in loans receivable, net)(1)	$	36,118	$	—	$	—	$	36,118
OREO	OREO	454		—		—		454		OREO	—		—		—		—
Total	Total	$	21,846	$	—	$	—	$	21,846	Total	$	36,118	$	—	$	—	$	36,118

_______________

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


		December 31, 2019									December 31, 2020
		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
		(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net)(1)	Impaired loans (included in loans receivable, net)(1)	$	19,939	$	—	$	—	$	19,939	Impaired loans (included in loans receivable, net)(1)	$	21,392	$	—	$	—	$	21,392
OREO	OREO	454		—		—		454		OREO	454		—		—		454
Total	Total	$	20,393	$	—	$	—	$	20,393	Total	$	21,846	$	—	$	—	$	21,846

________________

(1) Total value of impaired loans is net of ~~$31,000~~$8,000 of specific reserves on performing TDRs.

The following tables present quantitative information about Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis at December 31, ~~2020~~2021 and ~~2019.~~2020.

December 31, 2021

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average Change in Fair Value)

(Dollars in thousands)

Impaired Loans (1)

36,118

Market approach

Appraised value of collateral discounted by expected selling costs

0.0% (0.00%)

_______________

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

102

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average Change in Fair Value)

(Dollars in thousands)

Impaired Loans(1)

21,392

~~Discounted cash flows~~Market approach

~~Expected values~~Appraised value of ~~future cash flows~~collateral discounted by expected selling costs

0.0% (0.00%)

OREO

454

Market approach

Estimated selling price less selling costs

0.0% (0.00%)

~~_______________~~________________

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

~~December 31, 2019~~

~~Fair Value~~

~~Valuation Technique(s)~~

~~Unobservable Input(s)~~

~~Range (Weighted Average Change in Fair Value)~~

~~(Dollars in thousands)~~

~~Impaired Loans~~

~~19,939~~

~~Discounted cash flows~~

~~Expected values of future cash flows~~

~~0.0% (0.00%)~~

~~OREO~~

~~454~~

~~Market approach~~

~~Estimated selling price less selling costs~~

~~0.0% (0.00%)~~

~~112~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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, ~~2020,~~2021, and ~~2019,~~2020, were as follows:


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

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

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

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

December 31, 2019 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 $ 10,094 $ 10,094 $ 10,094 $ 0 $ 0
Interest-earning deposits 12,896 12,896 12,896 0 0
Investments available-for-sale 136,601 136,601 0 136,601 0
Loans receivable, net 1,108,462 1,096,499 0 0 1,096,499
FHLB stock 7,009 7,009 0 7,009 0
Accrued interest receivable 4,138 4,138 0 4,138 0
Derivative fair value asset 426 426 0 426 0
Financial Liabilities:
Deposits 513,959 513,959 513,959 0 0
Certificates of deposit, retail 425,103 430,418 0 430,418 0
Certificates of deposit, brokered 94,472 94,556 0 94,556 0
Advances from the FHLB 137,700 137,706 0 137,706 0
Accrued interest payable 285 285 0 285 0

103

~~113~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	December 31, 2020				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	$	7,995	$	7,995	$	7,995	$	—	$	—
Interest-earning deposits	72,494		72,494		72,494		—		—
Investments available-for-sale	127,551		127,551		—		127,551		—
Investments held-to-maturity	2,418		2,418		—		2,418		—
Loans receivable, net	1,100,582		1,101,559		—		—		1,101,559
FHLB stock	6,410		6,410		—		6,410		—
Accrued interest receivable	5,508		5,508		—		5,508		—


Financial Liabilities:
Deposits	684,057		684,057		684,057		—		—
Certificates of deposit, retail	409,576		418,118		—		418,118		—

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

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 7 - Accrued Interest Receivable

Accrued interest receivable consisted of the following at December 31, ~~2020~~2021 and ~~2019:~~2020:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Loans receivable	Loans receivable	$	5,031	$	3,518	Loans receivable	$	4,634	$	5,031
Investments	Investments	477		603		Investments	651		477
Interest-earning deposits		0		17
		$	5,508	$	4,138
							$	5,285	$	5,508

104

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Deposits

Deposit accounts consisted of the following at December 31, ~~2020~~2021 and ~~2019:~~2020:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Noninterest-bearing	Noninterest-bearing	$	91,285	$	52,849	Noninterest-bearing	$	117,751	$	91,285
Interest-bearing demand	Interest-bearing demand	108,182		65,897		Interest-bearing demand	97,907		108,182
Statement savings		19,221		17,447
Savings						Savings	23,146		19,221
Money market	Money market	465,369		377,766		Money market	624,543		465,369
Certificates of deposit, retail (1)	Certificates of deposit, retail (1)	409,576		425,103		Certificates of deposit, retail (1)	294,127		409,576
Certificates of deposit, brokered		0		94,472
		$	1,093,633	$	1,033,534
							$	1,157,474	$	1,093,633

_______________

(1) Shown net of ~~$12,000~~$3,000 and ~~$28,000~~$12,000 unamortized purchase accounting adjustment on December 31, ~~2020,~~2021, and ~~2019,~~2020, respectively.

At December 31, ~~2020,~~2021, scheduled maturities of certificates of deposit were as follows:


December 31,	December 31,	Amount		December 31,	Amount
		(In thousands)			(In thousands)
2021		$	267,621
2022	2022	63,288		2022	$	145,337
2023	2023	58,555		2023	95,987
2024	2024	18,522		2024	42,511
2025	2025	1,590		2025	7,527
thereafter		0
2026				2026	2,765
		$	409,576
					$	294,127

Deposits included public funds of ~~$59.2~~$60.6 million and ~~$34.0~~$59.2 million at December 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Certificates of deposit equal to or exceeding the FDIC insured amount of $250,000 included in deposits at December 31, 2021, and 2020, ~~and 2019,~~ were ~~$135.6~~$77.4 million and ~~$130.6~~$135.6 million, respectively. Interest expense on certificates of deposit equal to or exceeding $250,000 totaled ~~$3.0~~$1.2 million and ~~$2.9~~$3.0 million for the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Included in total deposits are accounts of $2.2 million and $2.1 million at ~~both~~ December 31, 2021, and 2020, ~~and 2019,~~respectively, which are controlled by related parties.

~~114~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Interest expense on deposits for the periods indicated was as follows:


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Interest-bearing demand	Interest-bearing demand	$	292	$	108	Interest-bearing demand	$	90	$	292
Statement savings		15		29
Savings						Savings	6		15
Money market	Money market	3,497		5,027		Money market	1,601		3,497
Certificates of deposit, retail	Certificates of deposit, retail	9,474		9,549		Certificates of deposit, retail	5,519		9,474
Certificates of deposit, brokered	Certificates of deposit, brokered	727		3,283		Certificates of deposit, brokered	—		727
		$	14,005	$	17,996		$	7,216	$	14,005

105

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9 - Other Borrowings

The Bank maintained credit facilities with the FHLB at December 31, 2021, and 2020, totaling $648.1 million and ~~2019, totaling~~ $614.4 million, respectively. At December 31, 2021, the credit facility was collateralized by $223.0 million of single-family residential mortgages, $145.4 million of commercial real estate loans, and ~~$588.7~~$54.1 million ~~respectively.~~of multifamily loans under a blanket lien arrangement. At December 31, 2020, the credit facility was collateralized by $255.5 million of single-family residential mortgages, $196.2 million of commercial real estate loans, and $72.1 million of multifamily loans under a blanket lien arrangement. At December 31, 2019, the credit facility was collateralized by $240.8 million of single-family residential mortgages, $186.9 million of commercial real estate loans, and $79.0 million of multifamily loans under a blanket lien arrangement. The Bank also had ~~$82.2~~$84.8 million of unused line-of-credit facilities with the FRB and $75.0 million with other financial institutions at December 31, ~~2020,~~2021, with interest payable at the then stated rate.

Summary information related to ~~outstanding~~FHLB advances ~~at the FHLB~~and other borrowings during the years ended December 31, ~~2020,~~2021, and ~~2019~~2020 consisted of the following:


		Year ended December 31,							Year ended December 31,
		2020			2019				2021			2020
		(Dollars in thousands)							(Dollars in thousands)
Maximum borrowing outstanding at any month end	Maximum borrowing outstanding at any month end	$	160,000		$	184,500		Maximum borrowing outstanding at any month end	$	120,000		$	160,000
Average borrowing outstanding during year	Average borrowing outstanding during year	125,392			129,899			Average borrowing outstanding during year	115,466			125,392
Balance outstanding at end of year	Balance outstanding at end of year	120,000			137,700			Balance outstanding at end of year	95,000			120,000
Average rate paid during the year	Average rate paid during the year	1.31		%	2.09		%	Average rate paid during the year	1.39		%	1.31		%
Weighted-average rate paid at end of year	Weighted-average rate paid at end of year	0.36			1.84			Weighted-average rate paid at end of year	1.26			1.40

At December 31, ~~2020,~~2021, all ~~$120.0~~$95.0 million of FHLB advances were due to mature in ~~2021.~~2022.

Note 10 - Leases

The Company follows ASC topic 842, Leases, recognizing a ROU assets and lease liabilities ~~included~~ on the Company’s consolidated balance sheets. At December 31, ~~2020,~~2021, the Company had thirteen operating leases for retail branch locations. The remaining initial lease terms range from 213 months to ~~10.1~~9.1 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 time of the lease inception, or at January 1, 2019, for leases in place at that date.

The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At December 31, ~~2020,~~2021, the Company was committed to paying ~~$67,000~~$69,000 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.

~~115~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Total lease expense included in the Company’s ~~Consolidated Income Statement~~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, ~~2020,~~2021, and ~~2019.~~2020.

December 31, 2020 December 31, 2019
(in thousands)
Lease expense $ 936 $ 752
Right-of-use asset 3,647 2,209
Lease liability 3,783 2,279
Weighted average remaining term (in years) 7.23 6.1
Weighted average discount rate 2.10% 2.94%

106

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	December 31, 2021		December 31, 2020
	(in thousands)
Lease expense, year-to-date	$	1,061	$	936
ROU	3,646		3,647
Lease liability	3,805		3,783

Weighted average remaining term (in years)	6.26		7.23
Weighted average discount rate	1.91%		2.10%

The following table provides a reconciliation between the undiscounted minimum lease payments at December 31, ~~2020~~2021 and the discounted lease liability at that date:


	December 31, ~~2020~~2021
	(in thousands)
Due through one year	$	~~713~~839
Due after one year through two years	~~690~~723
Due after two years through three years	~~569~~622
Due after three years through four years	~~462~~526
Due after four years through five years	~~362~~332
Due after five years	~~1,286~~1,003
Total minimum lease payments	~~4,082~~4,045
Less: present value discount	~~299~~240
Lease liability	$	~~3,783~~3,805

The Company has secured a lease for a new retail branch in Issaquah, Washington, that commenced in August 2020 and opened in March 2021. The initial lease term is for 66 months and includes three extensions options of five years each. The first five-year extension is included in the lease liability calculation. The monthly rent, not including variable items, is $4,000 with a 3% annual increase thereafter.

Note 11 - Derivatives

The Company uses derivative financial instruments in the form of interest rate swap agreements, which are designated as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. ~~The~~At December 31, 2021, the hedged items have a total notional amount of ~~$120.0~~$95.0 million, and consist of rolling one-month or three-month FHLB advances that are renewed at the fixed interest rate at each renewal date. The hedging instruments have four to eight year terms, with remaining terms ranging from ~~9 months~~1.8 years to ~~7.17~~7.8 years, and stipulate that the counterparty will pay the Company interest at one-month or three-month LIBOR and the Company will pay a weighted-average fixed interest of ~~1.22%~~1.05% on the notional amount of $10.0 million to ~~$50.0~~$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 Company has secured two forward-starting interest rate swap agreements, effective October 25, 2021, with a total notional amount of $25.0 million, for~~ ~~seven~~ ~~and~~ ~~eight~~ ~~year terms, respectively, and a weighted-average fixed interest of 0.80%.~~

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, ~~2020,~~2021, the ~~$2.8~~$1.5 million net fair value ~~loss~~gain of the cash flow hedges was reported with other ~~liabilities.~~assets. The tax effected amount of ~~$2.2~~$1.2 million was included in Accumulated Other Comprehensive Income. There were 0no amounts recorded in the Consolidated Income Statements for the years ended December 31, ~~2020~~2021 or ~~2019,~~2020, related to ineffectiveness.

~~116~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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, ~~2020~~2021 and ~~2019:~~2020:

Balance Sheet Location Fair Value at December 31, 2020 Fair Value at December 31, 2019
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedges (Other liabilities) other assets $ (2,825) $ 426

107

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Balance Sheet Location	Fair Value at December 31, 2021		Fair Value at December 31, 2020
	(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedges	Other assets (other liabilities)	$	1,491	$	(2,825)

The following table presents the net unrealized gains (losses) on derivative instruments, net of tax, included on the Consolidated Statements of Comprehensive Income for the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:

Location 2020 Amount of Loss Recognized In OCI, net of tax 2019 Amount of Loss Recognized In OCI, net of tax
(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedge Other Comprehensive Income $ (2,568) $ (977)


	Location	2021 Amount of Gain Recognized In OCI, net of tax		2020 Amount of Loss Recognized In OCI, net of tax
	(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedge	Other Comprehensive Income	$	3,410	$	(2,568)

Note 12 - Benefit Plans

Multi-employer Pension Plans

The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (“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 ~~(5.35%~~(5.56% for ~~2020~~2021 and ~~5.51%~~5.35% for ~~2019)~~2020) 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:


		2020		2019			2021		2020
Source	Source	Valuation Report		Valuation Report		Source	Valuation Report		Valuation Report
First Financial Northwest’s Plan(1)	First Financial Northwest’s Plan(1)	101.7	%	101.7	%	First Financial Northwest’s Plan(1)	111.2	%	101.7	%

_________________

(1) Market value of plan assets reflects any contributions received through June 30, ~~2020,~~2021, or ~~2019,~~2020, respectively.

Total contributions made to the Pentegra DB Plan, as reported on Pentegra’s Form 5500 ~~equal~~for the plan year ending June 30, 2020, were $253.2 million and $138.3 million ~~and $164.6 million~~ for both the plan years ended June 30, ~~2019~~2020 and June 30, ~~2018,~~2019, respectively. The Company’s contributions to the Pentegra DB Plan are not more than 5% of the total contributions to the Pentegra DB ~~Plan.~~Plan for the plan year ending June 30, 2020. The Company’s policy is to fund pension costs as accrued.

~~117~~

108

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total contributions by the Company during the years ended December 31, ~~2020~~2021 and ~~2019~~2020 were:


2020				2019
2021							2021			2020
Date Paid	Date Paid	Amount		Date Paid	Amount		Date Paid	Amount		Date Paid	Amount
(In thousands)	(In thousands)						(In thousands)
12/8/2020		$	171	10/8/2019	$	37
11/18/2021							11/18/2021	$	207	12/8/2020	$	171
				12/6/2019	503
Total	Total	$	171	Total	$	540	Total	$	207	Total	$	171

Supplemental Executive Retirement Plan

The Company has entered into post-employment agreements with certain key officers to provide supplemental retirement benefits. The Company recorded ~~$235,000~~$175,000 and ~~$74,000~~$235,000 of compensation expense for the years ended December 31, ~~2020,~~2021, and ~~2019,~~2020, respectively. At December 31, ~~2020,~~2021, a ~~$1.5 million~~$922,000 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, employee contributions up to 6% will be matched 50% by the Company. Such matching becomes 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 ~~$266,000~~$319,000 and ~~$333,000~~$266,000 to the plan for the years ended December 31, ~~2020,~~2021, and ~~2019,~~2020, respectively.

Employee Stock Ownership Plan

The Company provides an ESOP for the benefit of substantially all employees. The ESOP borrowed $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 per share. The loan matures on October 8, 2022 and has a fixed interest rate of 4.88%.

Shares purchased by the ESOP with the loan proceeds are held in a suspense account and are allocated to ESOP participants on a pro rata basis as principal and interest payments are made by the ESOP to First Financial Northwest. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP assets. Annual principal and interest payments of $1.6 million were made by the ESOP during ~~2020,~~2021, and ~~2019.~~2020.

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~~years ended December 31, follows:



		2020		2019			2021		2020
		(In thousands)					(In thousands)
ESOP contribution expense	ESOP contribution expense	$	1,200	$	1,698	ESOP contribution expense	$	1,696	$	1,200
Dividends on unallocated ESOP shares used to reduce ESOP contribution	Dividends on unallocated ESOP shares used to reduce ESOP contribution	124		148		Dividends on unallocated ESOP shares used to reduce ESOP contribution	87		124

~~118~~109

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Shares held by the ESOP at December 31, ~~2020~~2021 and ~~2019,~~2020, are as follows:


		December 31,					December 31,
		2020		2019			2021		2020
		(Dollars in thousands, except share data)					(Dollars in thousands, except share data)
Allocated shares	Allocated shares	1,495,307		1,382,453		Allocated shares	1,608,160		1,495,307
Unallocated shares	Unallocated shares	197,493		310,347		Unallocated shares	84,640		197,493
Total ESOP shares	Total ESOP shares	1,692,800		1,692,800		Total ESOP shares	1,692,800		1,692,800
Fair value of unallocated shares	Fair value of unallocated shares	$	2,251	$	4,637	Fair value of unallocated shares	$	1,369	$	2,251

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 and no additional awards will be made. Restricted stock awards and stock options that were granted under the 2008 Plan ~~will continue to vest~~are vested and be available for exercise, subject to the 2008 Plan provisions. At December 31, ~~2020,~~2021, there were ~~1,172,268~~1,060,922 total shares available for grant under the 2016 Plan, including ~~286,134~~230,461 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 ~~both~~2016 Plan for the year ended December 31, 2021, was $708,000. The final compensation expense for the 2008 Plan and the total compensation for the 2016 Plan for the year ended December 31, 2020, was $427,000. The related income tax benefit was $149,000 and $90,000 for the years ended December 31, ~~2020,~~2021, and ~~2019, was $427,000 and $501,000, respectively. The related income tax benefit was $90,000 and $105,000 for the years ended December 31,~~ 2020, ~~and 2019,~~ 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 awards~~At December 31, 2021, the 272,000 shares available for exercise were previously granted under the 2008 Plan and are fully vested. Stock options have a ~~vesting~~contractual 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.

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

110

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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” 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.

~~119~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

There were 0no stock options granted in 2021 or 2020. ~~There were 50,000 stock options granted in 2019, however, these shares were forfeited later in the year.~~

A summary of the Company’s stock option plan awards activity for the year ended December 31, ~~2020~~2021 follows:

Shares Weighted-
Average
Exercise Price Weighted-
Average
Remaining
Contractual
Term in Years Aggregate
Intrinsic Value
Outstanding at December 31, 2019 313,000 $ 10.34 $ 1,440,310
Outstanding at December 31, 2020 313,000 10.34 2.98 $ 397,890
Expected to vest assuming a 3% forfeiture rate over the vesting term 313,000 10.34 2.98 397,890
Exercisable at December 31, 2020 313,000 10.34 2.98 397,890


	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at January 1, 2021	313,000	$	10.34		$	397,890

Exercised	(41,000)	8.41			306,300

Outstanding at December 31, 2021	272,000	10.63		2.13	$	1,507,300
Expected to vest assuming a 3% forfeiture rate over the vesting term	272,000	10.63		2.13	1,507,300
Exercisable at December 31, 2021	272,000	10.63		2.13	1,507,300

As of December 31, ~~2020,~~2021, there was 0no unrecognized compensation cost related to nonvested stock options.

Restricted Stock Awards

A summary of changes in nonvested restricted stock awards for the year ended December 31, ~~2020,~~2021, follows:


Nonvested Shares	Nonvested Shares	Shares	Weighted Average Grant Date Fair Value	Nonvested Shares	Shares	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019		16,698	16.53
Nonvested at December 31, 2020				Nonvested at December 31, 2020	16,228	13.61
Granted	Granted	33,923	11.27	Granted	55,673	14.25
Vested	Vested	(34,393)	12.72	Vested	(27,475)	14.63
Nonvested at December 31, 2020		16,228	13.61
Nonvested at December 31, 2021				Nonvested at December 31, 2021	44,426	13.78

Expected to vest assuming a 3% forfeiture rate over the vesting term	Expected to vest assuming a 3% forfeiture rate over the vesting term	15,741	13.61	Expected to vest assuming a 3% forfeiture rate over the vesting term	43,093	13.78

As of December 31, ~~2020,~~2021, there was ~~$36,000~~$109,000 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 two months. The total fair value of shares vested during the years ended December 31, 2021, and 2020 were $402,000 and ~~2019 were~~ $437,000, ~~and $459,000,~~ 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,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Current	Current	$	1,937	$	2,453	Current	$	2,690	$	1,937
Deferred	Deferred	5		109		Deferred	235		5
Total income tax expense	Total income tax expense	$	1,942	$	2,562	Total income tax expense	$	2,925	$	1,942

~~120~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

A reconciliation of the tax provision based on the statutory corporate rate of 21% for the year ended December 31, ~~2020,~~2021, and ~~2019,~~2020, on pretax income is as follows:


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Income tax expense at statutory rate	Income tax expense at statutory rate	$	2,205	$	2,715	Income tax expense at statutory rate	$	3,187	$	2,205
Income tax effect of:	Income tax effect of:					Income tax effect of:
Tax exempt interest, net	Tax exempt interest, net	(23)		(25)		Tax exempt interest, net	(54)		(23)
BOLI income, net	BOLI income, net	(200)		(203)		BOLI income, net	(229)		(200)

Other, net	Other, net	(40)		75		Other, net	21		(40)
Total income tax expense	Total income tax expense	$	1,942	$	2,562	Total income tax expense	$	2,925	$	1,942

112

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The deferred tax assets and liabilities, included in the accompanying consolidated balance sheets, consisted of the following at the dates indicated:


		December 31,					December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Deferred tax assets:	Deferred tax assets:					Deferred tax assets:

ALLL	ALLL	$	3,187	$	2,775	ALLL	$	3,288	$	3,187
Reserve for unfunded commitments	Reserve for unfunded commitments	74		90		Reserve for unfunded commitments	59		74
Deferred compensation	Deferred compensation	309		272		Deferred compensation	194		309
Net unrealized loss on investments available-for-sale		0		146
Net unrealized loss on derivative fair value		594		0

Net unrealized loss on derivative cash flow hedge						Net unrealized loss on derivative cash flow hedge	—		594

Reserve for uncollected interest	Reserve for uncollected interest	45		0		Reserve for uncollected interest	—		45
Employee benefit plans	Employee benefit plans	424		487		Employee benefit plans	385		424

OREO market value adjustments	OREO market value adjustments	10		10		OREO market value adjustments	—		10
Accrued expenses	Accrued expenses	141		93		Accrued expenses	114		141
Core deposit intangible	Core deposit intangible	42		30		Core deposit intangible	53		42
Expenses to facilitate branch acquisition	Expenses to facilitate branch acquisition	22		24		Expenses to facilitate branch acquisition	20		22
Split dollar life insurance	Split dollar life insurance	78		67		Split dollar life insurance	87		78

Lease liability	Lease liability	794		479		Lease liability	799		794
Total deferred tax assets	Total deferred tax assets	5,720		4,473		Total deferred tax assets	4,999		5,720
Deferred tax liabilities:	Deferred tax liabilities:					Deferred tax liabilities:
FHLB stock dividends	FHLB stock dividends	4		16		FHLB stock dividends	3		4
Loan origination fees and costs	Loan origination fees and costs	1,031		940		Loan origination fees and costs	1,098		1,031
Net unrealized gain on derivative cash flow hedge						Net unrealized gain on derivative cash flow hedge	312		—
Net unrealized gain on investments available for sale	Net unrealized gain on investments available for sale	392		0		Net unrealized gain on investments available for sale	42		392
Gain on fair value of cash flow hedge		0		89
Fixed assets	Fixed assets	1,785		1,387		Fixed assets	1,818		1,785
Goodwill	Goodwill	42		29		Goodwill	54		42
Right of use asset	Right of use asset	766		464		Right of use asset	766		766
Other, net	Other, net	59		47		Other, net	56		59
Total deferred tax liabilities	Total deferred tax liabilities	$	4,079	$	2,972	Total deferred tax liabilities	$	4,149	$	4,079
Deferred tax assets, net	Deferred tax assets, net	$	1,641	$	1,501	Deferred tax assets, net	$	850	$	1,641

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

~~121~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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, ~~2020~~2021 and ~~2019,~~2020, the Company had 0no net operating loss carryforward.

As a result of the bad debt deductions taken in years prior to 1988, retained earnings includes accumulated earnings of approximately $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

113

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

income taxes may be imposed at the then-prevailing corporate tax rates. The Bank 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.

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 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, ~~2020,~~2021, it was determined the full deferred tax asset would be realized in future periods and a valuation allowance would not be necessary.

The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company evaluated the impact of the CARES Act and determined that none of the changes would result in a material income tax benefit to the Company. In addition, the Company has determined that neither the enactment of the CAA, 2021, nor changes to income tax laws or regulations in other jurisdictions have a significant impact on income taxes.

The Company had no unrecognized tax benefits at December 31, ~~2020~~2021 or ~~2019,~~2020, 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 ~~2017.~~2018.

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. Bank holding companies are subject to capital adequacy requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve 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. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital regulations that involve quantitative measures of their assets, liabilities, and certain ~~off-balance-~~off balance sheet items as calculated under regulatory accounting 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, ~~2020,~~2021, and ~~2019,~~2020, 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.

~~122~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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, ~~2020,~~2021, 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 Bank’s actual capital amounts and ratios at December 31, ~~2020,~~2021, and ~~2019,~~2020, are presented in the following table.


										To be Well Capitalized													To be Well Capitalized
						For Capital Adequacy				Under Prompt Corrective									For Capital Adequacy				Under Prompt Corrective
		Actual				Purposes				Action Provisions					Actual				Purposes				Action Provisions
		Amount		Ratio		Amount		Ratio		Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio
		(Dollars in thousands)													(Dollars in thousands)
December 31, 2020:
December 31, 2021:														December 31, 2021:

Total risk-based capital	Total risk-based capital	$	152,610	15.57	%	$	78,406	8.00	%	$	98,008	10.00	%	Total risk-based capital	$	160,840	15.48	%	$	83,121	8.00	%	$	103,901	10.00	%

Tier 1 risk-based capital	Tier 1 risk-based capital	140,319		14.32		58,805		6.00		78,406		8.00		Tier 1 risk-based capital	147,816		14.23		62,340		6.00		83,121		8.00

Common equity tier 1 capital (“CET1”)	Common equity tier 1 capital (“CET1”)	140,319		14.32		44,103		4.50		63,705		6.50		Common equity tier 1 capital (“CET1”)	147,816		14.23		46,755		4.50		67,536		6.50

Tier 1 leverage capital	Tier 1 leverage capital	140,319		10.29		54,551		4.00		68,189		5.00		Tier 1 leverage capital	147,816		10.34		57,191		4.00		71,489		5.00

December 31, 2019:
December 31, 2020:														December 31, 2020:

Total risk-based capital	Total risk-based capital	$	148,048	14.38	%	$	82,359	8.00	%	$	102,949	10.00	%	Total risk-based capital	$	152,610	15.57	%	$	78,406	8.00	%	$	98,008	10.00	%

Tier 1 risk-based capital	Tier 1 risk-based capital	135,170		13.13		61,769		6.00		82,359		8.00		Tier 1 risk-based capital	140,319		14.32		58,805		6.00		78,406		8.00

Common equity tier 1 capital (“CET1”)	Common equity tier 1 capital (“CET1”)	135,170		13.13		46,327		4.50		66,917		6.50		Common equity tier 1 capital (“CET1”)	140,319		14.32		44,103		4.50		63,705		6.50

Tier 1 leverage capital	Tier 1 leverage capital	135,170		10.27		52,630		4.00		65,787		5.00		Tier 1 leverage capital	140,319		10.29		54,551		4.00		68,189		5.00

In addition to the minimum CET1, Tier 1, total capital and leverage ratios, the Bank must 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. As of December 31, ~~2020,~~2021, the Bank’s capital conservation buffer was ~~7.57%~~7.48%.

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 $77.4 million at December 31, 2021, and $100.6 million at December 31, ~~2020, and $129.7 million at December 31, 2019.~~2020.

~~123~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Lease Commitments. First Financial Northwest Bank 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 Issaquah, all in Washington. For more information on the Company’s lease commitments, see Note 10 - Leases.

115

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	82	$	235	Cash and cash equivalents	$	74	$	82
Interest-bearing deposits	Interest-bearing deposits	14,346		18,456		Interest-bearing deposits	6,887		14,346
Investment in subsidiaries	Investment in subsidiaries	141,376		136,907		Investment in subsidiaries	150,822		141,376
Receivable from subsidiaries	Receivable from subsidiaries	689		990		Receivable from subsidiaries	363		689
Deferred tax assets, net	Deferred tax assets, net	2		0		Deferred tax assets, net	2		2
Other assets	Other assets	28		46		Other assets	25		28
Total assets	Total assets	$	156,523	$	156,634	Total assets	$	158,173	$	156,523

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Liabilities:	Liabilities:					Liabilities:
Payable to subsidiaries	Payable to subsidiaries	$	64	$	128	Payable to subsidiaries	$	170	$	64
Deferred tax liability, net		0		2

Other liabilities	Other liabilities	157		185		Other liabilities	124		157
Total liabilities	Total liabilities	221		315		Total liabilities	294		221
Stockholders’ equity	Stockholders’ equity	156,302		156,319		Stockholders’ equity	157,879		156,302
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	156,523	$	156,634	Total liabilities and stockholders’ equity	$	158,173	$	156,523

~~124~~

116

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIRST FINANCIAL NORTHWEST, INC.

Condensed Income Statements


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Operating income:	Operating income:					Operating income:
Interest income:	Interest income:					Interest income:
Interest-bearing deposits with banks	Interest-bearing deposits with banks	$	56	$	153	Interest-bearing deposits with banks	$	15	$	56

Total operating income	Total operating income	56		153		Total operating income	15		56
Operating expenses:	Operating expenses:					Operating expenses:
Other expenses	Other expenses	1,648		1,732		Other expenses	1,721		1,648
Total operating expenses	Total operating expenses	1,648		1,732		Total operating expenses	1,721		1,648
Loss before benefit for federal income taxes and equity in undistributed earnings of subsidiaries	Loss before benefit for federal income taxes and equity in undistributed earnings of subsidiaries	(1,592)		(1,579)		Loss before benefit for federal income taxes and equity in undistributed earnings of subsidiaries	(1,706)		(1,592)
Federal income tax benefit	Federal income tax benefit	(360)		(363)		Federal income tax benefit	(376)		(360)
Loss before equity in undistributed loss of subsidiaries	Loss before equity in undistributed loss of subsidiaries	(1,232)		(1,216)		Loss before equity in undistributed loss of subsidiaries	(1,330)		(1,232)
Equity in undistributed earnings of subsidiaries	Equity in undistributed earnings of subsidiaries	9,788		11,585		Equity in undistributed earnings of subsidiaries	13,579		9,788
Net income	Net income	$	8,556	$	10,369	Net income	$	12,249	$	8,556

~~125~~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,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	8,556	$	10,369	Net income	$	12,249	$	8,556
Adjustments to reconcile net income to net cash from operating	Adjustments to reconcile net income to net cash from operating					Adjustments to reconcile net income to net cash from operating
activities:	activities:					activities:
Equity in undistributed earnings of subsidiaries	Equity in undistributed earnings of subsidiaries	(9,788)		(11,585)		Equity in undistributed earnings of subsidiaries	(13,579)		(9,788)
Dividends received from subsidiary	Dividends received from subsidiary	4,888		6,525		Dividends received from subsidiary	6,708		4,888
ESOP, stock options, and restricted stock compensation	ESOP, stock options, and restricted stock compensation	24		19		ESOP, stock options, and restricted stock compensation	25		24
Change in deferred tax liability, net	Change in deferred tax liability, net	(4)		0		Change in deferred tax liability, net	—		(4)
Change in receivables from subsidiaries	Change in receivables from subsidiaries	9		(9)		Change in receivables from subsidiaries	(37)		9
Change in payables to subsidiaries	Change in payables to subsidiaries	(64)		81		Change in payables to subsidiaries	106		(64)
Change in other assets	Change in other assets	18		6		Change in other assets	3		18
Changes in other liabilities	Changes in other liabilities	(28)		2		Changes in other liabilities	(33)		(28)
Net cash provided by operating activities	Net cash provided by operating activities	3,611		5,408		Net cash provided by operating activities	5,442		3,611
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:

ESOP loan repayment	ESOP loan repayment	1,421		1,354		ESOP loan repayment	1,492		1,421
Net cash provided in investing activities	Net cash provided in investing activities	1,421		1,354		Net cash provided in investing activities	1,492		1,421
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from exercise of stock options	Proceeds from exercise of stock options	0		21		Proceeds from exercise of stock options	344		—
Proceeds for vested awards	Proceeds for vested awards	358		383		Proceeds for vested awards	767		358
Net share settlement of stock awards	Net share settlement of stock awards	(73)		(93)		Net share settlement of stock awards	(38)		(73)
Repurchase and retirement of common stock	Repurchase and retirement of common stock	(5,706)		(7,406)		Repurchase and retirement of common stock	(11,384)		(5,706)
Dividends paid	Dividends paid	(3,874)		(3,478)		Dividends paid	(4,090)		(3,874)
Net cash used by financing activities	Net cash used by financing activities	(9,295)		(10,573)		Net cash used by financing activities	(14,401)		(9,295)
Net decrease in cash	Net decrease in cash	(4,263)		(3,811)		Net decrease in cash	(7,467)		(4,263)
Cash and cash equivalents at beginning of year	Cash and cash equivalents at beginning of year	18,691		22,502		Cash and cash equivalents at beginning of year	14,428		18,691
Cash and cash equivalents at end of year	Cash and cash equivalents at end of year	$	14,428	$	18,691	Cash and cash equivalents at end of year	$	6,961	$	14,428

~~126~~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,					Year Ended December 31,
		2020		2019			2021		2020
		(Dollars in thousands, except share data)					(Dollars in thousands, except share data)
Net income	Net income	$	8,556	$	10,369	Net income	$	12,249	$	8,556
Earnings allocated to participating securities	Earnings allocated to participating securities	(14)		(16)		Earnings allocated to participating securities	(58)		(14)
Earnings allocated to common shareholders	Earnings allocated to common shareholders	$	8,542	$	10,353	Earnings allocated to common shareholders	$	12,191	$	8,542

Basic weighted-average common shares outstanding	Basic weighted-average common shares outstanding	9,734,493		9,976,056		Basic weighted-average common shares outstanding	9,340,997		9,734,493
Dilutive effect of stock options	Dilutive effect of stock options	20,460		93,446		Dilutive effect of stock options	95,584		20,460
Dilutive effect of restricted stock grants	Dilutive effect of restricted stock grants	3,691		6,404		Dilutive effect of restricted stock grants	17,914		3,691
Diluted weighted-average common shares outstanding	Diluted weighted-average common shares outstanding	9,758,644		10,075,906		Diluted weighted-average common shares outstanding	9,454,495		9,758,644

Basic earnings per share	Basic earnings per share	$	0.88	$	1.04	Basic earnings per share	$	1.31	$	0.88
Diluted earnings per share	Diluted earnings per share	$	0.88	$	1.03	Diluted earnings per share	$	1.29	$	0.88

Potential dilutive shares are excluded from the computation of EPS if their effect is anti-dilutive. ~~Options~~For the year ended December 31, 2021, there were no options to purchase shares of common stock that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. For the year ended December 31, 2020, options to purchase additional 203,000 shares of common stock were not included in the computation of diluted EPS ~~at December 31, 2020,~~ as the incremental shares under the treasury stock method of calculation resulted in them being antidilutive. ~~At December 31, 2019, there were 0 anti-dilutive shares outstanding related to options to acquire common stock..~~

Note 18 - Revenue Recognition

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

119

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Disaggregation of Revenue

The following table includes the Company’s noninterest income disaggregated by type of service for the years ended December 31, ~~2020~~2021 and ~~2019:~~2020:

~~127~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~


		Year Ended December 31,					Year Ended December 31,
		2020		2019			2021		2020
		(In thousands)					(In thousands)
Gain on sales of investment securities (1)	Gain on sales of investment securities (1)	$	86	$	151	Gain on sales of investment securities (1)	$	32	$	86
BOLI income (1)	BOLI income (1)	982		994		BOLI income (1)	1,107		982
Wealth management revenue	Wealth management revenue	663		879		Wealth management revenue	494		663
Deposit servicing fees	Deposit servicing fees	277		284		Deposit servicing fees	289		277
Debit card and ATM fees		478		449
Deposit card and ATM fees						Deposit card and ATM fees	583		478
Loan servicing fees	Loan servicing fees	1,517		681		Loan servicing fees	1,265		1,517
Loan interest swap servicing fees	Loan interest swap servicing fees	430		663		Loan interest swap servicing fees	—		430
Other	Other	9		40		Other	92		9
Total noninterest income	Total noninterest income	$	4,442	$	4,141	Total noninterest income	$	3,862	$	4,442

____________

(1) Not in scope of Topic 606

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

Revenues recognized within scope of Topic 606

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

Deposit related fees: Fees are earned on our deposit accounts for various products or services performed for our customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box, and others. These fees are recognized on a daily, 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 types. Fees are also earned on the prepayment of certain loans, and are recognized at the time the loan is paid off.

Loan interest swap fees: For loans participating in an interest rate swap agreement, servicing fees are earned at the onset of the agreement and are not contingent on any future performance or term length of the loan itself. The performance obligation is satisfied by entering into the contract and receipt of the fees from the counterparty.

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, ~~2020,~~2021, the Company had 0no contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had 0no material performance obligations as of this date.

120

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 19 - Subsequent Events

On February ~~1, 2021,~~18, 2022, the Company began repurchasing shares of common stock under the repurchase plan approved by the Company’s Board of Directors on ~~December 21, 2020,~~February 11, 2022, authorizing the repurchase of approximately ~~486,000~~ 455,000 shares of the Company’s common stock. ~~At March 8,~~

Subsequent to December 31, 2021, the Company ~~had~~repurchased 23,068 shares pursuant to the prior repurchase plan that expired February 15, 2022, at an average price of $17.00 per share. Total shares of common stock repurchased ~~80,422 shares~~under the plan that expired February 15, 2022, were 459,732 at an average price of ~~$12.96~~$16.83 per share. ~~At this date, 405,578 shares remained available for repurchase under this plan.~~

~~128~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

In late February 2021, we discovered that the lead bank on loans we had participated in had downgraded certain loans to special mention. We are in the process of conducting an independent analysis of these loans. If we determine it is appropriate, the result will be a downgrade of approximately $5.4 million in these commercial real estate participation loans (secured by nursing home/rehabilitation facilities), we estimate that this could impact our ALLL for the quarter ending March 31, 2021, by an amount between $400,000 and $500,000.

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, ~~2020~~2021 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, ~~2020,~~2021, First Financial Northwest’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’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; (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 Northwest 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’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.

121

First Financial Northwest’s management assessed the effectiveness of First Financial Northwest’s internal control over financial reporting as of December 31, ~~2020.~~2021. 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, ~~2020,~~2021, First Financial Northwest’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 as of December 31, ~~2020,~~2021, which is included in Item 8. Financial Statements and Supplementary Data.

~~129~~

(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.

There were no significant changes in First Financial Northwest’s internal control over financial reporting during First Financial Northwest’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, First Financial Northwest’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 ~~2020~~2021 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 Statement for the ~~2020~~2021 Annual Meeting of Shareholders (“Proxy Statement”) is incorporated herein by reference.

For information regarding the executive officers of First Financial Northwest and the Bank, see the information contained herein under the section captioned “Item 1. Business - Personnel - Executive Officers of the Registrant.”

Audit Committee Financial Expert

At December 31, ~~2020,~~2021, our Audit Committee was composed of Directors Joann E. Lee (Chairman), ~~Richard M. Riccobono~~Cindy L. Runger and Ralph C. Sabin. Each member of the Audit Committee is “independent” as defined in listing standards of The Nasdaq Stock Market LLC. Our Board of Directors has designated Directors Joann E. Lee, ~~Richard M. Riccobono~~Cindy L. Runger and Ralph C. Sabin as the Audit Committee financial experts, as defined in the SEC’s Regulation S-K. Directors Joann E. Lee, ~~Richard M. Riccobono~~Cindy L. Runger and Ralph C. Sabin 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

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.

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.

~~130~~

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.

(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, ~~2020.~~2021.

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))

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)

(a)

(b)

(c)

Equity compensation plans (stock options) approved by security holders:

2008 Equity Incentive Plan

313,000

10.34

—

2008 Equity Incentive Plan

272,000

10.63

—

2016 Equity Incentive Plan (1)

—

1,172,268

2016 Equity Incentive Plan (1)

—

1,060,922

Equity compensation plans not approved by security holders

N/A

Equity compensation plans not approved by security holders

N/A

Total

313,000

10.34

1,172.268

Total

272,000

10.63

1,060.922

___________________

(1) The shares available for grant under the 2016 Equity Incentive Plan include ~~286,134~~230,461 shares of restricted stock. Each share granted as restricted stock 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 appointment of ~~Moss Adams as our independent auditor for 2021”~~Independent Registered Public Accounting Firm in the Proxy Statement is incorporated herein by reference.

~~131~~

~~Table of Contents~~

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)
4.1			Form of stock certificate of First Financial Northwest (1)
4.2			Description of Capital Stock of First Financial Northwest(3)
+10.1			Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III~~(3)~~(4)
+10.2			Form of Change in Control Severance Agreement for Executive Officers~~(4)~~(5)
+10.3			Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III~~(5)~~(6)
+10.4			2008 Equity Incentive Plan~~(6)~~(7)
+10.5			2016 Equity Incentive Plan~~(7)~~(8)
+10.6			Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan~~(8)~~(9)
+10.7			Form of restricted stock award agreement under the 2008 Equity Incentive Plan~~(8)~~(9)
+10.8			Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson~~(3)~~(4)
+10.9			Form of restricted stock award agreement under the 2016 Equity Incentive Plan~~(9)~~(10)
+10.10			Form of incentive stock option award agreement under the 2016 Equity Incentive Plan~~(10)~~(11)
+10.11			Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan~~(10)~~(11)
+10.12			Form of restricted stock award agreement under the 2016 Equity Incentive Plan~~(11)~~(12)
+10.13			Offer letter for Randy T. Riffle~~(12)~~(13)
+10.14			Form of Involuntary Termination Agreement with Randy T. Riffle~~(13)~~(14)
+10.15			Form of Change in Control Severance Agreement with Randy T. Riffle~~(13)~~(14)
+10.16			Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III ~~(14)~~(15)
+10.17			Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson~~(15)~~(16)
+10.18			F ~~orm~~Form of Change in Control Severance Agreement ~~(Amended~~ (Amended and R ~~estated)~~Restated) by and between First Financial Northwest Bank and Simon Soh, Dalen D. Harrison, and Ronnie J. Clariza~~(16)~~(17)
14			Code of Business Conduct and Ethics (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on the Company’s website at www.ffnwb.com pursuant to Regulation S-K section 229.406(c))
21			Subsidiaries
23			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
101			The following materials from First Financial Northwest’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, 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.
104			Cover Page Interactive Date File

124

______________

(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.

~~(4)~~(5) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated September 9, 2014.

~~(5)~~(6) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.

~~(6)~~(7) Filed as Appendix A to First Financial Northwest’s definitive proxy statement dated April 15, 2008.

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

~~(8)~~(9) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated July 1, 2008.

~~132~~

~~(9)~~(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.

~~(10)~~(11) Filed as an exhibit to First Financial Northwest’s Registration Statement on Form S-8 on June 15, 2016 (333-212029).

~~(11)~~(12) Filed as an exhibit to First Financial Northwest’s Quarterly Report on Form 10-Q for September 30, 2018 filed November 7, 2018.

~~(12)~~(13) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated December 20, 2018.

~~(13)~~(14) Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 3, 2019.

~~(14)~~ ~~Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated January 15, 2020.~~

(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.

~~133~~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 ~~12, 2021~~11, 2022	By:	/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.

Signature

Title

Date

/s/ ~~Daniel L. Stevens~~Ralph C. Sabin

Chairman of the Board and Director

March ~~12, 2021~~11, 2022

~~Daniel L. Stevens~~Ralph C. Sabin

/s/ Joseph W. Kiley III

President, Chief Executive Officer and Director

March ~~12, 2021~~11, 2022

Joseph W. Kiley III

(Principal Executive Officer)

/s/ Richard P. Jacobson

Chief Financial Officer and Director

March ~~12, 2021~~11, 2022

Richard P. Jacobson

(Principal Financial Officer)

/s/ Christine A. Huestis

First Vice President and Controller

March ~~12, 2021~~11, 2022

Christine A. Huestis

(Principal Accounting Officer)

/s/ Diane C. Davis

Director

March ~~12, 2021~~11, 2022

Diane C. Davis

/s/ Joann E. Lee

Director

March ~~12, 2021~~11, 2022

Joann E. Lee

/s/ Roger H. Molvar

Director

March ~~12, 2021~~11, 2022

Roger H. Molvar

/s/ Richard M. Riccobono

Director

March ~~12, 2021~~11, 2022

Richard M. Riccobono

/s/ ~~Ralph C. Sabin~~Cindy L. Runger

Director

March ~~12, 2021~~11, 2022

~~Ralph C. Sabin~~Cindy L. Runger

~~134~~126



PART III.
	Item 10.	Directors, Executive Officers and Corporate Governance	~~130~~122
	Item 11.	Executive Compensation	~~130~~123
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~130~~123
	Item 13.	Certain Relationships and Related Transactions and Director Independence	~~131~~123
	Item 14.	Principal Accounting Fees and Services	~~131~~124
PART IV.
	Item 15.	Exhibits and Financial Statement Schedules	~~132~~124
	Item 16.	Form 10-K Summary	~~133~~125
		Signatures	~~134~~126


Borrower (1)	Number of Loans	One-to-Four Family Residential(2)		Multifamily		Commercial Real Estate(2)		Business		Aggregate Balance of Loans
	(Dollars in thousands)
Real estate investor	2	$	—	$	12,250	$	14,500	$	—	$	26,750
Real estate investor	7	420		—		20,191		—		20,611
Real estate investor	2	—		—		18,366		—		18,366
Real estate investor	1	—		—		15,426		—		15,426
Real estate investor	1	—		—		—		15,110		15,110
Total	13	$	420	$	12,250	$	68,483	$	15,110	$	96,263


	Loans Delinquent						Total
	30-59 Days			90 Days and Greater			Delinquent Loans
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)
One-to-four family residential:
Owner occupied	2	$	77	—	$	—	2	$	77
Non-owner occupied	1	159		—	—		1	159
Multifamily	—	—		1	2,104		1	2,104
Total real estate	3	236		1	2,104		4	2,340
Business	1	275		—	—		1	275
Consumer	1	38		—	—		1	38
Total	5	$	549	1	$	2,104	6	$	2,653


Weighted-Average Interest Rate		Term	Category	Amount		Percentage of Total Deposits
(Dollars in thousands)
—	%	N/A	Noninterest bearing demand deposits	$	91,285	8.3	%
0.06		N/A	Interest-bearing demand	108,182		9.9
0.04		N/A	Statement savings	19,221		1.8
0.37		N/A	Money market	465,369		42.6

			Certificates of deposit, retail
1.28		Three months or less		1,322		0.1
0.60		Over three through six months		310		—
0.47		Over six through twelve months		57,739		5.3
2.27		Over twelve months		350,217		32.0
			Retail certificates of deposit, fair value adjustment	(12)		—
2.01			Total certificates of deposit, retail	409,576		37.4



			Total deposits	$	1,093,633	100.0	%


	Female		Minority		Distribution by EEOC Job Classification

Executive / Senior level officers	35.7	%	28.6	%	9.3	%
Mid-level officers and managers	62.2		27.5		30.0
Professionals	56.7		26.7		20.0
Sales workers	40.0		44.4		6.7
Administrative support	80.4		42.6		34.0
Total	64.7	%	33.1	%	100.0	%


	Period Ended
Index	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019	12/31/2020
First Financial Northwest, Inc.	100.00	143.83	114.81	116.59	115.30	91.48
Russell 2000 Index	100.00	121.31	139.08	123.76	155.35	186.36
SNL Thrift Index	100.00	122.49	121.60	102.42	126.10	116.21
SNL Micro Cap U.S. Bank Index	100.00	122.94	150.40	142.71	159.37	119.72


	At or For the Year Ended December 31,
KEY FINANCIAL RATIOS:	2020			2019			2018			2017			2016
Performance Ratios:
Return on assets	0.63		%	0.80		%	1.21		%	0.76		%	0.88		%
Return on equity	5.50			6.73			9.86			5.94			5.55
Dividend payout ratio	45.45			33.65			21.53			32.93			32.02
Equity-to-assets ratio	11.26			11.65			12.28			11.79			13.31

Net interest margin	3.15			3.19			3.56			3.60			3.60
Average interest-earning assets to average interest-bearing liabilities	115.62			113.44			114.28			114.07			117.11
Efficiency ratio	72.39			70.66			66.88			67.31			62.27
Noninterest expense as a percent of average total assets	2.39			2.35			2.40			2.42			2.27
Book value per common share	$	16.05		$	15.25		$	14.35		$	13.27		$	12.63
Capital Ratios: (1)
Tier 1 leverage	10.29		%	10.27		%	10.37		%	10.20		%	11.17		%
Common equity tier 1	14.32			13.13			13.43			12.52			14.36
Tier 1 capital ratio	14.32			13.13			13.43			12.52			14.36
Total capital ratio	15.57			14.38			14.68			13.77			15.61
Asset Quality Ratios: (2)
Nonperforming loans as a percent of total loans	0.19			0.01			0.07			0.02			0.10
Nonperforming assets as a percent of total assets	0.18			0.04			0.10			0.05			0.31
ALLL as a percent of total loans	1.36			1.18			1.29			1.28			1.32
ALLL as a percent of nonperforming loans	721.20			13,913.68			1,774.87			7,196.65			1,276.34
Net recoveries to average loans receivable, net	—			(0.02)			(0.45)			(0.27)			(0.02)


	Balance of loans deferred 4 to 6 months		Balance of loans deferred longer than 6 months		Total deferrals		Total loans 12/31/20		% of loans on deferral as of 12/31/20
	(Dollars in thousands)
One-to-four family residential	$	745	$	1,027	$	1,772	$	381,960	0.5	%
Multifamily	—		2,347		2,347		136,694		1.7	%

Commercial:
Office	—		—		—		84,311		—	%
Retail	—		3,972		3,972		114,117		3.5	%
Mobile home park	—						28,094		—	%
Hotel/motel	—		30,501		30,501		69,304		44.0	%
Nursing home	—		6,368		6,368		12,868		49.5	%
Warehouse	—		—		—		17,484		—	%
Storage	—		—		—		33,671		—	%
Other non-residential	—		—		—		25,416		—	%
Total Commercial	—		40,841		40,841		385,265		10.6	%

Construction/land	—		—		—		92,207		—	%

Business:
Aircraft	—		—		—		10,811		—	%
SBA	—		—		—		928		—	%
PPP	—		—		—		41,251		—	%
Other business	—		—		—		27,673		—	%
Total business	—		—		—		80,663		—	%

Consumer:
Classic/collectible auto	—		190		190		29,359		0.6	%
Other consumer	—		—		—		11,262		—	%
Total consumer	—		190		190		40,621		0.5	%

Total loans with COVID-19 pandemic modifications	$	745	$	44,405	$	45,150	$	1,117,410	4.0	%


			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	$	5,990	$	2,090	$	3,900	$	—	$	—
Unused portion of lines of credit	34,820		11,445		1,794		4,573		17,008
Undisbursed portion of construction loans	59,824		38,019		21,805		—		—
Total commitments	$	100,634	$	51,554	$	27,499	$	4,573	$	17,008


	Less Than One Year		One to Three Years		Three to Five Years		More Than Five Years		Total
	(In thousands)
Deposits (1)	$	951,688	$	121,846	$	20,111	$	—	$	1,093,645
Term debt	120,000		—		—		—		120,000
Other long-term liabilities (2)	138		276		309		738		1,461
Lease commitments	713		1,258		824		1,286		4,081
Total contractual obligations	$	1,072,539	$	123,380	$	21,244	$	2,024	$	1,219,187


	Loans Past Due as of December 31, 2019
	30-59 Days		60-89 Days		90 Days and Greater		Total		Current		Total Loans (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	79	$	0	$	0	$	79	$	210,819	$	210,898
Non-owner occupied	0		0		0		0		161,630		161,630
Multifamily	2,105		0		0		2,105		170,810		172,915
Commercial real estate	0		0		0		0		395,152		395,152
Construction/land	0		0		0		0		113,665		113,665
Total real estate	2,184		0		0		2,184		1,052,076		1,054,260
Business	0		0		0		0		37,779		37,779
Consumer	0		0		0		0		30,199		30,199
Total	$	2,184	$	0	$	0	$	2,184	$	1,120,054	$	1,122,238


	Balance Sheet Location	Fair Value at December 31, 2020		Fair Value at December 31, 2019
	(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedges	(Other liabilities) other assets	$	(2,825)	$	426


	Location	2020 Amount of Loss Recognized In OCI, net of tax		2019 Amount of Loss Recognized In OCI, net of tax
	(In thousands)
Interest rate swaps on FHLB debt designated as cash flow hedge	Other Comprehensive Income	$	(2,568)	$	(977)