

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

FORM 10-Q

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

	For the quarterly period ended ~~September 30, 2017~~March 31, 2023

or
~~[ ]~~	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 001-33652


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

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

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Asas of ~~November 3, 2017, 10,762,037~~May 10, 2023, 9,148,086 shares of the issuer’s common stock, $0.01 par value per share, were outstanding.

FIRST FINANCIAL NORTHWEST, INC.

PART I - FINANCIAL INFORMATION

PART II - OTHER INFORMATION

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

Part 1. Financial Information

Item 1. Financial Statements


	March 31, 2023		December 31, 2022
Assets
	(Unaudited)
Cash on hand and in banks	$	9,618	$	7,722
Interest-earning deposits with banks	70,998		16,598
Investments available-for-sale, at fair value	214,948		217,778
Investments held-to-maturity, at amortized cost	2,439		2,444
Loans receivable, net of allowance of $16,028, and $15,227	1,184,750		1,167,083
Federal Home Loan Bank ("FHLB") stock, at cost	8,203		7,512
Accrued interest receivable	7,011		6,513
Deferred tax assets, net	2,990		2,597

Premises and equipment, net	20,732		21,192
Bank owned life insurance ("BOLI"), net	36,647		36,286
Prepaid expenses and other assets	11,336		12,479
Right of use asset (“ROU”), net	3,194		3,275
Goodwill	889		889
Core deposit intangible, net	516		548
Total assets	$	1,574,271	$	1,502,916

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	110,780	$	119,944
Interest-bearing deposits	1,116,348		1,050,096
Total deposits	1,227,128		1,170,040
FHLB advances	160,000		145,000
Advance payments from borrowers for taxes and insurance	5,447		3,051
Lease liability, net	3,374		3,454
Accrued interest payable	749		328

Other liabilities	17,928		20,683
Total liabilities	1,414,626		1,342,556

Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding	—		—
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,148,086 shares at March 31, 2023, and 9,127,595 shares at December 31, 2022	92		91
Additional paid-in capital	72,445		72,424
Retained earnings	95,597		95,059
Accumulated other comprehensive loss, net of tax	(8,489)		(7,214)

Total stockholders' equity	159,645		160,360
Total liabilities and stockholders' equity	$	1,574,271	$	1,502,916

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Income Statements

(Dollars in thousands, except per share ~~data)~~amounts)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Interest income
Loans, including fees	$	16,029	$	12,001
Investment securities	2,105		831
Interest-earning deposits with banks	236		19
Dividends on FHLB stock	130		74
Total interest income	18,500		12,925
Interest expense
Deposits	6,332		1,257
FHLB advances and other borrowings	912		300
Total interest expense	7,244		1,557
Net interest income	11,256		11,368
Provision (recapture of provision) for credit losses	300		(500)
Net interest income after provision (recapture of provision) for credit losses	10,956		11,868
Noninterest income

BOLI income	308		288
Wealth management revenue, net	45		82
Deposit related fees	223		215
Loan related fees	91		199
Other (expense) income, net	(2)		5
Total noninterest income	665		789
Noninterest expense
Salaries and employee benefits	5,461		5,261
Occupancy and equipment	1,165		1,228
Professional fees	417		452
Data processing	686		677
Regulatory assessments	101		101
Insurance and bond premiums	130		129
Marketing	77		37
Other general and administrative	956		741
Total noninterest expense	8,993		8,626
Income before federal income tax provision	2,628		4,031
Federal income tax provision	506		771
Net income	$	2,122	$	3,260
Basic earnings per common share	$	0.23	$	0.36
Diluted earnings per common share	$	0.23	$	0.36
Basic weighted average number of common shares outstanding	9,104,371		8,987,482
Diluted weighted average number of common shares outstanding	9,173,276		9,117,432

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 1,861
$ 2,606
$ 6,073
$ 5,871
Other comprehensive income, before tax:
Gross unrealized holding gains (losses) on investments available-for-sale 214
(509 ) 1,043
1,800
Tax (provision) benefit (75 ) 178
(365 ) (631 )
Reclassification adjustment for net gains realized in income (47 ) (33 ) (103 ) (33 )
Tax benefit 17
12
36
12
Gain (loss) on cash flow hedge 28
—
(215 ) —
Tax (provision) benefit (10 ) —
75
—
Other comprehensive income, net of tax $ 127
$ (352 ) $ 471
$ 1,148
Total comprehensive income $ 1,988
$ 2,254
$ 6,544
$ 7,019

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except per share ~~data)~~amounts)

(Unaudited)

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, 2015 13,768,814
$ 138
$ 136,338
$ 42,892
$ (1,077 ) $ (7,618 ) $ 170,673
Net income —
—
—
5,871
—
—
5,871
Other comprehensive income —
—
—
—
1,148
—
1,148
Exercise of stock options 63,173
1
317
—
—
—
318
Issuance of common stock - restricted stock awards 8,752
—
(74 ) —
—
—
(74 )
Compensation related to stock options and restricted stock awards —
—
505
—
—
—
505
Allocation of 84,639 ESOP shares —
—
298
—
—
847
1,145
Repurchase and retirement of common stock (1,868,112 ) (19 ) (26,319 ) —
—
—
(26,338 )
Canceled common stock - restricted stock awards (74,478 ) (1 ) 1
—
—
—
—
Cash dividend declared and paid ($0.18 per share) —
—
—
(2,194 ) —
—
(2,194 )
Balances at September 30, 2016 11,898,149
$ 119
$ 111,066
$ 46,569
$ 71
$ (6,771 ) $ 151,054

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, 2016 10,938,251
$ 109
$ 96,852
$ 48,981
$ (1,328 ) $ (6,489 ) $ 138,125
Net income —
—
—
6,073
—
—
6,073
Other comprehensive income —
—
—
—
471
—
471
Exercise of stock options 134,880
2
1,307
—
—
—
1,309
Issuance of common stock - restricted stock awards, net 3,984
—
(105 ) —
—
—
(105 )
Compensation related to stock options and restricted stock awards —
—
505
—
—
—
505
Allocation of 84,642 ESOP shares —
—
625
—
—
846
1,471
Repurchase and retirement of common stock (313,200 ) (3 ) (5,016 ) —
—
—
(5,019 )
Cash dividend declared and paid ($0.20 per share) —
—
—
(2,070 ) —
—
(2,070 )
Balances at September 30, 2017 10,763,915
$ 108
$ 94,168
$ 52,984
$ (857 ) $ (5,643 ) $ 140,760


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


	Three Months Ended March 31, 2023
	Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at December 31, 2022	9,127,595	$	91	$	72,424	$	95,059	$	(7,214)	$	—	$	160,360
Net income	—	—		—		2,122		—		—		2,122
Other comprehensive loss, net of tax	—	—		—		—		(1,275)		—		(1,275)

Issuance of common stock - restricted stock awards, net	27,618	1		—		—		—		—		1
Compensation related to stock options and restricted stock awards	—	—		128		—		—		—		128


Canceled common stock - restricted stock awards	(7,127)	—		(107)		—		—		—		(107)
Cash dividend declared and paid ($0.13 per share)	—	—		—		(1,189)		—		—		(1,189)
Adjustment to beginning retained earnings, net of tax - adoption of ASU 2016-13	—	—		—		(395)		—		—		(395)
Balances at March 31, 2023	9,148,086	$	92	$	72,445	$	95,597	$	(8,489)	$	—	$	159,645

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income	$	2,122	$	3,260
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (recapture of provision) for credit losses	300		(500)


Net amortization of premiums and discounts on investments	127		258

Depreciation of premises and equipment	514		555
Loss on disposal of premises and equipment	1		—
Deferred federal income taxes	50		329
Allocation of ESOP shares	—		475
Stock compensation expense	128		188
BOLI income	(308)		(288)
Annuity income	(3)		(1)
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(374)		(318)
ROU	189		191
Advance payments from borrowers for taxes and insurance	2,396		2,390
Accrued interest receivable	(498)		(305)
Lease liability	(188)		(188)
Increase in accrued interest payable	421		—
Decrease (increase) in other liabilities	(2,747)		4,025
Net cash provided by operating activities	2,130		10,071

Cash flows from investing activities:


Proceeds from calls and maturities of investments available-for-sale	—		2,382

Principal repayments on investments available-for-sale	2,639		4,868
Purchases of investments available-for-sale	—		(25,854)


Net increase in loans receivable	(18,467)		(17,421)
Purchase of FHLB stock	(691)		(47)
Purchase of premises and equipment	(55)		(369)



Purchase of BOLI	(53)		(54)

Net cash used by investing activities	(16,627)		(36,495)

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net income $ 6,073
$ 5,871
Adjustments to reconcile net income to net cash provided by
operating activities:

Provision for loan losses 800
1,400
OREO market value adjustments 50
257
(Gain) loss on sale of OREO property, net (5 ) 87
Gain on sale of investments available-for-sale (103 ) (33 )
Loss on sale of premises and equipment 65
—
Depreciation of premises and equipment 883
797
Amortization of premiums and discounts on investments available-for-sale, net 500
726
Deferred federal income taxes 507
884
Allocation of ESOP shares 1,471
1,145
Stock compensation expense 505
505
Increase in cash surrender value of BOLI (490 ) (641 )
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets (840 ) (128 )
Net (decrease) increase in advance payments from borrowers for taxes and insurance 2,008
1,958
Increase in accrued interest receivable (562 ) (410 )
Increase (decrease) in accrued interest payable 49
(19 )
Increase (decrease) in other liabilities 3,038
(299 )
Net cash provided by operating activities 13,949
12,100
Cash flows from investing activities:

Proceeds from sales of OREO properties 461
988
Proceeds from calls and sales of investments available-for-sale 7,494
24,921
Principal repayments on investments available-for-sale 7,980
12,375
Purchases of investments available-for-sale (23,518 ) (40,522 )
Net increase in loans receivable (117,619 ) (162,258 )
Purchase of FHLB stock (871 ) (3,894 )
Purchase of premises and equipment (2,399 ) (1,386 )
Proceeds from sale or disposal of premises and equipment, net 7
—
Surrender of BOLI —
10,182
Purchase of BOLI (4,251 ) (10,182 )
Net cash received from acquisition of branches 71,568
—
Net cash used by investing activities (61,148 ) (169,776 )

Continued

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2023		2022
Cash flows from financing activities:
Net increase (decrease) in deposits	$	57,088	$	(17,373)
Advances from the FHLB	111,000		—
Repayments of advances from the FHLB	(96,000)		—
Proceeds from stock options exercises	—		21
Net share settlement of stock awards	(106)		(226)
Repurchase and retirement of common stock	—		(694)
Dividends paid	(1,189)		(1,083)
Net cash provided (used) by financing activities	70,793		(19,355)

Increase (decrease) in cash and cash equivalents	56,296		(45,779)
Cash and cash equivalents at beginning of period	24,320		73,391
Cash and cash equivalents at end of period	$	80,616	$	27,612

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid	$	6,823	$	1,557





Noncash items:

Change in unrealized loss on investments available-for-sale	$	(64)	$	(7,082)
Change in unrealized gain on cash flow hedges	(1,549)		4,471

Initial recognition of ROU	108		—
Initial recognition of lease liability	108		—
Adjustment to beginning retained earnings - adoption of ASU 2016-13, net of tax	395		—

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Description of Business

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

~~As of September 30, 2017.~~At March 31, 2023, First Financial Northwest Bank ~~had nine~~operated in 15 locations in Washington with the headquarters and ~~four additional~~seven retail branch locations in King County, ~~and~~ five retail branch locations in Snohomish ~~County. The Bank acquired four bank~~County and two retail branches ~~(one~~ in King and three in Snohomish counties) and $74.7 million in retail deposits from Opus Bank on August 25, 2017. No loans were acquired in this transaction. The Bank has received regulatory approval to open a new branch in Bothell, Washington, which is expected to open in the first quarter of 2018.Pierce County. The Bank’s primary market area consists of King, Snohomish, Pierce and Kitsap counties, Washington.

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

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

Note 2 - Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. These unaudited interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2022, as filed with the ~~SEC.~~SEC (“2022 Form 10-K”). In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the unaudited interim consolidated financial statements in accordance with GAAP have been included. All significant intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2023. In preparing the unaudited consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the allowance for ~~loan and lease~~credit losses (“~~ALLL”~~ACL”), the valuation of other real estate owned (“OREO”) and the underlying collateral of impaired loans, deferred tax assets, the right-of-use asset and lease liability on our operating leases, and the fair value of financial instruments.

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

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 - Recently Issued Accounting Pronouncements

~~In May 2014,~~Recent Accounting Pronouncements

Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) as amended by ASU 2018-19, ASU 2019-04 and ASU 2019-05, was originally issued by the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) ~~issued Accounting Standards Update ("ASU") No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606). In August 2015, FASB issued ASU No. 2015-14,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ ~~which postponed the effective date of 2014-09. Subsequently,~~ in ~~March 2016, the FASB issued ASU 2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations.~~ This amendment clarifies that an entity should determine if it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued ASU No. 2016-10~~, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.~~ The core principle of Topic 606 is that an entity must recognize revenue when it has satisfied a performance obligation of transferring promised goods or services to a customer. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption is not permitted. The standard allows for full retrospective adoption for all periods presented or modified retrospective adoption to only the most current period presented in the financial statements. The cumulative effect of initially applying the standard is recognized at the date of the initial application. Our primary source of revenue is interest income, which is recognized as it is earned and is deemed to be in compliance with this ASU. With respect to noninterest income, the Company is in process of identifying and evaluating the revenue streams and underlying revenue contracts within the scope of the guidance. The Company is developing processes and procedures to ensure it is fully compliant with these amendments. To date, the Company has not yet identified any significant changes in the timing of revenue recognition when considering the amended accounting guidance; however, the Company’s implementation efforts are ongoing and such assessments may change prior to the January 1, 2018 implementation date. Accordingly, the Company does not expect implementation of this standard to have a material impact on our consolidated financial statements.

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

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

In June 2016 ~~FASB issued ASU No. 2016-13,~~ ~~Financial Instruments--Credit Losses (Topic 326)~~. This ASU replaces the ~~existing~~ incurred loss ~~impairment~~ methodology that ~~recognizes credit losses when~~delays recognition until it is probable a ~~probable~~ loss has been incurred with ~~new~~an expected loss methodology ~~where loss estimates are based upon lifetime~~that is referred to as the current expected credit ~~losses.~~loss (“CECL”) methodology. The amendments in this ASU require a financial asset that is measured at amortized cost to be presented at the net amount expected to be collected. The income statement would then reflect the measurement of credit losses for newly recognized financial assets as well as changes to the expected credit losses that have taken place during the reporting period. The measurement of expected credit losses will be based on historical information, current conditions, and reasonable and supportable forecasts that impact the collectability of the reported amount. Available-for-sale securities will bifurcate the fair value mark and establish an allowance for credit losses through the income statement for the credit portion of that mark. The interest portion will continue to be recognized through accumulated other comprehensive income

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

or loss. The change in allowance recognized as a result of adoption will occur through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is adopted. ~~The amendments in this~~This ASU ~~are~~is effective for smaller reporting companies, such as the Company, for fiscal years beginning after December 15, ~~2019,~~2022, including interim periods within those fiscal years, with early adoption ~~permitted for fiscal years beginning after December 15, 2018.~~permitted. ASU 2019-05 issued in April 2019 further provides that entities that have certain financial instruments measured at amortized cost that has credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The ~~Company~~fair value option applies to available-for-sale debt securities. This ASU is ~~evaluating our current expected loss methodology~~effective upon adoption of ~~our loan~~ASU 2016-13, and ~~investment portfolios~~should be applied on a modified-retrospective basis as a cumulative-effect adjustment to ~~identify~~ the ~~necessary modifications in accordance with this standard and expects a change~~opening balance of retained earnings in the ~~processes~~statement of financial condition as of the adoption date. On January 1, 2023, the Company adopted this ASU, which resulted in a net of tax charge of $395,000 to retained earnings, and ~~procedures~~a $500,000 increase to ~~calculate the ALLL, including changes in assumptions and estimates to consider expected~~allowance for credit losses ~~over~~for the ~~life~~cumulative effect of adopting this guidance. The impact that the ~~loan versus~~transition to CECL had on the current accounting practice that utilizes the incurred loss model. A valuation adjustment to our ALLL or investment portfolio that is identified in this process will be reflected as a one-time adjustment in equity rather than earnings. We are in the process of compiling historical data that will be used to calculate expected credit losses on ~~our loan portfolio~~unfunded commitments was deemed to ~~ensure we are fully compliant with~~be immaterial.

In January 2021, the ASU at the adoption date and are evaluating the potential impact adoption of this ASU will have on our consolidated financial statements. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.

~~In August 2016,~~ FASB issued ASU No. ~~2016-15,~~ ~~Statement of Cash Flows~~2021-01, Reference Rate Reform (Topic ~~230): Classification of Certain Cash Receipts and Cash Payments~~848). This ASU ~~was~~applies to ~~address the appropriate classification~~contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows.reference rate reform. The amendments in this ASU are ~~effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted~~elective and ~~must~~apply to all entities that have derivative instruments that use an interest rate that will be modified by reference rate reform. This ASU provides implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to derivative instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12, 2020, or on a prospective basis to new modifications from any date subsequent to the date of issuance. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol (“Protocol”) as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. Additionally, effective January 1, 2022, the Company was no longer initiating or renewing loans using ~~a retrospective transition method~~LIBOR as an index. As of March 31, 2023, the Company’s derivative instruments continued to ~~each period presented.~~use LIBOR as the basis for interest-rate swap calculations. The Company does not ~~currently have items on its cash flow statement that would be impacted by adoption of~~expect this ASU ~~and will evaluate future cash flow statement classifications in accordance with the standard. Adoption of ASU 2016-15 is not expected~~ to have a material impact on ~~the Company’s consolidated financial statements.~~its business operations and Consolidated Financial Statements.

In ~~January 2017,~~March 2022, the FASB issued ASU ~~2017-01,~~ ~~Business Combinations~~2022-02, Financial Instruments - Credit Losses (Topic ~~805)~~326): Troubled Debt Restructurings and Vintage Disclosures. This ASU ~~clarifies~~eliminates the ~~definition of a business to assist in determining whether transactions should be accounted~~accounting guidance for ~~as acquisitions (or disposals) or assets or businesses. The amendments in this ASU provide a screen to determine~~troubled debt restructured loans (“TDRs”) by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a ~~set~~borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write offs by year of ~~assets~~origination for financing receivables and ~~activities is not a business, thereby reducing the number of transactions requiring further evaluation. If the screen is not met, the amendments~~net investments in ~~this ASU further provide a framework to evaluate if the criteria is present to qualify for a business.~~leases. This ASU is effective for annual periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. Adoption of ASU 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.

~~In January 2017, FASB issued ASU No. 2017-04,~~ ~~Intangibles--Goodwill and Other (Topic 350).~~ This ASU simplifies the impairment calculation for subsequent measurement of goodwill by eliminating the step of comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in this ASU, an entity will evaluate the carrying amount of a reporting unit to its fair value, as if the reporting unit had been acquired in a business combination. An impairment charge should be recognized for the amount that the carrying amount exceeds the fair value, not to exceed the amount of goodwill. The income tax effect should be considered for any tax deductible goodwill when measuring the impairment loss. The amendments in this ASU are effective for goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for reporting periods after January 1, 2017. The Company recognized goodwill from its recent branch acquisition and intends on adopting this ASU in 2018. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

~~In March 2017, FASB issued ASU No. 2017-08,~~ ~~Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~. The ASU shortens the amortization period for certain callable debt securities held at a premium. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Theupon adoption of ASU ~~No. 2017-08 is not expected to have a material impact on~~2016-13. On January 1, 2023, the ~~Company's consolidated financial statements.~~

~~In May 2017, FASB issued~~Company adopted this ASU ~~No. 2017-09,~~ ~~Compensation--Stock Compensation (Topic 718): Scope of Modification Accounting~~.at the same time ASU 2016-13 was adopted. The ~~ASU was issued to provide clarity as to when to apply modification accounting when there is a change~~Company had no write offs in the ~~terms or conditions~~first quarter of ~~a share-based payment award. According to this ASU, an entity should account~~2023 and recoveries for the ~~effects~~quarter were $1,000, all of a modification unless the fair value, vesting conditions, and balance sheet classification of the award is the same after the modification as compared to the original award prior to the modification. This ASU is effective for reporting periods beginning after December 15, 2017,which were from one-to-four family residental loans.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

with early adoption permitted. The Company has not had any modifications on share-based payment awards. The adoption of ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

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

Note 4 - Investments

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


	March 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	11,739	$	—	$	(1,708)	$	10,031
Freddie Mac	13,684		—		(1,685)		11,999
Ginnie Mae	29,191		31		(1,469)		27,753
Other	33,548		—		(1,842)		31,706
Municipal bonds	36,868		55		(5,050)		31,873
U.S. Government agencies	75,131		6		(1,990)		73,147
Corporate bonds	33,000		—		(4,561)		28,439
Total	$	233,161	$	92	$	(18,305)	$	214,948


	September 30, 2017										December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)										(In thousands)
Mortgage-backed investments:										Mortgage-backed investments:
Fannie Mae	$	47,118	$	133	$	(590	)	$	46,661	Fannie Mae	$	11,800	$	—	$	(1,860)	$	9,940
Freddie Mac	15,048		86		(45		)	15,089		Freddie Mac	13,720		—		(1,831)		11,889
Ginnie Mae	19,994		27		(602		)	19,419		Ginnie Mae	29,426		18		(1,601)		27,843
Other										Other	34,295		—		(1,906)		32,389
Municipal bonds	13,987		265		(25		)	14,227		Municipal bonds	36,968		17		(6,102)		30,883
U.S. Government agencies	19,849		108		(165		)	19,792		U.S. Government agencies	76,718		6		(2,370)		74,354
Corporate bonds	22,503		545		(389		)	22,659		Corporate bonds	33,000		—		(2,520)		30,480
Total	$	138,499	$	1,164	$	(1,816	)	$	137,847	Total	$	235,927	$	41	$	(18,190)	$	217,778

December 31, 2016
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 42,060
$ 126
$ (854 ) $ 41,332
   Freddie Mac 18,013
95
(99 ) 18,009
   Ginnie Mae 19,133
41
(540 ) 18,634
Municipal bonds 13,203
11
(107 ) 13,107
U.S. Government agencies 15,937
75
(155 ) 15,857
Corporate bonds 22,506
241
(426 ) 22,321
Total $ 130,852
$ 589
$ (2,181 ) $ 129,260
There were no holdings of investment securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2023 and December 31, 2022.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On a quarterly basis, management ~~makes an assessment~~evaluates available-for-sale (“AFS”) securities in unrealized loss positions to determine ~~whether there have been any events or economic circumstances to indicate that a security on which there~~if an allowance for credit losses is ~~an unrealized loss is impaired on an other-than-temporary basis.~~required. The Company considers many factors including the severity and duration of the impairment, economic circumstances, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. ~~Securities on which there~~If it is determined that a credit loss exists, that loss is recognized as an ~~unrealized loss that is deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value.~~allowance for credit losses through the provision for credit losses in the Consolidated Income Statements. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell the debt security before recovering its cost basis, the entire impairment loss would be recognized ~~in earnings as an OTTI.~~through earnings. If the Company does not intend to sell the debt security and it is not likely that it will be required to sell the debt security but does not expect to recover the entire amortized cost basis of the debt security, only the portion of the ~~impairment~~unrealized loss representing a credit ~~losses~~loss would be recognized in ~~earnings.~~earnings, limited by the amount that the fair value is less than the amortized cost basis. The credit loss on a debt security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the debt security being measured for a potential ~~OTTI.~~credit loss. 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. At September 30, 2017 and December 31, 2016, the~~

The Company had 45121 securities and 53123 securities in an unrealized loss position, ~~respectively. At September 30, 2017~~with 92 and ~~December 31, 2016, the Company had fifteen~~62 of these securities ~~and four securities, respectively,~~ in an unrealized loss position for 12 months or ~~more. Management reviewed the financial condition of the entities issuing municipal or corporate bonds~~more, at ~~September 30, 2017~~March 31, 2023, and December 31, ~~2016,~~2022, respectively. Management does

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

not believe that any material amount of the unrealized losses at December 31, 2022 was related to credit issues. The decline in fair market value of these securities was generally due to changes in market interest rates and ~~determined~~changes in market-desired spreads subsequent to their purchase. However, at March 31, 2023, a portion of the losses in the Company’s corporate bond portfolio are credit related. Specifically, the Company’s corporate bond portfolio includes $22.0 million in subordinated debt securities issued by financial institutions, including $8.0 million issued by two large regional west coast financial institutions. The market value on the securities issued by these two institutions declined by $2.1 million in the quarter ended March 31, 2023, with estimated valuations totaling $5.5 million at quarter end. Currently, the Company does not intend to sell, and it is not more likely than not that ~~an OTTI charge~~the Company will be required to sell the positions before their recovery of the amortized cost basis, which may be at maturity. As such, no allowance for credit losses was ~~not warranted.~~recorded with respect to AFS securities as of or during the three months ended March 31, 2023, and December 31, 2022.

The amortized cost and estimated fair value of investments available-for-sale at ~~September 30, 2017,~~March 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.


	March 31, 2023
	Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	24,929	$	24,357
Due after one year through five years	25,248		24,737
Due after five years through ten years	30,923		25,910
Due after ten years	63,899		58,455
	144,999		133,459
Mortgage-backed investments	88,162		81,489
Total	$	233,161	$	214,948

September 30, 2017
Amortized Cost Fair Value
(In thousands)
Due within one year $ 6,562
$ 6,572
Due after one year through five years 3,953
3,963
Due after five years through ten years 23,068
23,175
Due after ten years 22,756
22,968
56,339
56,678
Mortgage-backed investments 82,160
81,169
Total $ 138,499
$ 137,847

Under Washington state law, in order to participate in the public funds program the Company is required to pledge eligible securities as collateral in an amount equal to 50% of the public deposits held less the FDIC insured amount. Investment securities with market values of ~~$20.8~~$27.4 million and ~~$22.6~~$21.0 million were pledged as collateral for public deposits at ~~September 30, 2017~~March 31, 2023, and December 31, ~~2016,~~2022, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

For the three ~~and nine~~ months ended ~~September 30, 2017, we had~~March 31, 2023, there were no calls, sales ~~and a maturity on~~or maturities of investment ~~securities of $2.8 million, and $7.5 million, respectively, generating a net gain of $47,000 and $103,000, respectively.~~securities. For the three ~~and nine~~ months ended ~~September 30, 2016, we had calls and~~March 31, 2022, there was a $30,000 call on one investment security with no gain or loss generated. There were no sales onof investment securities ~~of $24.5 million, and $24.9 million, respectively, generating a net gain of $33,000 for both periods.~~during the three months ended March 31, 2022.

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Note 5 - Loans Receivable~~

~~Loans receivable are summarized as follows at~~In January 2020, the ~~dates indicated:~~

September 30, 2017 December 31, 2016
(In thousands)
One-to-four family residential:
Permanent owner occupied $ 139,736
$ 137,834
Permanent non-owner occupied 126,711
111,601
266,447
249,435

Multifamily 173,681
123,250

Commercial real estate 320,416
303,694

Construction/land:
One-to-four family residential 85,593
67,842
Multifamily 115,345
111,051
Commercial 5,325
—
Land 38,423
30,055
244,686
208,948

Business 22,243
7,938
Consumer 9,301
6,922
Total loans 1,036,774
900,187

Less:
Loans in process ("LIP") 91,316
72,026
Deferred loan fees, net 1,486
2,167
Allowance for loan and lease losses ("ALLL") 12,110
10,951
Loans receivable, net $ 931,862
$ 815,043

~~At September 30, 2017, loans~~Bank purchased three annuity contracts, totaling ~~$457.5~~$2.4 million, ~~were pledged to secure borrowings from the FHLB of Des Moines compared to $472.1 million at December 31, 2016.~~

~~ALLL~~. The Company maintains an ALLL as a reserve against probable and inherent risk of losses in its loan portfolios. The ALLL is comprised of a general reserve component for loans evaluated collectively for loss and a specific reserve component for loans evaluated individually. When an issue is identified and it is determined that the loan needs to be ~~classified~~held long-term to satisfy the benefit obligation associated with certain supplemental executive retirement plan agreements. At March 31, 2023, the annuities were reported as ~~nonperforming and/or impaired,~~investments held-to-maturity at an ~~evaluation~~amortized cost of $2.4 million on the Company’s Consolidated Balance Sheets. The amortized cost is considered the fair value of the discounted expected cash flows is done and an appraisal may be obtained on the collateral. Based on this evaluation, additional provision for loan loss or charge-offs is recorded prior to the end of the financial reporting period.investment.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Loans Receivable and Allowance for Credit Losses

~~The following tables summarize changes in the ALLL and loan portfolio by loan type and impairment method~~

Loans receivable are summarized as follows at the dates ~~and for~~indicated:


	March 31, 2023		December 31, 2022
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	242,477	$	232,869
Permanent non-owner occupied	240,183		241,311
	482,660		474,180

Multifamily	143,332		126,866

Commercial real estate	408,905		407,904

Construction/land:
One-to-four family residential	53,948		52,492
Multifamily	(131)		15,393

Land	9,786		9,759
	63,603		77,644

Business	31,659		31,363

Consumer	70,619		64,353

Total loans receivable, gross	1,200,778		1,182,310

Less:
ACL	16,028		15,227
Total loans receivable, net	$	1,184,750	$	1,167,083

At March 31, 2023, loans totaling $648.0 million were pledged to secure borrowings from the ~~periods shown:~~

At or For the Three Months Ended September 30, 2017
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 2,627
$ 1,231
$ 3,733
$ 2,942
$ 457
$ 295
$ 11,285
   Charge-offs —
—
—
—
—
—
—
   Recoveries 247
—
78
—
—
—
325
Provision (recapture) (157 ) 472
(68 ) 40
211
2
500
Ending balance $ 2,717
$ 1,703
$ 3,743
$ 2,982
$ 668
$ 297
$ 12,110

At or For the Nine Months Ended September 30, 2017
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 2,551
$ 1,199
$ 3,893
$ 2,792
$ 237
$ 279
$ 10,951
   Charge-offs —
—
—
—
—
—
—
   Recoveries 280
—
78
—
—
1
359
   Provision (recapture) (114 ) 504
(228 ) 190
431
17
800
Ending balance $ 2,717
$ 1,703
$ 3,743
$ 2,982
$ 668
$ 297
$ 12,110

ALLL by category:

General reserve $ 2,582
$ 1,703
$ 3,723
$ 2,982
$ 668
$ 297
$ 11,955
Specific reserve 135
—
20
—
—
—
155

Loans: ⁽¹⁾

Total loans $ 266,447
$ 173,681
$ 319,872
$ 153,914
$ 22,243
$ 9,301
$ 945,458
Loans collectively evaluated for impairment ⁽²⁾
251,141
172,541
316,656
153,914
22,243
9,205
925,700
Loans individually evaluated for impairment ⁽³⁾
15,306
1,140
3,216
—
—
96
19,758

⁽¹⁾~~Net of LIP.~~

⁽²⁾~~Loans collectively evaluated for general reserves.~~

⁽³⁾~~Loans individually evaluated for specific reserves.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

At or For the Three Months Ended September 30, 2016
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 2,747
$ 1,194
$ 3,771
$ 1,880
$ 217
$ 325
$ 10,134
   Charge-offs —
—
—
—
—
(28 ) (28 )
   Recoveries —
—
—
—
—
—
—
   Provision (recapture) (60 ) (215 ) 486
678
25
(14 ) 900
Ending balance $ 2,687
$ 979
$ 4,257
$ 2,558
$ 242
$ 283
$ 11,006

At or For the Nine Months Ended September 30, 2016
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 3,028
$ 1,193
$ 3,395
$ 1,193
$ 229
$ 425
$ 9,463
   Charge-offs —
—
—
—
—
(47 ) (47 )
   Recoveries 84
—
104
—
—
2
190
   Provision (recapture) (425 ) (214 ) 758
1,365
13
(97 ) 1,400
Ending balance $ 2,687
$ 979
$ 4,257
$ 2,558
$ 242
$ 283
$ 11,006

ALLL by category:

General reserve $ 2,369
$ 979
$ 4,150
$ 2,477
$ 242
$ 283
$ 10,500
Specific reserve 318
—
107
81
—
—
506

Loans: ⁽¹⁾

Total loans $ 255,905
$ 135,414
$ 329,204
$ 124,134
$ 8,023
$ 6,530
$ 859,206
Loans collectively evaluated for impairment ⁽²⁾
227,650
133,839
324,782
123,638
8,023
6,400
824,332
Loans individually evaluated for impairment ⁽³⁾
28,255
1,575
4,422
496
—
130
34,874

⁽¹⁾ ~~Net of LIP.~~

⁽²⁾ ~~Loans collectively evaluated for general reserves.~~

⁽³⁾ ~~Loans individually evaluated for specific reserves.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Past Due Loans.~~ Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At September 30, 2017, past due loans were 0.01% of total loans receivable, net of LIP. In comparison, past due loans were 0.06% of total loans receivable, net of LIPFHLB compared to $605.0 million at December 31, ~~2016. The following tables represent~~2022. In addition, loans totaling $85.2 million and $87.7 million were pledged to the Federal Reserve Bank of San Francisco to secure a ~~summary~~line of ~~the aging of loans by type~~credit at ~~the dates indicated:~~

Loans Past Due as of September 30, 2017
30-59 Days 60-89 Days 90 Days and
Greater Total Past
Due Current
Total ^{(1) (2)}
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ 84
$ —
$ —
$ 84
$ 139,652
$ 139,736
Non-owner occupied —
—
—
—
126,711
126,711
Multifamily —
—
—
—
173,681
173,681
Commercial real estate —
—
—
—
319,872
319,872
Construction/land —
—
—
—
153,914
153,914
Total real estate 84
—
—
84
913,830
913,914
Business —
—
—
—
22,243
22,243
Consumer —
—
—
—
9,301
9,301
Total loans $ 84
$ —
$ —
$ 84
$ 945,374
$ 945,458

~~________________~~

⁽²⁾ ~~Net of LIP.~~

Loans Past Due as of December 31, 2016
30-59 Days 60-89 Days 90 Days and
Greater Total Past
Due Current
Total ^{(1) (2)}
(In thousands)
Real estate:
One-to-four family residential:
Owner occupied $ 304
$ —
$ 169
$ 473
$ 137,361
$ 137,834
Non-owner occupied —
—
—
—
111,601
111,601
Multifamily —
—
—
—
123,250
123,250
Commercial real estate —
—
—
—
303,694
303,694
Construction/land —
—
—
—
136,922
136,922
Total real estate 304
—
169
473
812,828
813,301
Business —
—
—
—
7,938
7,938
Consumer —
—
—
—
6,922
6,922
Total loans $ 304
$ —
$ 169
$ 473
$ 827,688
$ 828,161

~~_________________~~

⁽¹⁾ ~~There were no loans 90 days and greater past due and still accruing interest at~~ December 31, ~~2016.~~

⁽²⁾ ~~Net of LIP.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Nonaccrual Loans.The following table is a summary of nonaccrual loans by loan type at the dates indicated:~~

September 30, 2017 December 31, 2016
(In thousands)
One-to-four family residential $ 132
$ 798
Consumer 53
60
Total nonaccrual loans $ 185
$ 858

During the three and nine months ended September 30, 2017, interest income that would have been recognized had these nonaccrual loans been performing in accordance with their original terms was $3,000 and $21,000, respectively. For the three and nine months ended September 30, 2016, foregone interest on nonaccrual loans was $13,000 and $40,000,2022, respectively.

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

September 30, 2017
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction /
Land Business Consumer
Total ⁽¹⁾
(In thousands)
Performing ⁽²⁾
$ 266,315
$ 173,681
$ 319,872
$ 153,914
$ 22,243
$ 9,248
$ 945,273
Nonperforming ⁽³⁾
132
—
—
—
—
53
185
Total loans $ 266,447
$ 173,681
$ 319,872
$ 153,914
$ 22,243
$ 9,301
$ 945,458

December 31, 2016
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer
Total⁽¹⁾
(In thousands)
Performing ⁽²⁾
$ 248,637
$ 123,250
$ 303,694
$ 136,922
$ 7,938
$ 6,862
$ 827,303
Nonperforming ⁽³⁾
798
—
—
—
—
60
858
Total loans $ 249,435
$ 123,250
$ 303,694
$ 136,922
$ 7,938
$ 6,922
$ 828,161

⁽¹⁾~~Net of LIP.~~

⁽²⁾~~There were $137.0 million of owner-occupied one-to-four family residential loans and $111.6 million of non-owner occupied one-to-four family residential loans classified as performing.~~

⁽³⁾~~The $798,000 of one-to-four family residential loans classified as nonperforming are all owner-occupied.~~

~~Impaired Loans.~~ ~~A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the original loan document. There were~~ no ~~funds committed to be advanced in connection with impaired loans at either September 30, 2017, or December 31, 2016.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

September 30, 2017

Recorded Investment ⁽¹⁾

Unpaid Principal Balance ⁽²⁾
Related Allowance
(In thousands)
Loans with no related allowance:
  One-to-four family residential:

      Owner occupied $ 1,334
$ 1,527
$ —
      Non-owner occupied 10,125
10,125
—
Multifamily 1,140
1,140
—
   Commercial real estate 2,473
2,473
—
   Consumer 96
144
—
Total 15,168
15,409
—
Loans with an allowance:

  One-to-four family residential:

      Owner occupied 524
570
8
      Non-owner occupied 3,323
3,345
127
   Commercial real estate 743
743
20
Total 4,590
4,658
155
Total impaired loans:

  One-to-four family residential:

      Owner occupied 1,858
2,097
8
      Non-owner occupied 13,448
13,470
127
   Multifamily 1,140
1,140
—
   Commercial real estate 3,216
3,216
20
   Consumer 96
144
—
Total $ 19,758
$ 20,067
$ 155

~~_________________~~

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

⁽²⁾ ~~Contractual loan principal balance.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

December 31, 2016

Recorded Investment ⁽¹⁾

Unpaid Principal Balance⁽²⁾
Related Allowance
(In thousands)
Loans with no related allowance:
  One-to-four family residential:
      Owner occupied $ 2,216
$ 2,475
$ —
      Non-owner occupied 16,634
16,652
—
Multifamily 1,564
1,564
—
   Commercial real estate 2,952
3,029
—
   Consumer 103
223
—
Total 23,469
23,943
—
Loans with an allowance:
  One-to-four family residential:
      Owner occupied 1,896
1,965
51
      Non-owner occupied 4,326
4,347
151
   Commercial real estate 755
755
26
   Construction/land 495
495
81
Total 7,472
7,562
309
Total impaired loans:
  One-to-four family residential:
      Owner occupied 4,112
4,440
51
      Non-owner occupied 20,960
20,999
151
   Multifamily 1,564
1,564
—
   Commercial real estate 3,707
3,784
26
   Construction/land 495
495
81
   Consumer 103
223
—
Total $ 30,941
$ 31,505
$ 309

~~_________________~~

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

⁽²⁾ ~~Contractual loan principal balance.~~

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table presents the average recorded investment in loans individually evaluated for impairment and the interest income recognized for the three and nine months ended September 30, 2017 and 2016:

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
(In thousands)
Loans with no related allowance:

   One-to-four family residential:

      Owner occupied $ 1,658
$ 22
$ 1,886
$ 69
      Non-owner occupied 11,395
158
13,445
485
Multifamily 1,143
19
1,251
56
Commercial real estate 2,693
49
2,818
135
Consumer 97
2
99
6
Total 16,986
250
19,499
751

Loans with an allowance:

   One-to-four family residential:

      Owner occupied 1,099
10
1,495
22
      Non-owner occupied 3,343
47
3,773
128
Commercial real estate 745
10
749
31
Construction/land —
—
124
—
Total 5,187
67
6,141
181

Total impaired loans:

   One-to-four family residential:

      Owner occupied 2,757
32
3,381
91
      Non-owner occupied 14,738
205
17,218
613
Multifamily 1,143
19
1,251
56
Commercial real estate 3,438
59
3,567
166
Construction/land —
—
124
—
Consumer 97
2
99
6
Total $ 22,173
$ 317
$ 25,640
$ 932

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
(In thousands)
Loans with no related allowance:

   One-to-four family residential:

      Owner occupied $ 2,434
$ 57
$ 2,679
$ 123
      Non-owner occupied 20,208
296
21,234
878
Multifamily 1,576
26
1,189
79
Commercial real estate 1,796
31
2,089
77
Consumer 119
3
123
8
Total 26,133
413
27,314
1,165

Loans with an allowance:

   One-to-four family residential:

      Owner occupied 2,003
28
2,042
78
      Non-owner occupied 5,050
76
5,874
202
Multifamily —
—
393
—
Commercial real estate 2,638
52
2,499
152
Construction/land 495
5
495
14
Consumer —
—
25
—
Total 10,186
161
11,328
446

Total impaired loans:

   One-to-four family residential:

      Owner occupied 4,437
85
4,721
201
      Non-owner occupied 25,258
372
27,108
1,080
Multifamily 1,576
26
1,582
79
Commercial real estate 4,434
83
4,588
229
Construction/land 495
5
495
14
Consumer 119
3
148
8
Total $ 36,319
$ 574
$ 38,642
$ 1,611

~~Troubled Debt Restructurings.~~ Certain loan modifications are accounted for as troubled debt restructured loans (“TDRs”). At September 30, 2017, the TDR portfolio totaled $19.6 million, all of which were performing in accordance with their restructured payment terms. At December 31, 2016, the TDR portfolio totaled $30.3 million, of which one loan of $174,000 was not performing in accordance with the terms of its restructure and was on nonaccrual status.

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The following tables present loans that were modified as TDRs during the periods indicated and their recorded investment both before and after the modification:~~

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
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)
One-to-four family residential:
Principal and interest with interest rate concession and advancement of maturity date 1
$ 524
$ 524
8
$ 2,492
$ 2,492
Total 1
$ 524
$ 524
8
$ 2,492
$ 2,492

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Number of Loans Pre-Modification Outstanding
Recorded
Investment Post-Modification Outstanding
Recorded
Investment Number of Loans Pre-Modification Outstanding
Recorded
Investment Post-Modification Outstanding
Recorded
Investment
(Dollars in thousands)
One-to-four family residential:
Principal and interest with interest rate concession 1
$ 316
$ 316
15
$ 3,490
$ 3,490
Advancement of maturity date 5
1,119
1,119
5
1,119
1,119
Commercial real estate:
Interest-only payments with interest rate concession and advancement of maturity date —
—
—
1
495
495
Advancement of maturity date 1
434
434
1
434
434
Total 7
$ 1,869
$ 1,869
22
$ 5,538
$ 5,538

At ~~September 30, 2017~~, the Company had no commitments to extend additional credit to borrowers whose loan terms have been modified in TDRs. All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment as part of the calculation of the ALLL.

The TDRs that occurred during the three and nine months ended September 30, 2017 and September 30, 2016, were all on existing TDRs and included extensions of existing interest rate concessions and advancing maturity dates for a period of time ranging from one to three years. No loans accounted for as TDRs were charged-off to the ALLL for the three and nine months ended September 30, 2017 and 2016.

TDRs that default after they have been modified are typically evaluated individually on a collateral basis. Any additional impairment is charged to the ALLL. For the three and nine months ended September 30, 2017, and September 30, 2016, no loans that had been modified in the previous 12 months defaulted.

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

•Grades 1 through 55: These grades are considered to be “pass” credits. ~~Pass credits~~These include assets where there is virtually no credit risk, such as cash secured loans with funds on deposit with the ~~Bank, where there is virtually no credit risk.~~Company. Pass credits also include credits that are on the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future. ~~Credits~~

•Grade 6: These credits, classified as ~~special mention are risk rated~~ 6 ~~and~~“special mention”, possess weaknesses that deserve management’s close attention. Special mention assets do not expose the Company to sufficient risk to warrant adverse classification in the substandard, doubtful or loss categories. ~~Substandard~~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 ~~risk rated~~ 7~~. An asset is considered substandard if it is~~not corrected. These credits have well

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

~~Substandard assets include those characterized by~~•Grade 8: These credits are classified as “doubtful” and possess well defined weaknesses which make the ~~distinct possibility that~~full collection or liquidation of the ~~Company will sustain some~~loan highly questionable and improbable. This classification is used where significant risk exposures are perceived but the exact amount of the loss ~~if the deficiencies are not corrected.~~cannot yet be determined due to pending events.

•Grade 9: Assets classified as doubtful are risk rated 8 and have all the weaknesses inherent in those credits classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets classified as loss are risk rated 9 and“loss” are considered uncollectible and cannot be justified as a viable asset for the Company. There ~~were~~is little or no prospect of near term recovery and no realistic strengthening action of significance is pending.

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

As of March 31, 2023, and December 31, 2022, the Company had no loans ~~classified~~rated as doubtful or ~~loss at September 30, 2017 and December 31, 2016.~~

loss. The following tables represent a summary of loans at March 31, 2023, and December 31, 2022 by type and risk ~~category at the dates indicated:~~category:


	March 31, 2023
	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Total Loans
	(In thousands)
One-to-four family residential
Pass	$	18,166	$	155,300	$	102,559	$	67,545	$	34,995	$	102,459	$	481,024
Watch	—		—		—		—		—		620		620
Special mention	—		—		—		—		—		1,016		1,016
Substandard	—		—		—		—		—		—		—
Total one-to-four family residential	18,166		155,300		102,559		67,545		34,995		104,095		482,660
Multifamily
Pass	1,097		7,579		23,088		43,936		29,609		34,129		139,438
Watch	—		—		—		—		—		2,274		2,274
Special mention	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		1,620		1,620
Total multifamily	1,097		7,579		23,088		43,936		29,609		38,023		143,332
Commercial
Pass	12,083		35,346		82,859		70,849		22,362		116,683		340,182
Watch	—		—		4,185		8,783		—		5,949		18,917
Special mention	—		—		—		—		—		4,651		4,651
Substandard	—		—		—		527		1,295		43,333		45,155
Total commercial real estate	12,083		35,346		87,044		80,159		23,657		170,616		408,905
Construction/land
Pass	(131)		25,583		34,813		2,931		407		—		63,603
Watch	—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—
Total construction/land	(131)		25,583		34,813		2,931		407		—		63,603

September 30, 2017
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer
Total ⁽¹⁾
(In thousands)
Risk Rating:
   Pass $ 262,951
$ 173,681
$ 317,396
$ 153,914
$ 22,243
$ 9,060
$ 939,245
   Special mention 2,817
—
2,476
—
—
188
5,481
   Substandard 679
—
—
—
—
53
732
Total loans $ 266,447
$ 173,681
$ 319,872
$ 153,914
$ 22,243
$ 9,301
$ 945,458

~~_____________~~

⁽¹⁾ ~~Net of LIP.~~

December 31, 2016

One-to-Four
Family
Residential
Multifamily
Commercial
Real Estate

Construction /
Land
Business Consumer
Total ⁽¹⁾
(In thousands)
Risk Rating:
   Pass $ 245,237
$ 123,250
$ 300,655
$ 136,427
$ 7,938
$ 6,674
$ 820,181
   Special mention 2,847
—
3,039
—
—
188
6,074
   Substandard 1,351
—
—
495
—
60
1,906
Total loans $ 249,435
$ 123,250
$ 303,694
$ 136,922
$ 7,938
$ 6,922
$ 828,161

~~_____________~~

⁽¹⁾ ~~Net of LIP.~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	March 31, 2023
	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Total Loans(1)
	(In thousands)
Business
Pass	71		4,918		495		1,672		1,724		22,779		31,659
Watch	—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—
Total business	71		4,918		495		1,672		1,724		22,779		31,659
Consumer
Pass	10,942		30,776		12,528		6,869		5,781		3,448		70,344
Watch	—		—		—		—		26		—		26
Special mention	—		—		—		—		48		—		48
Substandard	—		—		201		—		—		—		201
Total consumer	10,942		30,776		12,729		6,869		5,855		3,448		70,619

Total loans receivable, gross
Pass	$	42,228	$	259,502	$	256,342	$	193,802	$	94,878	$	279,498	$	1,126,250
Watch	—		—		4,185		8,783		26		8,843		21,837
Special mention	—		—		—		—		48		5,667		5,715
Substandard	—		—		201		527		1,295		44,953		46,976
	$	42,228	$	259,502	$	260,728	$	203,112	$	96,247	$	338,961	$	1,200,778


	December 31, 2022
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass, grade 1-4	$	473,700	$	122,972	$	342,827	$	78,120	$	31,371	$	61,632	$	1,110,622
Pass, grade 5 (watch)	1,113		2,291		14,845		—		—		27		18,276
Special mention	1,023		—		4,668		—		—		203		5,894
Substandard	—		1,632		45,542		—		—		193		47,367
Total loans	$	475,836	$	126,895	$	407,882	$	78,120	$	31,371	$	62,055	$	1,182,159

ACL. ACL is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the ACL when management believes the non-collectability of a loan balance is confirmed. Expected recoveries may not exceed the aggregate amounts previously charged-off and expected to be charged-off. The allowance for credit losses, as reported in our consolidated statements of financial conditions, is adjusted by a provision for credit losses, which is reported in earnings, and reduced by the charge-offs of loan amounts, net of recoveries.

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

of the loan, it may establish a specific allowance in an amount deemed prudent to address the risk specifically. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to the particular problem assets. When an insured institution classifies problem assets as a loss, pursuant to Federal regulations, it is required to charge-off such assets in the period in which they are deemed uncollectible. The determination as to the classification of the Company’s assets and the amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional allowances for credit losses.

At March 31, 2023, total loans receivable included $707,000 of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) as compared to $5.2 million at March 31, 2022. Although these loans were included in the population of loans collectively evaluated for impairment, no general allowance was allocated to them as these loans are 100% guaranteed by the SBA.

The following tables detail activity in the allowance for credit losses on loans by loan categories at or for the three months ended March 31, 2023 and in the allowance for loan and lease losses (“ALLL”) under the incurred loss methodology for the three months ended March 31, 2022:












	At or For the Three Months Ended March 31, 2023
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
ACL:
Beginning balance	$	4,043	$	1,210	$	5,397	$	1,717	$	948	$	1,912	$	15,227
Adjustment for adoption of Topic 326	1,520		83		(970)		408		(510)		(31)		$	500

Recoveries	1		—		—		—		—		—		1
Provision (recapture)	47		314		69		(332)		(25)		227		300
Ending balance	$	5,611	$	1,607	$	4,496	$	1,793	$	413	$	2,108	$	16,028

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)












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

Recoveries	2		—		—		—		—		—		2
Provision (recapture)	259		176		(300)		(422)		(331)		118		(500)
Ending balance	$	3,475	$	1,455	$	6,315	$	1,642	$	781	$	1,491	$	15,159

ALLL by category:
General allowance	$	3,457	$	1,455	$	6,315	$	1,642	$	781	$	1,491	$	15,141
Specific allowance	18		—		—		—		—		—		18

Loans:
Total loans	$	412,231	$	152,855	$	416,988	$	74,697	$	30,546	$	49,431	$	1,136,748
Loans collectively evaluated for impairment	410,136		151,195		376,815		74,697		30,546		49,431		1,092,820
Loans individually evaluated for impairment	2,095		1,660		40,173		—		—		—		43,928

Past Due Loans. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. Loans past due were $230,000 and $220,000 at March 31, 2023, and December 31, 2022, respectively, representing 0.02% of total loans receivable at both dates. The following tables represent a summary of the aging of loans by type at the dates indicated:


	Loans Past Due as of March 31, 2023
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	—	$	—	$	—	$	—	$	242,477	$	242,477
Non-owner occupied			—		—		—		240,183		240,183
Multifamily	—		—		—		—		143,332		143,332
Commercial real estate	—		—		—		—		408,905		408,905
Construction/land	—				—		—		63,603		63,603
Total real estate	—		—		—		—		1,098,500		1,098,500
Business	—		—		—		—		31,659		31,659
Consumer	29		—		201		230		70,389		70,619
Total loans	$	29	$	—	$	201	$	230	$	1,200,548	$	1,200,778

________________

(1) There were no loans 90 days and greater past due and still accruing interest at March 31, 2023.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Loans Past Due as of December 31, 2022
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	—	$	—	$	—	$	—	$	233,785	$	233,785
Non-owner occupied	27		—		—		27		242,024		242,051
Multifamily	—		—		—		—		126,895		126,895
Commercial real estate	—		—		—		—		407,882		407,882
Construction/land	—		—		—		—		78,120		78,120
Total real estate	27		—		—		27		1,088,706		1,088,733
Business	—		—		—		—		31,371		31,371
Consumer	—		—		193		193		61,862		62,055
Total loans	$	27	$	—	$	193	$	220	$	1,181,939	$	1,182,159

_________________

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

Nonperforming Loans. When a loan becomes 90 days past due, the Company generally places the loan on nonaccrual status. Loans may be placed on nonaccrual status prior to being 90 days past due if there is an identified problem that indicates the borrower is unable to meet their scheduled payment obligations. Nonaccrual loans totaled $201,000 and $193,000 at March 31, 2023 and March 31, 2022, respectively.

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


	March 31, 2023
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing (1)	$	482,660	$	143,332	$	408,905	$	63,603	$	31,659	$	70,418	$	1,200,577
Nonperforming	—		—		—		—				201		201
Total loans	$	482,660	$	143,332	$	408,905	$	63,603	$	31,659	$	70,619	$	1,200,778

_____________

(1) There were $242.5 million of owner-occupied one-to-four family residential loans and $240.2 million of non-owner occupied one-to-four family residential loans classified as performing.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2022
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing (1)	$	475,836	$	126,895	$	407,882	$	78,120	$	31,371	$	61,862	$	1,181,966
Nonperforming	—		—		—		—		—		193		193
Total loans	$	475,836	$	126,895	$	407,882	$	78,120	$	31,371	$	62,055	$	1,182,159

_____________

(1) There were $233.8 million of owner-occupied one-to-four family residential loans and $242.1 million of non-owner occupied one-to-four family residential loans classified as performing.

Impaired Loans and Allowance for Loan Losses - Prior to the implementation of Financial Instruments - Credit Losses (Topic 326) on January 1, 2023, a loan was considered impaired when, based on current information and circumstances, the Company determines it was probable that it would be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Factors considered in determining impairment included, but were not limited to, the financial condition of the borrower, the value of the underlying collateral and the status of the economy. Impaired loans were comprised of loans on nonaccrual, TDRs that were performing under their restructured terms, and loans that were 90 days or more past due, but were still on accrual.

The following table presents a summary of loans individually evaluated for impairment by loan type at December 31, 2022:


	December 31, 2022
	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	174	$	175	$	—
Non-owner occupied	188		188		—
Multifamily	1,632		1,632		—
Commercial real estate	45,542		45,542		—


Total	47,536		47,537		—

Loans with an allowance:
One-to-four family residential:
Owner occupied	486		533		12
Non-owner occupied	512		512		1




Total	998		1,045		13

Total impaired loans:
One-to-four family residential:
Owner occupied	660		708		12
Non-owner occupied	700		700		1
Multifamily	1,632		1,632		—
Commercial real estate	45,542		45,542		—


Total	$	48,534	$	48,582	$	13

_________________

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

(2) Contractual loan principal balance.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the amortized cost basis of loans on nonaccrual status and loans 90 days or more past due and still accruing as of March 31, 2023:


	March 31, 2023
	Nonaccrual with No ACL		Nonaccrual with ACL		Total Nonaccrual		90 Days or More Past Due and Still Accruing
	(In thousands)
Consumer Loans	$	201	$	—	$	201	$	—
Total	$	201	$	—	$	201	$	—

The following table presents the amortized cost basis of collateral dependent loans by class as of March 31, 2023:


	March 31, 2023
	Real Estate		Total
	(In thousands)
Multifamily	$	1,620	$	1,620
Commercial Real Estate	$	45,155	$	45,155
Total	$	46,775	$	46,775

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


		Three Months Ended March 31, 2022
		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied		$	178	$	3
Non-owner occupied		912		15
Multifamily		830		17
Commercial real estate		37,102		410


Total		39,022		445

Loans with an allowance:
One-to-four family residential:
Owner occupied		493		7
Non-owner occupied		519		9




Total		1,012		16

Total impaired loans:
One-to-four family residential:
Owner occupied		671		10
Non-owner occupied		1,431		24
Multifamily		830		17
Commercial real estate		37,102		410


Total		$	40,034	$	461

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Troubled Debt Restructurings (“TDR”). On January 1, 2023,the Company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326) which eliminates the accounting guidance for TDR for creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. No loans to borrowers experiencing financial difficulty were modified in the three months ended March 31, 2023. At March 31, 2022, the Company had $2.1 million of TDRs. TDRs that default after they have been modified are typically evaluated individually on a collateral basis. For the three months ended March 31, 2022, no TDRs that had been modified in the previous 12 moths defaulted. The Company had no loan charge-offs for the three months ended March 31, 2023. We intend to disclose future loan charge-offs by year of origination in a vintage table, to be compliant with the ASU.

Note 6 - Other Real Estate Owned

OREO includes properties acquired by the Company through foreclosure and deed in lieu of foreclosure. ~~The following table is a summary~~As of ~~OREO activity during~~both March 31, 2023, and December 31, 2022, the ~~periods shown:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Balance at beginning of period $ 1,825
$ 2,331
$ 2,331
$ 3,663
Gross proceeds from sale of OREO —
—
(461 ) (988 )
Gain on sale of OREO —
—
5
(87 )
Market value adjustments —
—
(50 ) (257 )
Balance at end of period $ 1,825
$ 2,331
$ 1,825
$ 2,331

~~There were~~Company had no OREO properties sold during the three months ended September 30, 2017. During the nine months ended September 30, 2017, one OREO property sold for $461,000, generating a gain on sale of $5,000. For the three months ended September 30, 2017, there were no market value adjustments taken on OREO properties. During the nine months ended September 30, 2017, a $50,000 market value adjustment was recognized prior to the sale of the one OREO property sold during this period. OREO at September 30, 2017 consisted of $1.8 million in commercial real estate properties. At September 30, 2017, there were no loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

Note 7 - Fair Value

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

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

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, is 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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•OREO: 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 judgement or estimation.

The tables below present the balances of assets measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements) at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016:~~2022:


	Fair Value Measurements at March 31, 2023
	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)
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae	$	10,031	$	—	$	10,031	$	—
Freddie Mac	11,999		734		11,265		—
Ginnie Mae	27,753		—		27,753		—
Other	31,706		—		31,706		—
Municipal bonds	31,873		—		31,873		—
U.S. Government agencies	73,147		38,768		34,379		—
Corporate bonds	28,439		—		28,439		—
Total available-for-sale investments	214,948		39,502		175,446		—
Derivative fair value asset	8,936		—		8,936		—
Total	$	223,884	$	39,502	$	184,382	$	—


	Fair Value Measurements at December 31, 2022
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae	$	9,940	$	—	$	9,940	$	—
Freddie Mac	11,889		736		11,153		—
Ginnie Mae	27,843		—		27,843		—
Other	32,389		—		32,389		—
Municipal bonds	30,883		—		30,883		—
U.S. Government agencies	74,354		38,450		35,904		—
Corporate bonds	30,480		—		30,480		—
Total available-for-sale investments	217,778		39,186		178,592		—
Derivative fair value asset	10,485		—		10,485		—
Total	$	228,263	$	39,186	$	189,077	$	—

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Measurements at September 30, 2017
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)
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae $ 46,661
$ —
$ 46,661
$ —
Freddie Mac 15,089
—
15,089
—
Ginnie Mae 19,419
—
19,419
—
Municipal bonds 14,227
—
14,227
—
U.S. Government agencies 19,792
—
19,792
—
Corporate bonds 22,659
—
22,659
—
Total available-for-sale
investments 137,847
—
137,847
—
Derivative fair value asset 1,118
—
1,118
—
$ 138,965
$ —
$ 138,965
$ —

Fair Value Measurements at December 31, 2016
Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(In thousands)
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae $ 41,332
$ —
$ 41,332
$ —
Freddie Mac 18,009
—
18,009
—
Ginnie Mae 18,634
—
18,634
—
Municipal bonds 13,107
—
13,107
—
U.S. Government agencies 15,857
—
15,857
—
Corporate bonds 22,321
—
22,321
—
Total available-for-sale
investments 129,260
—
129,260
—
Derivative fair value asset 1,333
—
1,333
—
$ 130,593
$ —
$ 130,593
$ —

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

The tables below present the balances of assets measured at fair value on a nonrecurring basis at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016:~~2022:


	Fair Value Measurements at March 31, 2023
	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)
Collateral dependent loans included in loans receivable	$	46,775	$	—	$	—	$	46,775

Total	$	46,775	$	—	$	—	$	46,775

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Fair Value Measurements at September 30, 2017
Fair Value
Measurements Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Impaired loans (included in loans
receivable, net) ⁽¹⁾
$ 19,603
$ —
$ —
$ 19,603
OREO 1,825
—
—
1,825
Total $ 21,428
$ —
$ —
$ 21,428


	Fair Value Measurements at December 31, 2022
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Impaired loans (included in loans receivable, net) (1)	$	48,521	$	—	$	—	$	48,521

Total	$	48,521	$	—	$	—	$	48,521

_____________


⁽¹⁾	~~Total fair value of impaired loans is net of $155,000 of specific reserves on performing TDRs.~~

Fair Value Measurements at December 31, 2016
Fair Value
Measurements Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Impaired loans (included in loans
receivable, net) ⁽¹⁾
$ 30,632
$ —
$ —
$ 30,632
OREO 2,331
—
—
2,331
Total $ 32,963
$ —
$ —
$ 32,963

~~_____________~~

⁽¹⁾Total fair value of impaired loans is net of ~~$309,000~~$13,000 of specific ~~reserves~~allowances on performing TDRs.

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

OREO properties are measured at the lower of their carrying amount or fair value, less estimated 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 estimated costs to sell, an impairment loss is recognized.

The following tables present quantitative information about Level 3 fair value measurements for ~~financial instruments~~assets measured at fair value on a nonrecurring basis at ~~September 30, 2017 and~~March 31, 2023 an December 31, ~~2016:~~2022:

March 31, 2023

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Collateral Dependent Loans

46,775

Market approach

Appraised value discounted by market or borrower conditions

0.0%

(0.0%)

December 31, 2022

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

48,521

Market approach

Appraised value discounted by market or borrower conditions

0.0% - 6.91%

(0.06%)

September 30, 2017
Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average)
(Dollars in thousands)
Impaired Loans $ 19,603
Market approach Appraised value discounted by market or borrower conditions 0.0%
(0.0%)

OREO $ 1,825
Market approach Appraised value less selling costs 0.0%
(0.0%)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2016
Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average)
(Dollars in thousands)
Impaired Loans $ 30,632
Market approach Appraised value discounted by market or borrower conditions 0.0%
(0.0%)

OREO $ 2,331
Market approach Appraised value less selling costs 0.0%
(0.0%)

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


	March 31, 2023
			Estimated		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	9,618	$	9,618	$	9,618	$	—	$	—
Interest-earning deposits with banks	70,998		70,998		70,998		—		—
Investments available-for-sale	214,949		214,949		39,502		175,447		—
Investments held-to-maturity	2,439		2,439		—		2,439		—
Loans receivable, net	1,184,750		1,132,310		—		—		1,132,310
FHLB stock	8,203		8,203		—		8,203		—
Accrued interest receivable	7,011		7,011		—		7,011		—
Derivative fair value asset	8,936		8,936		—		8,936		—

Financial Liabilities:
Deposits	702,780		702,780		702,780		—		—
Certificates of deposit, retail	332,934		326,306		—		326,306		—

Brokered deposits	191,414		191,241		—		191,241		—
Advances from the FHLB	160,000		159,998		—		159,998		—
Accrued interest payable	749		749		—		749		—

September 30, 2017
Estimated Fair Value Measurements Using:
Carrying Value Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash on hand and in banks $ 7,910
$ 7,910
$ 7,910
$ —
$ —
Interest-earning deposits with banks 14,093
14,093
14,093
—
—
Investments available-for-sale 137,847
137,847
—
137,847
—
Loans receivable, net 931,862
930,838
—
—
930,838
FHLB stock 8,902
8,902
—
8,902
—
Accrued interest receivable 3,709
3,709
—
3,709
—
Derivative fair value asset 1,118
1,118
—
1,118
—

Financial Liabilities:

Deposits 394,127
394,127
394,127
—
—
Certificates of deposit, retail 346,125
345,618
—
345,618
—
Certificates of deposit, brokered 75,488
75,634
—
75,634
—
Advances from the FHLB 191,500
189,805
—
189,805
—
Accrued interest payable 280
280
—
280
—


	December 31, 2022
			Estimated		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	7,722	$	7,722	$	7,722	$	—	$	—
Interest-earning deposits with banks	16,598		16,598		16,598		—		—
Investments available-for-sale	217,778		217,778		39,186		178,592		—
Investments held-to-maturity	2,444		2,444		—		2,444		—
Loans receivable, net	1,167,083		1,120,403		—		—		1,120,403
FHLB stock	7,512		7,512		—		7,512		—
Accrued interest receivable	6,513		6,513		—		6,513		—
Derivative fair value asset	10,485		10,485		—		10,485		—

Financial Liabilities:
Deposits	782,600		782,600		782,600		—		—
Certificates of deposit, retail	262,554		254,004		—		254,004		—
Certificates of deposit, brokered	124,886		124,843		—		124,843		—
Advances from the FHLB	145,000		144,999		—		144,999		—
Accrued interest payable	328		328		—		328		—

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8 - Leases

December 31, 2016
Estimated Fair Value Measurements Using:
Carrying Value Fair Value Level 1 Level 2 Level 3
(In thousands)
Financial Assets:
Cash on hand and in banks $ 5,779
$ 5,779
$ 5,779
$ —
$ —
Interest-earning deposits with banks 25,573
25,573
25,573
—
—
Investments available-for-sale 129,260
129,260
—
129,260
—
Loans receivable, net 815,043
818,054
—
—
818,054
FHLB stock 8,031
8,031
—
8,031
—
Accrued interest receivable 3,147
3,147
—
3,147
—
Derivative fair value asset 1,333
1,333
—
1,333
—

Financial Liabilities:

Deposits 285,335
285,335
285,335
—
—
Certificates of deposit, retail 356,653
356,723
—
356,723
—
Certificates of deposit, brokered 75,488
75,431
—
75,431
—
Advances from the FHLB 171,500
170,221
—
170,221
—
Accrued interest payable 231
231
—
231
—

~~Fair value estimates, methods,~~The Company follows ASC Topic 842, Leases, recognizing a ROU and ~~assumptions are set forth below for~~related lease liabilities on the Company’s ~~financial instruments:~~

~~Financial instruments~~Consolidated Balance Sheets. At March 31, 2023, the Company had 13 operating leases for retail branch locations. The remaining lease terms range from 1.2 years to 7.8 years, with ~~book value equal~~most leases carrying optional extensions of three to ~~fair value:~~five years. The ~~fair~~Company will include optional lease term extensions in the ROU and lease liabilities when management believes it is reasonably certain that the term extension will be exercised, which will be determined based on indicators that the Company would have an economic incentive to extend the lease. The Company has elected to not apply ASU 2016-02 to short term leases, which are those that have a term of one year or less. To calculate the present value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to book value. These instruments include cash on hand and in banks, interest-earning deposits with banks, FHLB stock, accrued interest receivable and accrued interest payable. FHLB stock islease payments not ~~publicly-traded, however it may be redeemed on a dollar-for-dollar basis, for any amount~~yet paid, the ~~Bank is not required to hold, subject to~~Company uses the ~~FHLB’s discretion. The fair value is therefore equal to the book value.~~

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

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

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

~~Liabilities:~~ ~~The fair value of deposits with no stated maturity, such as statement savings, interest-bearing checking and money market accounts,~~ is equal to the ~~amount payable on demand.~~FHLB advance rate for the remaining term of the lease at the time of the lease inception, or at January 1, 2019, for leases in place at that date.

The ~~fair value of certificates of deposit is~~minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At March 31, 2023, the Company was committed to paying $72,000 per month in minimum monthly lease payments. The minimum monthly lease payment over the initial lease term, including any free rent period, was used to calculate the ROU and lease liability. The Company’s current leases do not include any non-lease components.

Total lease expense included on the Company’s Consolidated Income Statements includes the amortized lease expense under ASC Topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the individual lease agreements. The following table includes details on these items at and for the three months ended March 31, 2023, and 2022.


	At and For the Three Months Ended
	March 31, 2023			March 31, 2022
	(Dollars in thousands)
Lease expense, quarter-to-date	$	284		$	268
Lease expense, year-to-date	284			268
ROU	3,194			3,455
Lease liability	3,374			3,617

Weighted average remaining term, years	5.2 years			6.4 years
Weighted average discount rate	2.23		%	1.90		%

The following table provides a reconciliation between the undiscounted minimum lease payments at March 31, 2023 and the discounted value of contractual cash flows using current interest rates for certificates of deposit with similar remaining maturities. The fair value of FHLB advances is estimated based on discounting the future cash flows using current interest rates for debt with similar remaining maturities.

lease liability at that date:


	March 31, 2023
	(In thousands)
Due through one year	$	832
Due after one year through two years	741
Due after two years through three years	619
Due after three years through four years	311
Due after four years through five years	299
Due after five years	654
Total minimum lease payments	3,456
Less: present value discount	82
Lease liability	$	3,374

~~Off balance sheet commitments:~~ ~~No fair value adjustment is necessary for commitments made to extend credit, which represents commitments for loan originations or for outstanding commitments to purchase loans. These commitments~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~are at variable rates, are for loans with terms of less than one year and have interest rates which approximate prevailing market rates, or are set at the time of loan closing.~~

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

Note 89 - Derivatives

The Company uses a derivative financial ~~instrument,~~instruments, in particular, interest rate swaps, which ~~qualifies~~are designated as a cash flow ~~hedge,~~hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. ~~The hedge instrument is~~At March 31, 2023, the cash flow hedges have a ~~$50.0~~total notional amount of $95.0 million and consist of rolling one-week, two-week, one-month or three-month FHLB ~~advance~~advances that ~~will be~~are renewed ~~every three months~~ at the fixed interest rate at ~~that time. The agreement has~~each renewal date. These hedging instruments have four to eight year terms, with remaining terms ranging from 7 months to 6.5 years, a ~~five-year~~weighted average remaining term of 3.7 years, and ~~stipulates~~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 ~~1.34%~~1.05% on the ~~$50.0~~notional amount ranging from $10.0 million ~~notional amount.~~to $15.0 million. The Company pays or receives the net interest amount monthly or quarterly based on the respective hedge agreement, and includes this amount as part of its interest expense on the Company’s Consolidated Income Statement.

Quarterly, the effectiveness evaluation is based upon the fluctuation of the fixed rate interest the Company pays to the FHLB for the ~~hedge instrument as~~period compared to the one-month or three-month LIBOR interest received from the counterparty. At ~~September 30, 2017, the~~March 31, 2023, a $8.9 million net fair value gain of the cash flow ~~hedge of $1.1 million~~hedges was reported with other ~~assets.~~assets on the Company’s Consolidated Balance Sheet. The tax effected amount of ~~$726,000~~$7.1 million was included in ~~Other Comprehensive Income.~~accumulated other comprehensive loss on the Company’s Consolidated Balance Sheet. There were no amounts recorded inon the Consolidated Income ~~Statement~~Statements for the quarters ended ~~September 30, 2017~~March 31, 2023 or ~~2016~~2022, related to ineffectiveness.

Fair value for ~~this~~these derivative ~~instrument,~~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 ~~this~~these derivative ~~instrument~~instruments as of ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016:~~2022:


	Balance Sheet Location	Fair Value at March 31, 2023		Fair Value at December 31, 2022
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	Other Assets/(Other Liabilities)	$	8,936	$	10,485

Balance Sheet Location
Fair Value at
September 30, 2017

Fair Value at
December 31, 2016
(In thousands)
Interest rate swap on FHLB debt
designated as cash flow hedge
Other Assets $ 1,118
$ 1,333

Total derivatives $ 1,118
$ 1,333

The following table presents the ~~effect~~net unrealized gains and losses, net of ~~this~~tax, from these derivative ~~instrument~~instruments included on the Consolidated ~~Statement~~Statements of Comprehensive Income ~~for~~at the ~~quarters ended September 30, 2017 and December 31, 2016:~~dates indicated:


	Amount Recognized in OCI for the three months ended March 31, 2023		Amount Recognized in OCI for the three months ended March 31, 2022
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	$	(1,224)	$	3,532

Balance Sheet Location Amount Recognized in OCI at September 30, 2017 Amount Recognized in OCI at December 31, 2016
(In thousands)
Interest rate swap on FHLB debt
designated as cash flow hedge Other assets $ 726
$ 866

Note 910 - Stock-Based Compensation

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

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen with no additional awards being made under the 2008 Plan. Restricted stock awards and stock options that were granted under the 2008 Plan are fully vested and unexercised options remain exercisable, subject to the provision of the

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2008 Plan and the respective award agreements. At March 31, 2023, there were 914,598 total shares available for grant under the 2016 Plan, including 157,299 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 unless the award agreement provides otherwise.

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen and no additional awards will be made. As of June 30, 2016, there were 611,756 available stock options and 74,478 available restricted stock awards that are no longer available to be awarded under the 2008 Plan. Restricted stock awards and stock options that were granted under the 2008 Plan will continue to vest and be available for exercise, subject to the 2008 Plan provisions. At September 30, 2017, there were 1,351,028 total shares available for grant under the 2016 Plan, including 375,514 shares available to be granted as restricted stock.

For the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016,~~2022, total compensation expense for the 2016 Plan was ~~$104,000~~$128,000 and ~~$302,000,~~$188,000, respectively, and the related income tax benefit was ~~$36,000~~$27,000 and ~~$106,000,~~$39,000, respectively.

~~For both the nine months ended September 30, 2017 and 2016, total~~ The final compensation expense for the ~~Plan was $505,000, and the related income tax benefit was $177,000.~~

~~Included in the above compensation for the nine months ended September 30, 2017, directors’ compensation of $180,000~~2008 plan was recognized ~~as a result of the awarding and vesting of restricted shares~~ in ~~lieu of cash payments of directors’ fees, with a related income tax benefit of $63,000.~~2020.

Stock Options

Under the 2008 Plan, stock option awards were granted with an exercise price equal to the market price of First Financial Northwest’s common stock at the grant date. These option awards have a vesting period of five years, with 20% vesting on the anniversary date of each grant date, and a contractual life of 10ten years. Any unexercised stock options ~~expires~~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 and the Bank. At March 31, 2023, there were 217,519 stock options from the 2008 Plan vested and available for exercise, subject to the 2008 Plan provisions.

Under the 2016 Plan, the exercise price and vesting period for stock options are determined by the award committee and specified in the award agreement, however, the exercise price shall not be less than the fair market value of a share as of the grant date. Any unexercised stock option will expire 10 years after the award date or sooner in the event of the award recipient’s death, disability, retirement, or termination of service. At March 31, 2023, there were no stock options issued from the 2016 Plan.

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

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

A summary of the Company’s stock option plan awards and activity for the three months ended March 31, 2023, follows:













	For the Three Months Ended March 31, 2023
	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value		Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2023	217,519	$	11.20		$	823,028	$	4.10

Exercised	—	—			—		$	—


Outstanding at March 31, 2023	217,519	11.20		1.19	353,111		4.10
Vested	217,519	11.20		1.19	353,111		4.10
Exercisable at March 31, 2023	217,519	11.20		1.19	353,111		4.10

As of March 31, 2023, there was no unrecognized compensation cost related to nonvested stock options. There were no stock options granted during the three months ended March 31, 2023.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~A summary of the Company’s stock option plan awards and activity for the three and nine months ended September 30, 2017, follows:~~

For the Three Months Ended September 30, 2017
Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value
Outstanding at July 1, 2017 487,940
$ 10.29

$ 2,851,319
Granted —

Exercised (19,000 ) 9.23

Forfeited or expired (16,000 ) 13.80

Outstanding at September 30, 2017 452,940
10.21
4.73 3,072,447
Vested and expected to vest assuming a 3% forfeiture
rate over the vesting term 449,880
10.20
4.72 3,054,835
Exercisable at September 30, 2017 350,940
9.91
4.11 2,485,367

For the Nine Months Ended September 30, 2017
Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value
Outstanding at January 1, 2017 603,820

$ 10.19

$ 5,766,947
Granted —

Exercised (134,880 )
9.70

Forfeited or expired (16,000 )
13.80

Outstanding at September 30, 2017 452,940

10.21

4.73
3,072,447
Vested and expected to vest assuming a 3% forfeiture
rate over the vesting term
449,880

10.20

4.72
3,054,835
Exercisable at September 30, 2017 350,940

9.91

4.11
2,485,367

As of September 30, 2017, there was $329,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2008 Plan. The cost is expected to be recognized over the remaining weighted-average vesting period of 2.09 years. There were no stock options granted during the nine months ended September 30, 2017 under either the 2008 Plan or 2016 Plan.

Restricted Stock Awards

The 2008 Plan authorized the grant of restricted stock awards to directors, advisory directors, officers and employees. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. The restricted stock awards’ fair value is equal to the stock price on the grant date. Shares awarded under this plan as restricted stock vest ratably over a ~~five-year period beginning at the grant date with 20% vesting on the anniversary date of each grant date.~~

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

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

A summary of changes in nonvested restricted stock awards for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2023, follows:












	For the Three Months Ended March 31, 2023
	Shares	Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2023	31,272	$	16.93
Granted	27,618	14.92
Vested	(31,272)	16.93


Nonvested at March 31, 2023	27,618	14.92
Expected to vest assuming a 3% forfeiture rate over the vesting term	26,789	14.92

For the Three Months Ended September 30, 2017

Shares Weighted-Average
Grant Date
Fair Value
Nonvested at July 1, 2017 26,400
$ 9.13
Vested (15,000 ) 8.97
Nonvested at September 30, 2017 11,400
9.34
Expected to vest assuming a 3% forfeiture rate over the vesting term 11,058

For the Nine Months Ended September 30, 2017
Shares Weighted-Average
Grant Date
Fair Value
Nonvested at January 1, 2017 26,400
$ 9.13
Granted 10,434

Vested (25,434 ) 9.75
Nonvested at September 30, 2017 11,400
9.34
Expected to vest assuming a 3% forfeiture rate over the vesting term 11,058

As of ~~September 30, 2017,~~March 31, 2023, there was ~~$44,000~~$372,000 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~~eleven month vesting ~~period~~period.

Note 11 - Accumulated Other Comprehensive Income

The table below presents the changes in accumulated other comprehensive (loss) income, net of ~~0.75 years.~~tax, for the three months ended March 31, 2023 and 2022.


	Unrealized Losses on Available-for-Sale Securities		Gains ( Losses) on Cash Flow Hedges		Total
	(In thousands)






Balance December 31, 2022	$	(15,497)	$	8,283	$	(7,214)
Other comprehensive loss before reclassifications	(51)		(1,224)		(1,275)

Net other comprehensive loss	(51)		(1,224)		(1,275)
Balance March 31, 2023	$	(15,548)	$	7,059	$	(8,489)







Balance December 31, 2021	$	(1,004)	$	1,178	$	174
Other comprehensive (loss) income before reclassifications	(5,595)		3,532		(2,063)

Net other comprehensive (loss) income	(5,595)		3,532		(2,063)
Balance March 31, 2022	$	(6,599)	$	4,710	$	(1,889)

Note 1012 - Earnings Per Share

Per the provisions of FASB ASC 260, Earnings Per Share, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. ~~ESOP shares are considered outstanding for basic and diluted earnings per share when the shares are committed to be released.~~ Certain of the Company’s nonvested restricted stock awards qualify as participating securities.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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


	Three Months Ended March 31,
	2023		2022
	(Dollars in thousands, except share data)
Net income	$	2,122	$	3,260
Less: Earnings allocated to participating securities	(6)		(12)
Earnings allocated to common shareholders	$	2,116	$	3,248

Basic weighted average common shares outstanding	9,104,371		8,987,482
Dilutive stock options	51,350		100,246
Dilutive restricted stock grants	17,555		29,704
Diluted weighted average common shares outstanding	9,173,276		9,117,432

Basic earnings per share	$	0.23	$	0.36
Diluted earnings per share	$	0.23	$	0.36

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(Dollars in thousands, except share data)
Net income $ 1,861
$ 2,606
$ 6,073
$ 5,871
Less: Earnings allocated to participating
securities (2 ) (7 ) $ (6 ) $ (16 )
Earnings allocated to common shareholders $ 1,859
$ 2,599
$ 6,067
$ 5,855

Basic weighted average common shares
outstanding 10,287,663
11,859,683
10,323,459
12,329,815
Dilutive stock options 126,044
131,919
142,755
132,711
Dilutive restricted stock grants 13,331
20,350
13,847
18,853
Diluted weighted average common shares
outstanding 10,427,038
12,011,952
10,480,061
12,481,379

Basic earnings per share $ 0.18
$ 0.22
$ 0.59
$ 0.47
Diluted earnings per share $ 0.18
$ 0.22
$ 0.58
$ 0.47

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For both the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2023, and 2022, 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~~

Note 13 - Revenue Recognition

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

Disaggregation of Revenue

The following table includes the Company’s noninterest income disaggregated by type of service for the three ~~and nine~~ months ended ~~September 30, 2016, there were no options~~March 31, 2023 and ~~60,000 options, respectively, to purchase additional shares of common stock excluded from the computation of diluted earnings per share because their effect would be anti-dilutive.~~

~~Note 11 - Branch Acquisition~~

On August 25, 2017, First Financial Northwest Bank completed the acquisition of four branches from Opus Bank, a California state-chartered commercial bank (“Branch Acquisition”). The Branch Acquisition included four retail branches located in Woodinville, Clearview, Lake Stevens, and Smokey Point, Washington. The Bank acquired $74.7 million of retail deposits, prior to the fair value adjustment, one owned bank branch, three leased branches, and certain fixed assets at these branches. The purchase price of the Branch Acquisition paid by the Bank included a deposit premium of 3.125% of the average daily balance of acquired deposits for 20 days prior to the closing date, or $2.5 million; 80% of the fair market value of the owned branch, or $488,000; the net book value of fixed assets, or $56,000; and $14,000 for other pro rations and adjustments as of the closing date. The transaction was settled with Opus Bank paying the Bank in a preliminary settlement $71.6 million in cash for the difference between these amounts and the total deposits assumed, with a final settlement to occur in the fourth quarter of 2017.

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

The application of the acquisition method of accounting resulted in recognition of a core deposit intangible asset (“CDI”) of $1.35 million and goodwill of $979,000. The acquired CDI has been determined to have a useful life of approximately ten years and will be amortized on an accelerated basis. Goodwill is not amortized but will be evaluated for impairment on an annual basis, or more often if circumstances dictate, to determine if the carrying value remains appropriate.

2022:

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended
	March 31, 2023		March 31, 2022
	(In thousands)

BOLI change in cash surrender value (1)	$	308	$	288
Wealth management revenue	45		82
Deposit related fees	72		73
Debit card and ATM fees	151		142
Loan related fees	91		199

Other	(2)		5
Total noninterest income	$	665	$	789

_______________

(1) Not within scope of Topic 606

~~The following table presents the estimated fair values of the assets received and liabilities assumed as of the acquisition date:~~

At August 25, 2017
Acquired Book Value Fair Value Adjustments Amount Recorded
(In thousands)
Assets
Cash and cash equivalents $ 71,568
$ —
$ 71,568
Premises and equipment, net 544
119
⁽¹
⁾
663
Goodwill —
979
⁽²
⁾
979
Core deposit intangible —
1,319
⁽³
⁾
1,319
Total assets acquired $ 72,112
$ 2,417
$ 74,529

Liabilities
Deposits
Noninterest-bearing deposits $ 11,995
$ —
$ 11,995
Interest-bearing deposits 62,662
(128 )
⁽⁴
⁾
62,534
Total deposits 74,657
(128 ) 74,529
Total liabilities assumed $ 74,657
$ (128 ) $ 74,529

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

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

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

At August 25, 2017
(In thousands)

Purchase price $ 3,089
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value
Cash and cash equivalents 74,657
Premises and equipment, net 663
Core deposit intangible 1,319
Deposits (74,529 )
Total fair value of identifiable net assets 2,110
Goodwill $ 979

⁽³⁾~~Core deposit intangible (“CDI”):~~ ~~The CDI represents the fair value of the acquired core deposits. The CDI will be amortized over ten years into noninterest expense, with amortization expense of $15,000 recognized for~~For both the three months ended ~~September 30, 2017. Amortization expense~~March 31, 2023 and 2022, substantially all of the ~~CDI is expected as follows:~~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

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(In thousands)
2017 $ 53
2018 150
2019 148
2020 144
2021 140
Thereafter 684
Total $ 1,319

⁽⁴⁾~~Certificates~~Wealth management revenue: Our wealth management revenue consists of ~~deposit:~~ ~~The fair value of acquired certificates of deposit was determined~~commissions received on the investment portfolio managed by Bank personnel but held by a ~~third-party valuation~~third party. Commissions are earned on brokerage services and ~~will be amortized into interest expense over 2.25~~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 ~~5.25 years~~the Company when the performance obligation has been completed by both entities.

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

Debit card and ATM fees: Fees are earned when a debit card issued by the Company is used or when another financial institution’s customer uses the Company’s ATM services. Revenue is recognized at the time the fees are collected from the customer’s account or remitted by the VISA interchange network.

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

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

Contract Balances

At March 31, 2023, the Company had no contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had no material performance obligations as of this date.

(In thousands)
2017 $ 21
2018 49
2019 30
2020 16
2021 9
2022 3
Total $ 128

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

When used in this document, “First Financial Northwest” refers to First Financial Northwest, Inc., the holding company for First Financial Northwest Bank (the “Bank”).The terms “we,” “our,” “us,” or the “Company” as used throughout this report refers to First Financial Northwest and the Bank on a consolidated basis, unless the context otherwise requires.

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of

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

•potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation or deflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as supply chain disruptions and any governmental or societal responses to new COVID-19 variants;

•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~~credit 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;~~ allowance for credit losses;

•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;

•transition away from the London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks;

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

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

•effects of critical accounting policies and judgments, including 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; ~~computer~~

•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on ~~which we depend could fail or experience a security breach;~~ 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 our~~execute 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, including our recent Branch Acquisition;~~ thereto;

•our ability to manage loan delinquency rates;

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

•increased competitive pressures among financial services companies;

•changes in consumer spending, borrowing and savings habits;

•legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other ~~rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) and the implementing regulations;~~ rules;

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

•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities ~~markets;~~ markets, including market liquidity;

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

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

•the ~~economic impact~~effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or ~~any terrorist activities;~~ terrorism, and other external events on our business;

•other economic, competitive, governmental, regulatory, and technological factors affecting our ~~operations;~~operations, pricing, products and services; and

•other risks detailed in our ~~filings~~Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”) and our other reports filed with and furnished to the U.S. Securities and Exchange Commission (“SEC”)~~, including our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”)~~.

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

Overview

First Financial Northwest Bank ~~(“the Bank”)~~ is a wholly-owned subsidiary of First Financial Northwest ~~Inc. (“the Company”)~~ and, as such, comprises substantially all of the activity for the Company. ~~First Financial Northwest~~The Bank was a community-based savings bank until February 4, 2016, when ~~the Bank~~it converted to a Washington chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsap counties, Washington, through its full-service banking office and headquarters in Renton, Washington, as well as ~~three~~seven retail branches in King County, Washington, ~~and~~ five retail branches in Snohomish County, ~~Washington. On August 25, 2017, the Bank completed the purchase of four~~Washington, and two retail branches in ~~Woodinville in King~~Pierce County, and Lake Stevens, Clearview, and Smokey Point in Snohomish County and acquired $74.7 million in deposits. The Branch Acquisition expanded our retail footprint and provided an opportunity to extend our unique brand of community banking into those communities. In addition, the Bank has received regulatory approval to open a new branch office at The Junction, a new, mixed use development in Bothell, Washington which is expected to open in the first quarter of 2018.Washington.

The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the ~~Federal Home Loan Bank of Des Moines (“FHLB”)~~FHLB and raising funds in the wholesale market, then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business and consumer loans. ~~Our current business strategy emphasizes commercial real estate, construction, one-to-four family residential, and multifamily lending. With the current low interest rate environment,~~Additionally, we are not aggressively pursuing longer term assets, but rather are focused on financing shorter term loans, in particular construction/land loans. Recently, improvements in the economy, employment rates, stronger real estate prices, and a general lack of new housing inventory in certain areas in the Puget Sound region have resulted in our significantly increasing originations of construction loans for properties located in our market area. We anticipate that construction/land lending will 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. ~~In addition, we have geographically expanded~~These loans typically mature in 12 to 24 months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. During the first three months of 2023, our loan originations, refinances and purchases outpaced repayments of loans, resulting in an increase of $17.7 million in net loans receivable with a balance of $1.18 billion at March 31, 2023.

Our strategic initiatives seek to diversify our loan portfolio ~~through loan purchases or loan participations of commercial~~ and ~~multifamily real estate loans that are outside of~~broaden growth opportunities within our ~~primary market area. We have a loan officer with extensive experience in California to further support~~current risk tolerance levels and asset/liability objectives. Through our efforts to geographically diversify our loan portfolio ~~through~~outside of the State of Washington with direct loan originations, loan participations, or loan ~~purchases.~~purchases, our portfolio at March 31, 2023 included $165.0 million of loans to borrowers or secured by properties in 46 other states and the District of Columbia, with the largest concentrations in California, Oregon, Florida, Texas, and Alabama of $39.2 million, $13.3 million, $12.3 million, $10.1 million and $8.1 million, respectively.

~~In support of~~The Bank has affiliated with a SBA partner to process our ~~strategic growth plan,~~SBA loans while the Bank ~~has developed~~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 a ~~national line~~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 ~~originate and~~ service ~~aircraft loans. These loans are collateralized by new or used, single-engine piston aircraft to light jets for~~these customers with their business or personal use which have demonstrated an acceptable valuation history under industry accepted valuation resources. As we grow our aircraft loan portfolio, we anticipate these loans will range in size from $250,000 to $8.0 million with underwriting guidelines primarily based on the asset value of the collateral with secondary emphasis placed on the ability of the borrower to repay the loan. We begandeposits as well.

~~originating aircraft loans in the fourth quarter of 2016. At September 30, 2017, our business loans included $11.3 million in fixed and adjustable rate aircraft loans.~~

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest ~~income.~~income and net interest margin. The Bank is currently slightly liability-sensitive, meaning our

~~An offset~~

interest-earning liabilities reprice at a faster rate than our interest-bearing assets. For the three months ended March 31, 2023, net interest margin decreased 21 basis points, to 3.22%, compared to 3.43% in the same quarter last year, primarily due to the cost of interest-bearing liabilities increasing faster than the yields on interest-earning assets in the rising rate environment. Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 475 basis points, including 50 basis points during the first quarter of 2023, to a range of 4.75% to 5.00%. If the FOMC continues to raise the targeted federal funds rate in an effort to curb inflation, which appears likely based on recent communications and interest rate forecasts, we expect the net interest margin stays compressed.

Net interest income is also affected by the provision for ~~loan~~credit losses, ~~which~~or the recapture of the provision for credit losses, that is required to establish the ~~allowance for loan~~ACL. The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and ~~lease losses (“ALLL”) at a~~reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets. 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~~ACL may increase, resulting in a decrease to net interest ~~income.~~income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any required increase to ~~ALLL~~ACL due to loan growth or an increase in probable ~~loan~~credit losses.

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

Our noninterest expenses consist primarily of salaries and employee benefits, professional fees, regulatory assessments, occupancy and equipment, and other general and administrative expenses. Salaries and employee benefits consist primarily of the salaries and wages paid to our employees, including commissions and bonuses, 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~~is the change to the Company’s unfunded commitment reserve which ~~are~~is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.

Critical Accounting Policies

Our ~~significant~~critical accounting ~~policies~~estimates are ~~fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect~~described in detail in the ~~value~~"Critical Accounting Estimates" section within Item 7 of our ~~assets~~2022 Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or ~~liabilities and our financial results. These policies are critical because they require management~~complex judgments, often as a result of the need to make ~~difficult, subjective, and complex judgments~~estimates about the effect of matters that are inherently uncertain and ~~because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern~~may change in future periods. The Company's critical accounting estimates include estimate of the ~~ALLL,~~ACL, the valuation of OREO, and the calculation of deferred taxes, the right-of-use asset and lease liability on our operating leases, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies with the 2016 Form 10-K. There have not been any material changes in the Company’s critical accounting ~~policies and~~ estimates ~~as compared to~~during the ~~disclosure contained in the 2016 Form 10-K.~~three month ended March 31, 2023.

Comparison of Financial Condition at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016~~2022

Total assets were ~~$1.2~~$1.57 billion at ~~September 30, 2017,~~March 31, 2023, an increase of ~~12.1%~~4.7%, from ~~$1.0~~$1.50 billion at December 31, ~~2016.~~2022. The following table details the ~~$126.0~~$71.4 million net change in the composition of our assets at ~~September 30, 2017~~March 31, 2023 from December 31, ~~2016.~~

2022.


	Balance at September 30, 2017		Change from December 31, 2016			Percent Change			March 31, 2023		December 31, 2022		$ Change		% Change
	(Dollars in thousands)								(Dollars in thousands)
Cash on hand and in banks	$	7,910	$	2,131		36.9	%	Cash on hand and in banks	$	9,618	$	7,722	$	1,896	24.6	%
Interest-earning deposits with banks	14,093		(11,480		)	(44.9	)	Interest-earning deposits with banks	70,998		16,598		54,400		327.8
Investments available-for-sale, at fair value	137,847		8,587			6.6		Investments available-for-sale, at fair value	214,948		217,778		(2,830)		(1.3)
Investments held-to-maturity, at amortized cost								Investments held-to-maturity, at amortized cost	2,439		2,444		(5)		(0.2)
Loans receivable, net	931,862		116,819			14.3		Loans receivable, net	1,184,750		1,167,083		17,667		1.5
Premises and equipment, net	20,568		2,107			11.4
FHLB stock, at cost	8,902		871			10.8		FHLB stock, at cost	8,203		7,512		691		9.2
Accrued interest receivable	3,709		562			17.9		Accrued interest receivable	7,011		6,513		498		7.6
Deferred tax assets, net	2,381		(761		)	(24.2	)	Deferred tax assets, net	2,990		2,597		393		15.1
OREO	1,825		(506		)	(21.7	)

Premises and equipment, net								Premises and equipment, net	20,732		21,192		(460)		(2.2)
BOLI, net	28,894		4,741			19.6		BOLI, net	36,647		36,286		361		1.0
Prepaid expenses and other assets	3,304		640			24.0		Prepaid expenses and other assets	11,336		12,479		(1,143)		(9.2)
ROU, net								ROU, net	3,194		3,275		(81)		(2.5)
Goodwill	979		979			n/a		Goodwill	889		889		—		—
Core deposit intangible	1,304		1,304			n/a
Core deposit intangible, net								Core deposit intangible, net	516		548		(32)		(5.8)
Total assets	$	1,163,578	$	125,994		12.1	%	Total assets	$	1,574,271	$	1,502,916	$	71,355	4.7	%

Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco ~~decreased~~(“FRB”), increased by ~~$11.5~~$54.4 million ~~from December~~to $71.0 million during the three months ended March 31, ~~2016~~2023. During the quarter, management elected to ~~September 30, 2017. Loan payoffs received late~~increase liquidity in light of the volatility in the ~~fourth quarter of 2016~~banking industry. Excess funds were ~~temporarily held in~~deposited to our ~~Federal Reserve Bank account, then partially used to fund new loan originations in the nine months ended September 30, 2017.~~interest-earning accounts with banks and are readily available for our funding needs.

Investments available-for-sale. Our investments available-for-sale portfolio ~~increased~~decreased by ~~$8.6~~$2.8 million, primarily due to regularly scheduled principal payments. No investment securities were purchased during the ~~first nine~~three months of 2017. During this period, we purchased $23.5 million of securities which included six mortgage-backed securities, two subordinated debt securities, one tax-exempt municipal bond, and one U.S. government agency bond. Partially offsetting these purchases, we sold $6.7 million of securities which included two mortgage-backed securities and two portions of a subordinated debt security. The mortgage-backed securities were sold and replaced by a collateralized mortgage obligation security which met our investment objectives while the portions of the subordinated debt security were sold in order to allow us the ability to diversify our holdings of bank subordinated debt notes through reinvestment of the proceeds received in other issuers. In addition, the Bank had partial calls and a full call totaling $120,000 on one taxable municipal security as well as partial calls of $111,000 on two U.S. government agency securities and payoff at maturity of a $500,000 U.S. government agency security. At September 30, 2017, corporate bonds issued by financial institutions represented $22.7 million, or 16.4% of our investments available-for-sale and municipal bonds represented $14.2 million, or 10.3% of our investments available-for-sale.ended March 31, 2023.

The net unrealized loss on our investments available-for-sale improved to a pre-tax decrease of $652,000 at September 30, 2017 from a pre-tax decrease of $1.6 million at December 31, 2016, as a result of a net improvement in the market value of the underlying securities in our portfolio.

The effective duration of the investments available-for-sale at ~~September 30, 2017,~~March 31, 2023 was ~~3.4% as~~3.75%, compared to ~~4.0%~~3.65% at December 31, ~~2016.~~2022. Effective duration ~~is a measure that attempts to quantify~~measures the anticipated percentage change in the value of an investment security (or portfolio) in the ~~event~~event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change.

Loans receivable. Net loans receivable increased ~~$116.8~~$17.7 million, or 1.5% to $1.18 billion at March 31, 2023 from December 31, 2022, primarily due to growth in one-to-four family residential, multifamily, commercial real estate and consumer loans of $8.5 million, $16.5 million, $1.0 million, and $6.3 million, respectively. Partially offsetting these increases was a decrease of $14.0 million in construction/land loans, primarily due to a $15.4 million multifamily construction loan that converted to a permanent multifamily loan in accordance with its terms during the ~~nine months ended September 30, 2017 to $931.9 million. While~~quarter.

At March 31, 2023 and December 31, 2022, the ~~concentrations~~Bank’s construction/land loans totaled 44.9% and 53.1% of ~~our~~total capital plus surplus, respectively, and total non-owner occupied commercial real estate was347.7% and ~~construction loans have increased, we routinely monitor these levels in support~~346.9% of ~~our strategic plan to maintain compliance with internally established concentration guidelines.~~total capital plus surplus, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, non-residential, and ~~construction,~~construction/land loans, should not exceed 550% of total ~~risk-based capital.~~capital plus surplus. Our concentration guideline for construction/land loans is to limit these loans to 100% of total ~~risk-based capital. At September 30, 2017, the Bank’s concentrations were 478.9% for total commercial real estate loans and 114.4% for total construction/land loans.~~capital plus surplus. The concentration of construction/land loans is

calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the

portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ~~ALLL.~~ACL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review.

The following table presents a breakdown of our multifamily, commercial and construction ~~loan portfolio~~loans by collateral type at ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016:~~

September 30, 2017 December 31, 2016
(In thousands)
Multifamily real estate:
Micro-unit apartments $ 7,053
$ 7,878
Other multifamily 166,628
115,372
Total multifamily real estate 173,681
123,250

Commercial real estate:
Office 99,350
101,688
Retail 101,787
106,294
Mobile home park 21,344
20,689
Warehouse 22,788
15,338
Storage 32,365
34,816
Other non-residential 42,782
24,869
Total commercial real estate 320,416
303,694

Construction/land:
One-to-four family residential 85,593
67,842
Multifamily 115,345
111,051
Commercial 5,325
—
Land 38,423
30,055
Total construction/land 244,686
208,948
Total commercial, multifamily and construction/land loans $ 738,783
$ 635,892

~~During the first nine months of 2017, total~~2022. Total construction/land loans ~~increased by $35.7~~are net of $39.0 and $41.4 million ~~as compared to~~of LIP, at March 31, 2023 and December 31, 2016. The LIP related to these loans increased by $18.7 million as the unfunded portion of new loan originations exceeded disbursements on existing loans. Included in total construction/land loans at September 30, 2017 are $81.8 million of multifamily loans, $5.3 million of commercial loans and $2.6 million of one-to-four family loans that will roll over to permanent loans at the completion of their construction period in accordance with the terms of the construction/land loan.2022, respectively.


	March 31, 2023				December 31, 2022
	Amount		% of Total in Portfolio		Amount		% of Total in Portfolio
	(In thousands)
Multifamily residential	$	143,332	100.0	%	$	126,866	100.0	%

Commercial real estate:
Retail	130,788		32.0	%	132,917		32.6	%
Office	79,793		19.5		84,301		20.6
Hotel / motel	67,165		16.4		55,408		13.6
Storage	33,604		8.2		33,797		8.3
Mobile home park	21,992		5.4		25,283		6.2
Warehouse	19,780		4.9		19,917		4.9
Nursing home	12,260		3.0		12,348		3.0
Other non-residential	43,523		10.6		43,933		10.8
Total commercial real estate	408,905		100.0	%	407,904		100.0	%

Construction/land:
One-to-four family residential	53,948		84.8	%	52,492		67.6	%
Multifamily	(131)		(0.2)		15,393		19.8

Land	9,786		15.4		9,759		12.6
Total construction/land	63,603		100.0	%	77,644		100.0	%
Total multifamily residential, commercial real estate and construction/land loans	$	615,840			$	612,414

To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank ~~will originate~~originates and ~~purchase~~purchases loans and ~~utilize~~utilizes loan participations with the underlying collateral located within areas of Washington State outside our primary market area or in other states. The Bank’s goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank’s underwriting ~~standards.~~and risk guidelines. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2023, the Bank purchased ~~$71.4~~$9.4 million of loans and loan participations located in Washington and other states, including $960,000 of one-to-four family residential ~~and multifamily real estate~~ loans and ~~commercial real estate participation interests~~$8.4 million of consumer loans secured by ~~properties located in~~classic/collectible automobiles. Management believes that the ~~states of Washington, Oregon and California and $3.2 million in aircraft loans. Subsequent to September 30, 2017, the Bank~~one-to-four family loans purchased ~~$25.2 million in commercial loans in California and other states.~~will assist with its Community Reinvestment Act (“CRA”) efforts.

The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount isof loans are secured by properties located in other areas of Washington, in California, and in other states. At ~~September 30, 2017,~~March 31, 2023, total loans secured by collateral located in California represented ~~4.3%~~3.3% of our total loans, ~~net of LIP~~ and total loans secured by collateral located outside the states of California and Washington represented ~~5.3%~~10.5% of our total ~~loans, net of LIP.~~loans. The following table details geographic concentrations in our loan ~~portfolio, net~~portfolio:


	At March 31, 2023
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total
	(In thousands)
King County	$	368,056	$	86,382	$	240,850	$	60,987	$	22,476	$	10,166	$	788,917
Pierce County	42,625		10,658		40,767		—		222		552		94,824
Snohomish County	38,412		7,475		13,981		1,999		3,585		1,253		66,705
Kitsap County	6,460		5		721		—		—		20		7,206
Other Washington Counties	18,876		27,292		30,067		617		228		755		77,835
California	1,508		9,611		17,008		—		44		11,020		39,191
Outside Washington and California (1)	6,723		1,909		65,511		—		5,104		46,853		126,100
Total loans	$	482,660	$	143,332	$	408,905	$	63,603	$	31,659	$	70,619	$	1,200,778

_______________

(1) Includes loans in Oregon, Florida, Texas and Alabama of ~~LIP:~~$13.3 million, $12.3 million, $10.1 million and $8.1 million, respectively, and $82.3 million of loans located in 40 other states and the District of Columbia.

At September 30, 2017
One-to-four family residential Multifamily Commercial real estate Construction/land Business Consumer Total
(In thousands)
King County $ 199,602
$ 94,999
$ 167,239
$ 133,561
$ 11,204
$ 7,873
$ 614,478
Pierce County 35,748
14,430
26,330
6,296
—
410
83,214
Snohomish County 14,231
3,239
32,790
12,702
36
212
63,210
Kitsap County 2,308
1,529
817
218
—
78
4,950
California 2,794
17,860
17,773
—
2,222
—
40,649
Oregon —
8,885
8,581
—
—
—
17,466
Other Washington Counties 11,184
24,315
49,886
1,137
1,351
728
88,601
Outside Washington, Oregon and California 580
8,424
16,456
—
7,430
—
32,890
Total loans, net of LIP $ 266,447
$ 173,681
$ 319,872
$ 153,914
$ 22,243
$ 9,301
$ 945,458

~~Our five largest borrowing relationships, which represent 8.7% of our net loans,~~The ACL increased ~~by $2.3 million~~ to ~~$81.8~~$16.0 million at ~~September 30, 2017~~March 31, 2023, from ~~$79.5~~$15.2 million at December 31, 2016. The total number of loans represented by this group of borrowers decreased to 16 loans at September 30, 2017 from 23 loans at December 31, 2016. At September 30, 2017, all five borrowers were current on their loan payments. We monitor the performance of these borrowing relationships very closely due to their concentration risk in relation2022, which included a $500,000 one-time adjustment related to the ~~entire loan portfolio. The following table details our five largest lending relationships at September 30, 2017:~~

Borrower ⁽¹⁾
Number
of Loans
One-to-Four Family
Residential ⁽²⁾

Multifamily
Commercial
Real Estate
Construction/
Land Business
Aggregate
Balance of
Loans ⁽³⁾

(Dollars in thousands)
Real estate investor 2 $ 559
$ —
$ —
$ 22,000
$ —
$ 22,559
Real estate investor 2 —
—
—
15,698
—
15,698
Real estate investor 4 —
—
—
4,699
10,631
15,330
Real estate investor 5 458
—
14,312
—
—
14,770
Real estate investor 3 —
1,938
11,550
—
—
13,488
Total 16 $ 1,017
$ 1,938
$ 25,862
$ 42,397
$ 10,631
$ 81,845

~~________~~


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


⁽²⁾	$458,000 of the one-to-four family residential loans for these borrowers are for owner occupied properties while $559,000 is for non-owner occupied. The commercial real estate loans are for non-owner occupied properties.


⁽³⁾	~~Net of LIP.~~

~~The ALLL increased to $12.1 million at September 30, 2017, from $11.0 million at December 31,~~adoption of ASU 2016, Topic 325, and represented ~~1.3%~~1.33% and 1.29% of total loans receivable ~~net of LIP~~ at ~~both September 30, 2017~~March 31, 2023, and December 31, ~~2016.~~2022, respectively. The ~~ALLL consists~~growth of ~~two components,~~ the loan portfolio, the loan mix changes and changes in the economic forecasts used in the ACL model also impacted the ACL.

For the three months ended March 31, 2023, the Company had no specific allowance. The nine modified loans which were individually analyzed for specific allowance a quarter ago were transferred to the pool of loans with similar characteristics for general allowance ~~and the specific reserves. The increase~~calculation in the ~~ALLL, primarily a result~~first quarter of ~~growth in our loan portfolio, consisted~~2023 due to the adoption of ~~a $1.3 million increase in the general reserve, which included $359,000 of recoveries, offset by a $154,000~~

~~decrease in the specific reserves.~~ ASU 2022-02. For additional information, see “Comparison of Operating Results for the Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022 - Provision for ~~Loan~~Credit Losses” discussed below.

We believe that the ~~ALLL~~ACL at ~~September 30, 2017,~~March 31, 2023, was adequate to absorb the ~~probable and inherent risks of loss~~expected 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~~ACL are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the ~~allowance~~ACL 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~~ACL is subject to review by bank regulators as part of the routine examination process, 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.

~~As we work with~~ Uncertainties relating to our borrowers that face difficult financial circumstances, we explore various options available to minimize our risk of loss. At times, the best option for our customers and the Bank is to modify the loan for a period of time, usually one year or less. Certain loan modificationsACL are accounted for as troubled debt restructured loans (“TDRs”). These modifications have included a reduction in interest rate on the loan for a period of time, advancing the maturity date of the loan, or allowing interest-only payments for a specific time frame. These modifications are granted only when there is a reasonable and attainable restructured loan plan that has been agreed to by the borrower and is considered to be in the Bank’s best interest.

~~The following table presents a breakdown of our TDRs at the dates indicated:~~

September 30, 2017
December 31, 2016
Nine Month Change

(Dollars in thousands)
Nonperforming TDRs:

   One-to-four family residential $ —

$ 174

$ (174 )
Total nonperforming TDRs —

174

(174 )

Performing TDRs:

   One-to-four family residential 15,174

24,274

(9,100 )
   Multifamily 1,140

1,564

(424 )
   Commercial real estate 3,216

4,202

(986 )
   Consumer 43

43

—
Total performing TDRs 19,573

30,083

(10,510 )
Total TDRs $ 19,573

$ 30,257

$ (10,684 )
% TDRs classified as performing 100.0 %
99.4 %

~~Our TDRs decreased $10.7 million at September 30, 2017, compared to December 31, 2016,~~heightened as a result of ~~principal repayments~~the risks surrounding economic forecasts and ~~loan payoffs. At September 30, 2017, there were no TDRs on nonaccrual status. In addition, there were no committed but undisbursed funds~~risks inherited in ~~connection with~~the business environment as described in further detail in Part 1, Item 1A of our TDRs and impaired loans. The largest TDR relationship at September 30, 2017, totaled $6.8 million and was comprised of $6.0 million in one-to-four family residential rental properties and $743,000 in owner occupied commercial property, all located in King County.2022 Form 10-K.

Asset Quality. Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. ~~At September 30, 2017, total past~~Past due loans ~~represented 0.01%~~totaled $230,000 and $220,000 at March 31, 2023 and December 31, 2022, respectively, representing 0.02% of total loans receivable ~~as compared to 0.06%~~ at ~~December 31, 2016.~~both periods.

Nonperforming assets decreased to $2.0 million at September 30, 2017, compared to $3.2 million at December 31, 2016. The following table presents detailed information on our nonperforming assets at the dates indicated:

September 30, 2017
December 31, 2016
Nine Month Change

(Dollars in thousands)
Nonperforming loans:

One-to-four family residential $ 132

$ 798

$ (666 )
Consumer 53

60

(7 )
Total nonperforming loans 185

858

(673 )

OREO 1,825

2,331

(506 )
Total nonperforming assets ⁽¹⁾
$ 2,010

$ 3,189

$ (1,179 )

Nonperforming assets as a
percent of total assets 0.17 %
0.31 %

^____________

⁽¹⁾ The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all TDRs as nonperforming loans, although 100.0% of our TDRs were performing in accordance with their restructured terms at September 30, 2017.

Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. ~~Nonaccrual~~ Our credit quality remains strong as nonaccrual (nonperforming) loans ~~decreased to $185,000~~remained low at ~~September 30, 2017, from $858,000~~$201,000, and $193,000 at March 31, 2023 and December 31, ~~2016. During the first nine months~~2022, representing 0.01% of ~~2017, three loans with a~~ total balance of $440,000 returned to accrual status as a result of consistent payments for a period of time and demonstration of the ability to continue making payments. Further reductions in nonperforming loans were the result of $233,000 of principal payments and payoffs of nonaccrual loans during this period. There were no charge-offs or loans added to nonaccrual status.assets at both periods.

The three nonaccrual loans in the loan portfolio at September 30, 2017, included a $126,000 one-to-four family residential loan secured by an owner occupied single family residence in Snohomish County, a $53,000 home equity second mortgage secured by an owner-occupied single family residence in King County, and a $6,000 one-to-four family residential loan secured by an owner occupied single family residence in King County. Each of these loans is current on its loan payments.

We will continue to focus our efforts on working with borrowers to bring ~~their~~any past due loans ~~current or converting nonaccrual loans to OREO and subsequently selling the properties.~~current. By taking ownership of ~~these properties,~~the underlying collateral if needed, we can generally convert ~~nonearning~~non-earning assets into earning assets on a more timely basis than ~~which~~ may otherwise be the case. Our success in this area is reflected by ~~the continued improved ratio of~~ our low nonperforming ~~assets as a percent of total assets, which declined to 0.17% at September 30, 2017, compared to 0.31% at December 31, 2016.~~assets.

~~OREO.~~ OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At September 30, 2017, and December 31, 2016, OREO was $1.8 million and $2.3 million, respectively. OREO at September 30, 2017 consisted of commercial real estate properties. For the three months ended September 30, 2017, there were no market value adjustments taken on OREO properties. During the nine months ended September 30, 2017, a $50,000 market valuation adjustment was recognized prior to the sale of the one OREO property sold during this period.

The three largest OREO properties at September 30, 2017, were an office building valued at $837,000 located in Pierce County, a retail building valued at $505,000 in Mason County, and undeveloped land valued at $270,000 in Pierce County. Subsequent to September 30, 2017, the $837,000 office building sold, generating a $103,000 gain on sale.

~~The following table presents a breakdown of our OREO by county and number of properties at September 30, 2017:~~

County Total OREO Number of Properties Percent of
Total OREO
Pierce Mason
(Dollars in thousands)
OREO:
Commercial real estate ⁽¹⁾
$ 1,320
$ 505
$ 1,825
4
100.0 %
Total OREO $ 1,320
$ 505
$ 1,825
4
100.0 %

⁽¹⁾~~Of the four properties classified as commercial real estate, two are office/retail buildings and two are undeveloped lots.~~

~~Intangible assets.~~ As a result of our Branch Acquisition, the Bank recognized goodwill of $979,000 and a core deposit intangible (“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. It is expected that the final settlement figures will result in an adjustment to goodwill, however the settlement adjustment is not expected to have a material impact on the Company’s consolidated financial statements.

The CDI was provided by a 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 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.

Deposits. ~~During the first nine months of 2017, deposits increased $98.2 million to $815.7 million at September 30, 2017, compared to $717.5 million at December 31, 2016.~~ Deposit accounts consisted of the following:


	Balance at March 31, 2023		Balance at December 31, 2022		$ Change		% Change
	(Dollars in thousands)
Noninterest-bearing demand	$	110,780	$	119,944	$	(9,164)	(7.6)	%
Interest-bearing demand	86,183		96,632		$	(10,449)	(10.8)
Savings	21,871		23,636		$	(1,765)	(7.5)
Money market	483,945		542,388		$	(58,443)	(10.8)
Certificates of deposit, retail	332,935		262,554		$	70,381	26.8
Brokered deposits	191,414		$	124,886	$	66,528	53.3
	$	1,227,128	$	1,170,040	$	57,088	4.9

September 30, 2017 Change from December 31, 2016 Percent Change
(Dollars in thousands)
Noninterest-bearing $ 47,652
$ 14,230
42.6 %
Interest-bearing checking 31,590
13,058
70.5
Statement savings 29,425
1,042
3.7
Money market 285,460
80,462
39.3
Certificates of deposit, retail 346,125
(10,528 ) (3.0 )
Certificates of deposit, brokered 75,488

—

—

$ 815,740

$ 98,264

13.7

~~In support of our strategy~~Deposits increased $57.0 million to ~~expand our geographic footprint and grow our core deposits, our Branch Acquisition resulted in an increase in deposits of $74.7 million~~$1.23 billion at ~~the closing date on August 25, 2017. Of this balance, $59.1 million were core deposits. Total core deposits increased~~March 31, 2023, compared to ~~$718.3 million at September 30, 2017 from $623.1 million~~$1.17 billion at December 31, ~~2016.~~

~~Our portfolio~~2022. Declines in money market accounts, interest-bearing demand deposits and noninterest-bearing demand deposits of ~~brokered~~$79.8 million in the aggregate, were partially offset by a $70.4 million increase in retail certificates of deposits ~~remained at $75.5 million at September 30, 2017, unchanged from December 31, 2016. We may add~~due in large part to ~~our portfolio~~promotions of these products during the quarter and a $66.5 million increase in brokered deposits. For the first three months of 2023, management elected to obtain additional funds in the wholesale markets due to the considerable volatility in the banking industry. The Bank continues to consider multiple funding alternatives in addition to customer deposits, including wholesale markets, brokered deposits, ~~as a source of additional funding in future periods. While brokered certificates of~~and the national deposit may carry a higher cost than our retail certificates, their remaining maturity periods of 10 to 40 months, along with the enhanced call features of these deposits, assist us in our efforts to manage interest rate risk.market.

At ~~September 30, 2017~~March 31, 2023 and December 31, ~~2016,~~2022, we held ~~$21.4~~$77.3 million and ~~$23.7~~$61.0 million in public funds, respectively, ~~nearly all of which were~~primarily in retail certificates of ~~deposit.~~deposit and money market accounts.

Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, ~~and~~ to leverage our balance ~~sheet.~~sheet and to supplement our deposits. Total FHLB advances were ~~$191.5~~$160.0 million and $145.0 million at ~~September 30, 2017~~March 31, 2023, and ~~$171.5 million at~~ December 31, ~~2016.~~2022, respectively. At ~~September 30, 2017, the Bank had $56.5~~March 31, 2023, advances included $25.0 million of overnight advances, $20.0 million fixed rate one-week advances, $20.0 million fixed rate two-week advances, $60.0 million of fixed-rate one-month advances that renew monthly and $35.0 million of fixed-rate three-month advances that renew quarterly. The $95.0 million of one- and three-month advances are utilized in ~~borrowings that are~~cash flow hedge agreements, as described below. At March 31, 2023, all of our FHLB advances were due to reprice in less than ~~one year and $135.0 million in borrowings that are due in one to three years. Included~~two months.

Cash Flow Hedge. To assist in our ~~total advances at that date is a $50.0 million three-month fixed-rat~~

~~e advance designated~~interest rate risk management efforts, the Bank has entered into multiple interest rate swap agreements with qualified institutions. Each interest rate swap agreement qualifies as ~~a hedge instrument in~~ a cash flow hedge as described below. Included in the category of advances that are due in one to three years is a $120.0 million Member Option Variable Rate advance that reprices quarterly and allows prepayment without penalties on the repricing date.

~~Cash Flow Hedge.~~ To assist in managing interest rate risk, the Bank entered into a five-year, $50 million notional, pay fixed, receive floating cash flow hedge or interest rate swap with a qualified institution on October 25, 2016. Under the terms of the ~~Cash Flow Hedge agreement,~~variability of future interest payments attributable to the ~~Bank will pay a fixed rate of 1.34% for five years and, will~~changes in ~~turn, receive an interest payment based on the~~one-month or three-month LIBOR index, which resets quarterly. Concurrently, the Bank borrowed a $50.0 million fixed rate three-month advance that will be renewed quarterly at the fixed interest rate in effect at that time. Effectiveness of the swap is evaluated quarterly with any ineffectiveness recognized as a gain or a loss on the income statement in noninterest income. A change in the fair valuerates. The objective of the cash flow hedge is to offset the variability of cash flows due to the rollover of the Bank’s FHLB, or other fixed rate advances, for one-month or three-months, respectively, for the term of the agreement. The agreements allow for a substitute index to be used if LIBOR is unavailable.

The following table presents details of the Bank’s interest rate swap agreements as of March 31, 2023. For each interest rate swap agreement listed, the Bank has secured a fixed-rate FHLB advance for the notional amount that reprices at the same frequency as the corresponding interest rate swap. The Bank pays a fixed interest rate to the counterparty and in return, receives a floating interest rate based on the index noted in the table below. The original term of these interest rate swap agreements range from four to eight years.

Notional amount

Start Date

Maturity Date

Fixed rate paid to counterparty

Index rate received from counterparty

Repricing Frequency

(Dollars in thousands)

15,000

9/27/2019

9/27/2024

1.440

1-month LIBOR

monthly

10,000

11/20/2019

11/20/2023

1.585

3-month LIBOR

quarterly

15,000

3/2/2020

3/2/2026

0.911

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2027

0.937

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2028

0.984

1-month LIBOR

monthly

15,000

10/25/2021

10/25/2028

0.793

3-month LIBOR

quarterly

10,000

10/25/2021

10/25/2029

0.800

3-month LIBOR

quarterly

A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At ~~September 30, 2017,~~March 31, 2023 and December 31, 2022, we recognized ~~a $1.1 million~~ fair value ~~asset as a result in the increase in the market value~~assets of ~~the hedge agreement.~~

~~Stockholders’ Equity.~~ ~~Total stockholders’ equity increased $2.7~~$8.9 million ~~during 2017 to $140.8~~and $10.5 million, at September 30, 2017, from $138.1 million at December 31, 2016. The primary source of the increase was a $4.0 million increase in retained earnings as the result of $6.1 million in net income partially offset by shareholder dividends of $2.1 million paid during the nine months ended September 30, 2017. Partially offsetting this increase, additional paid-in-capital decreased by $2.7 millionrespectively, as a result of the ~~$5.0~~increase in market value of the interest rate swap agreements.

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

Stockholders’ Equity. Stockholders’ equity decreased to $159.6 million at March 31, 2023, from $160.4 million at December 31, 2022. Stockholders’ equity during the three months ended March 31, 2023, reflected net income of ~~share repurchases~~$2.1 million partially offset by dividends paid of $1.2 million and a net of tax adjustment from the adoption of Topic 326 of $395,000. In addition, stockholders’ equity was adversely impacted by aggregate unrealized losses in securities available-for-sale and cash hedges of $1.6 million, resulting in a $1.3 million ~~received from the exercise~~accumulated other comprehensive loss, net of stock options and $1.0 million in stock-based compensation. Other comprehensive income increased by $471,000 as a result of changes in market valuations of our derivative and available-for-sale securities.tax.

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


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
	2017			2016			2017			2016				2023			2022

Dividend declared per common share	$	0.07		$	0.06		$	0.20		$	0.18		Dividend declared per common share	$	0.13		$	0.12
Dividend payout ratio ⁽¹⁾	38.9		%	27.4		%	33.9		%	37.9		%	Dividend payout ratio (1)	56.5		%	33.2		%

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

The Company has a share repurchase plan in effect from May 30, 2017 through November 30, 2017 authorizing the repurchase of 1,100,000 shares, or 10.0% of outstanding shares. At September 30, 2017, the Company had repurchased 313,200 shares at an average price of $15.99 per share.

Comparison of Operating Results for the Three Months Ended ~~September 30, 2017~~March 31, 2023 and ~~2016~~2022

General. Net income for the three months ended ~~September 30, 2017~~March 31, 2023, was ~~$1.9 million,~~ $2.1 million, or ~~$0.18~~$0.23 per diluted share as compared to ~~net income of $2.6~~$3.3 million, or ~~$0.22~~$0.36 per diluted share for the ~~quarter~~three months ended ~~September 30, 2016. The $745,000~~March 31, 2022. Contributing to the $1.1 million decrease in net income ~~during~~was a $5.7 million increase in interest expense that more than offset a $5.6 million increase in interest income. In addition, a $300,000 provision for credit losses was recognized for the ~~third quarter~~three months ended March 31, 2023, as compared to a $500,000 recapture of ~~2017~~provision for credit losses for the three months ended March 31, 2022. Further contributing to the decrease in net income was ~~primarily~~ a ~~result of an~~$124,000 decrease in noninterest income and a $367,000 increase in noninterest ~~expense that was partially offset by an increase in net interest income.~~expense.

Net Interest Income. Net interest income for the ~~quarter~~three months ended ~~September 30, 2017 increased $441,000~~March 31, 2023, decreased $112,000 to ~~$9.4~~$11.3 million ~~as compared to $8.9~~from $11.4 million for the third quarter in 2016 due to the $1.2 million increase in our interest income partially offset by a $720,000 increase in interest expense. Interest income increased primarily as a result of the growth in average loans receivable and in particular, multifamily loans. Our net interest margin was 3.53% for the quarter ended September 30, 2017, compared to 3.64% for the quarter ended September 30, 2016. During a period of increasing interest rates, our cost of funds tends to reflect the change sooner than our interest-earning assets, as evidenced by the 22 basis point increase in our cost of funds for the three months ended ~~September 30, 2017~~March 31, 2022. The decrease was primarily due to higher interest expense on deposits and other borrowings, primarily reflecting the continued increase in market interest rates due to the ongoing increases to the targeted federal funds rate and continued intense competition for deposits, partially offset by higher income on loans, including fees, and investments. Since March 2022, in response to inflation, the Federal Open market Committee of the Federal Reserve System has increased the target range for the federal funds rate by 475 basis points, including 50 basis points during the first quarter of 2023, to a range of 4.75% to 5.00%.

Interest income increased $5.6 million for the three months ended March 31, 2023, as compared to the same period in 2022, primarily due to the ongoing increases to the targeted federal funds rate and corresponding increases to the prime lending rate and other short term market rates, including LIBOR, that positively impact the Company’s yields on variable rate loans and investment securities. Loan interest income increased $4.0 million, due to an increases in the average loan yields and to a lesser extent, average loan balances. Our average loan yield increased to 5.56% for the three months ended March 31, 2023, from 4.36% for the three months ended March 31, 2022, due in large part to recent increases in the targeted federal funds rate that increased our returns from variable rate loans. The average balance of loans receivable increased $53.1 million to $1.2 billion for the three months ended March 31, 2023.

Interest income from investment securities increased $1.3 million for the three months ended March 31, 2023, as compared to the same period in 2022, as a result of a $48.3 million increase in the average balance and a 192 basis point increase in average yield to 3.88% for the three months ended March 31, 2023, as compared to 1.96% the same period in 2022, due largely to the continued increases in the targeted federal funds rate and related market rates.

Interest income from interest-earning deposits increased $217,000 for the three months ended March 31, 2023, as compared to the three months ended ~~September 30, 2016, compared~~March 31, 2022. The average yield in interest-earning deposits increased to ~~an increase of just nine basis points~~4.40% for the three months ended March 31, 2023, from 0.15% for the three months ended March 31, 2022. Excess cash was invested in ~~our~~higher interest-earning assets, ~~for these same periods.~~

~~The following table details the change~~resulting in ~~net interest income due to changes in yield or cost, or changes~~a $28.1 million decrease in the average balance of interest-earning deposits for the ~~related asset or liability:~~

Three Months Ended September 30, 2017
Compared to September 30, 2016
Net Change

Rate
Volume
Total

(In thousands)
Interest-earning assets:

   Loans receivable, net $ 62

$ 930

$ 992
   Investments available-for-sale 79

(2 )
77
   Interest-earning deposits with banks 63

7

70
   FHLB stock 19

3

22
Total net change in income on interest-earning assets 223

938

1,161

Interest-bearing liabilities:

   Interest-bearing demand 7

4

11
   Statement savings (1 )
(1 )
(2 )
   Money market 190

80

270
   Certificates of deposit, retail 81

3

84
   Certificates of deposit, brokered 6
19
25
   Advances from the FHLB 304

28

332
Total net change in expense on interest-bearing liabilities 587

133

720
Total net change in net interest income $ (364 )
$ 805

$ 441

~~The $992,000 increase in loan interest income during the third quarter of 2017,~~three months ended March 31, 2023, as compared to the same period in ~~2016, was~~2022.

Dividends on FHLB Stock increased $56,000 for the three months ended March 31, 2023, as a result of a ~~$75.1~~181 basis point increase in average yield and an $1.8 million increase in average balance, as compared to the three months ended March 31, 2022

The increase in interest income was offset by a $5.7 million increase in interest expense for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, with interest expense on deposits and borrowings increasing $5.1 million and $612,000, respectively. The average rate paid on interest-bearing deposits increased to 2.41% for the three months ended March 31, 2023, as compared to 0.50% for the three months ended March 31, 2022. The higher cost of deposits was due to increased interest expense on money market and certificate of deposit balances and the continued use of higher cost brokered deposits and wholesale sources to meet our funding needs. For the three months ended March 31, 2023, the average ~~outstanding loan~~ balance ~~combined with an increase~~of our brokered deposits increased to $135.2 million, outpacing the decrease of $116.0 in ~~the average loan yield of three basis points. Continued growth in higher yielding construction and commercial loans helped contribute to the increase in yield on these assets.~~

~~During the third quarter of 2017, interest income from our investments available-for-sale increased by $77,000~~money market accounts as compared to the same period in ~~2016. The~~2022, resulting in a net increase of $38.3 million in interest-bearing deposits attributing to the increase in costs.

Interest expense from borrowings increased $612,000 as a result of a $42.6 million increase in the average balance ~~of our investments available-for-sale~~and a 141 basis point increase in average cost for the three months ended ~~September 30, 2017 decreased by $299,000~~March 31, 2023, as compared to the same period in 2016 as sales and paydowns outpaced purchases of new investments. As a result of restructuring our available-for-sale investment portfolio through the sales of lower yielding investment securities, and utilizing the proceeds received2022.

The Company’s net interest margin decreased to ~~purchase higher yielding, long-term investment securities last year, our yield on these assets increased by 23 basis points~~3.22% for the three months ended ~~September 30, 2017, as compared to the same period in 2016.~~

~~Interest expense increased by $720,000~~March 31, 2023, from 3.43% for the three months ended ~~September 30, 2017, as compared~~March 31, 2022. This decrease was primarily due to the ~~same period in 2016. The average balance of our interest-bearing liabilities increased $95.3 million from September 30, 2016 to September 30, 2017 to support the growth~~188 basis points increase in our ~~financial assets.~~ average cost on interest bearing liabilities outpacing the 139 basis points increase in the average yield of interest earning assets between periods. These increases reflect higher market interest rates due to recent increases in the target range for federal funds, including a 50 basis point increase during the first quarter of 2023, to a range of 4.75% to 5.00%. For more information, see “How We Measure the Interest Rate Changes” in Item 3 of this report.

The ~~average balance~~following table presents the effects of ~~deposits increased~~changing rates and volumes on our net interest income during the periods indicated. Information is provided with respect to: (1) effects on interest income attributable to changes in volume (changes in volume multiplied by ~~$81.0 million for the three months ended September 30, 2017 as compared~~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 ~~same period~~changes in ~~2016. Average money market deposits increased by $70.0 million while interest-bearing checking accounts increased by $8.3 million~~rate and brokered certificates of deposit increased by $4.5 million. The average cost of our interest-bearing deposits increased by 10 basis points for the three months ended September 30, 2017, as compared to the same period in 2016.volume.

In further support of our asset growth, average borrowings at the FHLB increased by $14.3 million to $197.1 million for the three months ended September 30, 2017, and the average cost of these funds increased 61 basis points as compared to the same period in 2016. At September 30, 2017, the Bank did not hold any overnight advances. In comparison, at September 30, 2016, we held $110.0 million in overnight funding at the FHLB at a rate of 0.45%. The low rate of these funds contributed to the lower average rate for the quarter ended September 30, 2016, and were held in preparation of more strategic funding options, including our interest rate swap. As discussed above, to assist in managing interest rate risk, the Bank entered into a five-year, $50.0 million notional, pay fixed, receive floating cash flow hedge or interest rate swap at a fixed rate of 1.34% for five years and concurrently borrowed a $50.0 million fixed rate three-month advance that renews quarterly at the fixed interest rate in effect at that time. At September 30, 2017, this hedge continued to provide us with the intended interest rate risk protection in a rising interest rate environment.


	Three Months Ended March 31, 2023 Compared to March 31, 2022 Net Change in Interest
	Rate		Volume		Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	3,457	$	571	$	4,028
Investment securities, taxable	1,022		243		1,265
Investment securities, non-taxable	19		(10)		9
Interest-earning deposits with banks	228		(11)		217
FHLB stock	32		24		56
Total net change in income on interest-earning assets	4,758		817		5,575

Interest-bearing liabilities:
Interest-bearing demand	304		(1)		303
Savings	—		—		—
Money market	2,418		(71)		2,347
Certificates of deposit, retail	846		72		918
Brokered deposits	1,507		—		1,507
Borrowings	477		135		612
Total net change in expense on interest-bearing liabilities	5,552		135		5,687
Total net change in net interest income	$	(794)	$	682	$	(112)

The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended ~~September 30, 2017~~March 31, 2023 and ~~2016.~~2022. Average balances have been calculated using the average daily balances during the period. Interest and dividends are not reported on a tax equivalent basis. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.


	Three Months Ended September 30,													Three Months Ended March 31,
	2017						2016							2023						2022
	Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost			Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost
	(Dollars in thousands)													(Dollars in thousands)
Assets													Assets
Loans receivable, net	$	879,075	$	10,959	4.95	%	$	804,014	$	9,967	4.92	%	Loans receivable, net	$	1,168,539	$	16,029	5.56	%	$	1,115,428	$	12,001	4.36	%
Investments available-for-sale	132,959		869		2.59		133,258		792		2.36
Investment securities, taxable													Investment securities, taxable	197,301		1,977		4.06		147,048		712		1.96
Investment securities, non-taxable													Investment securities, non-taxable	22,668		128		2.29		24,637		119		1.96
Interest-earning deposits with banks	33,854		108		1.27		28,275		38		0.53		Interest-earning deposits with banks	21,729		236		4.40		49,857		19		0.15
FHLB stock	9,126		67		2.91		8,483		45		2.10		FHLB stock	7,219		130		7.30		5,467		74		5.49
Total interest-earning assets	1,055,014		12,003		4.51		974,030		10,842		4.42		Total interest-earning assets	1,417,456		18,500		5.29		1,342,437		12,925		3.90
Noninterest earning assets	65,162						60,781						Noninterest earning assets	91,841						81,617
Total average assets	$	1,120,176					$	1,034,811					Total average assets	$	1,509,297					$	1,424,054

Liabilities and Stockholders' Equity													Liabilities and Stockholders' Equity
Interest-bearing demand	$	26,280	$	20	0.30	%	$	18,018	$	9	0.20	%	Interest-bearing demand	$	94,925	$	321	1.37	%	$	99,862	$	18	0.07	%
Statement savings	28,238		10		0.14		30,902		12		0.15
Savings													Savings	23,547		2		0.03		23,699		2		0.03
Money market	255,097		481		0.75		185,089		211		0.45		Money market	500,440		2,725		2.21		616,401		378		0.25
Certificates of deposit, retail	342,599		1,105		1.28		341,685		1,021		1.19		Certificates of deposit, retail	311,728		1,777		2.31		287,545		859		1.21
Certificates of deposit, brokered	75,488		317		1.67		70,964		292		1.63
Brokered deposits													Brokered deposits	135,187		1,507		4.52		—		—		—
Total interest-bearing deposits	727,702		1,933		1.05		646,658		1,545		0.95		Total interest-bearing deposits	1,065,827		6,332		2.41		1,027,507		1,257		0.50
Advances from the FHLB and other borrowings	197,098		695		1.40		182,804		363		0.79
Borrowings													Borrowings	137,600		912		2.69		95,000		300		1.28
Total interest-bearing liabilities	924,800		2,628		1.13		829,462		1,908		0.91		Total interest-bearing liabilities	1,203,427		7,244		2.44		1,122,507		1,557		0.56
Noninterest bearing liabilities	51,401						43,659						Noninterest bearing liabilities	143,854						142,791
Average equity	143,975						161,690						Average equity	162,016						158,756
Total average liabilities and equity	$	1,120,176					$	1,034,811					Total average liabilities and equity	$	1,509,297					$	1,424,054
Net interest income			$	9,375					$	8,934			Net interest income			$	11,256					$	11,368
Net interest margin					3.53	%					3.64	%	Net interest margin					3.22	%					3.43	%

Provision for ~~Loan~~Credit Losses.Management recognizes that ~~loan~~credit losses may occur over the life of a loan and that the ~~ALLL~~ACL must be maintained at a level necessary to absorb ~~specific~~management’s estimated of credit losses over the remaining expected life of loans in the portfolio. The Company’s ACL model methodology is to build a reserve rate using historical life of loan default rates combined with assessment of current loan portfolio information, forecasted economic environment and business cycle information. The model uses statistical analysis to determine the life of loan default and loss rates for the quantitative component and analyzes qualitative factors (Q-Factors) that assess the current loan portfolio conditions and forecasted economic environment. The Q-Factors adjust the expected loss rates for current and forecasted conditions that are not fully provided for in the historical loss information. The Company has established a methodology for adjusting the previously determined expected loss rates based on ~~impaired~~the more recent or forecasted changes. The Q-Factor methodology is based on a blend of quantitative analysis and management judgement and reviewed on a quarterly basis.

Specific allowances result when individual loans do not share risk characteristics with other loans and ~~probable losses inherent in~~management performs an impairment analysis on the loan portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific reserves. The general reserve is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, the prevailing economy, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, managements’ experience level, our loan review and grading systems, the value of underlying collateral and the level of problemindividual loans ~~in assessing the ALLL. The specific reserve component is created~~ 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~~allowance is ~~probable.~~established in the ACL for the loan. The amount of the specific ~~reserves are~~allowance is computed using current appraisals, listed sales prices, and other available information less costs to complete, if any, and costs to sell the property. This ~~evaluation~~analysis is inherently subjective as it ~~requires~~relies on estimates that are susceptible to significant revision as more information becomes available or ifas future events differ from ~~current estimates.~~predictions.

The Company also records an allowance for credit losses on unfunded loan commitments. We estimate expected credit losses on unfunded commitments in which we are exposed to credit risk, unless we have the option to unconditionally cancel the obligation. Management determined that the initial adjustment to the allowance for credit losses on unfunded commitment due to the CECL transition was immaterial. The allowance for unfunded commitments is included in “Other Liabilities” on the Consolidated Balance Sheets, with changes to the balance being charged to noninterest expense.

During the ~~quarter~~three months ended ~~September 30, 2017,~~March 31, 2023, management evaluated the adequacy of the ~~ALLL~~ACL and concluded that ~~additional~~a $300,000 provision for ~~loan~~credit losses was appropriate. The increase in the ~~amount~~ACL was due to the growth of the loan portfolio, the loan mix changes and changes in the economic forecasts used in the ACL model. In comparison, a $500,000 ~~was appropriate for the quarter. For the quarter ended September 30, 2016, a $900,000~~recapture of provision for loan losses was ~~recorded. For~~recognized in the ~~third quarter of 2017, the provision for loan losses~~three months ended March 31, 2022. This recapture was primarily ~~a result~~attributed to $8.1 million of ~~$70.2 million increase~~commercial and multifamily loans downgraded to substandard, resulting in ~~net loan receivables and recoveries~~these loans being removed from the general reserve calculation. An individual analysis of ~~$325,000 of previously charged off~~these loans for required specific reserves was instead performed which ~~reduced the provision necessary~~indicated no additional specific allowance was needed due to ~~support~~their collateral values being higher than the loan ~~growth during~~balances. By removing these loans from the ~~quarter. In comparison,~~general reserve calculations, the ~~provision reported in~~general allowance was reduced, contributing to the ~~third quarter~~recapture of ~~2016 was primarily a result of a $79.9 million increase in net loans receivable.~~the general allowance for some commercial and multifamily loans. For more information, see Note 5 - Loans Receivable and Allowance for Credit Losses.


	At or For the Three Months Ended March 31,
	2023			2022
	(Dollars in thousands)
ACL or ALLL as a percent of total loans	1.33		%	1.33		%
ACL or ALLL at period end	$	16,028		$	15,159
Total loans outstanding	1,200,778			1,136,748

Non-accrual loans as a percentage of total loans outstanding at period end	0.02		%	0.02		%
Total non-accrual loans	$	201		$	179
Total loans outstanding	1,200,778			1,136,748

ACL or ALLL as a percent of non-accrual loans at period end	7,974.13		%	8,468.86		%
ACL or ALLL at period end	$	16,028		$	15,159
Total non-accrual loans	201			179

Net recoveries/(charge-offs) during period to average loans outstanding:
One-to-four family residential:	—		%	—		%
Net recoveries during period	$	1		$	2
Average loans receivable, net (1)	473,633			390,236
Multifamily:	—		%	—		%
Net recoveries/(charge-offs) during period	$	—		$	—
Average loans receivable, net (1)	139,984			131,373
Commercial:	—		%	—		%
Net recoveries/(charge-offs) during period	$	—		$	—
Average loans receivable, net (1)	396,960			415,173
Construction/land development:	—		%	—		%
Net recoveries/(charge-offs) during period	$	—		$	—
Average loans receivable, net (1)	62,039			94,387
Business:	—		%	—		%
Net recoveries/(charge-offs) during period	$	—		$	—
Average loans receivable, net (1)	31,161			37,786
Consumer:	—		%	—		%
Net recoveries/(charge-offs) during period	$	—		$	—
Average loans receivable, net (1)	64,762			46,473
Total loans:	—		%	—		%
Net recoveries during period	$	1		$	2
Average loans receivable, net (1)	1,168,539			1,115,428

(1) The average loans receivable, net balances, include nonaccrual loans and ~~ratios are calculated using loan balances that are net of LIP.~~deferred fees.

At or For the Three Months Ended September 30,

2017
2016
(Dollars in thousands)
Total loans receivable, net of LIP, end of period $ 945,458
$ 859,205
Average loans receivable during period 879,075
804,014
ALLL balance at beginning of period 11,285
10,134
Provision for loan losses 500
900
Charge-offs:

Consumer —
(28 )
Total charge-offs —
(28 )
Recoveries:

One-to-four family 247
—
Commercial real estate 78
—
Total recoveries 325
—
Net recovery 325
(28 )
ALLL balance at end of period $ 12,110
$ 11,006
ALLL as a percent of total loans, net of LIP 1.28 % 1.28 %
Ratio of net recoveries to average net loans receivable 0.15
(0.01 )

Noninterest Income. Noninterest income ~~increased $58,000~~decreased $124,000 to ~~$731,000~~$665,000 for the quarter ended ~~September 30, 2017, from $673,000 for~~March 31, 2023, as compared to the quarter ended ~~September 30, 2016.~~ March 31, 2022.

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


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(Dollars in thousands)

BOLI income	$	308	$	288	$	20	6.9	%
Wealth management revenue	45		82		(37)		(45.1)
Deposit related fees	223		215		8		3.7
Loan related fees	91		199		(108)		(54.3)
Other	(2)		5		(7)		(140.0)
Total noninterest income	$	665	$	789	$	(124)	(15.7)

Three Months Ended September 30, 2017 Change from Three Months Ended
September 30, 2016 Percent Change
(Dollars in thousands)
Service fees on deposit accounts $ 34
$ 18
112.5 %
Loan service fees                                 61
9
17.3
Net gain on sale of investments 47
14
42.4
BOLI change in cash surrender value 173
(78 ) (31.1 )
Wealth management revenue 252
87
52.7
Other            164
8
5.1
Total noninterest income                                            $ 731
$ 58
8.6

~~The increase in~~ During the ~~quarter~~three months ended ~~September 30, 2017,~~March 31, 2023, as compared to the ~~quarter~~three months ended ~~September 30, 2016, was~~March 31, 2022, loan related fees decreased $108,000, primarily ~~the result of an $87,000 increase~~due to a $99,000 decrease in ~~wealth management revenue. Increases of $18,000 and $9,000 occurred with our deposit and~~ loan prepayment fees ~~respectively,~~which slowed as a result of ~~the increase in the number of our accounts. Offsetting these increases in noninterest income, the increase in the cash surrender value of our BOLI policies was $78,000 less for~~rising interest rates. Wealth management revenue decreased $37,000 during the three months ended ~~September 30, 2017~~March 31, 2023, as compared to the same period in ~~2016. During the second quarter of 2017, we purchased $4.2 million in additional policies where~~

~~certain policy expenses are~~2022, primarily due to lower sales volume. These decreases were partially offset ~~against the~~by a $20,000 increase in ~~cash surrender value for the first year, resulting in a decrease to our~~ BOLI income ~~each quarter. Other noninterest income~~as a result of annual premiums and dividends on certain BOLI policies.

Noninterest Expense. Noninterest expense increased $367,000 to $9.0 million for the three months ended September 30, 2017 included $83,000 in interest rate swap fees received on loans where certain commercial loan customers participate in an interest rate swap with a third party broker institution and the Bank receives a fee that is recognized as other noninterest income at the time the loan is originated. In addition, ATM and debit card related fees increased $29,000 as a result of increased customer usage.

~~Noninterest Expense.~~ ~~Noninterest expense increased $1.5 million to $6.8~~March 31, 2023, from $8.6 million for the ~~quarter~~three months ended ~~September 30, 2017 from $5.3 million for the comparable quarter in 2016.~~March 31, 2022.

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


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	(Dollars in thousands)
Salaries and employee benefits	$	5,461	$	5,261	$	200	3.8	%
Occupancy and equipment	1,165		1,228		(63)		(5.1)
Professional fees	417		452		(35)		(7.7)
Data processing	686		677		9		1.3

Regulatory assessments	101		101		—		—
Insurance and bond premiums	130		129		1		0.8
Marketing	77		37		40		108.1
Other general and administrative	956		741		215		29.0
Total noninterest expense	$	8,993	$	8,626	$	367	4.3

Three Months Ended September 30, 2017 Change from Three Months Ended
September 30, 2016 Percent Change
(Dollars in thousands)
Salaries and employee benefits $ 4,406
$ 585
15.3 %
Occupancy and equipment                                            726
259
55.5
Professional fees                                 458
—
—
Data processing                                 372
113
43.6
OREO related (reimbursements) expenses, net (6 ) 5
(45.5 )
Regulatory assessments 122
40
48.8
Insurance and bond premiums                                            105
19
22.1
Marketing 102
35
52.2
Other general and administrative 551
526
2,104.0
Total noninterest expense                                            $ 6,836
$ 1,582
30.1 %

~~The Company recognized~~During the nonrecurring acquisition costs related to the Branch Acquisition, such as system conversion costs, consulting, legal fees, and marketing and advertising costs of $290,000 included in the various noninterest expense categories below for the quarterthree months ended ~~September 30, 2017. There were no acquisition costs in the quarter ended September 30, 2016.~~

~~Expenses for~~March 31, 2023, salaries and employee benefits increased $585,000 for the third quarter of 2017, as compared to the same period in 2016 primarily as a result of increases in costs due to the increase in the number of employees. As a result of our de novo branches, the Branch Acquisition and the development of new products, the number of employees increased to 146 at September 30, 2017 from 118 at September 30, 2016.

The number of our branch locations increased to nine at September 30, 2017 from four at September 30, 2016 resulting in increased operating expenses. During the quarter ended September 30, 2017, we converted our ATM processing system and continued to upgrade our original branch location to better serve our customers’ needs, resulting in a $259,000 increase in occupancy and equipment expense compared to the same period last year.

In support of our ATM conversion and Branch Acquisition, our data processing expense increased by $113,000 for the quarter ended September 30, 2017 as compared to the same period in 2016. The rate of the increase in data processing expense is expected to decline in future periods as we complete system conversion costs although our core processor service fees will increase reflecting the increase in deposit accounts activity from the growth in customer accounts.

~~Other general and administrative expenses increased by $526,000 for the three months ended September 30, 2017~~$200,000 as compared to the three months ended ~~September 30, 2016~~March 31, 2022, primarily ~~as a result of a $385,000 increase~~due to merit based salary increases during the current quarter and higher vacancies in staffing in the year ago quarter, partially offset by the absence of compensation expense ~~for unfunded commitments. This reserve is held~~related to ~~absorb estimated probable losses~~the Bank’s Employee Stock Ownership Plan which matured and was fully allocated during the third quarter of ~~our unfunded lines of credit and construction loans and varies as a result of the timing of funding these types of loans.~~2022. In addition, ~~general and administrative expenses related~~the Company offered a profit-sharing plan to ~~our ATM and debit cards increased by $50,000 for these comparative periods~~its employees beginning in ~~support of the conversion of our ATM processing system. As a result of our Branch Acquisition, other general and administrative expenses increased by $39,000 and the Bank recognized CDI amortization~~2023 which resulted in accrued expense of ~~$15,000~~$226,000 for the three months ended ~~September 30, 2017.~~March 31, 2023.

~~Federal Income Tax Expense.~~ ~~Our statutory income tax rate is 35%. We recorded federal income tax provisions~~Other general and administrative expense increased $215,000, primarily due to a $60,000 increase in reserve for unfunded commitment, largely due to the adoption of ~~$909,000~~ASC 326, a $54,000 increase in state and ~~$847,000~~local taxes as well as increases in travel expenses, subscription and fraud losses.

Marketing expense increased to $77,000 for the ~~quarters ended September 30, 2017, and 2016, respectively, as a result of our consolidated pretax~~

net income. Our effective tax rate as of September 30, 2017 was 30.1%, which reflected the year-to-date impact of stock options exercised during 2017. In comparison, the effective tax rate as of September 30, 2016 was 28.9%, which reflected reversal of nontaxable BOLI income and a 10% penalty on the early surrender a BOLI policy.

~~Comparison of Operating Results for the Nine Months Ended September 30, 2017 and 2016~~

~~General.~~ ~~Net income for the nine~~three months ended ~~September 30, 2017 was $6.1 million, or $0.58 per diluted share~~March 31, 2023, as compared to net income of $5.9 million, or $0.47 per diluted share for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, an increase in net interest income of $2.3 million and a $600,000 decrease in the provision for loan losses was partially offset by a $2.6 million increase in noninterest expense as compared to the same period in 2016.

~~Net Interest Income.~~ ~~Net interest income for the nine months ended September 30, 2017 was $27.2 million, as compared to $24.9 million~~$37,000 for the same period in ~~2016,~~2022, primarily due to increased marketing/promotional campaigns.

Partially offsetting these increases were decreases in occupancy and equipment expense of $63,000 primarily due to reduced facility/equipment maintenance, and in professional fees of $35,000, primarily due to $44,000 in expenses related to an Internal Asset Review audit in the ~~$4.0 million increase in our interest~~first quarter of 2022 with no similar expense recorded during the current quarter.

Federal Income Tax Expense. The federal income partially offset by a $1.7 million increase in interest expense. The increase in total interest income was primarily the result of the $110.6 million growth in average loans receivable. Our net interest margin was stable at 3.59%tax provision decreased to $506,000 for the ~~nine~~three months ended ~~September 30, 2017, compared to 3.58% for the nine months ended September 30, 2016.~~

~~The following table details the change in net interest income due to changes in yield or cost, or changes in the average balance of the related asset or liability:~~

Nine Months Ended September 30, 2017
Compared to September 30, 2016 Net Change
Rate Volume Total
(In thousands)
Interest-earning assets:
   Loans receivable, net $ (555 ) $ 4,151
$ 3,596
   Investments available-for-sale 394
(17 ) 377
   Interest-earning deposits with banks 99
(103 ) (4 )
   FHLB stock 41
34
75
Total net change in income on interest-earning assets (21 ) 4,065
4,044

Interest-bearing liabilities:
   Interest-bearing demand 31
5
36
   Statement savings (1 ) (2 ) (3 )
   Money market 391
95
486
   Certificates of deposit, retail 216
169
385
   Certificates of deposit, brokered (83 ) 110
27
   Advances from the FHLB 508
269
777
Total net change in expense on interest-bearing liabilities 1,062
646
1,708
Total net change in net interest income $ (1,083 ) $ 3,419
$ 2,336

~~The $3.6 million increase in loan interest income was a result of the $110.6 million increase in average loans receivable for the nine months ended September 30, 2017~~March 31, 2023, as compared to the same period in 2016 partially offset by a decrease in the average yield to 4.93% from 5.02% for the nine months ended September 30, 2017 and 2016, respectively as loans originated during the past year were at lower average rates than those paying off.

Interest income on our investments available-for-sale increased $377,000 for the nine months ended September 30, 2017 as compared to the same period in 2016 primarily as a result of the 41 basis point increase in the yield on these assets. We have continued to restructure our portfolio of these securities to include additional longer term higher-yielding investment securities to increase earnings from our investment portfolio. Purchases of investments available-for-sale for the nine months ended September 30, 2017 included $11.6 million in fixed-rate securities and $11.9 million in variable-rate securities to assist in managing our interest-rate risk.

Interest income on our interest-earning deposits decreased $4,000 for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily as a result of the $26.8 million decrease in the average balance of these deposits as we shifted cash earning a nominal yield into higher yielding assets. Partially offsetting the impact of the decrease in average balance, the average yield earned on interest-earning deposits from the Federal Reserve Bank increased by 53 basis points year over year.

Partially offsetting the increase in interest income, interest expense increased $1.7 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The average cost of interest-bearing deposits increased by 10 basis points for the nine months ended September 30, 2017, as compared to the same period in 2016. Interest expense on money market accounts increased by $486,000, year over year primarily due to an increase of 23 basis points in the cost of these funds and a $29.6 million increase in the average balance of these funds. In addition, interest expense on retail certificates of deposit increased by $385,000 from a combined result of a $19.5 million increase in the average balance of these accounts and a nine basis point increase in the cost of these funds. Interest expense on our FHLB advances and other borrowings increased by $777,000 for the nine months ended September 30, 2017, as compared to the same period in 2016 as a result of a $41.3 million increase in the average balance of FHLB advances and a 37 basis point increase in the cost of these funds.

The following table compares detailed average balances, associated yields and rates, and the resulting changes in interest and dividend income or expense for the nine months ended September 30, 2017 and 2016. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.

Nine Months Ended September 30,
2017 2016
Average Balance Interest Earned / Paid Yield or Cost Average Balance Interest Earned / Paid Yield or Cost
(Dollars in thousands)
Assets
Loans receivable, net                                            $ 849,923
$ 31,338
4.93 % $ 739,312
$ 27,742
5.02 %
Investments available-for-sale 131,457
2,601
2.65
132,471
2,224
2.24
Interest-earning deposits with banks                                           25,008
194
1.04
51,855
198
0.51
FHLB stock                       8,596
211
3.28
6,878
136
2.64
Total interest-earning assets                                                       1,014,984
34,344
4.52
930,516
30,300
4.35
Noninterest earning assets 62,965
59,127

Total average assets $ 1,077,949
$ 989,643

Liabilities and Stockholders' Equity
Interest-bearing demand $ 22,087
$ 54
0.33 % $ 17,534
$ 18
0.14 %
Statement savings 27,893
32
0.15
29,461
35
0.16
Money market 228,559
1,122
0.66
198,958
636
0.43
Certificates of deposit, retail 349,091
3,252
1.25
329,622
2,867
1.16
Certificates of deposit, brokered 75,488
940
1.66
67,345
913
1.81
Total interest-bearing deposits 703,118
5,400
1.03
642,920
4,469
0.93
Advances from the FHLB and other borrowings 184,412
1,710
1.24
143,092
933
0.87
Total interest-bearing liabilities 887,530
7,110
1.07
786,012
5,402
0.92
Noninterest bearing liabilities 47,685
36,545

Average equity 142,734
167,086

Total average liabilities and equity $ 1,077,949
$ 989,643

Net interest income $ 27,234
$ 24,898

Net interest margin 3.59 % 3.58 %

~~Provision for Loan Losses.~~ During the nine months ended September 30, 2017, management evaluated the adequacy of the ALLL and concluded that a provision for loan losses in the amount of $800,000 was appropriate for the period. The provision for the nine months ended September 30, 2017 was primarily a reflection of the $116.8 million growth in net loans receivable partially offset by recoveries of $359,000. For the nine months ended September 30, 2016, a provision for loan losses of $1.4 million was recorded as a result of $160.9 million in net loan growth.

~~The following table summarizes selected financial data related to our ALLL and loan portfolio. All loan balances and ratios are calculated using loan balances that are net of LIP.~~

At or For the Nine Months Ended September 30,
2017 2016
(Dollars in thousands)
Total loans receivable, net of LIP, end of period $ 945,458
$ 859,206
Average loans receivable during period 849,923
739,312
ALLL balance at beginning of period 10,951
9,463
Provision for loan losses 800
1,400
Charge-offs:
Consumer —
(47 )
Total charge-offs —
(47 )
Recoveries:
One-to-four family 280
85
Commercial real estate 78
104
Consumer 1
1
Total recoveries 359
190
Net recovery 359
143
ALLL balance at end of period $ 12,110
$ 11,006
ALLL as a percent of total loans, net of LIP 1.28 % 1.28 %
Ratio of net recoveries to average net loans receivable (annualized) 0.06
0.03

~~Noninterest Income.~~ ~~Noninterest income increased to $2.0 million for the nine months ended September 30, 2017, from $1.9 million~~$771,000 for the same period in ~~2016. The following table provides~~2022, primarily due to a ~~detailed analysis of the changes in the components of noninterest income:~~

Nine Months Ended September 30, 2017 Change from
Nine Months Ended
September 30, 2016 Percent Change
(Dollars in thousands)
Service fees on deposit accounts $ 96
$ 36
60.0 %
Loan service fees                                 215
34
18.8
Net gain on sale of investments 103
70
212.1
BOLI change in cash surrender value 490
(151 ) (23.6 )
Wealth management revenue 699
43
6.6
Other            394
104
35.9
Total noninterest income                                            $ 1,997
$ 136
7.3

Service fees on deposit and loan accounts increased primarily as a result of changes in the number of deposit accounts reflecting our branch expansion, the Branch Acquisition and organic growth. The net gain on sales of investments increased by $70,000 as we continue sales of securities as part of the restructure of our investment portfolio, as discussed above. Additional increases were noted in other noninterest income, with increases of $54,000 in interest rate swap fees and $45,000 in ATM and debit card related fees as a result of increased customer usage. Partially offsetting the increases, the increase in BOLI cash surrender value was $151,000 lower for the nine months ended September 30, 2017 as compared to the nine months ended September 30,

~~2016 as we purchased $4.2~~$1.4 million ~~in new policies in 2017 that apply certain policy expenses during the initial year against the policy value, offsetting the increase in the cash surrender value.~~

~~Noninterest Expense.~~ ~~Noninterest expense increased $2.6 million to $19.7 million for the nine months ended September 30, 2017 as compared to the same period in 2016.~~

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

Nine Months Ended September 30, 2017 Change from
Nine Months Ended
September 30, 2016 Percent Change
(Dollars in thousands)
Salaries and employee benefits $ 13,100
$ 1,664
14.6 %
Occupancy and equipment                                            1,785
322
22.0
Professional fees                                 1,379
(108 ) (7.3 )
Data processing                                 1,131
431
61.6
OREO-related (reimbursements) expenses, net 14
(285 ) (95.3 )
Regulatory assessments 330
11
3.4
Insurance and bond premiums                                            302
42
16.2
Marketing 202
57
39.3
Other general and administrative 1,497
507
51.2
Total noninterest expense                                            $ 19,740
$ 2,641
15.4

The Company recognized nonrecurring acquisition costs related to the Branch Acquisition, such as system conversion costs, consulting, legal fees, and marketing and advertising costs of $609,000 included in the various noninterest expense categories below for the nine months ended September 30, 2017. There were no acquisition costs in the nine months ended September 30, 2016.

Salaries and employee benefits expense increased $1.7 million for the nine months ended September 30, 2017 as compared to the same period in 2016. The number of employees increased over the last year as we added employees to support our branch expansion and the development of new products. Likewise, occupancy and equipment expenses increased as a result of our branch expansion and the Branch Acquisition as well as upgrading our original branch location. Data processing increased by $431,000 during these same periods primarily as a result of the cost of data conversion related to the Branch Acquisition. These increases were partially offset by a $285,000 decrease in OREO related expenses as we incurred valuation write-downs for the nine months ended September 30, 2017 of $50,000 as compared to write-downs of $257,000 for the nine months ended September 30, 2016. In addition, sales of OREO properties resulted in a gain of $5,000 as compared to a loss of $87,000 for the nine months ended September 30, 2017 and 2016, respectively. Our branch expansion and the Branch Acquisition also increased our marketing costs over the last year. Other general and administrative expenses increased by $507,000 for the nine months ended September 30, 2017 primarily as a result of a $68,000 expense for the reserve for unfunded commitments in 2017 as compared to a recovery of $201,000 for the same period in 2016. In addition, deposit operating expense increased by $46,000 for the nine months ended September 30, 2017, year over year, in support of our Branch Acquisition and overall growth in our deposit accounts. Also contributing to the increase in other expense, state taxes increased by $57,000 for the nine months ended September 30, 2017 as compared to the same period in 2016 as a result of the addition of California state taxes as a result of our loan expansion into that state.

~~Federal Income Tax Expense.~~ ~~Our statutory~~ income ~~tax rate is 35%. We recorded~~before federal income tax ~~provisions of $2.6 million~~provision.

Liquidity and $2.4 million for the nine months ended September 30, 2017, and 2016 as a result of our consolidated net income. Our effective tax rate for the nine months ended September 30, 2017 was 30.1% partially as a result of tax benefit from the exercise of stock options in 2017. In comparison, the effective tax rate for the nine months ended September 30, 2016 was 28.9% as a result of the reversal of noninterest income and a tax penalty from the early surrender of BOLI policies, partially offset by a benefit from the exercise of stock options.Capital Resources

We are required to have ~~enough~~sufficient cash flow in order to maintain ~~sufficient~~proper liquidity to ensure a safe and sound operation. We maintain cash flows above the minimum level believed to be adequate to meet the requirements of normal operations, including

potential deposit outflows. On a daily basis, we review and update cash flow projections to ensure that adequate liquidity is maintained.

Our primary sources of funds are customer deposits, ~~cash flow from the~~scheduled loan and investment ~~portfolios,~~repayments, including interest payments, maturing loans and investment securities, advances from the FHLB, brokered deposits and ~~to a lesser extent, brokered certificates of deposit.~~deposits obtained in the national CD and internet markets. These funds, together with equity, are used to ~~make~~fund loans, acquire investment securities and other assets, and fund continuing operations. At September 30, 2017, retail certificates of deposit scheduled to mature in one year or less totaled $165.9 million. Management’s practice is to maintain deposit rates at levels that are competitive with other local financial institutions. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We believe that our current liquidity position, and our forecasted operating results are sufficient to fund all of our existing commitments.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or other investment securities. On a longer term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and withdrawals on other deposit accounts, to fund loan commitments, and to maintain our portfolio of investment securities. At March 31. 2023, the undisbursed portion of construction LIP and unused portion of lines of credit totaled $39.0 million and $38.1 million, respectively. Certificates of deposit scheduled to mature in one year or less at March 31, 2023, totaled $378.3 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 the Bank.

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



	Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3731
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5747
	Item 4.	Controls and Procedures	6050
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	6151
	Item 1A.	Risk Factors	6151
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6151
	Item 3.	Defaults upon Senior Securities	6152
	Item 4.	Mine Safety Disclosures	6152
	Item 5.	Other Information	6152
	Item 6.	Exhibits	6253
SIGNATURES			6354



	September 30, 2017			December 31, 2016
Assets	September 30, 2017			December 31, 2016
	(Unaudited)
Cash on hand and in banks	$	7,910		$	5,779
Interest-earning deposits with banks	14,093			25,573
Investments available-for-sale, at fair value	137,847			129,260
Loans receivable, net of allowance of $12,110 and $10,951	931,862			815,043
Federal Home Loan Bank ("FHLB") stock, at cost	8,902			8,031
Accrued interest receivable	3,709			3,147
Deferred tax assets, net	2,381			3,142
Other real estate owned ("OREO")	1,825			2,331
Premises and equipment, net	20,568			18,461
Bank owned life insurance ("BOLI"), net	28,894			24,153
Prepaid expenses and other assets	3,304			2,664
Goodwill	979			—
Core deposit intangible	1,304			—
Total assets	$	1,163,578		$	1,037,584

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	47,652		$	33,422
Interest-bearing deposits	768,088			684,054
Total deposits	815,740			717,476
FHLB Advances	191,500			171,500
Advance payments from borrowers for taxes and insurance	4,267			2,259
Accrued interest payable	280			231
Other liabilities	11,031			7,993
Total liabilities	1,022,818			899,459

Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding	—			—
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 10,763,915 shares at September 30, 2017, and 10,938,251 shares at December 31, 2016	108			109
Additional paid-in capital	94,168			96,852
Retained earnings, substantially restricted	52,984			48,981
Accumulated other comprehensive loss, net of tax	(857		)	(1,328		)
Unearned Employee Stock Ownership Plan ("ESOP") shares	(5,643		)	(6,489		)
Total stockholders' equity	140,760			138,125
Total liabilities and stockholders' equity	$	1,163,578		$	1,037,584



	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, 2016	10,938,251		$	109		$	96,852		$	48,981		$	(1,328	)	$	(6,489	)	$	138,125
Net income	—		—			—			6,073			—			—			6,073
Other comprehensive income	—		—			—			—			471			—			471
Exercise of stock options	134,880		2			1,307			—			—			—			1,309
Issuance of common stock - restricted stock awards, net	3,984		—			(105		)	—			—			—			(105		)
Compensation related to stock options and restricted stock awards	—		—			505			—			—			—			505
Allocation of 84,642 ESOP shares	—		—			625			—			—			846			1,471
Repurchase and retirement of common stock	(313,200	)	(3		)	(5,016		)	—			—			—			(5,019		)
Cash dividend declared and paid ($0.20 per share)	—		—			—			(2,070		)	—			—			(2,070		)
Balances at September 30, 2017	10,763,915		$	108		$	94,168		$	52,984		$	(857	)	$	(5,643	)	$	140,760


	September 30, 2017																March 31, 2023
	Less Than 12 Months					12 Months or Longer					Total						Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss				Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(In thousands)																(In thousands)
Mortgage-backed investments:																Mortgage-backed investments:
Fannie Mae	$	27,950	$	(160	)	$	8,568	$	(430	)	$	36,518	$	(590	)	Fannie Mae	$	2,113	$	(30)	$	7,918	$	(1,678)	$	10,031	$	(1,708)
Freddie Mac	6,293		(45		)	—		—			6,293		(45		)	Freddie Mac	959		(25)		10,306		(1,660)		11,265		(1,685)
Ginnie Mae	1,847		(33		)	14,444		(569		)	16,291		(602		)	Ginnie Mae	3,148		(17)		16,208		(1,452)		19,356		(1,469)
Other																Other	25,129		(1,424)		6,577		(418)		31,706		(1,842)
Municipal bonds	1,381		(12		)	433		(13		)	1,814		(25		)	Municipal bonds	3,016		(19)		26,369		(5,031)		29,385		(5,050)
U.S. Government agencies	12,127		(92		)	1,829		(73		)	13,956		(165		)	U.S. Government agencies	17,381		(329)		55,305		(1,661)		72,686		(1,990)
Corporate bonds	1,500		—			7,110		(389		)	8,610		(389		)	Corporate bonds	10,959		(1,041)		17,480		(3,520)		28,439		(4,561)
Total	$	51,098	$	(342	)	$	32,384	$	(1,474	)	$	83,482	$	(1,816	)	Total	$	62,705	$	(2,885)	$	140,163	$	(15,420)	$	202,868	$	(18,305)



	Loans Past Due as of September 30, 2017
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total ^{(1) (2)}
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	84	$	—	$	—	$	84	$	139,652	$	139,736
Non-owner occupied	—		—		—		—		126,711		126,711
Multifamily	—		—		—		—		173,681		173,681
Commercial real estate	—		—		—		—		319,872		319,872
Construction/land	—		—		—		—		153,914		153,914
Total real estate	84		—		—		84		913,830		913,914
Business	—		—		—		—		22,243		22,243
Consumer	—		—		—		—		9,301		9,301
Total loans	$	84	$	—	$	—	$	84	$	945,374	$	945,458



	Loans Past Due as of December 31, 2016
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total ^{(1) (2)}
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	304	$	—	$	169	$	473	$	137,361	$	137,834
Non-owner occupied	—		—		—		—		111,601		111,601
Multifamily	—		—		—		—		123,250		123,250
Commercial real estate	—		—		—		—		303,694		303,694
Construction/land	—		—		—		—		136,922		136,922
Total real estate	304		—		169		473		812,828		813,301
Business	—		—		—		—		7,938		7,938
Consumer	—		—		—		—		6,922		6,922
Total loans	$	304	$	—	$	169	$	473	$	827,688	$	828,161


⁽²⁾	~~There were $139.6 million of owner-occupied one-to-four family residential loans and $126.7 million of non-owner occupied one-to-four family residential loans classified as performing.~~


⁽³⁾	~~The $132,000 of one-to-four family residential loans classified as nonperforming are all owner-occupied.~~



	September 30, 2017
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	1,334	$	1,527	$	—
Non-owner occupied	10,125		10,125		—
Multifamily	1,140		1,140		—
Commercial real estate	2,473		2,473		—
Consumer	96		144		—
Total	15,168		15,409		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	524		570		8
Non-owner occupied	3,323		3,345		127
Commercial real estate	743		743		20
Total	4,590		4,658		155
Total impaired loans:
One-to-four family residential:
Owner occupied	1,858		2,097		8
Non-owner occupied	13,448		13,470		127
Multifamily	1,140		1,140		—
Commercial real estate	3,216		3,216		20
Consumer	96		144		—
Total	$	19,758	$	20,067	$	155



	December 31, 2016
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance⁽²⁾		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	2,216	$	2,475	$	—
Non-owner occupied	16,634		16,652		—
Multifamily	1,564		1,564		—
Commercial real estate	2,952		3,029		—
Consumer	103		223		—
Total	23,469		23,943		—
Loans with an allowance:
One-to-four family residential:
Owner occupied	1,896		1,965		51
Non-owner occupied	4,326		4,347		151
Commercial real estate	755		755		26
Construction/land	495		495		81
Total	7,472		7,562		309
Total impaired loans:
One-to-four family residential:
Owner occupied	4,112		4,440		51
Non-owner occupied	20,960		20,999		151
Multifamily	1,564		1,564		—
Commercial real estate	3,707		3,784		26
Construction/land	495		495		81
Consumer	103		223		—
Total	$	30,941	$	31,505	$	309



	Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	1,658	$	22	$	1,886	$	69
Non-owner occupied	11,395		158		13,445		485
Multifamily	1,143		19		1,251		56
Commercial real estate	2,693		49		2,818		135
Consumer	97		2		99		6
Total	16,986		250		19,499		751

Loans with an allowance:
One-to-four family residential:
Owner occupied	1,099		10		1,495		22
Non-owner occupied	3,343		47		3,773		128
Commercial real estate	745		10		749		31
Construction/land	—		—		124		—
Total	5,187		67		6,141		181

Total impaired loans:
One-to-four family residential:
Owner occupied	2,757		32		3,381		91
Non-owner occupied	14,738		205		17,218		613
Multifamily	1,143		19		1,251		56
Commercial real estate	3,438		59		3,567		166
Construction/land	—		—		124		—
Consumer	97		2		99		6
Total	$	22,173	$	317	$	25,640	$	932



	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	2,434	$	57	$	2,679	$	123
Non-owner occupied	20,208		296		21,234		878
Multifamily	1,576		26		1,189		79
Commercial real estate	1,796		31		2,089		77
Consumer	119		3		123		8
Total	26,133		413		27,314		1,165

Loans with an allowance:
One-to-four family residential:
Owner occupied	2,003		28		2,042		78
Non-owner occupied	5,050		76		5,874		202
Multifamily	—		—		393		—
Commercial real estate	2,638		52		2,499		152
Construction/land	495		5		495		14
Consumer	—		—		25		—
Total	10,186		161		11,328		446

Total impaired loans:
One-to-four family residential:
Owner occupied	4,437		85		4,721		201
Non-owner occupied	25,258		372		27,108		1,080
Multifamily	1,576		26		1,582		79
Commercial real estate	4,434		83		4,588		229
Construction/land	495		5		495		14
Consumer	119		3		148		8
Total	$	36,319	$	574	$	38,642	$	1,611



	Three Months Ended September 30, 2017					Nine Months Ended September 30, 2017
	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)
One-to-four family residential:
Principal and interest with interest rate concession and advancement of maturity date	1	$	524	$	524	8	$	2,492	$	2,492
Total	1	$	524	$	524	8	$	2,492	$	2,492



	Balance Sheet Location	Fair Value at September 30, 2017		Fair Value at December 31, 2016
	(In thousands)
Interest rate swap on FHLB debt designated as cash flow hedge	Other Assets	$	1,118	$	1,333

Total derivatives		$	1,118	$	1,333



	Balance Sheet Location	Amount Recognized in OCI at September 30, 2017		Amount Recognized in OCI at December 31, 2016
	(In thousands)
Interest rate swap on FHLB debt designated as cash flow hedge	Other assets	$	726	$	866



	At August 25, 2017
	Acquired Book Value		Fair Value Adjustments					Amount Recorded
	(In thousands)
Assets
Cash and cash equivalents	$	71,568	$	—				$	71,568
Premises and equipment, net	544		119			⁽¹	⁾	663
Goodwill	—		979			⁽²	⁾	979
Core deposit intangible	—		1,319			⁽³	⁾	1,319
Total assets acquired	$	72,112	$	2,417				$	74,529

Liabilities
Deposits
Noninterest-bearing deposits	$	11,995	$	—				$	11,995
Interest-bearing deposits	62,662		(128		)	⁽⁴	⁾	62,534
Total deposits	74,657		(128		)			74,529
Total liabilities assumed	$	74,657	$	(128	)			$	74,529



	At August 25, 2017
	(In thousands)

Purchase price	$	3,089
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value
Cash and cash equivalents	74,657
Premises and equipment, net	663
Core deposit intangible	1,319
Deposits	(74,529		)
Total fair value of identifiable net assets	2,110
Goodwill	$	979



	(In thousands)
2017	$	53
2018	150
2019	148
2020	144
2021	140
Thereafter	684
Total	$	1,319



	At September 30, 2017
	One-to-four family residential		Multifamily		Commercial real estate		Construction/land		Business		Consumer		Total
	(In thousands)
King County	$	199,602	$	94,999	$	167,239	$	133,561	$	11,204	$	7,873	$	614,478
Pierce County	35,748		14,430		26,330		6,296		—		410		83,214
Snohomish County	14,231		3,239		32,790		12,702		36		212		63,210
Kitsap County	2,308		1,529		817		218		—		78		4,950
California	2,794		17,860		17,773		—		2,222		—		40,649
Oregon	—		8,885		8,581		—		—		—		17,466
Other Washington Counties	11,184		24,315		49,886		1,137		1,351		728		88,601
Outside Washington, Oregon and California	580		8,424		16,456		—		7,430		—		32,890
Total loans, net of LIP	$	266,447	$	173,681	$	319,872	$	153,914	$	22,243	$	9,301	$	945,458



Borrower ⁽¹⁾	Number of Loans	One-to-Four Family Residential ⁽²⁾		Multifamily		Commercial Real Estate		Construction/ Land		Business		Aggregate Balance of Loans ⁽³⁾
	(Dollars in thousands)
Real estate investor	2	$	559	$	—	$	—	$	22,000	$	—	$	22,559
Real estate investor	2	—		—		—		15,698		—		15,698
Real estate investor	4	—		—		—		4,699		10,631		15,330
Real estate investor	5	458		—		14,312		—		—		14,770
Real estate investor	3	—		1,938		11,550		—		—		13,488
Total	16	$	1,017	$	1,938	$	25,862	$	42,397	$	10,631	$	81,845



	September 30, 2017			December 31, 2016			Nine Month Change
	(Dollars in thousands)
Nonperforming TDRs:
One-to-four family residential	$	—		$	174		$	(174	)
Total nonperforming TDRs	—			174			(174		)

Performing TDRs:
One-to-four family residential	15,174			24,274			(9,100		)
Multifamily	1,140			1,564			(424		)
Commercial real estate	3,216			4,202			(986		)
Consumer	43			43			—
Total performing TDRs	19,573			30,083			(10,510		)
Total TDRs	$	19,573		$	30,257		$	(10,684	)
% TDRs classified as performing	100.0		%	99.4		%



	County				Total OREO		Number of Properties	Percent of Total OREO
	Pierce		Mason		Total OREO		Number of Properties	Percent of Total OREO
	(Dollars in thousands)
OREO:
Commercial real estate ⁽¹⁾	$	1,320	$	505	$	1,825	4	100.0	%
Total OREO	$	1,320	$	505	$	1,825	4	100.0	%



	Three Months Ended September 30, 2017		Change from Three Months Ended September 30, 2016			Percent Change
	(Dollars in thousands)
Service fees on deposit accounts	$	34	$	18		112.5	%
Loan service fees	61		9			17.3
Net gain on sale of investments	47		14			42.4
BOLI change in cash surrender value	173		(78		)	(31.1	)
Wealth management revenue	252		87			52.7
Other	164		8			5.1
Total noninterest income	$	731	$	58		8.6



	Nine Months Ended September 30, 2017		Change from Nine Months Ended September 30, 2016			Percent Change
	(Dollars in thousands)
Service fees on deposit accounts	$	96	$	36		60.0	%
Loan service fees	215		34			18.8
Net gain on sale of investments	103		70			212.1
BOLI change in cash surrender value	490		(151		)	(23.6	)
Wealth management revenue	699		43			6.6
Other	394		104			35.9
Total noninterest income	$	1,997	$	136		7.3



			Amount of Commitment Expiration
	Total Amounts Committed		Through One Year		After One Through Three Years		After Three Through Five Years		After Five Years
	(In thousands)
Unused portion of lines of credit	$	24,782	$	1,934	$	14,187	$	3,570	$	5,091
Undisbursed portion of construction loans	91,316		40,075		51,241		—		—
Total commitments	$	116,098	$	42,009	$	65,428	$	3,570	$	5,091



	At September 30, 2017
	Actual				For Minimum Capital Adequacy Purposes				To be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Tier I leverage capital (to average assets)
Bank only	$	120,665	10.80	%	$	44,677	4.00	%	$	55,846	5.00	%
Consolidated	139,594		12.48		44,734		4.00		55,918		5.00
Common equity tier I ("CET1") (to risk-weighted assets)
Bank only	120,665		12.94		41,969		4.50		60,622		6.50
Consolidated	139,594		14.93		42,062		4.50		60,756		6.50
Tier I risk-based capital (to risk-weighted assets)
Bank only	120,665		12.94		55,959		6.00		74,612		8.00
Consolidated	139,594		14.93		56,082		6.00		74,776		8.00
Total risk-based capital (to risk-weighted assets)
Bank only	132,334		14.19		74,612		8.00		93,265		10.00
Consolidated	151,289		16.19		74,776		8.00		93,471		10.00



Net Interest Income Change at September 30, 2017
Basis Point Change in Rates	Net Interest Income		% Change
(Dollars in thousands)
+300	$	36,482	(2.64	)%
+200	36,811		(1.76	)
+100	37,232		(0.64	)
Base	37,470		—
(100)	37,400		(0.19	)



Basis Point								Net Portfolio as % of				Market
Change in	Net Portfolio Value⁽¹⁾							Portfolio Value of Assets				Value of
Rates	Amount		$ Change ⁽²⁾			% Change		NPV Ratio ⁽³⁾		% Change ⁽⁴⁾		Assets ⁽⁵⁾
	(Dollars in thousands)
+300	$	115,974	$	(37,204	)	(24.29	)%	10.77	%	(3.21	)%	$	1,077,194
+200	128,008		(25,170		)	(16.43	)	11.60		(2.17	)	1,103,773
+100	142,338		(10,840		)	(7.08	)	12.56		(0.93	)	1,133,374
Base	153,178		—			—		13.20		—		1,160,270
(100)	158,870		5,692			3.72		13.41		0.49		1,184,854


Net Interest Income Change at March 31, 2023
Basis Point Change in Rates	Net Interest Income	% Change
(Dollars in thousands)
+400	$40,329	(7.80)%
+300	$41,177	(5.86)
+200	$42,011	(3.96)
+100	$42,967	(1.77)
Base	$43,742	—
(100)	$45,219	3.38
(200)	$45,274	3.50
(300)	$44,364	1.42
(400)	$44,409	1.52


~~(b)~~	~~Changes in Internal Controls:~~ In the quarter ended September 30, 2017, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet Be Repurchased Under the Plan (1)
January 1 - January 31, 2023	—	$	—	—	456,000
February 1 - February 28, 2023	—	—		—	456,000
March 1 - March 31, 2023	—	—		—	456,000
	—	—		—