

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 ~~March 31,~~September 30, 2020

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

For the transition period from ____________ to ____________

Commission File Number: 001-33652


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

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

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

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

FFNW

The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

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

YES X NO

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



Large accelerated filer _____	Accelerated filer X	Non-accelerated filer _____
Smaller reporting company _~~_X_~~_ X	Emerging growth company _____

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

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

YES NO X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of ~~May 6,~~November 4, 2020, ~~10,177,511~~9,785,866 shares of the issuer’s common stock, $0.01 par value per share, were outstanding.

FIRST FINANCIAL NORTHWEST, INC.

FORM 10-Q

TABLE OF CONTENTS



			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3338
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5261
	Item 4.	Controls and Procedures	5564
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	5565
	Item 1A.	Risk Factors	5565
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5766 66
	Item 3.	Defaults upon Senior Securities	5767
	Item 4.	Mine Safety Disclosures	5767
	Item 5.	Other Information	5767
	Item 6.	Exhibits	5868
SIGNATURES			5969

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

Part 1. Financial Information

Item 1. Financial Statements


	September 30, 2020		December 31, 2019
Assets
	(Unaudited)
Cash on hand and in banks	$	7,440	$	10,094
Interest-earning deposits	18,674		12,896
Investments available-for-sale, at fair value	126,020		136,601
Investments held-to-maturity	2,406		0
Loans receivable, net of allowance of $14,568 and $13,218	1,133,984		1,108,462
Federal Home Loan Bank ("FHLB") stock, at cost	6,410		7,009
Accrued interest receivable	5,676		4,138
Deferred tax assets, net	1,879		1,501
Other real estate owned ("OREO")	454		454
Premises and equipment, net	22,409		22,466
Bank owned life insurance ("BOLI"), net	32,830		31,982
Prepaid expenses and other assets	1,704		2,216
Right of use asset (“ROU”)	3,834		2,209
Goodwill	889		889
Core deposit intangible	860		968
Total assets	$	1,365,469	$	1,341,885

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	82,376	$	52,849
Interest-bearing deposits	987,306		980,685
Total deposits	1,069,682		1,033,534
FHLB advances	120,000		137,700
Advance payments from borrowers for taxes and insurance	4,742		2,921
Lease liability	3,942		2,279
Accrued interest payable	197		285

Other liabilities	12,128		8,847
Total liabilities	1,210,691		1,185,566

Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares; 0 shares issued or outstanding	0		0
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,911,607 shares at September 30, 2020, and 10,252,953 shares at December 31, 2019	99		103
Additional paid-in capital	83,839		87,370
Retained earnings	76,300		73,321
Accumulated other comprehensive loss, net of tax	(3,203)		(1,371)
Unearned Employee Stock Ownership Plan ("ESOP") shares	(2,257)		(3,104)
Total stockholders' equity	154,778		156,319
Total liabilities and stockholders' equity	$	1,365,469	$	1,341,885

March 31, 2020 December 31, 2019
Assets
(Unaudited)
Cash on hand and in banks $ 6,453
$ 10,094
Interest-earning deposits 22,063
12,896
Investments available-for-sale, at fair value 132,159
136,601
Investment held-to-maturity 2,371
—
Loans receivable, net of allowance of $13,530 and $13,218 1,092,128
1,108,462
Federal Home Loan Bank ("FHLB") stock, at cost 8,010
7,009
Accrued interest receivable 4,302
4,138
Deferred tax assets, net 2,227
1,501
Other real estate owned ("OREO") 454
454
Premises and equipment, net 22,591
22,466
Bank owned life insurance ("BOLI"), net 32,290
31,982
Prepaid expenses and other assets 1,898
2,216
Right of use asset (“ROU”) 2,446
2,209
Goodwill 889
889
Core deposit intangible 932
968
Total assets $ 1,331,213

$ 1,341,885

Liabilities and Stockholders' Equity

Deposits:
Noninterest-bearing deposits $ 53,519
$ 52,849
Interest-bearing deposits 946,465
980,685
Total deposits 999,984
1,033,534
FHLB advances 160,000
137,700
Advance payments from borrowers for taxes and insurance 4,960
2,921
Lease liability 2,538
2,279
Accrued interest payable 236
285
Other liabilities 10,403
8,847
Total liabilities 1,178,121
1,185,566

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 10,184,411 shares at March 31, 2020, and 10,252,953
shares at December 31, 2019 102
103
Additional paid-in capital 86,357
87,370
Retained earnings 74,017
73,321
Accumulated other comprehensive loss, net of tax (4,563 ) (1,371 )
Unearned Employee Stock Ownership Plan ("ESOP") shares (2,821 ) (3,104 )
Total stockholders' equity 153,092
156,319
Total liabilities and stockholders' equity $ 1,331,213
$ 1,341,885

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Income Statements

(Dollars in thousands, except per share data)

Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest income
Loans, including fees	$	12,847	$	13,897	$	39,504	$	40,784
Investments available-for-sale	751		1,066		2,466		3,334
Investments held-to-maturity	6		0		17		0
Interest-earning deposits	8		158		45		246
Dividends on FHLB stock	82		97		240		290
Total interest income	13,694		15,218		42,272		44,654
Interest expense
Deposits	3,206		5,037		11,238		13,189
Borrowings	400		529		1,214		2,255
Total interest expense	3,606		5,566		12,452		15,444
Net interest income	10,088		9,652		29,820		29,210
Provision (recapture of provision) for loan losses	700		100		1,300		(300)
Net interest income after provision (recapture of provision) for loan losses	9,388		9,552		28,520		29,510
Noninterest income
Net gain on sale of investments	18		88		86		80
BOLI income	269		235		778		693
Wealth management revenue	145		245		493		702
Deposit related fees	201		179		560		555
Loan related fees	376		290		865		562
Other	2		2		7		26
Total noninterest income	1,011		1,039		2,789		2,618
Noninterest expense
Salaries and employee benefits	4,880		4,813		14,893		14,547
Occupancy and equipment	987		924		3,090		2,688
Professional fees	371		440		1,257		1,262
Data processing	731		478		2,112		1,393
OREO related expenses, net	1		1		7		33
Regulatory assessments	134		13		405		286
Insurance and bond premiums	116		95		339		288
Marketing	41		118		133		280
Other general and administrative	606		573		1,843		1,670
Total noninterest expense	7,867		7,455		24,079		22,447
Income before federal income tax provision	2,532		3,136		7,230		9,681
Federal income tax provision	450		631		1,320		1,927
Net income	$	2,082	$	2,505	$	5,910	$	7,754
Basic earnings per common share	$	0.22	$	0.25	$	0.60	$	0.77
Diluted earnings per common share	$	0.21	$	0.25	$	0.60	$	0.77
Basic weighted average number of common shares outstanding	9,661,498		9,901,586		9,788,397		9,989,970
Diluted weighted average number of common shares outstanding	9,675,567		9,991,011		9,811,602		10,091,631

Three Months Ended March 31,
2020 2019
Interest income
Loans, including fees $ 13,474
$ 13,281
Investments available-for-sale 919
1,159
Interest-earning deposits 31
40
Dividends on FHLB stock 76
91
Total interest income 14,500
14,571
Interest expense

Deposits 4,366
3,822
Other borrowings 470
897
Total interest expense 4,836
4,719
Net interest income 9,664
9,852
Provision for loan losses 300
400
Net interest income after provision for loan losses 9,364
9,452
Noninterest income

Net loss on sale of investments —
(8 )
BOLI income 254
269
Wealth management revenue 165
196
Deposit related fees 176
171
Loan related fees 392
63
Other 3
9
Total noninterest income 990
700
Noninterest expense

Salaries and employee benefits 5,212
5,000
Occupancy and equipment 1,071
866
Professional fees 430
496
Data processing 694
518
OREO related expenses, net 1
31
Regulatory assessments 144
137
Insurance and bond premiums 120
105
Marketing 64
86
Other general and administrative 532
470
Total noninterest expense 8,268
7,709
Income before federal income tax provision 2,086
2,443
Federal income tax provision 402
498
Net income $ 1,684
$ 1,945
Basic earnings per common share $ 0.17
$ 0.19
Diluted earnings per common share $ 0.17
$ 0.19
Basic weighted average number of common shares outstanding 9,896,234
10,118,286
Diluted weighted average number of common shares outstanding 9,978,060
10,220,900

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	2,082	$	2,505	$	5,910	$	7,754
Other comprehensive income (loss), before tax:
Unrealized holding gains on investments available-for-sale	538		662		2,031		3,062
Tax effect	(113)		(139)		(427)		(643)
Reclassification adjustment for net gains realized in income	(18)		(88)		(86)		(80)
Tax effect	4		18		18		17
Gains (losses) on cash flow hedges	343		(237)		(4,264)		(1,449)
Tax effect	(72)		50		896		304
Other comprehensive income (loss), net of tax	682		266		(1,832)		1,211
Total comprehensive income	$	2,764	$	2,771	$	4,078	$	8,965

Three Months Ended March 31,
2020 2019
Net income $ 1,684
$ 1,945
Other comprehensive (loss) income, before tax:
Unrealized holding (losses) gains on investments available-for-sale (327 ) 976
Tax benefit (provision) 68
(205 )
Reclassification adjustment for net losses realized in income —
8
Tax provision —
(1 )
Losses on cash flow hedges (3,713 ) (460 )
Tax benefit 780
97
Other comprehensive (loss) income, net of tax (3,192 ) 415
Total comprehensive (loss) income $ (1,508 ) $ 2,360

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except share data)

(Unaudited)


	Three Months Ended September 30, 2019
	Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at June 30, 2019	10,375,325	$	104	$	88,725	$	69,976	$	(1,309)	$	(3,668)	$	153,828
Net income	—	—		—		2,505		—		—		2,505
Other comprehensive income, net of tax	—	—		—		—		267		—		267

Issuance of common stock - restricted stock awards, net	8,580	—		0		—		—		—		0
Compensation related to stock options and restricted stock awards	—	—		226		—		—		—		226
Allocation of 28,214 ESOP shares	—	—		120		—		—		282		402
Repurchase and retirement of common stock	(87,852)	(1)		(1,236)		—		—		—		(1,237)

Cash dividend declared and paid ($0.09 per share)	—	—		—		(889)		—		—		(889)

Balances at September 30, 2019	10,296,053	$	103	$	87,835	$	71,592	$	(1,042)	$	(3,386)	$	155,102

	Nine Months Ended September 30, 2019
	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, 2018	10,710,656	$	107	$	93,773	$	66,343	$	(2,253)	$	(4,232)	$	153,738
Net income	—	—		—		7,754		—		—		7,754
Other comprehensive income, net of tax	—	—		—		—		1,211		—		1,211

Issuance of common stock - restricted stock awards, net	25,278	—		(93)		—		—		—		(93)
Compensation related to stock options and restricted stock awards	—	—		457		—		—		—		457
Allocation of 84,640 ESOP shares	—	—		444		—		—		846		1,290
Repurchase and retirement of common stock	(433,952)	(4)		(6,746)		—		—		—		(6,750)
Canceled common stock - restricted stock awards	(5,929)	—		—		—		—		—		0
Cash dividend declared and paid ($0.26 per share)	—	—		—		(2,592)		—		—		(2,592)
Beginning balance adjustment from adoption of Topic 842	—	—		—		87		—		—		87
Balances at September 30, 2019	10,296,053	$	103	$	87,835	$	71,592	$	(1,042)	$	(3,386)	$	155,102

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands except share data)

(Unaudited)


																						Three Months Ended September 30, 2020
	Three Months Ended March 31, 2019																					Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
	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, 2018	10,710,656		$	107		$	93,773		$	66,343		$	(2,253	)	$	(4,232	)	$	153,738
Balances at June 30, 2020																					Balances at June 30, 2020	10,048,961	$	100	$	85,119	$	75,181	$	(3,885)	$	(2,539)	$	153,976
Net income	—		—			—			1,945			—			—			1,945			Net income	—	—		—		2,082		—		—		2,082
Other comprehensive income, net of tax	—		—			—			—			415			—			415			Other comprehensive income, net of tax	—	—		—		—		682		—		682

Issuance of common stock - restricted stock awards, net	16,698		—			(93		)	—			—			—			(93		)	Issuance of common stock - restricted stock awards, net	17,695	—		0		—		—		—		0
Compensation related to stock options and restricted stock awards	—		—			124			—			—			—			124			Compensation related to stock options and restricted stock awards	—	—		224		—		—		—		224
Allocation of 28,213 ESOP shares	—		—			163			—			—			282			445
Allocation of 28,214 ESOP shares																					Allocation of 28,214 ESOP shares	—	—		(21)		—		—		282		261
Repurchase and retirement of common stock																					Repurchase and retirement of common stock	(155,049)	(1)		(1,483)		—		—		—		(1,484)

Cash dividend declared and paid ($0.10 per share)																					Cash dividend declared and paid ($0.10 per share)	—	—		—		(963)		—		—		(963)
Balances at September 30, 2020																					Balances at September 30, 2020	9,911,607	$	99	$	83,839��	$	76,300	$	(3,203)	$	(2,257)	$	154,778

																						Nine Months Ended September 30, 2020
																						Shares	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss, net of tax		Unearned ESOP Shares		Total Stockholders’ Equity
Balances at December 31, 2019																					Balances at December 31, 2019	10,252,953	$	103	$	87,370	$	73,321	$	(1,371)	$	(3,104)	$	156,319
Net income																					Net income	—	—		—		5,910		—		—		5,910
Other comprehensive loss, net of tax																					Other comprehensive loss, net of tax	—	—		—		—		(1,832)		—		(1,832)

Issuance of common stock - restricted stock awards, net																					Issuance of common stock - restricted stock awards, net	33,923	—		(73)		—		—		—		(73)
Compensation related to stock options and restricted stock awards																					Compensation related to stock options and restricted stock awards	—	—		367		—		—		—		367
Allocation of 84,642 ESOP shares																					Allocation of 84,642 ESOP shares	—	—		57		—		—		847		904
Repurchase and retirement of common stock	(263,800	)	(3		)	(4,167		)	—			—			—			(4,170		)	Repurchase and retirement of common stock	(369,894)	(4)		(3,882)		—		—		—		(3,886)
Canceled common stock - restricted stock awards	(5,929	)	—			—			—			—			—			—			Canceled common stock - restricted stock awards	(5,375)	—		—		—		—		—		0
Cash dividend declared and paid ($0.08 per share)	—		—			—			(807		)	—			—			(807		)
Beginning balance adjustment from adoption of Topic 842	—		—			—			87			—			—			87
Balances at March 31, 2019	10,457,625		$	104		$	89,800		$	67,568		$	(1,838	)	$	(3,950	)	$	151,684
Cash dividend declared and paid ($0.30 per share)																					Cash dividend declared and paid ($0.30 per share)	—	—		—		(2,931)		—		—		(2,931)
Balances at September 30, 2020																					Balances at September 30, 2020	9,911,607	$	99	$	83,839	$	76,300	$	(3,203)	$	(2,257)	$	154,778

Three Months Ended March 31, 2020
Shares Common Stock Additional Paid-in Capital Retained Earnings
Accumulated Other Comprehensive Loss,
net of tax

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

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	5,910	$	7,754
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (recapture of provision) for loan losses	1,300		(300)
OREO market value adjustments	0		29

Net amortization of premiums and discounts on investments	589		626
Gain on sale of investments available-for-sale	(86)		(80)
Depreciation of premises and equipment	1,638		1,330
Loss on sale of premises and equipment	0		5
Deferred federal income taxes	110		320
Allocation of ESOP shares	904		1,290
Stock compensation expense	367		457
BOLI income	(778)		(693)
Annuity income	(31)		0
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other assets	194		(636)
Decrease in ROU	491		367
Increase in advance payments from borrowers for taxes and insurance	1,821		2,110
Increase in accrued interest receivable	(1,538)		(339)
Decrease in lease liability	(453)		(341)
Decrease in accrued interest payable	(88)		(96)
Decrease in other liabilities	(558)		(1,164)
Net cash provided by operating activities	9,792		10,639
Cash flows from investing activities:


Proceeds from sales, calls and maturities of investments available-for-sale	12,082		5,057

Principal repayments on investments available-for-sale	8,991		4,859
Purchases of investments available-for-sale	(9,050)		(3,534)

Purchase of investments held-to-maturity	(2,375)		0
Net increase in loans receivable	(26,822)		(60,646)
Net sale of FHLB stock	599		969
Purchase of premises and equipment	(1,581)		(2,350)

Proceeds from BOLI	0		310

Purchase of BOLI	(70)		(1,457)

Net cash used by investing activities	(18,226)		(56,792)

Three Months Ended March 31,
2020 2019
Cash flows from operating activities:
Net income $ 1,684
$ 1,945
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 300
400
OREO market value adjustments —
29
Net amortization of premiums and discounts on investments 235
193
Loss on sale of investments available-for-sale —
8
Depreciation of premises and equipment 538
427
Deferred federal income taxes 122
7
Allocation of ESOP shares 382
445
Stock compensation expense 80
124
BOLI income (254 ) (269 )
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets (72 ) (182 )
Increase in ROU (237 ) (1,730 )
Increase in advance payments from borrowers for taxes and insurance 2,039
2,441
Increase in accrued interest receivable (164 ) (793 )
Increase in lease liability 259
1,745
Decrease in accrued interest payable (49 ) —
(Decrease) increase in other liabilities (1,731 ) 153
Net cash provided by operating activities 3,132
4,943
Cash flows from investing activities:

Proceeds from sales, calls and maturities of investments available-for-sale —
2,995
Principal repayments on investments available-for-sale 3,880
1,300
Purchase of investments held-to-maturity (2,371 ) —
Net decrease (increase) in loans receivable 16,034
(29,207 )
Purchase of FHLB stock (1,001 ) (731 )
Purchase of premises and equipment (663 ) (466 )
Purchase of BOLI (54 ) (52 )
Net cash provided (used) by investing activities 15,825
(26,161 )

Cash flows from financing activities:

Net (decrease) increase in deposits $ (33,550 ) $ 16,240
Advances from the FHLB 199,000
71,500
Repayments of advances from the FHLB (176,700 ) (54,500 )
Net share settlement of stock awards (73 ) (93 )
Repurchase and retirement of common stock (1,120 ) (4,170 )
Dividends paid (988 ) (807 )
Net cash (used) provided by financing activities (13,431 ) 28,170

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
Cash flows from financing activities:
Net increase in deposits	$	36,148	$	77,796
Advances from the FHLB	248,000		196,500
Repayments of advances from the FHLB	(265,700)		(222,000)

Net share settlement of stock awards	(73)		(93)
Repurchase and retirement of common stock	(3,886)		(6,750)
Dividends paid	(2,931)		(2,592)
Net cash provided by financing activities	11,558		42,861
Net increase (decrease) in cash and cash equivalents	3,124		(3,292)
Cash and cash equivalents at beginning of period	22,990		17,010
Cash and cash equivalents at end of period	$	26,114	$	13,718

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid	$	12,540	$	15,540



Federal income taxes paid	1,190		1,860

Noncash items:

Change in unrealized loss on investments available-for-sale	$	1,945	$	2,982
Change in unrealized loss on cash flow hedge	(4,264)		(1,449)

Initial recognition of ROU	2,116		1,853
Initial recognition of lease liability	2,116		1,853

Three Months Ended March 31,
2020 2019
Net increase in cash and cash equivalents 5,526
6,952
Cash and cash equivalents at beginning of period 22,990
17,010
Cash and cash equivalents at end of period $ 28,516
$ 23,962

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest paid $ 4,884
$ 4,719

Noncash items:
Change in unrealized loss on investments available-for-sale $ (327 ) $ 984
Change in unrealized loss on cash flow hedge (3,713 ) (460 )
Initial recognition of ROU 1,312
1,853
Initial recognition of lease liability 1,312
1,853

See accompanying selected notes to consolidated financial statements.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Description of Business

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

At ~~March 31,~~September 30, 2020, First Financial Northwest Bank operated in thirteen locations in Washington with the headquarters and six retail branch locations in King County, five retail branch locations in Snohomish County and one retail branch in Pierce County. ~~The~~On October 5, 2020, the Bank opened a new branch in Gig Harbor, Washington, located in Pierce County. In addition, the Bank has received ~~regulatory~~FDIC approval to open a ~~retail~~new branch in ~~Gig Harbor,~~Issaquah, Washington, located in ~~Pierce~~King County, ~~Washington.~~which is expected to open in early 2021. 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, 2019, as filed with the SEC (“2019 Form 10-K”). In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the unaudited interim consolidated financial statements in accordance with GAAP have been included. All significant intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. In preparing the unaudited consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the allowance for loan and lease losses (“ALLL”), the valuation of other real estate owned (“OREO”) and the underlying collateral of impaired loans, deferred tax assets, the right-of-use asset and lease liability on our operating leases, and the fair value of financial instruments.

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

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 3 - Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements Adopted in 2020

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove certain disclosure requirements regarding transfers between Level 1 and Level 2 of the fair value hierarchy and changes in unrealized gains and losses for recurring Level 3 fair value measurements. In addition, the amendments modified and added certain disclosure requirements for Level 3 fair value measurements. The Company adopted this ASU as of January 1, 2020, with no material impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. For a cash flow hedge, a change in the method used to assess hedge effectiveness will not result in de-designation of the hedging relationship if certain criteria are met. The Company is party to cash flow hedge arrangements where the hedge effectiveness is based on LIBOR. The Company adopted this ASU as of September 30, 2020, with no material impact on its consolidated financial statements.

Recent Accounting Pronouncements

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

In April 2019, FASB issued ASU 2019-05, Financial Instruments--Credit Losses (Topic 326), Targeted Transition Relief. The amendments in this ASU provide entities that have certain financial instruments measured at amortized cost that have credit losses, to irrevocably elect the fair value option in Subtopic 825-10, upon adoption of Topic 326. The fair value option applies to available-for-sale debt securities. This ASU is effective when ASU 2016-13 is adopted, and will be applied on a modified-retrospective basis as a cumulative-effect adjustment to the opening balance of retained earnings in the statement of

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

financial condition as of the adoption date. Adoption of ASU 2019-05 is not expected to have a material impact on the Company’s consolidated financial statements.

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

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

In ~~March~~October 2020, the FASB issued ASU ~~No. 2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation~~2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of ~~the Effects of reference Rate Reform on Financial Reporting.~~ ~~This~~paragraph 310-20-35-33 for each reporting period. ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. For a cash flow hedge, a change in the method used to assess hedge effectiveness will not result in de-designation of the hedging relationship if certain criteria are met. This ASU2020-08 is effective for ~~all entities as of March 12,~~fiscal years beginning after December 15, 2020, ~~through December 31, 2022. The Company is party to cash flow hedge arrangements where the hedge effectiveness is based on LIBOR.~~including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.

Note 4 - Investments

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


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	13,015	$	531	$	(11)	$	13,535
Freddie Mac	4,134		204		0		4,338
Ginnie Mae	18,840		661		(4)		19,497
Other	10,942		93		(109)		10,926
Municipal bonds	14,100		725		0		14,825
U.S. Government agencies	42,236		63		(899)		41,400
Corporate bonds	21,501		214		(216)		21,499
Total	$	124,768	$	2,491	$	(1,239)	$	126,020

March 31, 2020
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 15,416
$ 620
$ (28 ) $ 16,008
   Freddie Mac 4,169
178
—
4,347
   Ginnie Mae 21,559
259
(149 ) 21,669
   Other 11,130
—
(246 ) 10,884
Municipal bonds 10,653
307
(4 ) 10,956
U.S. Government agencies 44,753
29
(1,594 ) 43,188
Corporate bonds 25,500
720
(1,113 ) 25,107
Total $ 133,180
$ 2,113
$ (3,134 ) $ 132,159


	December 31, 2019										December 31, 2019
	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	$	15,605	$	128	$	(104	)	$	15,629	Fannie Mae	$	15,605	$	128	$	(104)	$	15,629
Freddie Mac	4,196		96		—			4,292		Freddie Mac	4,196		96		0		4,292
Ginnie Mae	23,239		140		(329		)	23,050		Ginnie Mae	23,239		140		(329)		23,050
Other	11,407		66		(25		)	11,448		Other	11,407		66		(25)		11,448
Municipal bonds	10,675		272		(36		)	10,911		Municipal bonds	10,675		272		(36)		10,911
U.S. Government agencies	46,672		13		(935		)	45,750		U.S. Government agencies	46,672		13		(935)		45,750
Corporate bonds	25,500		372		(351		)	25,521		Corporate bonds	25,500		372		(351)		25,521
Total	$	137,294	$	1,087	$	(1,780	)	$	136,601	Total	$	137,294	$	1,087	$	(1,780)	$	136,601

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:


	September 30, 2020
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	0	$	0	$	1,391	$	(11)	$	1,391	$	(11)
Freddie Mac	0		0		0		0		0		0
Ginnie Mae	1,370		(4)		0		0		1,370		(4)
Other	0		0		5,897		(109)		5,897		(109)
Municipal bonds	0		0		0		0		0		0
U.S. Government agencies	2,701		(34)		33,214		(865)		35,915		(899)
Corporate bonds	3,482		(25)		3,808		(191)		7,290		(216)
Total	$	7,553	$	(63)	$	44,310	$	(1,176)	$	51,863	$	(1,239)


	March 31, 2020																December 31, 2019
	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	$	1,406	$	(28	)	$	—	$	—		$	1,406	$	(28	)	Fannie Mae	$	8,340	$	(104)	$	0	$	0	$	8,340	$	(104)
Freddie Mac	—		—			—		—			—		—			Freddie Mac	0		0		0		0		0		0
Ginnie Mae	13,779		(149		)	—		—			13,779		(149		)	Ginnie Mae	156		0		12,921		(329)		13,077		(329)
Other	4,989		(130		)	5,895		(116		)	10,884		(246		)	Other	2,843		(7)		6,000		(18)		8,843		(25)
Municipal bonds	517		(4		)	—		—			517		(4		)	Municipal bonds	3,257		(36)		0		0		3,257		(36)
U.S. Government agencies	8,354		(428		)	32,876		(1,166		)	41,230		(1,594		)	U.S. Government agencies	12,266		(201)		31,490		(734)		43,756		(935)
Corporate bonds	1,897		(110		)	6,497		(1,003		)	8,394		(1,113		)	Corporate bonds	1,996		(12)		7,161		(339)		9,157		(351)
Total	$	30,942	$	(849	)	$	45,268	$	(2,285	)	$	76,210	$	(3,134	)	Total	$	28,858	$	(360)	$	57,572	$	(1,420)	$	86,430	$	(1,780)

December 31, 2019
Less Than 12 Months 12 Months or Longer Total
Fair Value
Gross Unrealized
Loss
Fair Value
Gross Unrealized
Loss
Fair Value
Gross Unrealized
Loss
(In thousands)
Mortgage-backed investments:
   Fannie Mae $ 8,340
$ (104 ) $ —
$ —
$ 8,340
$ (104 )
   Freddie Mac —
—
—
—
—
—
   Ginnie Mae 156
—
12,921
(329 ) 13,077
(329 )
   Other 2,843
(7 ) 6,000
(18 ) 8,843
(25 )
Municipal bonds 3,257
(36 ) —
—
3,257
(36 )
U.S. Government agencies 12,266
(201 ) 31,490
(734 ) 43,756
(935 )
Corporate bonds 1,996
(12 ) 7,161
(339 ) 9,157
(351 )
Total $ 28,858
$ (360 ) $ 57,572
$ (1,420 ) $ 86,430
$ (1,780 )

On a quarterly basis, management makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. The Company considers many factors including the severity and duration of the impairment, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be an other-than-temporary impairment (“OTTI”) are written down to fair value. If the Company intends to sell a debt security, or it is likely that the Company will be required to sell the debt security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the debt security and it is not likely that it will be required to sell the debt security but does not expect to recover the entire amortized cost basis of the debt security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a debt security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the debt security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. The Company had 3423 securities and 37 securities in an unrealized loss position, respectively, with ~~16 and~~ 18 of these securities in an unrealized loss position for 12 months or more, at ~~March 31,~~both September 30, 2020, and December 31, ~~2019, respectively.~~2019. Management does not believe that any individual unrealized loss as of ~~March 31,~~September 30, 2020, or December 31, 2019, represented OTTI. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads ~~subsequent to their purchase.~~

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

subsequent to their purchase. Management also reviewed the financial condition of the entities issuing municipal or corporate bonds at ~~March 31,~~September 30, 2020, and December 31, 2019, and determined that an OTTI charge was not warranted.

The amortized cost and estimated fair value of investments available-for-sale at ~~March 31,~~September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.


	September 30, 2020
	Amortized Cost		Fair Value
	(In thousands)
Due within one year	$	0	$	0
Due after one year through five years	8,993		8,947
Due after five years through ten years	15,227		15,318
Due after ten years	53,617		53,459
	77,837		77,724
Mortgage-backed investments	46,931		48,296
Total	$	124,768	$	126,020

March 31, 2020
Amortized Cost Fair Value
(In thousands)
Due within one year $ 497
$ 501
Due after one year through five years 6,554
6,976
Due after five years through ten years 22,097
21,389
Due after ten years 51,758
50,385
80,906
79,251
Mortgage-backed investments 52,274
52,908
Total $ 133,180
$ 132,159

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 ~~$18.8~~$21.2 million and $19.0 million were pledged as collateral for public deposits at ~~March 31,~~September 30, 2020, and December 31, 2019, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

For the three months ended ~~March 31,~~September 30, 2020, there were no$2.5 million in sales or maturities on investment securities generating a net gain of $18,000. For the nine months ended September 30, 2020, there were $12.0 million in sales or maturities on investment securities generating a net gain of $86,000. For the three months ended September 30, 2019, there were $2.0 million in sales or maturities on investment securities generating a net gain of $88,000. For the nine months ended September 30, 2019, there were $5.1 million in calls, sales, or maturities on investment ~~securities. For the three months ended March 31, 2019, the Bank had calls and sales on investment~~ securities ~~of $3.0 million~~ generating a net ~~loss~~gain of ~~$8,000.~~$80,000.

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Loans Receivable

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


	September 30, 2020		December 31, 2019
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	214,250	$	210,898
Permanent non-owner occupied	177,621		161,630
	391,871		372,528

Multifamily	142,619		172,915

Commercial real estate	389,768		395,152

Construction/land:
One-to-four family residential	45,231		44,491
Multifamily	47,547		40,954
Commercial	5,475		19,550
Land	1,345		8,670
	99,598		113,665

Business	85,780		37,779
Consumer	40,845		30,199
Total loans	1,150,481		1,122,238

Less:
Deferred loan fees, net	1,929		558
ALLL	14,568		13,218
Loans receivable, net	$	1,133,984	$	1,108,462

March 31, 2020 December 31, 2019
(In thousands)
One-to-four family residential:
Permanent owner occupied $ 203,045
$ 210,898
Permanent non-owner occupied 168,208
161,630
371,253
372,528

Multifamily 169,468
172,915

Commercial real estate 385,910
395,152

Construction/land:
One-to-four family residential 43,279
44,491
Multifamily 35,201
40,954
Commercial 22,946
19,550
Land 5,975
8,670
107,401
113,665

Business 34,702
37,779
Consumer 37,225
30,199
Total loans 1,105,959
1,122,238

Less:
Deferred loan fees, net 301
558
Allowance for loan and lease losses ("ALLL") 13,530
13,218
Loans receivable, net $ 1,092,128
$ 1,108,462

At ~~March 31,~~September 30, 2020, loans totaling ~~$501.7~~$521.3 million were pledged to secure borrowings from the FHLB ~~of Des Moines~~ compared to $506.7 million at December 31, 2019. In addition, loans totaling ~~$122.8~~$139.3 million and $130.3 million were pledged to the Federal Reserve Bank of San Francisco to secure a line of credit at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

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

•Grades 1 through 5: These grades are considered to be “pass” credits. These include assets where there is limited credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company’s watch list, where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future.

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

•Grade 7: These credits, classified as “substandard”, present a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These credits have well defined weaknesses which jeopardize the orderly liquidation

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

of the debt and are inadequately protected by the current net worth and payment capacity of the borrower or of any collateral pledged.

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

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

As of ~~March 31,~~September 30, 2020, and December 31, 2019, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at ~~March 31,~~September 30, 2020, and December 31, 2019 by type and risk category:


	September 30, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass	$	390,737	$	140,515	$	373,731	$	99,598	$	85,780	$	40,845	$	1,131,206
Special mention	605		0		16,037		0		0		0		16,642
Substandard	529		2,104		0		0		0		0		2,633
Total loans	$	391,871	$	142,619	$	389,768	$	99,598	$	85,780	$	40,845	$	1,150,481


	December 31, 2019
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass	$	371,363	$	170,810	$	394,627	$	101,141	$	37,779	$	30,199	$	1,105,919
Special mention	536		2,105		525		12,524		0		0		15,690
Substandard	629		0		0		0		0		0		629
Total loans	$	372,528	$	172,915	$	395,152	$	113,665	$	37,779	$	30,199	$	1,122,238

March 31, 2020
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
Risk Rating:
   Pass $ 370,100
$ 167,364
$ 385,389
$ 91,751
$ 34,702
$ 37,225
$ 1,086,531
   Special mention 531
—
521
15,650
—
—
16,702
   Substandard 622
2,104
—
—
—
—
2,726
Total loans $ 371,253
$ 169,468
$ 385,910
$ 107,401
$ 34,702
$ 37,225
$ 1,105,959

December 31, 2019

One-to-Four
Family
Residential
Multifamily
Commercial
Real Estate

Construction/
Land
Business Consumer Total
(In thousands)
Risk Rating:
   Pass $ 371,363
$ 170,810
$ 394,627
$ 101,141
$ 37,779
$ 30,199
$ 1,105,919
   Special mention 536
2,105
525
12,524
—
—
15,690
   Substandard 629
—
—
—
—
—
629
Total loans $ 372,528
$ 172,915
$ 395,152
$ 113,665
$ 37,779
$ 30,199
$ 1,122,238

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

At September 30, 2020, total loans receivable included $52.0 million of loans originated under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). PPP loans are 100% guaranteed by the SBA. Although these loans were included in the population of loans collectively evaluated for impairment, no general reserve was allocated to them as these loans are 100% guaranteed by the SBA.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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


	At or For the Three Months Ended March 31, 2020																	At or For the Three Months Ended September 30, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land			Business			Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)																	(In thousands)
ALLL:																	ALLL:
Beginning balance	$	3,034	$	1,607	$	4,559	$	2,222		$	1,140		$	656	$	13,218	Beginning balance	$	3,134	$	1,559	$	4,849	$	2,257	$	1,065	$	972	$	13,836

Recoveries	12		—		—		—			—			—		12		Recoveries	2		0		30		0		0		0		32
Provision (recapture)	9		51		134		(79		)	(66		)	251		300
Provision (Recapture)																	Provision (Recapture)	89		(165)		622		108		(21)		67		700
Ending balance																	Ending balance	$	3,225	$	1,394	$	5,501	$	2,365	$	1,044	$	1,039	$	14,568

																		At or For the Nine Months Ended September 30, 2020
																		One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
																		(In thousands)
ALLL:																	ALLL:
Beginning balance																	Beginning balance	$	3,034	$	1,607	$	4,559	$	2,222	$	1,140	$	656	$	13,218

Recoveries																	Recoveries	20		0		30		0		0		0		50
Provision (Recapture)																	Provision (Recapture)	171		(213)		912		143		(96)		383		1,300
Ending balance	$	3,055	$	1,658	$	4,693	$	2,143		$	1,074		$	907	$	13,530	Ending balance	$	3,225	$	1,394	$	5,501	$	2,365	$	1,044	$	1,039	$	14,568

ALLL by category:																	ALLL by category:
General reserve	$	3,026	$	1,658	$	4,693	$	2,143		$	1,074		$	907	$	13,501	General reserve	$	3,213	$	1,394	$	5,501	$	2,365	$	1,044	$	1,039	$	14,556
Specific reserve	29		—		—		—			—			—		29		Specific reserve	12		0		0		0		0		0		12

Loans:																	Loans:
Total loans	$	371,253	$	169,468	$	385,910	$	107,401		$	34,702		$	37,225	$	1,105,959	Total loans	$	391,871	$	142,619	$	389,768	$	99,598	$	85,780	$	40,845	$	1,150,481
Loans collectively evaluated for impairment ⁽¹⁾	367,395		167,364		384,653		91,751			34,702			37,225		1,083,090		Loans collectively evaluated for impairment (1)	389,033		140,515		372,995		99,598		85,780		40,845		1,128,766
Loans individually evaluated for impairment ⁽²⁾	3,858		2,104		1,257		15,650			—			—		22,869		Loans individually evaluated for impairment (2)	2,838		2,104		16,773		0		0		0		21,715

____________

⁽¹⁾Loans collectively evaluated for general reserves.

⁽²⁾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 March 31, 2019																		At or For the Three Months Ended September 30, 2019
	One-to-Four Family Residential			Multifamily			Commercial Real Estate		Construction/ Land		Business		Consumer			Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)																		(In thousands)
ALLL:																		ALLL:
Beginning balance	$	3,387		$	1,680		$	4,777	$	2,331	$	936	$	236		$	13,347	Beginning balance	$	3,085	$	1,643	$	4,607	$	2,271	$	1,120	$	331	$	13,057

Recoveries																		Recoveries	3		0		0		0		0		1		4
Provision (recapture)																		Provision (recapture)	(56)		91		(122)		(73)		37		223		100
Ending balance																		Ending balance	$	3,032	$	1,734	$	4,485	$	2,198	$	1,157	$	555	$	13,161

																			At or For the Nine Months Ended September 30, 2019
																			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
																			(In thousands)
ALLL:																		ALLL:
Beginning balance																		Beginning balance	$	3,387	$	1,680	$	4,777	$	2,331	$	936	$	236	$	13,347

Recoveries	24			—			—		—		—		37			61		Recoveries	31		45		0		0		0		38		114
(Recapture) provision	(379		)	(101		)	32		801		94		(47		)	400		(Recapture) provision	(386)		9		(292)		(133)		221		281		(300)
Ending balance	$	3,032		$	1,579		$	4,809	$	3,132	$	1,030	$	226		$	13,808	Ending balance	$	3,032	$	1,734	$	4,485	$	2,198	$	1,157	$	555	$	13,161

ALLL by category:																		ALLL by category:
General reserve	$	2,982		$	1,579		$	4,809	$	3,132	$	1,030	$	226		$	13,758	General reserve	$	3,001	$	1,734	$	4,485	$	2,198	$	1,157	$	555	$	13,130
Specific reserve	50			—			—		—		—		—			50		Specific reserve	31		0		0		0		0		0		31

Loans:																		Loans:
Total loans	$	351,332		$	167,843		$	384,686	$	114,510	$	33,513	$	14,336		$	1,066,220	Total loans	$	370,386	$	171,152	$	381,890	$	109,915	$	37,507	$	26,451	$	1,097,301
Loans collectively evaluated for impairment ⁽¹⁾	345,569			167,843			382,530		114,510		33,513		14,292			1,058,257		Loans collectively evaluated for impairment (1)	365,813		171,152		379,764		98,306		37,507		26,412		1,078,954
Loans individually evaluated for impairment ⁽²⁾	5,763			—			2,156		—		—		44			7,963		Loans individually evaluated for impairment (2)	4,573		0		2,126		11,609		0		39		18,347

_____________

⁽¹⁾ Loans collectively evaluated for general reserves.

⁽²⁾ 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 ~~March~~both September 30, 2020, and December 31, ~~2020, past due loans were 0.20% of total loans receivable. In comparison,~~2019, past due loans were 0.19% of total loans ~~receivable at December 31, 2019.~~receivable. The following tables represent a summary of the aging of loans by type at the dates indicated:


	Loans Past Due as of March 31, 2020													Loans Past Due as of September 30, 2020
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total ⁽¹⁾			30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)													(In thousands)
Real estate:													Real estate:
One-to-four family residential:													One-to-four family residential:
Owner occupied	$	79	$	—	$	—	$	79	$	202,966	$	203,045	Owner occupied	$	0	$	0	$	0	$	0	$	214,250	$	214,250
Non-owner occupied	—		—		—		—		168,208		168,208		Non-owner occupied	0		0		0		0		177,621		177,621
Multifamily	—		—		2,104		2,104		167,364		169,468		Multifamily	0		0		2,104		2,104		140,515		142,619
Commercial real estate	—		—		—		—		385,910		385,910		Commercial real estate	0		0		0		0		389,768		389,768
Construction/land	—		—		—		—		107,401		107,401		Construction/land	0		0		0		0		99,598		99,598
Total real estate	79		—		2,104		2,183		1,031,849		1,034,032		Total real estate	0		0		2,104		2,104		1,021,752		1,023,856
Business	—		—		—		—		34,702		34,702		Business	0		0		0		0		85,780		85,780
Consumer	—		—		—		—		37,225		37,225		Consumer	32		0		0		32		40,813		40,845
Total loans	$	79	$	—	$	2,104	$	2,183	$	1,103,776	$	1,105,959	Total loans	$	32	$	0	$	2,104	$	2,136	$	1,148,345	$	1,150,481

________________

⁽¹⁾ There were no0 loans 90 days and greater past due and still accruing interest at ~~March 31, 2020~~.September 30, 2020.


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

_________________

⁽¹⁾ There were no0 loans 90 days and greater past due and still accruing interest at December 31, 2019.

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	September 30, 2020		December 31, 2019
	(In thousands)
One-to-four family residential	$	0	$	95
Multifamily	2,104		0



Total nonaccrual loans	$	2,104	$	95

March 31, 2020 December 31, 2019
(In thousands)
One-to-four family residential $ 91
$ 95
Multifamily 2,104
—
Total nonaccrual loans $ 2,195
$ 95

During the three and nine months ended ~~March 31,~~September 30, 2020, interest income that would have been recognized had these nonaccrual loans been performing in accordance with their original terms was ~~$14,000.~~$24,000 and $58,000. For the three and nine months ended ~~March 31,~~September 30, 2019, foregone interest on nonaccrual loans was ~~$6,000.~~$2,000 and $11,000, respectively.

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


	March 31, 2020															September 30, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)															(In thousands)
Performing ⁽¹⁾	$	371,162	$	167,364	$	385,910	$	107,401	$	34,702	$	37,225	$	1,103,764	Performing (1)	$	391,871	$	140,515	$	389,768	$	99,598	$	85,780	$	40,845	$	1,148,377
Nonperforming ⁽²⁾	91		2,104		—		—		—		—		2,195
Nonperforming															Nonperforming	0		2,104		0		0		0		0		2,104
Total loans	$	371,253	$	169,468	$	385,910	$	107,401	$	34,702	$	37,225	$	1,105,959	Total loans	$	391,871	$	142,619	$	389,768	$	99,598	$	85,780	$	40,845	$	1,150,481

_____________

⁽¹⁾ There were ~~$203.0~~$214.3 million of owner-occupied one-to-four family residential loans and ~~$168.2~~$177.6 million of non-owner occupied one-to-four family residential loans classified as performing.

⁽²⁾~~The $91,000 one-to-four family residential loan classified as nonperforming is owner-occupied.~~


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

_____________

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

⁽²⁾The $95,000 of one-to-four family residential ~~loans~~loan classified as nonperforming ~~are all~~is 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 or the borrower failing to comply with contractual terms of the loan. At ~~March 31,~~September 30, 2020, there were no0 commitments to advance funds related to impaired loans. At December 31, 2019, there was ~~$3.1~~$3.1 million committed to be advanced on an impaired $12.5 million ~~construction~~construction/land loan. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~the $15.7 million impaired~~this construction/land loan became fully ~~funded.~~funded and was reclassified as an impaired permanent commercial real estate loan with a $15.5 million principal balance at September 30, 2020. The Bank authorized completion of the loan funding because it determined that it was in the Bank’s best interest to finalize the construction project. At ~~March 31,~~September 30, 2020, the loan is well collateralized and the Bank currently does not expect to incur a loss.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	March 31, 2020							September 30, 2020
	Recorded Investment ⁽¹⁾		Unpaid Principal Balance ⁽²⁾		Related Allowance			Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
	(In thousands)							(In thousands)
Loans with no related allowance:							Loans with no related allowance:
One-to-four family residential:							One-to-four family residential:
Owner occupied	$	429	$	575	$	—	Owner occupied	$	336	$	434	$	—
Non-owner occupied	1,289		1,289		—		Non-owner occupied	1,039		1,039		—
Multifamily	2,104		2,104		—		Multifamily	2,104		2,104		—
Commercial real estate	1,257		1,257		—		Commercial real estate	16,773		16,773		—
Construction/land	15,650		15,650		—

Total	20,729		20,875		—		Total	20,252		20,350		—

Loans with an allowance:							Loans with an allowance:
One-to-four family residential:							One-to-four family residential:
Owner occupied	503		549		12		Owner occupied	502		549		7
Non-owner occupied	1,637		1,637		17		Non-owner occupied	961		961		5

Total	2,140		2,186		29		Total	1,463		1,510		12

Total impaired loans:							Total impaired loans:
One-to-four family residential:							One-to-four family residential:
Owner occupied	932		1,124		12		Owner occupied	838		983		7
Non-owner occupied	2,926		2,926		17		Non-owner occupied	2,000		2,000		5
Multifamily	2,104		2,104		—		Multifamily	2,104		2,104		0
Commercial real estate	1,257		1,257		—		Commercial real estate	16,773		16,773		0
Construction/land	15,650		15,650		—

Total	$	22,869	$	23,061	$	29	Total	$	21,715	$	21,860	$	12

_________________

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

Total	17,818		21,089		—		Total	17,818		21,089		—

Loans with an allowance:							Loans with an allowance:
One-to-four family residential:							One-to-four family residential:
Owner occupied	505		552		13		Owner occupied	505		552		13
Non-owner occupied	1,647		1,647		18		Non-owner occupied	1,647		1,647		18

Total	2,152		2,199		31		Total	2,152		2,199		31

Total impaired loans:							Total impaired loans:
One-to-four family residential:							One-to-four family residential:
Owner occupied	942		1,134		13		Owner occupied	942		1,134		13
Non-owner occupied	3,133		3,133		18		Non-owner occupied	3,133		3,133		18
Multifamily	2,105		2,105		—		Multifamily	2,105		2,105		0
Commercial real estate	1,266		1,266		—		Commercial real estate	1,266		1,266		0
Construction/land	12,524		15,650		—		Construction/land	12,524		15,650		0

Total	$	19,970	$	23,288	$	31	Total	$	19,970	$	23,288	$	31

_________________

⁽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 ~~March 31,~~September 30, 2020 and 2019:


	Three Months Ended September 30, 2020				Nine Months Ended September 30, 2020
	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	$	381	$	2	$	407	$	15
Non-owner occupied	1,115		17		1,251		52
Multifamily	2,104		47		2,104		139
Commercial real estate	16,823		144		9,042		519
Construction/land	0		0		7,044		0

Total	20,423		210		19,848		725

Loans with an allowance:
One-to-four family residential:
Owner occupied	502		7		503		23
Non-owner occupied	964		15		1,303		45




Total	1,466		22		1,806		68

Total impaired loans:
One-to-four family residential:
Owner occupied	883		9		910		38
Non-owner occupied	2,079		32		2,554		97
Multifamily	2,104		47		2,104		139
Commercial real estate	16,823		144		9,042		519
Construction/land	0		0		7,044		0

Total	$	21,889	$	232	$	21,654	$	793

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
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 $ 433
$ 9
$ 1,078
$ 15
      Non-owner occupied 1,388
21
2,208
31
Multifamily 2,105
46
—
—
Commercial real estate 1,262
22
2,328
38
Construction/land 14,087
150
—
—
Consumer —
—
66
1
Total 19,275
248
5,680
85

Loans with an allowance:
   One-to-four family residential:
      Owner occupied 504
9
512
9
      Non-owner occupied 1,642
23
2,746
30
Commercial real estate —
—
121
—
Total 2,146
32
3,379
39

Total impaired loans:
   One-to-four family residential:
      Owner occupied 937
18
1,590
24
      Non-owner occupied 3,030
44
4,954
61
Multifamily 2,105
46
—
—
Commercial real estate 1,262
22
2,449
38
Construction/land 14,087
150
—
—
Consumer —
—
66
1
Total $ 21,421
$ 280
$ 9,059
$ 124


	Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
	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	$	834	$	15	$	956	$	44
Non-owner occupied	1,633		24		1,920		74

Commercial real estate	2,134		38		2,231		114
Construction/land	11,596		202		5,798		570
Consumer	41		1		53		3
Total	16,238		280		10,958		805

Loans with an allowance:
One-to-four family residential:
Owner occupied	508		9		510		26
Non-owner occupied	1,661		24		2,203		69

Commercial real estate	0		0		60		0


Total	2,169		33		2,773		95

Total impaired loans:
One-to-four family residential:
Owner occupied	1,342		24		1,466		70
Non-owner occupied	3,294		48		4,123		143

Commercial real estate	2,134		38		2,291		114
Construction/land	11,596		202		5,798		570
Consumer	41		1		53		3
Total	$	18,407	$	313	$	13,731	$	900

Troubled Debt Restructurings. Certain loan modifications are accounted for as troubled debt restructured loans (“TDRs”). At ~~March 31,~~September 30, 2020, the TDR portfolio totaled ~~$5.0~~$4.1 million. At December 31, 2019, the TDR portfolio totaled $5.2 million. At both dates, all TDRs were performing according to their modified repayment terms.

At ~~March 31,~~September 30, 2020,, the Company had no0 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. NoNaN loans accounted for as TDRs were charged-off to the ALLL for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), signed into law on March 27, 2020, provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. generally up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) December 31, 2020. At September 30, 2020, total loans receivable included $132.3 million of loans that had been granted short term deferrals under the CARES Act and related regulatory guidance, of which $65.5 million were in their active loan payment deferral period. At September 30, 2020, 0 loans whose deferral period had expired were delinquent. Loan modifications in accordance with the CARES Act are still subject to an impairment evaluation.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

There were no TDR modifications during the three and nine months ended ~~March 31,~~September 30, 2020. The following table presents TDR modifications for the three and nine months ended ~~March 31,~~September 30, 2019, and their recorded investment prior to and after the modification:


	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	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		$	536	$	536	7	$	1,360	$	1,360
Advancement of maturity date	0		0		0		3	694		694
Commercial
Advancement of maturity date	1		855		855		1	855		855
Total	$	2	$	1,391	$	1,391	11	$	2,909	$	2,909

Three Months Ended March 31, 2019
Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
(In thousands)
One-to-four family residential
Principal and interest with interest rate concession and advancement of maturity date 6
$ 824
$ 824
Advancement of maturity date 3
694
694
Total 9
$ 1,518
$ 1,518

TDRs that default after they have been modified are typically evaluated individually on a collateral basis. Any additional impairment is charged to the ALLL. For the three and nine months ended ~~March 31,~~September 30, 2020, and ~~March 31,~~September 30, 2019, no0 loans that had been modified in the previous 12 months defaulted.

Note 6 - Other Real Estate Owned

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


	Three Months Ended March 31,						Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019				2020		2019		2020		2019
	(In thousands)						(In thousands)
Balance at beginning of period	$	454	$	483		Balance at beginning of period	$	454	$	454	$	454	$	483

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

For the three and nine months ended ~~March 31,~~September 30, 2020, there were no0 OREO properties sold and no0 market value adjustments taken on the properties in OREO. For the three and nine months ended ~~March 31,~~September 30, 2019, there were no0 OREO properties sold and $29,000 in market value adjustments on OREO properties. OREO at ~~March 31,~~September 30, 2020, consisted of $454,000 in commercial real estate properties. At ~~March 31,~~September 30, 2020, there was a $2.1 million multifamily loan and no0 one-to-four family residential loans for which formal foreclosure proceedings were in process.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 7 - Fair Value

The Company 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.

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

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

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

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

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

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

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis (there were no transfers between Level 1, Level 2 and Level 3 recurring measurements) at ~~March 31,~~September 30, 2020 and December 31, 2019:


	Fair Value Measurements at September 30, 2020
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae	$	13,535	$	0	$	13,535	$	0
Freddie Mac	4,338		0		4,338		0
Ginnie Mae	19,497		0		19,497		0
Other	10,926		0		10,926		0
Municipal bonds	14,825		0		14,825		0
U.S. Government agencies	41,400		0		41,400		0
Corporate bonds	21,499		0		21,499		0
Total available-for-sale investments	126,020		0		126,020		0

Liabilities:
Derivative fair value liability	3,839		0		3,839		0

Fair Value Measurements at March 31, 2020
Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)
(In thousands)
Assets:
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae $ 16,008
$ —
$ 16,008
$ —
Freddie Mac 4,347
—
4,347
—
Ginnie Mae 21,669
—
21,669
—
Other 10,884
—
10,884
—
Municipal bonds 10,956
—
10,956
—
U.S. Government agencies 43,188
—
43,188
—
Corporate bonds 25,107
—
25,107
—
Total available-for-sale
investments 132,159
—
132,159
—

Liabilities:
Derivative fair value liability 3,287
—
3,287
—


	Fair Value Measurements at December 31, 2019
	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	$	15,629	$	0	$	15,629	$	0
Freddie Mac	4,292		0		4,292		0
Ginnie Mae	23,050		0		23,050		0
Other	11,448		0		11,448		0
Municipal bonds	10,911		0		10,911		0
U.S. Government agencies	45,750		0		45,750		0
Corporate bonds	25,521		0		25,521		0
Total available-for-sale investments	136,601		0		136,601		0
Derivative fair value asset	426		0		426		0
Total	$	137,027	$	0	$	137,027	$	0

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Fair Value Measurements at December 31, 2019
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 $ 15,629
$ —
$ 15,629
$ —
Freddie Mac 4,292
—
4,292
—
Ginnie Mae 23,050
—
23,050
—
Other 11,448
—
11,448
—
Municipal bonds 10,911
—
10,911
—
U.S. Government agencies 45,750
—
45,750
—
Corporate bonds 25,521
—
25,521
—
Total available-for-sale
investments 136,601
—
136,601
—
Derivative fair value asset 426
—
426
—
Total $ 137,027
$ —
$ 137,027
$ —

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The tables below present the balances of assets measured at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2020, and December 31, 2019:


	Fair Value Measurements at March 31, 2020									Fair Value Measurements at September 30, 2020
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net) ⁽¹⁾	$	22,840	$	—	$	—	$	22,840	Impaired loans (included in loans receivable, net) (1)	$	21,703	$	0	$	0	$	21,703
OREO	454		—		—		454		OREO	454		0		0		454
Total	$	23,294	$	—	$	—	$	23,294	Total	$	22,157	$	0	$	0	$	22,157

_____________

⁽¹⁾Total fair value of impaired loans is net of ~~$29,000~~$12,000 of specific reserves on performing TDRs.


	Fair Value Measurements at December 31, 2019									Fair Value Measurements at December 31, 2019
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net) ⁽¹⁾	$	19,939	$	—	$	—	$	19,939	Impaired loans (included in loans receivable, net) (1)	$	19,939	$	0	$	0	$	19,939
OREO	454		—		—		454		OREO	454		0		0		454
Total	$	20,393	$	—	$	—	$	20,393	Total	$	20,393	$	0	$	0	$	20,393

_____________

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

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2020 and December 31, 2019:

September 30, 2020

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

21,703

Market approach

Appraised value discounted by market or borrower conditions

0.0% - 8.0%

(4.7%)

OREO

454

Market approach

Appraised value less selling costs

0.0%

(0.0%)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2020
Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average)
(Dollars in thousands)
Impaired Loans $ 22,840
Market approach Appraised value discounted by market or borrower conditions 0.0%
(0.0%)

OREO $ 454
Market approach Appraised value less selling costs 0.0%
(0.0%)

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

19,939

Market approach

Appraised value discounted by market or borrower conditions

0.0%

(0.0%)

OREO

454

Market approach

Appraised value less selling costs

0.0%

(0.0%)

December 31, 2019
Fair Value Valuation Technique Unobservable Input(s) Range (Weighted Average)
(Dollars in thousands)
Impaired Loans $ 19,939
Market approach Appraised value discounted by market or borrower conditions 0.0%
(0.0%)

OREO $ 454
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, 2020											September 30, 2020
			Estimated		Fair Value Measurements Using:									Estimated		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3			Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)											(In thousands)
Financial Assets:											Financial Assets:
Cash on hand and in banks	$	6,453	$	6,453	$	6,453	$	—	$	—	Cash on hand and in banks	$	7,440	$	7,440	$	7,440	$	0	$	0
Interest-earning deposits with banks	22,063		22,063		22,063		—		—		Interest-earning deposits with banks	18,674		18,674		18,674		0		0
Investments available-for-sale	132,159		132,159		—		132,159		—		Investments available-for-sale	126,020		126,020		0		126,020		0
Investments held-to-maturity	2,371		2,371		—		2,371		—		Investments held-to-maturity	2,406		2,406		0		2,406		0
Loans receivable, net	1,092,128		1,088,184		—		—		1,088,184		Loans receivable, net	1,133,984		1,136,078		0		0		1,136,078
FHLB stock	8,010		8,010		—		8,010		—		FHLB stock	6,410		6,410		0		6,410		0
Accrued interest receivable	4,302		4,302		—		4,302		—		Accrued interest receivable	5,676		5,676		0		5,676		0

Financial Liabilities:											Financial Liabilities:
Deposits	536,850		536,850		536,850		—		—		Deposits	641,036		641,036		641,036		0		0
Certificates of deposit, retail	437,676		448,700		—		448,700		—		Certificates of deposit, retail	418,646		428,871		0		428,871		0
Certificates of deposit, brokered	25,457		25,546		—		25,546		—		Certificates of deposit, brokered	10,000		10,006		0		10,006		0
Advances from the FHLB	160,000		163,306		—		163,306		—		Advances from the FHLB	120,000		120,002		0		120,002		0
Accrued interest payable	236		236		—		236		—		Accrued interest payable	197		197		0		197		0
Derivative fair value liability	3,287		3,287		—		3,287		—		Derivative fair value liability	3,839		3,839		0		3,839		0

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2019
			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	$	10,094	$	10,094	$	10,094	$	0	$	0
Interest-earning deposits with banks	12,896		12,896		12,896		0		0
Investments available-for-sale	136,601		136,601		0		136,601		0
Loans receivable, net	1,108,462		1,096,499		0		0		1,096,499
FHLB stock	7,009		7,009		0		7,009		0
Accrued interest receivable	4,138		4,138		0		4,138		0
Derivative fair value asset	426		426		0		426		0

Financial Liabilities:
Deposits	513,959		513,959		513,959		0		0
Certificates of deposit, retail	425,103		430,418		0		430,418		0
Certificates of deposit, brokered	94,472		94,556		0		94,556		0
Advances from the FHLB	137,700		137,706		0		137,706		0
Accrued interest payable	285		285		0		285		0

December 31, 2019
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 $ 10,094
$ 10,094
$ 10,094
$ —
$ —
Interest-earning deposits with banks 12,896
12,896
12,896
—
—
Investments available-for-sale 136,601
136,601
—
136,601
—
Loans receivable, net 1,108,462
1,096,499
—
—
1,096,499
FHLB stock 7,009
7,009
—
7,009
—
Accrued interest receivable 4,138
4,138
—
4,138
—
Derivative fair value asset 426
426
—
426
—

Financial Liabilities:

Deposits 513,959
513,959
513,959
—
—
Certificates of deposit, retail 425,103
430,418
—
430,418
—
Certificates of deposit, brokered 94,472
94,556
—
94,556
—
Advances from the FHLB 137,700
137,706
—
137,706
—
Accrued interest payable 285
285
—
285
—

Note 8 - Leases

The Company adopted ASU 2016-02 and ASU 2018-11 using the modified retrospective approach with an effective date of January 1, 2019, and recognized on the consolidated balance sheets a ROU included in prepaid expenses and other assets and lease liabilities included in other liabilities. At ~~March 31,~~September 30, 2020, the Company had ~~eleven~~13 operating leases for retail branch locations. The remaining lease terms range from 5six months to ~~5.3~~5.4 years, with most leases carrying optional extensions of 3-5 years. The 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, and will be determined based on indicators that the Company would have an economic incentive to extend the lease. The Company has elected to not apply ASU 2016-02 to short term leases, which are those that have a term of one year or less. To calculate the present value of lease payments not yet paid, the Company uses the incremental borrowing rate, which is equal to the FHLB advance rate for the remaining term of the lease that was in place at January 1, 2019, or for leases added after that date, at the time of lease inception.

The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At ~~March 31,~~September 30, 2020, the Company was committed to paying ~~$57,000~~$67,000 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 in the Company’s Consolidated Income Statements for the three and nine months ended ~~March 31,~~September 30, 2020 was $226,000 and $669,000, respectively, and for the three and nine months ended September 30, 2019 was ~~$225,000~~$170,000 and ~~$175,000,~~$514,000, respectively. Lease expense includes the amortized lease expense under ASU 2016-02 combined with variable lease expenses for maintenance or other expenses as defined in the individual lease agreements. At ~~March 31,~~September 30, 2020, the ROU had a balance of ~~$2.4~~$3.83 million and the lease liability had a balance of ~~$2.5~~$3.94 million on the Company’s consolidated balance sheet and is amortizing over a weighted-average remaining term of ~~6.6~~4.3 years. The weighted-average discount rate used to calculate the present value of future minimum lease payments was ~~2.84%~~2.13% at ~~March 31,~~September 30, 2020.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides a reconciliation between the undiscounted minimum lease payments at ~~March 31,~~September 30, 2020 and the discounted lease liability at that date:


	September 30, 2020
	(in thousands)
Due through one year	$	719
Due after one year through two years	686
Due after two years through three years	615
Due after three years through four years	487
Due after four years through five years	394
Due after five years	1,361
Total minimum lease payments	4,262
Less: present value discount	(320)
Lease liability	$	3,942

March 31, 2020
(in thousands)
Due through one year $ 617
Due after one year through two years 446
Due after two years through three years 428
Due after three years through four years 324
Due after four years through five years 249
Due after five years 728
Total minimum lease payments 2,792
Less: present value discount (254 )
Lease liability $ 2,538

The Company has secured a lease for a new retail branch located in Gig Harbor, Washington that commenced in August 2020. The branch opened in October 2020. The initial lease term is ~~finalizing~~63 months and includes three extension options of five years each. The minimum rent due is $5,300 with a 3% annual increase. The Company also has commenced a lease for a new retail branch in ~~Gig Harbor,~~Issaquah, Washington, which is expected to ~~commence later~~open early in ~~2020.~~2021.

Note 9 - Derivatives

The Company uses derivative financial instruments, in particular, interest rate swaps, which qualify as cash flow hedges, to manage the risk of changes in future cash flows due to interest rate fluctuations. At ~~March 31,~~September 30, 2020, the Company held six interest rate swap agreements with initial terms of four to eight years, and total notional amount of $120.0 million. In addition, at that date, the Company held two forward-starting interest rate swap agreements with terms of seven and eight years and a total notional amount of $25.0 million. Under the current agreements, the Company pays a weighted-average fixed interest rate of 1.22% monthly and in exchange receives variable rate amounts from the interest rate swap counter party based on 1-month or 3-month LIBOR, based on the swap agreement’s stated rate reset date. On the forward-starting agreements, the Company will pay a weighted average fixed rate of 0.80% and in exchange receives variable rate amounts from the interest rate swap counter party based on 3-month LIBOR. Concurrent with each interest rate swap start dates, the Company secured fixed rate FHLB advances, for the notional amount of the swap, that reset at 1-month or 3-month cycles based on the rate reset dates of the interest rate swap agreement. The Company pays or receives the net interest to the counter party amount monthly or quarterly, based on the respective hedge agreement, and includes this amount as part of its interest expense on the Consolidated Income Statement.

Quarterly, the effectiveness evaluation is based upon the fluctuation of the interest the Company pays to the FHLB for the ~~hedge instruments~~funding utilized in the interest rate swap as compared to the one-month or three-month LIBOR interest received from the counterparty. At ~~March 31,~~September 30, 2020, the net fair value loss of the cash flow hedges of ~~$3.3~~$3.8 million was reported with other liabilities. The tax effected amount of ~~$2.6~~$3.0 million was included in Accumulated Other Comprehensive ~~Income.~~Loss. There were no0 amounts recorded in the Consolidated Income Statements for the quarters ended ~~March 31,~~September 30, 2020 or 2019, related to ineffectiveness.

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

~~The following table presents the fair value of these derivative instruments as of March 31, 2020 and December 31, 2019:~~

Balance Sheet Location
Fair Value at
March 31, 2020

Fair Value at
December 31, 2019
(In thousands)
Interest rate swaps on FHLB debt
designated as a cash flow hedge
(Other liabilities)
Other assets
$ (3,287 ) $ 426

Total derivatives $ (3,287 ) $ 426

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the fair value of these derivative instruments as of September 30, 2020 and December 31, 2019:


	Balance Sheet Location	Fair Value at September 30, 2020		Fair Value at December 31, 2019
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	(Other liabilities) Other assets	$	(3,839)	$	426

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


	Amount Recognized in OCI for the three months ended September 30, 2020		Amount Recognized in OCI for the three months ended September 30, 2019		Amount Recognized in OCI for the nine months ended September 30, 2020		Amount Recognized in OCI for the nine months ended September 30, 2019
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	$	271	$	(187)	$	(3,368)	$	(1,145)

Amount Recognized in OCI for the
three months ended
March 31, 2020

Amount Recognized in OCI for the
three months ended
March 31, 2019
(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge $ (2,933 ) $ (363 )

Note 10 - Stock-Based Compensation

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

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

As a result of the approval of the 2016 Plan, the First Financial Northwest, Inc. 2008 Equity Incentive Plan (“2008 Plan”) was frozen and no additional awards will be made. At ~~March 31,~~September 30, 2020, there were no0 unvested shares of restricted stock awards under the 2008 Plan. At this date, there were 8,000 stock options granted under the 2008 Plan that are expected to vest and be available for exercise, and an additional 305,000 stock options from the 2008 Plan were vested and available for exercise at ~~March 31,~~September 30, 2020, subject to the 2008 Plan provisions. At ~~March 31,~~September 30, 2020, there were ~~1,207,658~~1,172,268 total shares available for grant under the 2016 Plan, including ~~303,829~~286,134 shares available to be granted as restricted stock.

For the three months ended ~~March 31,~~September 30, 2020 and 2019, total compensation expense for both the 2008 and 2016 Plans was ~~$80,000~~$224,000 and ~~$124,000,~~$226,000, respectively, and the related income tax benefit was ~~$17,000~~$47,000 and ~~$26,000,~~$48,000, respectively.

For the nine months ended September 30, 2020 and 2019, total compensation expense for both the 2008 and 2016 Plans was $367,000 and $457,000, respectively, and the related income tax benefit was $77,000 and $96,000, respectively.

Stock Options

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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.

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

~~SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 and nine months ended ~~March 31,~~September 30, 2020, follows:


	For the Three Months Ended September 30, 2020
	Shares	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value		Weighted-Average Grant Date Fair Value
Outstanding at July 1, 2020	313,000	$	10.34		$	133,750	$	3.69




Outstanding at September 30, 2020	313,000	10.34		3.23	87,850		3.69
Vested and expected to vest assuming a 3% forfeiture rate over the vesting term	312,760	10.34		3.23	87,850		3.69
Exercisable at September 30, 2020	305,000	10.27		3.18	87,850		3.66


	For the Nine Months Ended September 30, 2020
	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, 2020	313,000	$	10.34		$	1,440,310	$	3.69




Outstanding at September 30, 2020	313,000	10.34		3.23	87,850		3.69
Vested and expected to vest assuming a 3% forfeiture rate over the vesting term	312,760	10.34		3.23	87,850		3.69
Exercisable at September 30, 2020	305,000	10.27		3.18	87,850		3.66

For the Three Months Ended March 31, 2020
Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term in Years Aggregate Intrinsic Value Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2019 313,000
$ 10.34
1,440,310
$ 3.69
Outstanding at March 31, 2020 313,000
10.34
3.73 166,050
3.69
Vested and expected to vest assuming a 3% forfeiture rate over the vesting term 312,760
10.34
3.73 166,050
3.69
Exercisable at March 31, 2020 305,000
10.27
3.68 166,050
3.66

As of ~~March 31,~~September 30, 2020, there was ~~$23,000~~$4,800 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 ~~eight month~~two months weighted-average vesting period. There were no0 stock options granted during the ~~three~~nine months ended ~~March 31,~~September 30, 2020.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock Awards

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

A summary of changes in nonvested restricted stock awards for the three and nine months ended ~~March 31,~~September 30, 2020, follows:


	For the Three Months Ended September 30, 2020
	Shares	Weighted-Average Grant Date Fair Value
Nonvested at July 1, 2020	16,228	$	13.61
Granted	17,695	9.12
Vested	(17,695)	9.12

Forfeited	—	—
Nonvested at September 30, 2020	16,228	13.61
Expected to vest assuming a 3% forfeiture rate over the vesting term	15,741	13.61


	For the Nine Months Ended September 30, 2020
	Shares	Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2020	16,698	$	16.53
Granted	33,923	13.61
Vested	(34,393)	16.53

Forfeited	—	—
Nonvested at September 30, 2020	16,228	13.61
Expected to vest assuming a 3% forfeiture rate over the vesting term	15,741	13.61

For the Three Months Ended March 31, 2020
Shares Weighted-Average
Grant Date
Fair Value
Nonvested at December 31, 2019 16,698
$ 16.53
Granted 16,228
13.61
Vested (16,698 ) 16.53
Nonvested at March 31, 2020 16,228
13.61
Expected to vest assuming a 3% forfeiture rate over the vesting term 15,741
13.61

As of ~~March 31,~~September 30, 2020, there was ~~$198,000~~$90,000 of total unrecognized compensation costs related to nonvested shares granted as restricted stock awards. The cost is expected to be recognized over the remaining ~~eleven month~~five months weighted-average vesting period.

Note 11 - Earnings Per Share

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

~~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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars in thousands, except share data)
Net income	$	2,082	$	2,505	$	5,910	$	7,754
Less: Earnings allocated to participating securities	(3)		(4)		(9)		(12)
Earnings allocated to common shareholders	$	2,079	$	2,501	$	5,901	$	7,742

Basic weighted average common shares outstanding	9,661,498		9,901,586		9,788,397		9,989,970
Dilutive stock options	10,988		83,423		20,755		95,985
Dilutive restricted stock grants	3,081		6,002		2,450		5,676
Diluted weighted average common shares outstanding	9,675,567		9,991,011		9,811,602		10,091,631

Basic earnings per share	$	0.22	$	0.25	$	0.60	$	0.77
Diluted earnings per share	$	0.21	$	0.25	$	0.60	$	0.77

Three Months Ended March 31,
2020 2019
(Dollars in thousands, except share data)
Net income $ 1,684
$ 1,945
Less: Earnings allocated to participating securities (3 ) (3 )
Earnings allocated to common shareholders $ 1,681
$ 1,942

Basic weighted average common shares outstanding 9,896,234
10,118,286
Dilutive stock options 72,120
89,718
Dilutive restricted stock grants 9,706
12,896
Diluted weighted average common shares outstanding 9,978,060
10,220,900

Basic earnings per share $ 0.17
$ 0.19
Diluted earnings per share $ 0.17
$ 0.19

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three months ended ~~March 31,~~September 30, 2020 and 2019, there were ~~40,000~~228,000 and 50,000 options to purchase shares of common stock, respectively, that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. For the nine months ended September 30, 2020 and 2019, there were 203,000 and 50,000 options to purchase shares of common stock, respectively, that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive.

Note 12 - 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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Disaggregation of Revenue

The following table includes the Company’s noninterest income disaggregated by type of service for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:


							Three Months Ended				Nine Months Ended
	Three Months Ended						September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
	March 31, 2020		March 31, 2019				(In thousands)
	(In thousands)
Loss on sale of investments ⁽¹⁾	$	—	$	(8	)
Gain on sale of investments (1)						Gain on sale of investments (1)	$	18	$	88	$	86	$	80
BOLI change in cash surrender value ⁽¹⁾	254		269			BOLI change in cash surrender value (1)	269		235		778		693
Wealth management revenue	165		196			Wealth management revenue	145		245		493		702
Deposit related fees	68		69			Deposit related fees	76		61		222		218
Debit card and ATM fees	108		102			Debit card and ATM fees	125		118		338		337
Loan related fees	392		47			Loan related fees	376		99		846		265
Loan interest swap fees	—		16			Loan interest swap fees	0		191		19		297
Other	3		9			Other	2		2		7		26
Total noninterest income	$	990	$	700		Total noninterest income	$	1,011	$	1,039	$	2,789	$	2,618

_______________

⁽¹⁾ Not within scope of Topic 606

For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, substantially all of the Company’s revenues under the scope of Topic 606 are for performance obligations satisfied at a specified date.

Revenues recognized within scope of Topic 606

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

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

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

Loan related fees: Noninterest fee income is earned on our loans for servicing or annual fees on certain loan types.

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

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

Contract Balances

At ~~March 31,~~September 30, 2020, ~~and December 31, 2019,~~ the Company had no0 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 no0 material performance obligations as of this date.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 13 - Subsequent Events

On November 3, 2020, the Company repurchased 124,179 shares of common stock at $10.15 per share, under the current stock repurchase plan that expires on December 30, 2020. This block purchase brought the total shares repurchased under this plan to 279,228 at an average price of $9.81 per share.

On October 21, 2020, the Company received notification that the lead bank on one of its participation loans, with a balance of $6.4 million at September 30, 2020, is likely to be downgraded by the lead bank. This interest-only loan was current on its payments at September 30, 2020. The impact to the Bank from this downgrade is anticipated to result in an additional $200,000 loan loss provision for the quarter and year ending December 31, 2020.

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

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors including, but not limited to: the effect of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs, that may be affected by deterioration in the housing and commercial real estate markets, and may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;uncertainty regarding the future of LIBOR, and the potential transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; our ability to pay dividends on our common stock; our ability to attract and retain deposits; increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement a branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the implementing regulations; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; the economic impact of war or any terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services, including the potential effects of the COVID-19 pandemic, and other risks detailed in our filings with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 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.

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

Overview

First Financial Northwest Bank (“the Bank”) is a wholly-owned subsidiary of First Financial Northwest, Inc. (“the Company”) and, as such, comprises substantially all of the activity for the Company. First Financial Northwest Bank was a community-based savings bank until February 4, 2016, when the Bank converted to a Washington chartered commercial bank reflecting the commercial banking services it now provides to its customers. The Bank primarily serves King, Pierce, Snohomish, and Kitsap counties, Washington, through its full-service banking office and headquarters in Renton, Washington, as well as six retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and one retail branch in Pierce County, Washington. ~~The~~In October 2020, the Bank opened a new branch in Gig Harbor, Washington, located in Pierce County. In addition, the Bank has received FDIC approval to open a new branch in ~~Gig Harbor, Washington. This additional Pierce~~Issaquah, Washington, located in King County, ~~location~~which is expected to open in ~~the second half of 2020.~~early 2021.

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 (including brokered deposits), then utilizing these funds to originate one-to-four family residential, multifamily, commercial real estate, construction/land, business, and consumer loans. We anticipate that construction/land lending will continue to be a strong element of our total loan portfolio in future periods. We will continue to take a disciplined approach in our construction/land lending by concentrating our efforts on residential loans to builders known to us, including multifamily loans to developers with proven success in this type of construction. These loans typically mature in six to eighteen months and funding is usually not fully disbursed at origination, therefore the impact to net loans receivable is generally minimal in the short term. We have also geographically expanded our loan portfolio through loan purchases or loan participations of commercial and multifamily real estate loans and consumer loans that are outside of our primary market area. Through our efforts to ~~geographically~~geographically diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 41 other states, including concentrations in California, Utah, Oregon and Georgia of ~~$44.1~~$37.3 million, $16.2 million, ~~$11.7~~$11.6 million and ~~$8.2~~$8.5 million, respectively.

The Bank’s strategic initiatives seek to diversify our loan portfolio and broaden growth opportunities with our current risk tolerance levels and asset/liability objectives. The Bank has created ~~a small business loan (“SBA”)~~an SBA department, with the goal of achieving SBA preferred lender status in ~~2020,~~2021, which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans, equipmentfinancing, and a focus on industry specific loans, such as green energy financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.

Our primary source of revenue is interest income, which is the income that we earn on our loans and investments. Interest expense is the interest that we pay on our deposits and borrowings. Net interest income is the difference between interest income and interest expense. Changes in levels of interest rates affect interest income and interest expense differently and, thus, impacts our net interest income. First Financial Northwest Bank is generally liability-sensitive, meaning our interest-bearing liabilities reprice at a faster rate than our interest-earning assets. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in the near term, if not longer.

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

Noninterest income is generated from various loan or deposit fees, increases in the cash surrender value of ~~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, payroll taxes, expenses for retirement, and other employee benefits. Professional fees include legal services, auditing and accounting services, computer support services, and other professional services in support of strategic plans. Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist

primarily of real estate taxes, depreciation expenses, maintenance, and costs of utilities. Also included in noninterest expense is the change to the Company’s unfunded commitment reserve which is reflected in general and administrative expenses. This unfunded commitment reserve expense can vary significantly each quarter, based on the amount believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities, and reflects changes in the amounts that the Company has committed to fund but has not yet disbursed.

COVID-19 Related Information

In response to the COVID-19 pandemic, the Bank is committed to providing assistance to its customers. Under the ~~Coronavirus Aid, Relief, and Economic Security~~CARES Act, ~~of 2020 (“CARES Act”) and regulatory guidance,~~ the Bank is providing certain short-term loan modifications. In addition, the Bank is participating in the Paycheck Protection Program (“PPP”) as a lender. The deadline for PPP loan applications was August 8, 2020. As of ~~April~~September 30, 2020, the Bank had ~~obtained~~funded 462 applications totaling $52.0 million of loans in its market areas through the PPP. Some of the PPP loans were for our existing customers, however we also provided PPP loans to those in our community who have not had a banking relationship with us in the past. We are processing applications for PPP loan forgiveness and will continue working with our customers to assist them with accessing other borrowing options, including SBA ~~Loan Authorizations~~and other government sponsored lending programs, as appropriate. The SBA has released a simplified forgiveness process for ~~$48.9 million~~ PPP ~~loans.~~loans of $50,000 or less. At September 30, 2020 the Bank held 253 PPP loans of $50,000 or less with a combined balance of $6.4 million.

The CARES Act and related bank regulatory guidance provided that ~~the~~ short-term ~~modification~~modifications of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications (e.g. generally up to 6 months) ~~modifications~~ such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. ~~Borrowers are considered current~~To qualify as an eligible loan under the CARES Act, ~~if they are less~~a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due ~~on their contractual payments at~~as of December 31, 2019; and (3) executed between March 1, 2020, and the ~~time a modification program is implemented.~~earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) December 31, 2020. The primary method of relief granted by the Company ~~at this time~~ is to allow the borrower to defer their loan payments for three to six months. Certain borrowers ~~will be~~are allowed to pay interest only or have payment deferrals for periods longer than six months ~~after a review of~~depending upon their specific circumstances. Deferred principal and interest amounts are added as a balloon payment due at the original maturity date or payoff of the loan.

As of ~~April~~September 30, 2020, the Bank had ~~received 168~~approved 144 requests for loan modifications ~~by borrowers adversely impacted by~~totaling $132.3 million under the ~~COVID-19 pandemic.~~ CARES Act of which 113 loans totaling $66.8 million had either returned to making regularly scheduled payments or were still in their first payment cycle since their modification expired. As of September 30, 2020, 31 loans totaling $65.5 million were under payment relief consisting of deferral of regularly scheduled principal and interest payments, including seven loans totaling $8.8 million that have entered into additional loan payment deferral periods.

The following table shows the ~~term~~current balance of loans in a COVID-19 pandemic relief ~~modifications granted to our borrowers, and the loan balance as of the~~ modification ~~date,~~period in accordance with the CARES ~~Act and regulatory guidance:~~Act:


	As of April 30, 2020											As of September 30, 2020
	Balance of loans with modifications up to 3 months		Balance of loans with modifications more than 3 months		Total balance of loans with modifications granted		Total loans as of March 31, 2020		Modifications as % of total loans as of March 31, 2020			Balance of loans with modification 1 - 3 months		Balance of loans with modification 4 - 6 months		Balance of loans with modification more than 6 months		Total balance of loans with modification granted	Total loans		Loans with modification as % of total loans in each category
	(Dollars in thousands)											(Dollars in thousands)
One-to-four family residential	$	17,141	$	6,772	$	23,913	$	371,253	6.4	%	One-to-four family residential	$	283	$	1,765	$	—	2,048	$	391,871	0.5	%
Multifamily	1,726		2,877		4,603		169,468		2.7		Multifamily	—		2,349		—		2,349	142,619		1.6
Commercial real estate:											Commercial real estate:							—
Office	2,408		—		2,408		95,911		2.5		Office	—		—		—		—	81,566		—
Retail	14,405		4,128		18,533		122,460		15.1		Retail	—		4,678		3,989		8,667	121,338		7.1
Mobile home park	—		—		—		25,370		—		Mobile home park	—		—		—		—	25,510		—
Hotel/motel	996		5,566		6,562		52,515		12.5		Hotel/motel	—		4,987		30,130		35,117	69,157		50.8
Nursing home	5,400		6,368		11,768		11,783		99.9		Nursing home	—		6,368		—		6,368	12,868		49.5
Warehouse	—		5,635		5,635		17,489		32.2		Warehouse	—		8,763		81		8,844	17,512		50.5
Storage	—		—		—		34,551		—		Storage	—		—		—		—	36,093		—
Other non-residential	828		—		828		25,831		3.2		Other non-residential	—		—		—		—	25,724		—
Total Commercial real estate	24,037		21,697		45,734		385,910		12.1		Total Commercial real estate	—		24,796		34,200		58,996	389,768		15.1
Construction/land	1,100		—		1,100		107,401		1.0		Construction/land	—		—		—		—	99,598		—
Business											Business							—
Aircraft	1,074		—		1,074		13,741		7.8		Aircraft	—		—		—		—	11,735		—
SBA	—		—		—		753		—		SBA	—		—		—		—	819		—
PPP											PPP	—		—		—		—	52,045		—
Other business	2,065		657		2,722		20,208		13.5		Other business	—		—		1,899		1,899	21,181		9.0
Total other business	3,139		657		3,796		34,702		10.9
Total business											Total business	—		—		1,899		1,899	85,780		2.2
Consumer:											Consumer:							—
Classic/collectible auto	1,202		—		1,202		22,029		5.5		Classic/collectible auto	86		105		—		191	27,784		0.7
Other consumer	760		—		760		15,196		5.0		Other consumer	—		—		—		—	13,061		—
Total consumer	1,962		—		1,962		37,225		5.3		Total consumer	86		105		—		191	40,845		0.5
Total loans with pandemic modifications	49,105		32,003		81,108		1,105,959		7.3
Total loans with COVID-19 pandemic modifications											Total loans with COVID-19 pandemic modifications	$	369	$	29,015	$	36,099	65,483	$	1,150,481	5.7	%

~~At March 31, 2020,~~ Prior to their modifications, the loans included in the above table were current on their loan payments. The Bank is monitoring its loan portfolio for delinquencies of loans that have not requested modifications under the CARES Act. As of April 30, 2020, there were 18 loans totaling $9.4 million that had not requested a deferral and were 10 or more days past due, including the $2.1 million multifamily loan currently in foreclosure.

Critical Accounting Policies

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and our financial results. These policies are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or by using different assumptions. These policies govern the ALLL, the valuation of OREO, and the calculation of deferred taxes, the right-of-use asset and lease liability on our operating leases, fair values, and other-than-temporary impairments on the market value of investments and derivatives. These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies in the 2019 Form 10-K. There have not been any material changes in the Company’s critical accounting policies and estimates as compared to the disclosure contained in the 2019 Form 10-K.

Comparison of Financial Condition at ~~March 31,~~September 30, 2020 and December 31, 2019

Total assets were ~~$1.33~~$1.37 billion at ~~March 31,~~September 30, 2020, ~~a decrease~~an increase of ~~0.8%~~1.8%, from $1.34 billion at December 31, 2019. The following table details the ~~$10.7~~$23.6 million net change in the composition of our assets at ~~March 31,~~September 30, 2020 from December 31, 2019.


	Balance at September 30, 2020		Change from December 31, 2019		Percent Change
	(Dollars in thousands)
Cash on hand and in banks	$	7,440	$	(2,654)	(26.3)	%
Interest-earning deposits with banks	18,674		5,778		44.8
Investments available-for-sale, at fair value	126,020		(10,581)		(7.7)
Investment held-to-maturity	2,406		2,406		n/a
Loans receivable, net	1,133,984		25,522		2.3
FHLB stock, at cost	6,410		(599)		(8.5)
Accrued interest receivable	5,676		1,538		37.2
Deferred tax assets, net	1,879		378		25.2
OREO	454		—		—
Premises and equipment, net	22,409		(57)		(0.3)
BOLI	32,830		848		2.7
Prepaid expenses and other assets	1,704		(512)		(23.1)
ROU	3,834		1,625		73.6
Goodwill	889		—		—
Core deposit intangible	860		(108)		(11.2)
Total assets	$	1,365,469	$	23,584	1.8	%

Balance at
March 31, 2020 Change from December 31, 2019 Percent Change
(Dollars in thousands)
Cash on hand and in banks                                            $ 6,453
$ (3,641 ) (36.1 )%
Interest-earning deposits with banks                                            22,063
9,167
71.1
Investments available-for-sale, at fair value 132,159
(4,442 ) (3.3 )
Investment held-to-maturity 2,371
2,371
n/a
Loans receivable, net                                            1,092,128
(16,334 ) (1.5 )
FHLB stock, at cost                                 8,010
1,001
14.3
Accrued interest receivable 4,302
164
4.0
Deferred tax assets, net 2,227
726
48.4
OREO 454
—
—
Premises and equipment, net 22,591
125
0.6
BOLI 32,290
308
1.0
Prepaid expenses and other assets 1,898
(318 ) (14.4 )
ROU 2,446
237
10.7
Goodwill 889
—
—
Core deposit intangible 932
(36 ) (3.7 )
Total assets                                 $ 1,331,213
$ (10,672 ) (0.8 )%

Interest-earning deposits with banks. Our interest-earning deposits with banks, consisting primarily of funds held at the Federal Reserve Bank of San Francisco (“FRB”), increased by ~~$9.2~~$5.8 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. ~~These~~Deposit growth of $36.1 million outpaced the growth in loans receivable providing excess funds ~~fluctuate based on our~~invested in these deposits and funding ~~needs.~~for the payoff of certain borrowings.

Investments available-for-sale. Our investments available-for-sale portfolio decreased by ~~$4.4~~$10.6 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. ~~During~~As part of a strategy to diversify the Bank’s holdings of subordinated debt obligations from financial institutions, during this period ~~we had no sales or maturities~~the Bank sold $5.0 million of ~~securities.~~subordinated debt obligations issued by two institutions, and purchased a total of $4.5 million of subordinated debt obligations issued by three different financial institutions. Following this restructure, the Bank’s maximum subordinated debt investment in a single financial institution was $2.0 million. In addition, the Bank sold one $3.0 million mortgage backed security and two corporate securities issued by large financial institutions totaling $3.5 million. These transactions resulted in a net gain on sale of $86,000. At ~~March 31,~~September 30, 2020, corporate bonds issued by financial institutions represented ~~$25.1~~$21.5 million, or ~~19.0%~~17.1% of our investments available-for-sale and municipal bonds represented ~~$11.0~~$14.8 million, or ~~8.3%~~11.8% of our investments available-for-sale.

The effective duration of the investments available-for-sale at ~~March 31,~~September 30, 2020, was ~~2.64%~~2.63% as compared to 2.54% at December 31, 2019. Effective duration 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. Total loans receivable ~~remained virtually unchanged, decreasing~~increased by ~~$16.3~~$25.5 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, to $1.1 billion at ~~March 31,~~September 30, 2020. The primary factor behind the increase was the origination of $52.0 million in SBA approved PPP loans. Loan originations of ~~$38.7~~$196.4 million ~~were~~were supplemented with ~~$5.3~~ $17.5 million of loan ~~purchases to help offset loan repayments.~~ purchases. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, ~~one‑to‑four~~business loans, which included PPP loans, increased by $48.0 million, one-to-four family residential loans increased by $19.3 million and consumer loans increased by $10.6 million. Partially offsetting these increases, construction/land loans decreased by ~~$1.3~~$14.1 million, multifamily loans decreased by $30.3 million and commercial real estate loans decreased by ~~$9.2~~$5.4 million, ~~multifamily loans decreased by $3.4 million, construction/land loans decreased by $6.3 million~~

At September 30, 2020 and ~~business loans decreased by $3.1 million. Partially offsetting these decreases, consumer loans increased by $7.0 million as purchases of classic and collectible auto loans continued to be strong.~~

~~Our loan concentrations remained stable at March 31, 2020 as compared to~~ December 31, ~~2019. At these dates,~~2019, the Bank’s construction loans totaled ~~77.6%~~68.4% and 81.9% of total capital, respectively, and total non-owner occupied commercial real estate was ~~437.7%~~407.1% and 449.7% of total capital, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including residential, ~~non‑residential,~~non-residential, and construction loans, should not exceed 550% of total risk-based capital. Our concentration guideline for construction/land loans is to limit these loans to 100% of total risk-based capital. The concentration of construction/land loans is calculated using the funded balance of these loans and consequently can fluctuate based on the timing of construction draws and loan payoffs. Management reviews estimated construction draws and loan payoffs and adjusts loan originations based on these estimates to achieve compliance with our construction guidelines. Our commercial and multifamily real estate and construction/land loan portfolios are subject to ongoing credit reviews performed by both independent loan review staff, as well as an external third-party review firm to assist with identifying potential adverse trends and risks in the portfolio allowing management to initiate timely corrective action, as necessary. Such reviews also assist with ensuring loan risk grades are accurately assigned and thereby properly accounted for in the ALLL. The review places emphasis on large borrowing relationships, stress testing, compliance with loan covenants, as well as other risk factors warranting enhanced review.

The following table presents a breakdown of our multifamily, commercial and construction loans by collateral type at ~~March 31,~~September 30, 2020 and December 31, 2019. Total construction/land loans are net of ~~$72.0~~$68.9 million and $89.6 million of LIP at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.


	September 30, 2020		December 31, 2019
	(In thousands)
Multifamily residential:
Micro-unit apartments	$	11,422	$	13,809
Other multifamily	131,197		159,106
Total multifamily residential	142,619		172,915

Non-residential
Office	81,566		100,744
Retail	121,338		133,094
Mobile home park	25,510		26,099
Hotel / motel	69,157		42,971
Nursing home	12,868		11,831
Warehouse	17,512		17,595
Storage	36,093		37,190
Other non-residential	25,724		25,628
Total non-residential	389,768		395,152

Construction/land:
One-to-four family residential	45,231		44,491
Multifamily	47,547		40,954
Commercial	5,475		19,550
Land	1,345		8,670
Total construction/land	99,598		113,665
Total multifamily residential, non-residential and construction/land loans	$	631,985	$	681,732

March 31, 2020 December 31, 2019
(In thousands)
Multifamily residential:
Micro-unit apartments $ 11,230
$ 13,809
Other multifamily 158,238
159,106
Total multifamily residential 169,468
172,915

Non-residential
Office 95,911
100,744
Retail 122,460
133,094
Mobile home park 25,370
26,099
Hotel / motel 52,515
42,971
Nursing home 11,783
11,831
Warehouse 17,489
17,595
Storage 34,551
37,190
Other non-residential 25,831
25,628
Total non-residential 385,910
395,152

Construction/land:
One-to-four family residential 43,279
44,491
Multifamily 35,201
40,954
Commercial 22,946
19,550
Land 5,975
8,670
Total construction/land 107,401
113,665
Total multifamily residential, non-residential and construction/land loans $ 662,779
$ 681,732

Included in total construction/land loans at ~~March 31,~~September 30, 2020, are ~~$32.6~~$44.8 million of multifamily loans ~~$22.9~~and $5.5 million of commercial real estate ~~loans and $3.6 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. At December 31, 2019, construction/land loans included $38.6 million of multifamily loans, $18.3 million of commercial real estate loans and $3.5 million of one-to-four family loans that roll over to permanent loans in accordance with the terms of the construction/land loan. In the above table, hotel/motel loans at September 30, 2020, includes $15.5 million for a loan that rolled over to permanent status during the current year. This loan was included as a commercial construction/land loan of $12.5 million at December 31, 2019.

To assist in our strategic initiatives for loan growth and to achieve geographic diversification, the Bank will originate and purchase loans and utilize loan participations with the underlying collateral located within areas of Washington State outside our primary market area or in other states. The Bank’s goal with respect to loan participations is to locate a selling bank that is unable to make an entire loan due to legal or lending concentration limitations. Sellers of these loans are reviewed for management/lending experience, financial condition, asset quality metrics, and regulatory matters. Loans acquired through participation or purchase must meet the Bank’s underwriting standards. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Bank purchased ~~$5.3~~$16.0 million of consumer loans secured by classic/collectible automobiles to borrowers located in Washington and other states.

The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas of Washington, in California, and in other states. At ~~March 31,~~September 30, 2020, total loans secured by collateral located in California represented ~~4.0%~~3.2% of our total loans and total loans secured by collateral located outside the states of California and Washington represented ~~9.8%~~9.7% of our total loans. The following table details geographic concentrations in our loan portfolio:


	At March 31, 2020															At September 30, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total
	(In thousands)															(In thousands)
King County	$	291,219	$	99,832	$	199,050	$	97,224	$	17,142	$	13,172	$	717,639	King County	$	304,858	$	82,490	$	222,611	$	87,432	$	53,221	$	12,434	$	763,046
Pierce County	33,897		5,052		26,702		6,069		362		606		72,688		Pierce County	35,840		4,675		25,891		6,409		2,483		125		75,423
Snohomish County	26,004		3,539		34,280		33		3,708		1,436		69,000		Snohomish County	28,898		3,278		12,893		3,508		16,693		1,614		66,884
Kitsap County	7,571		5		299		2,249		—		—		10,124		Kitsap County	8,293		5		297		2,249		650		—		11,494
Other Washington Counties	9,310		24,330		47,183		1,826		1,236		437		84,322		Other Washington Counties	10,763		23,507		49,450		—		820		188		84,728
California	2,664		20,335		15,482		—		972		4,634		44,087		California	2,637		12,472		15,313		—		937		5,929		37,288
Outside Washington and California ⁽¹⁾	588		16,375		62,914		—		11,282		16,940		108,099		Outside Washington and California (1)	582		16,192		63,313		—		10,976		20,555		111,618
Total loans	$	371,253	$	169,468	$	385,910	$	107,401	$	34,702	$	37,225	$	1,105,959	Total loans	$	391,871	$	142,619	$	389,768	$	99,598	$	85,780	$	40,845	$	1,150,481

_______________

⁽¹⁾Includes loans in Utah, Oregon, Georgia and ~~Georgia~~Florida of $16.2 million, ~~$11.7~~$11.6 million, $8.5 million and ~~$8.2~~$8.3 million, respectively, and loans in 3736 other states.

Our five largest borrowing relationships, which represent ~~8.0%~~7.7% of our net loans, increased by ~~$1.9~~$1.6 million to ~~$88.8~~$88.5 million at ~~March 31,~~September 30, 2020, from $86.9 million at December 31, 2019. The total number of loans represented by this group of borrowers ~~decreased slightly to 14~~remained steady with 16 loans at ~~March 31,~~both September 30, 2020, ~~from 16 loans at~~and December 31, 2019. At ~~March 31,~~September 30, 2020, all five borrowers were current on their loan payments. We monitor the performance of these borrowing relationships very closely due to their concentration risk in relation to the entire loan portfolio.

The following table details our five largest lending relationships at ~~March 31,~~September 30, 2020:


Borrower ⁽¹⁾	Number of Loans	One-to-Four Family Residential ⁽²⁾		Multifamily		Commercial Real Estate		Construction/Land		Aggregate Balance of Loans		Borrower (1)	Number of Loans	One-to-Four Family Residential (2)		Multifamily		Commercial Real Estate		Aggregate Balance of Loans
	(Dollars in thousands)												(Dollars in thousands)
Real estate investor	5	$	—	$	8,399	$	12,957	$	—	$	21,356	Real estate investor	5	$	—	$	8,319	$	12,836	$	21,155
Real estate investor	5	430		—		18,827		—		19,257		Real estate investor	6	424		—		18,802		19,226
Real estate investor	2	—		—		18,622		—		18,622		Real estate investor	2	—		—		18,454		18,454
Real estate investor	1	—		—		—		15,650		15,650		Real estate investor	1	—		—		15,524		15,524
Real estate investor	1	—		—		13,888		—		13,888		Real estate investor	2	—		—		14,137		14,137
Total	14	$	430	$	8,399	$	64,294	$	15,650	$	88,773	Total	16	$	424	$	8,319	$	79,753	$	88,496

________


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


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

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

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

The ALLL increased to ~~$13.5~~$14.6 million at ~~March 31,~~September 30, 2020, from $13.2 million at December 31, 2019, and represented ~~1.22%~~1.27% and 1.18% of total loans receivable at ~~March 31,~~September 30, 2020, and December 31, 2019, respectively. The ALLL consists of two components, the general allowance and the specific reserves. The increase in the ALLL general allowance was primarily the result of the downgrade of $26.8 million of commercial real estate loans combined with increases in forecasted credit deterioration for all loan categories in response to the economic disruption caused by the COVID-19 ~~pandemic.~~pandemic, with higher potential impact allocated to commercial real estate and construction/land portfolios. The ~~increase~~$52.0 million balance of PPP loans was ~~partially offset~~omitted from the ALLL calculation at September 30, 2020 as these loans are fully guaranteed by the ~~$16.3 million decline~~SBA. Management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in ~~total loans receivable.~~turn will reimburse the Bank for the amount forgiven. Impaired loans increased ~~$2.9~~$1.7 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020, however, the loans are generally well collateralized and did not require additional reserves to be set aside. The specific reserves decreased by ~~$2,000~~$19,000 as a result of amortization of the

additional allowance set aside on loans with ~~modifications.~~modifications and loan payoffs. For additional information, see “Comparison of Operating Results for the Three Months Ended ~~March 31,~~September 30, 2020 and 2019 - Provision for Loan Losses” and “Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019 - Provision for Loan Losses” discussed below.

We believe that the ALLL at ~~March 31,~~September 30, 2020, was adequate to absorb the probable and inherent risks of loss in the loan portfolio at that date. While we believe the estimates and assumptions used in our determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will be proven correct in the future, that the actual amount of future losses will not exceed the amount of past provisions, or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. Future additions to the allowance may become necessary based upon changing economic conditions, the level of problem loans, business conditions, credit concentrations, increased loan balances, or changes in the underlying collateral of the loan portfolio. In addition, the determination of the amount of our ALLL is subject to review by bank regulators as part of the routine examination process, which may result in the establishment of additional loss reserves or the charge-off of specific loans against established loss reserves based upon their judgment of information available to them at the time of their examination. Uncertainties relating to our ALLL are heightened as a result of the risks surrounding the COVID-19 pandemic as described in further detail in Part II, Item 1A.

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

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


	September 30, 2020			December 31, 2019			Nine Month Change
	(Dollars in thousands)








Performing TDRs:
One-to-four family residential	$	2,837		$	3,979		$	(1,142)

Commercial real estate	1,249			1,267			(18)



Total TDRs	$	4,086		$	5,246		$	(1,160)
% TDRs classified as performing	100.0		%	100.0		%

March 31, 2020 December 31, 2019 Three Month Change
(Dollars in thousands)
Performing TDRs:
One-to-four family residential $ 3,768
$ 3,979
$ (211 )
Commercial real estate 1,257
1,267
(10 )
Total TDRs $ 5,025
$ 5,246
$ (221 )
% TDRs classified as performing 100.0 % 100.0 %

Our TDRs decreased ~~$221,000~~$1.2 million at ~~March 31,~~September 30, 2020, compared to December 31, 2019, as a result of principal repayments and loan payoffs. ~~At March 31, 2020, all TDRs were performing and on accrual status.~~ In addition, at September 30, 2020, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at ~~March 31,~~September 30, 2020, totaled ~~$1.3~~$1.2 million and was secured by a commercial property located in King County.

Loans are considered past due if a scheduled principal or interest payment is due and unpaid for 30 days or more. At ~~both March 31,~~September 30, 2020, and December 31, 2019, total past due loans were $2.1 million and $2.2 million, respectively, representing ~~0.20% and~~ 0.19% of total loans receivable ~~respectively.~~at both dates.

Nonperforming assets increased by ~~$2.1~~$2.0 million during the first ~~three~~nine months of 2020, primarily as a result of a $2.1 million multifamily loan that was moved to nonaccrual status during this period. The following table presents detailed information on our nonperforming assets at the dates indicated:


	September 30, 2020			December 31, 2019			Nine Month Change
	(Dollars in thousands)
Nonaccrual loans:
One-to-four family residential	$	—		$	95		$	(95)
Multifamily	2,104			—			2,104



Total nonaccrual loans	2,104			95			2,009

OREO	454			454			—
Total nonperforming assets (1)	$	2,558		$	549		$	2,009

Nonperforming assets as a percent of total assets	0.19		%	0.04		%

____________

March 31, 2020 December 31, 2019 Three Month Change
(Dollars in thousands)
Nonaccrual loans:
One-to-four family residential $ 91
$ 95
$ (4 )
Multifamily 2,104
—
2,104
Total nonaccrual loans 2,195
95
2,100

OREO 454
454
—
Total nonperforming assets ⁽¹⁾
$ 2,649
$ 549
$ 2,100

Nonperforming assets as a
percent of total assets 0.20 % 0.04 %

^____________

⁽¹⁾ The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all TDRs as nonperforming loans, although 100.0% of our TDRs were performing in accordance with their restructured terms at ~~March 31,~~September 30, 2020.

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. ~~The largest~~Our only nonaccrual loan at ~~March 31,~~September 30, 2020 was a $2.1 million multifamily loan secured by a non-owner occupied multifamily residence located in King County. Foreclosure proceedings are underway on this loan as it was more than 90 days past due at ~~March 31,~~September 30, 2020. ~~Also included in nonaccrual loans at March 31, 2020, was a $91,000 owner occupied, single-family residence located in Snohomish County. This loan was current on its loan payments at that date.~~

We continue to focus our efforts on working with borrowers to bring their loans current or converting nonaccrual loans to OREO and subsequently selling the properties. By taking ownership of these properties, 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 low ratio of our nonperforming assets as a percent of total assets of ~~0.20%~~0.19% at ~~March 31,~~September 30, 2020, and 0.04% at December 31, 2019, as well as the minimal amount of OREO held at ~~March 31,~~September 30, 2020.

OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At both ~~March 31,~~September 30, 2020, and December 31, 2019, OREO was $454,000, and consisted of two undeveloped commercial lots located in Pierce County.

Intangible assets. The balance of goodwill was $889,000 at both ~~March 31,~~September 30, 2020 and December 31, 2019. Goodwill was calculated as the excess purchase price of the branches acquired in August 2017 (the “Branch Acquisition”) over the fair value of the assets acquired and liabilities assumed.

The core deposit intangible (“CDI”) recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing ~~checking,~~demand, interest-bearing ~~checking,~~demand, savings, and money market accounts. The CDI balance was ~~$932,000~~$860,000 at ~~March 31,~~September 30, 2020 and $968,000 at December 31, 2019. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. This amount amortizes into noninterest expense on an accelerated basis over ten years.

As a result of the economic disruption caused by the COVID-19 pandemic, the Company ~~will perform~~performed an interim impairment ~~testing~~analysis on goodwill and the CDI during the ~~second~~third quarter of 2020. Management has determined that at September 30, 2020, it was premature to determine potential sustained deterioration in the fair value of the Company and did not recognize any impairment on goodwill or the CDI. Additional analysis will be performed as required as more information on the economic impact of the COVID-19 pandemic becomes known.

Deposits. During the first ~~three~~nine months of 2020, deposits ~~decreased $33.6~~increased $36.1 million to ~~$1.00~~$1.07 billion at ~~March 31,~~September 30, 2020, compared to $1.03 billion at December 31, 2019. Deposit accounts consisted of the following:


	September 30, 2020		Change from December 31, 2019		Percent Change
	(Dollars in thousands)
Noninterest-bearing demand	$	82,376	$	29,527	55.9	%
Interest-bearing demand	110,856		44,959		68.2
Statement savings	19,292		1,845		10.6
Money market	428,512		50,746		13.4
Certificates of deposit, retail	418,646		(6,457)		(1.5)
Certificates of deposit, brokered	10,000		(84,472)		(89.4)
	$	1,069,682	$	36,148	3.5

March 31, 2020 Change from December 31, 2019 Percent Change
(Dollars in thousands)
Noninterest-bearing $ 53,519
$ 670
1.3 %
Interest-bearing checking 68,803
2,906
4.4
Statement savings 17,040
(407 ) (2.3 )
Money market 397,489
19,723
5.2
Certificates of deposit, retail 437,676
12,573
3.0
Certificates of deposit, brokered 25,457
(69,015 ) (73.1 )
$ 999,984
$ (33,550 ) (3.2 )

Our retail deposits increased by ~~$35.5~~$120.6 million during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Money market accounts increased by ~~$19.7 million and retail certificates of deposit increased by $12.6~~$50.7 million as the Bank competitively priced these products to increase these funding sources. In addition, ~~continued emphasis on~~noninterest-bearing demand and interest-bearing demand accounts increased by $29.5 million and $45.0 million, respectively, due in part to deposits related to PPP loans funded during the second quarter of 2020. Partially offsetting these increases, retail certificates of deposit ~~growth at our branches resulted~~decreased $6.5 million as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a ~~$2.9 million increase in interest-bearing checking accounts. The COVID-19 pandemic has not adversely impacted the Bank’s deposits with balances remaining stable subsequent to March 31, 2020.~~managed runoff of these funds.

The Bank’s portfolio of brokered certificates of deposits decreased by ~~$69.0~~$84.5 million to ~~$25.5~~$10.0 million at ~~March 31,~~September 30, 2020, from $94.5 million at December 31, 2019. Continued growth in retail deposits with our expanded branch network allowed the Bank to reduce brokered deposits as a source of funds. To assist in management of our interest rate risk, ~~$62.5~~$84.9 million of maturing brokered certificates of deposit were partially replaced with FHLB borrowings hedged by interest rate swap agreements. In addition, ~~$6.5~~$14.5 million of callable brokered certificates of deposit, with a weighted average interest rate of ~~2.86%~~2.06%, were redeemed early. ~~The Bank’s current portfolio~~Subsequently, the Bank exercised its call option on the remaining $10.0 million of brokered certificates of deposit ~~will mature in two to seven months.~~on October 15, 2020.

At ~~March 31,~~September 30, 2020 and December 31, 2019, we held ~~$37.2~~$55.7 million and $34.0 million in public funds, respectively, primarily in retail certificates of deposit and money market accounts.

Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, ~~and~~ to leverage our balance sheet and to supplement our deposits. Total FHLB advances were ~~$160.0~~$120.0 million at ~~March 31,~~September 30, 2020, a ~~$22.3~~$17.7 million ~~increase~~decrease from $137.7 million at December 31, 2019. At ~~March 31,~~September 30, 2020, the Bank’s advances included $60.0 million of fixed-rate three-month advances that renew quarterly, and $60.0 million of fixed-rate one-month advances

that renew monthly, ~~that~~all of which are utilized in cash flow hedge agreements, as described below. In addition, at March 31, 2020, we held $40.0 million of purchased FHLB Fed Funds that. The short-term nature of our advances and overnight FHLB advances provides us flexibility to adjust the level of our borrowings as our customer deposit balances change consistent with our asset/liability objectives. At ~~March 31,~~September 30, 2020, all of our FHLB advances were due to reprice in less than two months. At that date, there were no FHLB Fed Funds short-term borrowings.

Cash Flow Hedge. To assist in our interest rate risk management efforts, the Bank has entered into multiple interest rate swap agreements with qualified institutions. Each interest rate swap agreement qualifies as a cash flow hedge of the variability of future interest payments attributable to the changes in ~~1- month~~1-month or 3-month LIBOR rates. The objective of the cash flow hedge is to offset the variability of cash flows due to the rollover of the Bank’s FHLB, or other fixed rate ~~advance,~~advances, for 1-month or 3-months, respectively, for the term of the agreement. The agreements allow for a substitute index to be used if LIBOR is unavailable.

The following table presents details of the Bank’s interest rate swap agreements as of ~~March 31,~~September 30, 2020. 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 below table. 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)

50,000

10/25/2016

10/25/2021

1.340

3-month LIBOR

quarterly

15,000

9/27/2019

9/27/2024

1.440

1-month LIBOR

monthly

10,000

11/19/2019

11/20/2023

1.585

3-month LIBOR

quarterly

15,000

3/2/2020

3/2/2026

0.911

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2027

0.937

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2028

0.984

1-month LIBOR

monthly

15,000

10/25/2021

10/25/2028

0.793

3-month LIBOR

quarterly

10,000

10/25/2021

10/25/2029

0.800

3-month LIBOR

quarterly

Interest rate swap agreements in the above table with start dates in 2021 are forward-starting contracts. The Bank intends to secure two fixed-rate FHLB advances on October 25, 2021 for $15.0 million and $10.0 million, for seven years and eight years, respectively, which will reprice quarterly. These ~~agreements were contracted as a partial replacement of~~forward-starting contracts are intended to partially replace the $50.0 million notional interest rate swap that will mature on October 25, 2021.

A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At ~~March 31,~~September 30, 2020, we recognized a ~~$3.3~~$3.8 million net fair value liability as a result of the decrease in the market value of these interest rate swap agreements.

Stockholders’ Equity. Total stockholders’ equity decreased ~~$3.2~~$1.5 million during the first ~~three~~nine months of 2020 to ~~$153.1~~$154.8 million at ~~March 31,~~September 30, 2020, from $156.3 million at December 31, 2019. ~~Increases to stockholders’ equity included $1.7 million of~~During the nine months ended September 30, 2020, net income ~~and $462,000~~ of ~~stock based compensation. These increases were~~$5.9 million increased retained earnings. This increase was more than offset by several factors, including a ~~$3.2~~$1.8 million, net of tax, decrease in other comprehensive income as a result of the decline in the fair market value of our available-for-sale securities and cash flow ~~hedge.~~hedges. In addition, stockholders’ equity decreased by ~~$1.1~~$3.9 million from the repurchase of ~~79,395~~369,894 shares of common stock and ~~$988,000~~$2.9 million in cash dividends paid. As part of the strategy to increase shareholder value, the Company’s Board of Directors authorized a stock repurchase plan that began on ~~January 27,~~July 30, 2020 and expires on ~~July 27,~~December 30, 2020. The plan authorizes the repurchase of up to ~~513,000~~509,000 shares of the Company’s stock. At ~~March 31,~~September 30, 2020, the Company had repurchased ~~79,395~~155,049 shares under this repurchase plan at an average price of ~~$14.06~~$9.54 per share.

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


	Three Months Ended March 31,							Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019				2020			2019			2020			2019

Dividend declared per common share	$	0.10		$	0.08		Dividend declared per common share	$	0.10		$	0.09		$	0.30		$	0.26
Dividend payout ratio ⁽¹⁾	58.8		%	42.1		%	Dividend payout ratio (1)	45.5		%	36.0		%	50.0		%	33.6		%

______________

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

Comparison of Operating Results for the Three Months Ended ~~March 31,~~September 30, 2020 and 2019

General. Net income for the three months ended ~~March 31,~~September 30, 2020, was ~~$1.7~~$2.1 million, or ~~$0.17~~$0.21 per diluted share as compared to ~~net income of $1.9~~$2.5 million, or ~~$0.19~~$0.25 per diluted share for the three months ended ~~March 31,~~September 30, 2019. The ~~$261,000~~$423,000 decrease in net income during the three months ended ~~March 31,~~September 30, 2020, was primarily a ~~combined~~ result of ~~a $188,000 decrease in net interest income and a $559,000 increase in noninterest expense, partially offset by a $100,000 decrease~~the change in the provision for loan losses to a ~~$290,000 increase in noninterest income and~~$700,000 provision for the three months ended September 30, 2020 as compared to a ~~$96,000 decrease in federal income tax expense.~~$100,000 provision for the three months ended September 30, 2019.

Net Interest Income. Net interest income for the three months ended ~~March 31,~~September 30, 2020, ~~decreased $188,000~~increased $436,000 to ~~$9.7~~$10.1 million from ~~$9.9~~$9.7 million for the three months ended ~~March 31,~~September 30, 2019, as a ~~combined~~ result of a decrease in interest ~~income and an increase~~expense outpacing the decrease in interest ~~expense.~~income.

Interest income decreased by ~~$71,000~~$1.5 million for the three months ended ~~March 31,~~September 30, 2020, as compared to the same period in 2019, primarily as a result of ~~a $240,000~~the significant 150 basis point decrease in the targeted federal funds rate in March 2020 in response to the COVID-19 pandemic and the ongoing low interest rate environment putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields of the PPP loan portfolio. Loan interest income ~~on investments available-for-sale. During~~decreased $1.1 million for the three months ended ~~March 31,~~September 30, 2020 as compared to the same period in 2019, ~~our average balance of these investments decreased by $4.7 million and their average yield declined~~primarily due to ~~2.72% from 3.35%. Partially offsetting these declines, interest income from net loans receivable increased by $193,000 for the comparative periods as~~ a ~~result of a $64.1 million increase in their average balance, partially offset by a reduction~~decrease in yield to ~~4.94%~~4.49% for the three months ended ~~March 31,~~September 30, 2020 from ~~5.22% for the comparative period in 2019 primarily due to decreases in short-term market rates.~~

~~Also contributing to the decrease in interest income, the yield on interest-earning deposits decreased to 1.18%~~5.14% for the three months ended ~~March 31, 2020, from 2.50% for~~September 30, 2019. Partially offsetting the ~~three months ended March 31, 2019, outweighing a $4.1 million increase~~decrease in yield, the average balance of these funds, resulting in a $9,000 decrease in interest income. The average balance of FHLB advances decreased by $1.3 million, resulting in a $15,000 decrease in FHLB stock dividends received for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

~~Interest expense~~loans receivable increased ~~$117,000 to $4.8~~$64.5 million for the three months ended ~~March 31,~~September 30, 2020 as compared to the same period in 2019. ~~The~~However, a large portion of this increase was ~~primarily~~ the result of $52.0 million PPP loans originated during the six months ended September 30, 2020. As certain criteria are met, prepayments of these loans or amounts forgiven by the SBA may increase the loan yield in periods of payoff with recognition of unamortized fees and costs. The impact to our loan yields is expected to cease completely after the payoff or maturity of these loans.

Interest income from investments available-for-sale decreased $315,000, primarily due to a ~~$55.6~~decrease in yield to 2.32% for the three months ended September 30, 2020 from 3.02% for the three months ended September 30, 2019. In addition, the average balance of these investments decreased $11.1 million for the three months ended September 30, 2020, as compared to the same period in 2019.

Interest income from interest-earning deposits decreased $150,000 for the three months ended September 30, 2020, as a result of a decrease in yield to 0.10% from 2.24% for the three months ended September 30, 2019, outweighing a $4.7 million increase in the average balance of these ~~funds with growth of $119.6 million~~funds.

The decrease in ~~the average balance of retail deposits, partially~~interest income was more than offset by ~~decreases of $30.8~~a $2.0 million decrease in ~~brokered deposits and $33.2 million other borrowings. The total cost of interest-bearing deposits increased by five basis points~~interest expense for the three months ended ~~March 31,~~September 30, 2020 as compared to the ~~same period in 2019, with money market and retail certificates of deposit rate increases of 12 and 16~~three months ended September 30, 2019. Interest expense on interest-bearing deposits decreased 73 basis points ~~respectively,~~for the comparative periods, as ~~we competed~~a combined result of the declining interest rate environment and an increase in lower-cost demand deposits. Growth in our branch network allowed us to ~~grow these core~~repay almost all of our higher cost brokered deposits. ~~Partially offsetting these increases, the cost of~~Interest expense for brokered certificates of deposit decreased by 26$1.0 million, primarily as a result of a $162.5 million decrease in the average balance of these deposits for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. Our cost of funds was also impacted favorably by a 98 basis ~~points~~point decrease in the cost of money market accounts, partially offset by a $103.7 million increase in the average balance of these deposits. If market interest rates stay at or near current levels, management expects continued reduction in its cost of deposits as ~~certain higher cost maturing certificates were allowed~~decreases in the average rate paid on interest-bearing deposits tend to ~~run off, and $6.5~~lag changes in market interest rate. Approximately $260.4 million of ~~brokered~~ certificates of ~~deposits with~~deposit are scheduled to mature in the twelve months following September 30, 2020, at a ~~weighted-average~~weighted average interest rate of ~~2.86% were called.~~1.88%.

~~Partially offsetting~~

Further contributing to the ~~increase~~decrease in ~~deposit~~ interest expense, our cost of ~~other~~ borrowings decreased by ~~$427,000~~$129,000 for the three months ended ~~March 31,~~September 30, 2020, as compared to the same period in 2019. Through a combination of lower interest rates on FHLB Fed Funds ~~and~~short-term borrowings, as well as FHLB advances tied to interest rate swap agreements, the Bank’s cost of ~~these funds~~borrowings decreased to ~~1.48%~~1.28% for the three months ended ~~March 31,~~September 30, 2020, from ~~2.26%~~2.02% for the three months ended ~~March 31,~~September 30, 2019.

The Company’s net interest margin ~~decreased by 26 basis points, primarily due to decreases in our yield on interest earning assets outpacing~~was unchanged at 3.07% for the decline on our cost of interest‑bearing liabilities as a result of the lag in the market’s response to lowering deposit pricing when the targeted federal funds rate decreased in the second half of 2019three months ended September 30, 2020, and ~~the first quarter of 2020.~~September 30, 2019. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this report.

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:


	Three Months Ended September 30, 2020 Compared to September 30, 2019 Net Change in Interest
	Rate		Volume		Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(1,885)	$	835	$	(1,050)
Investments available-for-sale	(230)		(85)		(315)
Investments held-to-maturity	6		—		6
Interest-earning deposits with banks	(177)		27		(150)
FHLB stock	(31)		16		(15)
Total net change in income on interest-earning assets	(2,317)		793		(1,524)

Interest-bearing liabilities:
Interest-bearing demand	15		30		45
Statement savings	(3)		(1)		(4)
Money market	(1,050)		424		(626)
Certificates of deposit, retail	(283)		85		(198)
Certificates of deposit, brokered	(8)		(1,040)		(1,048)
Borrowings	(235)		106		(129)
Total net change in expense on interest-bearing liabilities	(1,564)		(396)		(1,960)
Total net change in net interest income	$	(753)	$	1,189	$	436

Three Months Ended March 31, 2020
Compared to March 31, 2019
Net Change in Interest
Rate Volume Total
(In thousands)
Interest-earning assets:
Loans receivable, net $ (632 ) $ 825
$ 193
Investments available-for-sale (201 ) (39 ) (240 )
Interest-earning deposits with banks (34 ) 25
(9 )
FHLB stock —
(15 ) (15 )
Total net change in income on interest-earning assets (867 ) 796
(71 )

Interest-bearing liabilities:
Interest-bearing demand 29
9
38
Statement savings (1 ) (2 ) (3 )
Money market 119
234
353
Certificates of deposit, retail 184
196
380
Certificates of deposit, brokered (43 ) (181 ) (224 )
Other borrowings (242 ) (185 ) (427 )
Total net change in expense on interest-bearing liabilities 46
71
117
Total net change in net interest income $ (913 ) $ 725
$ (188 )

The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended ~~March 31,~~September 30, 2020 and 2019. 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,
	2020						2019
	Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost
	(Dollars in thousands)
Assets
Loans receivable, net	$	1,137,742	$	12,847	4.49	%	$	1,073,283	$	13,897	5.14	%
Investments available-for-sale	128,885		751		2.32		140,031		1,066		3.02
Investments held-to-maturity	2,399		6		0.99		—		—		—
Interest-earning deposits with banks	32,701		8		0.10		27,992		158		2.24
FHLB stock	6,592		82		4.95		5,649		97		6.81
Total interest-earning assets	1,308,319		13,694		4.16		1,246,955		15,218		4.84
Noninterest earning assets	75,417						72,822
Total average assets	$	1,383,736					$	1,319,777

Liabilities and Stockholders' Equity
Interest-bearing demand	$	104,911	$	76	0.29	%	$	53,100	$	31	0.23	%
Statement savings	19,312		3		0.06		21,979		7		0.13
Money market	425,172		688		0.64		321,502		1,314		1.62
Certificates of deposit, retail	436,822		2,343		2.13		422,755		2,541		2.38
Certificates of deposit, brokered	16,301		96		2.34		178,787		1,144		2.54
Total interest-bearing deposits	1,002,518		3,206		1.27		998,123		5,037		2.00
Borrowings	124,543		400		1.28		103,707		529		2.02
Total interest-bearing liabilities	1,127,061		3,606		1.27		1,101,830		5,566		2.00
Noninterest bearing liabilities	101,687						62,890
Average equity	154,988						155,057
Total average liabilities and equity	$	1,383,736					$	1,319,777
Net interest income			$	10,088					$	9,652
Net interest margin					3.07	%					3.07	%

Three Months Ended March 31,
2020 2019
Average
Balance Interest Earned / Paid Yield /
Cost Average
Balance Interest Earned / Paid Yield /
Cost
(Dollars in thousands)
Assets
Loans receivable, net                                            $ 1,096,091
$ 13,474
4.94 % $ 1,031,994
$ 13,281
5.22 %
Investments available-for-sale 135,765
919
2.72
140,433
1,159
3.35
Interest-earning deposits with banks                                           10,555
31
1.18
6,484
40
2.50
FHLB stock                       6,615
76
4.62
7,888
91
4.68
Total interest-earning assets                                                       1,249,026
14,500
4.67
1,186,799
14,571
4.98
Noninterest earning assets 75,819
72,103

Total average assets $ 1,324,845
$ 1,258,902

Liabilities and Stockholders' Equity
Interest-bearing demand $ 63,413
$ 56
0.36 % $ 42,579
$ 18
0.17 %
Statement savings 17,089
5
0.12
24,146
8
0.13
Money market 389,886
1,431
1.48
320,411
1,078
1.36
Certificates of deposit, retail 428,695
2,500
2.35
392,337
2,120
2.19
Certificates of deposit, brokered 70,979
374
2.12
101,787
598
2.38
Total interest-bearing deposits 970,062
4,366
1.81
881,260
3,822
1.76
Other borrowings 127,707
470
1.48
160,950
897
2.26
Total interest-bearing liabilities 1,097,769
4,836
1.77
1,042,210
4,719
1.84
Noninterest bearing liabilities 69,584
63,842

Average equity 157,492
152,850

Total average liabilities and equity $ 1,324,845
$ 1,258,902

Net interest income $ 9,664
$ 9,852

Net interest margin 3.11 % 3.37 %

Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. 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 problem loans in assessing the ALLL. The specific reserve component is created when management believes that the collectability of a specific loan has been impaired and a loss is probable or a concession is granted that reduces the value of the loan. The specific reserves are computed using discounted cash flows, current appraisals, listed sales prices, and other available information, less costs to complete, if any, and costs to sell the property. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or if future events differ from current estimates.

During the three months ended ~~March 31,~~September 30, 2020, management evaluated the adequacy of the ALLL and concluded that a ~~$300,000~~$700,000 provision for loan losses was ~~appropriate~~appropriate. This provision was primarily attributed to reductions in loan grades during the quarter, including $26.8 million in commercial real estate loans that were downgraded due ~~primarily to forecasted credit losses due~~in large part to the ~~economic disruption and uncertainty from~~ongoing COVID-19 pandemic.In the quarter ended September 30, 2020, any relationship that requested a COVID-19 ~~pandemic. The increase~~related second loan payment deferral received additional scrutiny which resulted in ~~the ALLL required due to the COVID-19 pandemic was partially offset by a reduction in the ALLL for a $16.3 million decline in the balance~~some of ~~total~~these loans ~~receivable.~~being downgraded. In comparison, during the three months ended ~~March 31,~~September 30, 2019, a ~~$400,000~~$100,000 provision for loan losses was recognized primarily ~~as a result of~~due to growth in ~~net~~ loans receivable. For additional information, see Note 5 - Loans Receivable--ALLL.

The following table summarizes selected financial data related to our ALLL and loan portfolio.


	At or For the Three Months Ended September 30,
	2020			2019
	(Dollars in thousands)
Total loans receivable, end of period	$	1,150,481		$	1,097,301
Average loans receivable during period	1,137,742			1,073,283
ALLL balance at beginning of period	13,836			13,057
Provision for loan losses	700			100
Charge-offs:



Total charge-offs	—			—
Recoveries:
One-to-four family	2			3

Commercial real estate	30			—


Consumer	—			1
Total recoveries	32			4
Net recovery	32			4
ALLL balance at end of period	$	14,568		$	13,161
ALLL as a percent of total loans	1.27		%	1.20		%
Ratio of net recoveries to average net loans receivable. annualized	0.01			—

At or For the Three Months Ended March 31,
2020 2019
(Dollars in thousands)
Total loans receivable, end of period $ 1,105,959
$ 1,066,220
Average loans receivable during period 1,096,091
1,031,994
ALLL balance at beginning of period 13,218
13,347
Provision for loan losses 300
400
Charge-offs:
Total charge-offs —
—
Recoveries:
One-to-four family 12
24
Consumer —
37
Total recoveries 12
61
Net recovery 12
61
ALLL balance at end of period $ 13,530
$ 13,808
ALLL as a percent of total loans 1.22 % 1.30 %
Ratio of net recoveries to average net loans receivable —
0.01

Noninterest Income. Noninterest income ~~increased $290,000~~remained relatively stable, decreasing $28,000 to $1.0 million for the quarter ended ~~March 31,~~September 30, 2020, ~~from $700,000 for~~as compared to the quarter ended ~~March 31,~~September 30, 2019.

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


	Three Months Ended September 30, 2020		Change from Three Months Ended September 30, 2019		Percent Change
	(Dollars in thousands)
Net gain on sale of investments	$	18	$	(70)	(79.5)	%
BOLI change in cash surrender value	269		34		14.5
Wealth management revenue	145		(100)		(40.8)
Deposit related fees	201		22		12.3
Loan related fees	376		86		29.7
Other	2		—		—
Total noninterest income	$	1,011	$	(28)	(2.7)

Three Months Ended March 31, 2020 Change from Three Months Ended
March 31, 2019 Percent Change
(Dollars in thousands)
Net gain on sale of investments $ —
$ 8
(100.0 )%
BOLI change in cash surrender value 254
(15 ) (5.6 )
Wealth management revenue 165
(31 ) (15.8 )
Deposit related fees 176
5
2.9
Loan related fees 392
329
522.2
Other 3
(6 ) (66.7 )
Total noninterest income $ 990
$ 290
41.4 %

During the three months ended ~~March 31,~~September 30, 2020, as compared to the three months ended ~~March 31,~~September 30, 2019, ~~loan related fees increased by $329,000, primarily as a result of prepayment fees collected on certain loans paid prior to maturity. Partially offsetting this increase,~~ wealth management revenue decreased by ~~$31,000,~~$100,000, primarily as a result of regular fluctuations in the timing and mix of commissions received on serviced accounts. ~~Also reducing noninterest income,~~In addition, net gain on sales of investments declined by $70,000 for the ~~change in cash surrender value of our BOLI policies decreased~~three months ended September 30, 2020. Partially offsetting these declines, loan related feesincreased by ~~$15,000,~~$86,000, primarily as a result of ~~timing differences~~a $273,000 increase in ~~recognition of earnings~~loan prepayment fees collected on certain ~~policies.~~loans paid prior to maturity, partially offset by a

reduction of $191,000 in loan 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 at the time the swap agreement is commenced.

Noninterest Expense. Noninterest expense increased ~~$559,000~~$412,000 to ~~$8.3~~$7.9 million for the three months ended ~~March 31,~~September 30, 2020, from ~~$7.7~~$7.5 million for the comparable period in 2019.

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


	Three Months Ended September 30, 2020		Change from Three Months Ended September 30, 2019		Percent Change
	(Dollars in thousands)
Salaries and employee benefits	$	4,880	$	67	1.4	%
Occupancy and equipment	987		63		6.8
Professional fees	371		(69)		(15.7)
Data processing	731		253		52.9
OREO related expenses, net	1		—		—
Regulatory assessments	134		121		930.8
Insurance and bond premiums	116		21		22.1
Marketing	41		(77)		(65.3)
Other general and administrative	606		33		5.8
Total noninterest expense	$	7,867	$	412	5.5

Three Months Ended March 31, 2020 Change from Three Months Ended
March 31, 2019 Percent Change
(Dollars in thousands)
Salaries and employee benefits $ 5,212
$ 212
4.2 %
Occupancy and equipment                                            1,071
205
23.7
Professional fees                                 430
(66 ) (13.3 )
Data processing                                 694
176
34.0
OREO related expenses, net 1
(30 ) (96.8 )
Regulatory assessments 144
7
5.1
Insurance and bond premiums                                            120
15
14.3
Marketing 64
(22 ) (25.6 )
Other general and administrative 532
62
13.2
Total noninterest expense                                            $ 8,268
$ 559
7.3 %

Continued ~~growth and~~ branch expansion ~~as well as normal annual salary increases, for the Company contributed to~~and a new online banking platform resulted in an increase ~~in salary and employee benefits~~ of ~~$212,000, occupancy and equipment of $205,000 and~~$253,000 in data processing ~~services of $176,000,~~expenses for the three months ended September 30, 2020, as compared to the same period in 2019. Regulatory assessments increased $121,000 to $134,000 as a portion of the Bank’s small bank assessment credit offset the assessment in the quarter ended September 30, 2019, with no such credit available in the quarter ended September 30, 2020. Partially offsetting these increases, marketing expense decreased by $77,000 for the three months ended September 30, 2020, as compared to the same period in 2019, due primarily to cancellations of sponsored events due to COVID-19 restrictions. In addition, professional fees declined by $69,000 in the quarter ended September 30, 2020, with fewer projects in process requiring professional fees as compared to the prior period.

Federal Income Tax Expense. The federal income tax provision decreased by $181,000 to $450,000 for the three months ended September 30, 2020, as compared to $631,000 for the same period in 2019, primarily due to a $604,000 decrease in income before federal income taxes. The effective tax rate for the three months ended September 30, 2020, and 2019, was 17.8% and 20.1%, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2020 and 2019

General. Net income for the nine months ended September 30, 2020 was $5.9 million, or $0.60 per diluted share as compared to net income of $7.8 million, or $0.77 per diluted share for the nine months ended September 30, 2019. The decrease during the nine months ended September 30, 2020, as compared to the same period last year was primarily the result of the change in loan loss provision to a $1.3 million provision as compared to a $300,000 recapture of provision and a $1.6 million increase in noninterest expense.

Net Interest Income. Net interest income for the nine months ended September 30, 2020 was $29.8 million, as compared to $29.2 million for the same period in 2019, with decreases in interest income and interest expense of $2.4 million and $3.0 million, respectively.

Interest income decreased by $2.4 million for the nine months ended September 30, 2020, as compared to the same period in 2019, primarily as a result of the significant 150 basis point decrease in the targeted federal funds rate in March ~~31,~~2020 in response to the COVID-19 pandemic, and the ongoing historically low interest rate environment putting downward pressure on adjustable rate instruments combined with the impact of the low loan yields of the PPP loan portfolio. Loan interest income decreased $1.3 million for the nine months ended September 30, 2020 as compared to the same period in 2019, primarily due to a decrease in yield to 4.72% for the nine months ended September 30, 2020 from 5.18% for the nine

months ended September 30, 2019. Partially offsetting the decrease in yield, the average balance of loans receivable increased $66.4 million for the nine months ended September 30, 2020 as compared to the same period in 2019. However, a large portion of this increase was the result of $52.0 million PPP loans originated during the nine months ended September 30, 2020. Prepayments of these loans or amounts forgiven by the SBA may increase the loan yield in periods of payoff with recognition of unamortized fees and costs. The impact to our loan yields is expected to cease completely after the payoff or maturity of these loans.

Further contributing to the decrease in interest income, investments available-for-sale interest income decreased $868,000, primarily as a result of a decrease in yield to 2.49% for the nine months ended September 30, 2020 from 3.19% for the nine months ended September 30, 2019. In addition, the average balance of these investments decreased $7.1 million for the nine months ended September 30, 2020 as compared to the same period in 2019.

Interest income from interest-earning deposits decreased $201,000 for the nine months ended September 30, 2020, as a result of a decrease in yield to 0.24% from 2.30% for the nine months ended September 30, 2019, which more than offset the impact from a $10.4 million increase in the average balance of these funds.

The decrease in interest income was more than offset by a $2.0 million decrease in interest expense for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The cost of interest-bearing deposits decreased 37 basis points between the periods, as a combined result of the declining interest rate environment and an increase in lower-cost demand deposits. Growth in our branch network allowed us to repay substantially all of our higher cost brokered deposits. Interest expense on these brokered funds decreased by $1.9 million for the nine months ended September 30, 2020, as compared to the same period in 2019, primarily as a result of a $96.7 million decrease in their average balance.

Further contributing to the decrease in interest expense, borrowing interest expense decreased by $1.0 million for the nine months ended September 30, 2020, as compared to the same period in 2019. As a result of the ~~Company continues~~declining interest rate environment, our cost of borrowings decreased 93 basis points to ~~expand its branches and market presence, we expect these expenses to increase accordingly. Partially offsetting~~1.28% for the ~~increases during the three~~nine months ended ~~March 31,~~September 30, 2020, professional fees and marketing expenses decreased by $66,000 and $22,000, respectively, as these services fluctuate due to the frequency and nature of special projects or events. OREO related expenses declined by $30,000from 2.21% for the ~~three~~nine months ended ~~March 31, 2020, as the comparative period~~September 30, 2019. Growth in ~~2019 included a $29,000 valuation expense~~lower cost demand deposits allowed us to ~~recognize an adjustment to the market value~~decrease our use of FHLB advances, thereby reducing our ~~remaining two OREO properties. Regulatory assessments increased to normal levels as the Bank utilized all~~average balance of ~~its remaining regulatory assessment credit in 2019.~~

~~Federal Income Tax Expense.~~ ~~The federal income tax provision decreased~~borrowings by ~~$96,000 to $402,000~~$9.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, as compared to ~~$498,000~~the same period in 2019.

The Company’s net interest margin decreased to 3.10% for the nine months ended September 30, 2020, from 3.22% for the nine months ended September 30, 2019, primarily due to decreases in our yield on interest earning assets outpacing the decrease in cost of interest-bearing liabilities. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this report.

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, 2020 Compared to September 30, 2019 Net Change in Interest
	Rate		Volume		Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(3,855)	$	2,575	$	(1,280)
Investments available-for-sale	(697)		(171)		(868)
Investments held-to-maturity	17		—		17
Interest-earning deposits with banks	(380)		179		(201)
FHLB stock	(37)		(13)		(50)
Total net change in income on interest-earning assets	(4,952)		2,570		(2,382)

Interest-bearing liabilities:
Interest-bearing demand	90		55		145
Statement savings	(6)		(5)		(11)
Money market	(1,559)		1,016		(543)
Certificates of deposit, retail	(164)		482		318
Certificates of deposit, brokered	(79)		(1,781)		(1,860)
Borrowings	(878)		(163)		(1,041)
Total net change in expense on interest-bearing liabilities	(2,596)		(396)		(2,992)
Total net change in net interest income	$	(2,356)	$	2,966	$	610

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, 2020 and 2019. 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,
	2020						2019
	Average Balance		Interest Earned / Paid		Yield or Cost		Average Balance		Interest Earned / Paid		Yield or Cost
	(Dollars in thousands)
Assets
Loans receivable, net	$	1,118,987	$	39,504	4.72	%	$	1,052,541	$	40,784	5.18	%
Investments available-for-sale	132,553		2,466		2.49		139,698		3,334		3.19
Investments held-to-maturity	2,279		17		1.00		—		—		—
Interest-earning deposits with banks	24,777		45		0.24		14,329		246		2.30
FHLB stock	6,648		240		4.82		6,950		290		5.58
Total interest-earning assets	1,285,244		42,272		4.39		1,213,518		44,654		4.92
Noninterest earning assets	74,863						72,753
Total average assets	$	1,360,107					$	1,286,271

Liabilities and Stockholders' Equity
Interest-bearing demand	$	86,456	$	217	0.34	%	$	48,976	$	72	0.20	%
Statement savings	18,160		12		0.09		23,153		23		0.13
Money market	406,705		3,015		0.99		316,348		3,558		1.50
Certificates of deposit, retail	435,906		7,333		2.25		407,893		7,015		2.30
Certificates of deposit, brokered	40,219		661		2.20		136,954		2,521		2.46
Total interest-bearing deposits	987,446		11,238		1.52		933,324		13,189		1.89
Borrowings	126,793		1,214		1.28		136,641		2,255		2.21
Total interest-bearing liabilities	1,114,239		12,452		1.49		1,069,965		15,444		1.93
Noninterest bearing liabilities	90,340						62,906
Average equity	155,528						153,400
Total average liabilities and equity	$	1,360,107					$	1,286,271
Net interest income			$	29,820					$	29,210
Net interest margin					3.10	%					3.22	%

Provision for Loan Losses. During the nine months ended September 30, 2020, management evaluated the adequacy of the ALLL and concluded that a provision for loan losses in the amount of $1.3 million was appropriate for the period. The additional provision was due primarily to COVID-19 related adjustments to economic factors considered in evaluating the ALLL against the probable losses inherent in the loan portfolio, along with reduction in loan grades on a portion of our commercial real estate portfolio, including $26.8 million in loans that were downgraded due in large part to the ongoing COVID-19 pandemic. In addition, any relationship that requested a COVID-19 related second loan payment deferral received additional scrutiny which resulted in some of these loans being downgraded. Higher adjustments were also made for our commercial real estate and construction/land portfolios to reflect the impact from the COVID-19 pandemic. In comparison, for the nine months ended September 30, 2019, a recapture of provision for loan losses of $300,000 was primarily the result of a construction loan with a balance of $11.6 million that was technically in default and classified as impaired, however, the Bank’s impairment analysis concluded there were no anticipated losses from the loan at this time, and therefore, the allowance previously allocated in the ALLL to this loan was recaptured.

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,
	2020			2019
	(Dollars in thousands)
Total loans receivable, end of period	$	1,150,481		$	1,097,301
Average loans receivable during period	1,118,987			1,052,541
ALLL balance at beginning of period	13,218			13,347
Provision (recapture of provision) for loan losses	1,300			(300)
Charge-offs:



Total charge-offs	—			—
Recoveries:
One-to-four family	20			31
Multifamily	—			45
Commercial real estate	30			—
Construction/land development	—			—
Business
Consumer	—			38
Total recoveries	50			114
Net recovery	50			114
ALLL balance at end of period	$	14,568		$	13,161
ALLL as a percent of total loans	1.27		%	1.20		%
Ratio of net recoveries to average net loans receivable, annualized	0.01			0.01

Noninterest Income. Noninterest income increased by $171,000 to $2.8 million for the nine months ended September 30, 2019, as compared to $2.6 million for the same period in 2019. The following table provides a detailed analysis of the changes in the components of noninterest income:


	Nine Months Ended September 30, 2020		Change from Nine Months Ended September 30, 2019		Percent Change
	(Dollars in thousands)
Net gain on sale of investments	$	86	$	6	7.5	%
BOLI change in cash surrender value	778		85		12.3
Wealth management revenue	493		(209)		(29.8)
Deposit related fees	560		5		0.9
Loan related fees	865		303		53.9
Other	7		(19)		(73.1)
Total noninterest income	$	2,789	$	171	6.5	%

Noninterest income from loan related fees increased by $303,000 for the nine months ended September 30, 2020, as compared to the same period in 2019, ~~primarily~~as a result of a $581,000 increase in loan prepayment fees on certain commercial loans. This was partially offset by an $278,000 decrease 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. Wealth management revenue decreased $209,000 for these comparative periods. Although the assets managed by the Bank’s wealth management team have grown, differences in the timing and nature of commissions received on serviced accounts creates fluctuations in revenue and the nine months ended September 30, 2020 has resulted in fewer face-to-face opportunities to meet with customers in this pandemic environment, reducing opportunities for additional income in this area.

Noninterest Expense. Noninterest expense increased 7.3% to $24.1 million to for the nine months ended September 30, 2020, as compared to $22.4 million for the same period in 2019.

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


	Nine Months Ended September 30, 2020		Change from Nine Months Ended September 30, 2019		Percent Change
	(Dollars in thousands)
Salaries and employee benefits	$	14,893	$	346	2.4	%
Occupancy and equipment	3,090		402		15.0
Professional fees	1,257		(5)		(0.4)
Data processing	2,112		719		51.6
OREO-related expenses, net	7		(26)		(78.8)
Regulatory assessments	405		119		41.6
Insurance and bond premiums	339		51		17.7
Marketing	133		(147)		(52.5)
Other general and administrative	1,843		173		10.4
Total noninterest expense	$	24,079	$	1,632	7.3

The primary contributor to the increase in noninterest expense was our continued branch expansionand the implementation of a new online banking platform in the nine months ended September 30, 2020. Salaries and employee benefits expense increased by $346,000 for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, due to increased staffing in support of the new branches. In addition, occupancy and equipment expenses increased by $402,000 with our growth to thirteen branch locations at September 30, 2020, and staffing for our fourteenth branch office that opened on October 5, 2020. Further, data processing expense increased by $719,000 as a ~~$357,000 decrease~~combined result of increased loan and deposit transaction volume, and the implementation of a new online banking platform, as discussed above.

Partially offsetting these increases, marketing expense decreased $147,000 for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, due primarily to cancellations of sponsored events due to COVID-19 restrictions in ~~pretax net income.~~2020.

Federal Income Tax Expense. Income before federal income taxes decreased by $2.5 million for the nine months ended September 30, 2020, as compared to the same period in 2019, resulting in a reduction in federal income tax expense of $607,000. In addition, the effective tax rate was reduced to 18.3% for the nine months ended September 30, 2020 as a result of the impact to certain stock compensation from a reduction in the Company’s stock price. In comparison, the effective tax rate for the nine months ended September 30, 2019, was 19.9%.

Liquidity

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

Our primary sources of funds are customer deposits, cash flow from the loan and investment portfolios, advances from the FHLB, and brokered certificates of deposit. These funds, together with equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. At ~~March 31,~~September 30, 2020, retail certificates of deposit of ~~$193.9 million and brokered certificates of deposit of $25.5~~$260.4 million were scheduled to mature in one year or less. Management’s practice is to maintain deposit rates at levels that are competitive with other local financial institutions. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We measure our liquidity based on our ability to fund our assets and to meet liability

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

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

When deposits are not readily available and/or cost effective to provide the funds for our assets, we use alternative funding sources. These sources include but are not limited to: advances from the FHLB or the FRB, which are collateral dependent, wholesale funding, national certificates of deposit listing services, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs. The balance of our investments available-for-sale decreased ~~$4.4~~$10.6 million to ~~$132.2~~$126.0 million at ~~March 31,~~September 30, 2020, from $136.6 million at December 31, 2019, and represents a ready source of cash if needed. The balance of our interest-earning deposits with banks increased by ~~$9.2~~$5.8 million to ~~$22.1~~$18.7 million at ~~March 31,~~September 30, 2020, from $12.9 million at December 31, 2019, as a result of ~~fluctuations in our funding needs for loans receivable and~~increased retail deposits. At ~~March 31,~~September 30, 2020, the Bank maintained credit facilities with the FHLB totaling ~~$603.9~~$638.2 million, subject to qualifying collateral limits that reduced our pledged collateral capacity to ~~$501.7~~$521.3 million, with an outstanding balance of ~~$160.0~~$120.0 million. As further funding sources, we also had the ability to borrow ~~$85.2~~$93.5 million from the FRB from loan programs other than the PPPLF, and ~~$35.0~~$75.0 million from lines of credit with other financial institutions, with no balance outstanding from these sources at ~~March 31,~~September 30, 2020. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

To assist in our funds acquisition and interest rate risk management efforts, management utilizes from time to time the national brokered deposit market and maintained a balance at ~~March 31,~~September 30, 2020, of ~~$25.5~~$10.0 million of brokered certificates of ~~deposit.~~deposit, which were redeemed subsequent to September 30, 2020. In contrast to most retail certificate of deposit offerings which provide the depositor with an option to withdraw their funds prior to maturity, subject to an early withdrawal penalty, certificates of deposit acquired in the brokered market limits the depositor ability to withdraw the funds before the end of the term (except in the case of death or adjudication of incompetence of a depositor) which greatly reduces early redemption risk compared to retail deposits. ~~At March 31, 2020,~~This callable option available on certain brokered certificates of deposit ~~had a remaining maturity of up to seven months. Some of these certificates also provide the Bank the option~~ to redeem the deposit after six months is a favorable distinction compared to retail certificate of deposit terms that are offered in our local market. During the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Bank redeemed ~~$6.5~~$14.5 million of callable brokered certificates of deposit with a weighted average remaining maturity of ~~one year.~~1.4 years. With these redemption limitations and call features, the cost of these brokered deposits is generally higher than our retail certificate of deposit offerings. Consequently, if we increase our brokered deposits, our cost of funds may increase.

First Financial Northwest is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. First Financial Northwest's primary sources of funds consist of dividends from the Bank, although there are regulatory requirements related to the ability of the Bank to pay dividends. At ~~March 31,~~September 30, 2020, the Company (on an unconsolidated basis) had liquid assets of ~~$17.6~~$14.6 million and short-term liabilities of ~~$211,000.~~$251,000.

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

Commitments and Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit and lines of credit are not

recorded as an asset or liability by us until the instrument is exercised. At ~~March 31,~~September 30, 2020 and December 31, 2019, we had no commitments to originate loans for sale.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by us upon the extension of credit, is based on our credit evaluation of the customer. The amount and type of collateral required varies but may include real estate and income-producing commercial properties.

The following table summarizes our outstanding commitments to originate loans, advance additional amounts pursuant to outstanding lines of credit and to disburse funds related to our construction loans at ~~March 31,~~September 30, 2020:


			Amount of Commitment Expiration
	Total Amounts Committed		Through One Year		After One Through Three Years		After Three Through Five Years		After Five Years
	(In thousands)
Commitments to originate loans	$	—	$	—	$	—	$	—	$	—
Unused portion of lines of credit	35,018		3,878		7,097		5,161		18,882
Undisbursed portion of construction loans	68,896		36,253		32,643		—		—
Total commitments	$	103,914	$	40,131	$	39,740	$	5,161	$	18,882

Amount of Commitment Expiration
Total Amounts Committed Through One Year After One Through Three Years After Three Through Five Years After Five Years
(In thousands)
Commitments to originate loans $ 4,037
$ 4,037
$ —
$ —
$ —
Unused portion of lines of credit 30,262
7,351
8,206
1,992
12,713
Undisbursed portion of construction loans 71,953
28,481
42,048
1,424
—
Total commitments $ 106,252
$ 39,869
$ 50,254
$ 3,416
$ 12,713

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

As of ~~March 31,~~September 30, 2020, the Bank had ~~eleven~~thirteen operating leases with remaining terms of 5six months to 105.4 years which carry minimum lease payments of ~~$57,000~~$67,000 per month. All of the lease agreements offer extension periods.

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

Capital

At ~~March 31,~~September 30, 2020, stockholders’ equity totaled ~~$153.1~~$154.8 million, or ~~11.5%~~11.3% of total assets. Our book value per share of common stock was ~~$15.03~~$15.62 at ~~March 31,~~September 30, 2020, compared to $15.25 at December 31, 2019. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well-capitalized” status in accordance with regulatory standards.

As of ~~March 31,~~September 30, 2020, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory capital guidelines of the FDIC. The following table provides the Bank’s capital requirements and actual results.

At March 31, 2020
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) $ 135,626
10.25 % $ 52,919
4.00 % $ 66,149
5.00 %
Common equity tier I ("CET1") (to risk-
   weighted assets)
135,626
13.42
45,492
4.50
65,711
6.50
Tier I risk-based capital (to risk-weighted
    assets)
135,626
13.42
60,656
6.00
80,875
8.00
Total risk-based capital (to risk-weighted
    assets)
148,278
14.67
80,875
8.00
101,094
10.00


	At September 30, 2020
	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)	$	138,493	10.03	%	$	55,255	4.00	%	$	69,069	5.00	%
Common equity tier I ("CET1") (to risk- weighted assets)	138,493		14.01		44,491		4.50		64,265		6.50
Tier I risk-based capital (to risk-weighted assets)	138,493		14.01		59,322		6.00		79,095		8.00
Total risk-based capital (to risk-weighted assets)	150,883		15.26		79,095		8.00		98,869		10.00

In addition to the minimum CET1, Tier I total capital and leverage ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At ~~March 31,~~September 30, 2020, the Bank’s capital conservation buffer was ~~6.67%~~7.26%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

•economic conditions;

•interest rate outlook;

•asset/liability mix;

•interest rate risk sensitivity;

•current market opportunities to promote specific products;

•historical financial results;

•projected financial results; and

•capital position.

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

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our deposits. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

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

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

•we have attempted, where possible, to extend the maturities of our deposits which typically fund our ~~long-term~~long- term assets;

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

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

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

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

We have evaluated the use of derivative instruments to limit the impact of interest rate changes on earnings and cash flows and to lower our cost of borrowing while taking into account various elements of interest rate risk. We are using interest rate swaps which qualify as a cash flow hedge as a tool to lower the cost of certain FHLB advances as compared to the fixed rates offered by the FHLB for its longer term advances. At ~~March 31,~~September 30, 2020, the Bank held six interest rate swap agreements with a total notional amount of $120.0 million and a weighted-average fixed interest rate of 1.22%. Under the interest rate agreements, the Bank pays a fixed interest rate, and receives a floating rate based on 1-month or 3-month LIBOR rates to coincide with each agreement’s reset frequency for an original term of four to eight years. Concurrently at the onset of each interest rate agreement, the Bank secured a fixed rate FHLB advance that resets to market rate on the same cycle as the corresponding interest rate swap agreement. In addition, the Bank has entered into two, forward starting interest rate swap agreements with a start date of October 25, 2021, a total notional amount of $25.0 million, and a weighted-average interest rate of 0.80%. These interest rate agreements are intended to partially replace the $50.0 million notional amount interest rate swap that matures on that date. Entering into these agreements has allowed the Bank to secure fixed rate funding at a lower cost than a traditional five-year fixed rate FHLB advance. We will continue to review similar instruments and may continue to utilize them for interest rate risk management in the future.

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

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

How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis by measuring the impact of changes to net interest income in multiple rate environments. Management retains the services of a third party consultant with nearly 40 years of experience in asset-liability management to assist in its interest rate risk and asset-liability management. Management uses various assumptions to evaluate the sensitivity of the market value of our assets and liabilities to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust in conjunction with market rates. Approximately ~~56.5%~~51.3% of our total loans were adjustable-rate loans at ~~March 31,~~September 30, 2020. At that date, ~~$413.4~~$394.8 million, or ~~66.1%~~66.9% of these loans were at their floor, with a weighted-average interest rate of ~~4.84%~~4.65%. A portion of ~~our adjustable~~these loans are set to reprice at defined time intervals. Adjustable rate loans that are based on prime rate plus a specified margin orrecalculate each time the ~~fully indexed rate. For these~~ prime ~~based loans where~~rate changes. When the floor rate is ~~currently~~ above ~~the~~a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At ~~March 31,~~September 30, 2020, the Bank’s net loans receivable ~~included $159.9~~included $126.9 million of prime based loans, of which ~~$146.6~~$115.9 million were at a floor rate that exceeded their fully indexed rate. The following table shows the rate increase that would need to occur on these loans before the Bank receives the benefit of a floating rate:

March 31, 2020
Increase in prime rate: (Dollars in thousands)
0 - 25 bps $ 6,885
26 - 50 bps 2,466
51 - 75 bps 6,409
76 - 100 bps 27,414
101 - 150 bps 29,221
151 - 200 bps 37,795
> 200 bps 36,453
146,643


	September 30, 2020
Increase in prime rate:	(Dollars in thousands)
0 - 25 bps	$	5,414
26 - 50 bps	2,326
51 - 75 bps	11,233
76 - 100 bps	31,814
101 - 150 bps	29,723
151 - 200 bps	18,151
> 200 bps	17,268
	115,929

The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risk that borrowers may refinance these loans during periods of declining interest rates. However, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates. ~~Further, in the event of a significant change in interest rates, prepayment and early withdrawal levels would likely deviate from those assumed.~~ Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.

The assumptions we use to monitor interest rate risk are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, loan prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans, investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposit rates can be maintained

with rate adjustments proportionate to the change in market interest rates, based upon our historical deposit decay rates, which are substantially lower than market decay rates. We have observed in the past that our deposit accounts during changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base, competitive factors and historical experience. In the event of a significant change in interest rates, however, prepayment and early withdrawal levels would likely deviate from those assumed.

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

The following table illustrates the estimated change in our net interest income over the next 12 months from ~~March 31,~~September 30, 2020, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that the Bank might take to counter the effect of that interest rate movement.


Net Interest Income Change at September 30, 2020
Basis Point Change in Rates	Net Interest Income	% Change
(Dollars in thousands)
+300	$43,410	2.57%
+200	42,801	1.13
+100	42,367	0.11
Base	42,321	—
(100)	43,333	2.39

Net Interest Income Change at March 31, 2020
Basis Point Change in Rates Net Interest Income % Change
(Dollars in thousands)
+300 $ 38,891
2.78 %
+200 38,214
0.99
+100 37,934
0.25
Base 37,839
—
(100) 38,381
1.43

The following table illustrates the change in our net portfolio value (“NPV”) at ~~March 31,~~September 30, 2020, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.


Basis Point								Net Portfolio as % of				Market		Basis Point							Net Portfolio as % of				Market
Change in	Net Portfolio Value⁽¹⁾							Portfolio Value of Assets				Value of		Change in	Net Portfolio Value (1)						Portfolio Value of Assets				Value of
Rates	Amount		$ Change ⁽²⁾			% Change		NPV Ratio ⁽³⁾		% Change ⁽⁴⁾		Assets ⁽⁵⁾		Rates	Amount		$ Change (2)		% Change		NPV Ratio (3)		% Change (4)		Assets (5)
	(Dollars in thousands)														(Dollars in thousands)
+300	$	117,876	$	(12,870	)	(9.84	)%	9.44	%	(0.96	)%	$	1,249,261	+300	$	150,776	$	(14,685)	(8.88)	%	11.72	%	(1.07)	%	$	1,286,588
+200	122,711		(8,035		)	(6.15	)	9.61		(0.60	)	1,277,043		+200	156,156		(9,305)		(5.62)		11.88		(0.68)		1,314,742
+100	128,994		(1,752		)	(1.34	)	9.86		(0.13	)	1,307,711		+100	162,125		(3,336)		(2.02)		12.05		(0.24)		1,344,994
Base	130,746		—			—		9.79		—		1,335,424		Base	165,461		—		—		12.04		—		1,374,274
(100)	113,800		(16,946		)	(12.96	)	8.48		(1.27	)	1,341,254		(100)	153,994		(11,467)		(6.93)		11.17		(0.83)		1,378,564

_____________

⁽¹⁾ The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for determining, on a market value basis, how the market value of equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.

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

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

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

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

The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in

the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as set forth above. Also, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause changes to the net portfolio value and net interest income other than those indicated above.

At ~~March 31,~~September 30, 2020, other than the interest rate swap agreements we have entered into, we did not have any derivative financial instruments or trading accounts for any class of financial instruments, nor have we engaged in any other hedging activities or purchased off-balance sheet derivative instruments. However, we continue to review such instruments and may utilize them for interest rate risk management in the future. Interest rate risk continues to be one of our primary risks, as other types of risks, such as foreign currency exchange risk and commodity pricing risk do not arise in the normal course of our business activities and operations.

Item 4. Controls and Procedures

The management of First Financial Northwest, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (“Exchange Act”). A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these

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

~~(a)~~

~~Evaluation of Disclosure Controls and Procedures:~~ An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and several other members of our senior management as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.


~~(b)~~	~~Changes in Internal Controls:~~ In the quarter ended March 31, 2020, 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.

(a)Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and several other members of our senior management as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)Changes in Internal Controls: In the quarter ended September 30, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In light of recent developments relating to Coronavirus Disease 2019 (“COVID-19”), the Company is supplementing its risk factors contained in Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 12, 2020. The following risk factor should be read in conjunction with the risk factors described in the Annual Report on Form 10-K.

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

The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking services to businesses and individuals, most of whom ~~are currently~~were under government issued stay-at-home ~~orders.~~orders for a portion of the nine months ended September 30, 2020. As an essential business, we continue to provide banking and financial services to our customers at all of our branch locations. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens it could limit or disrupt our ability to provide banking and financial services to our customers.

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

There is pervasive uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations, other than through government sponsored programs such as the Payroll Protection Program (“PPP”), deposit availability, market interest rates and negatively impacted many of our business and consumer borrower’s ability to make their loan payments. Because the length of the pandemic and the

efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including ~~recent reductions in the~~a continued low targeted federal funds rate, until the pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.

The impact of the pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the pandemic will have on the credit quality of our loan portfolio. It is likely that loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the pandemic. Consistent with guidance provided by banking regulators, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic is resolved. Any increases in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

As of September 30, 2020, we hold and service a portfolio of 462 PPP loans totaling $52.0 million. The PPP loans are subject to the provisions of The Coronavirus Aid, Relief, and Economic Security Act of 2020 or CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. We could face additional risks in our administrative capabilities to service our PPP loans, and risk with respect to the determination of loan forgiveness, depending on the final procedures for determining loan forgiveness.

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

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown. and during which we may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled "Risk Factors" in our 2019 Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

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

(a) Not applicable

(b) Not applicable

(c) The following table summarizes First Financial Northwest’s common stock repurchases during the three months ended ~~March 31,~~September 30, 2020:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plan Maximum Number of Shares that May Yet Be Repurchased Under the Plan
January 27 - January 31, 2020 6,900
$ 15.19
6,900
506,100
February 1 - February 29, 2020 38,995
15.01
38,995
467,105
March 1 - March 31, 2020 33,500
12.71
33,500
433,605
79,395
14.06
79,395
433,605


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
July 1 - July 31, 2020	—	$	—	—	509,000
August 1 - August 31, 2020	92,300	9.32		92,300	416,700
September 1 - September 30, 2020	62,749	9.85		62,749	353,951
	155,049	9.54		155,049	353,951

On ~~January 6,~~June 17, 2020, the Board of Directors authorized the repurchase of up to ~~513,000~~509,000 shares of the Company’s common stock, or approximately 5% of the Company’s outstanding shares. The plan allowed for the repurchase from ~~January 27,~~July 30, 2020 through ~~July 27,~~December 30, 2020, on the open market or in privately negotiated transactions, in accordance with Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. At ~~March 31,~~September 30, 2020, the Company had repurchased ~~79,395~~155,049 shares authorized for repurchase at an average price of ~~$14.06~~$9.54 per share.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Financial Statement Schedules

(a) Exhibits



3.1		Articles of Incorporation of First Financial Northwest(1)
3.2		Amended and Restated Bylaws of First Financial Northwest(2)
4.1		Form of stock certificate of First Financial Northwest (1)
10.1			Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III(3)
10.2			Form of Change in Control Severance Agreement for Executive Officers(4)
10.3			Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (5)
10.4			2008 Equity Incentive Plan(6)
10.5			2016 Equity Incentive Plan(7)
10.6			Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan(8)
10.7			Form of restricted stock award agreement under the 2008 Equity Incentive Plan(8)
10.8			Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson(2)
10.9			Form of restricted stock award agreement under the 2016 Equity Incentive Plan (9)
10.10			Form of incentive stock option award agreement under the 2016 Equity Incentive Plan(10)
10.11			Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan(10)
10.12			Form of restricted stock award agreement under the 2016 Equity Incentive Plan(11)
10.13			Offer letter for Randy T. Riffle(12)
10.14			Form of Involuntary Termination Agreement with Randy T. Riffle(13)
10.15			Form of Change in Control Severance Agreement with Randy T. Riffle(13)
10.16			Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III(14)
10.17			Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson(15)
1431.1			Code of Business Conduct and Ethics (Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on the Company’s website at www.ffnwb.com pursuant to Regulation S-K section 229.406(c))
~~31.1~~	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2			Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32			Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101				The following materials from First Financial Northwest’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2020, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) Selected Notes to Consolidated Financial Statements.

_____________


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


⁽²⁾	~~Filed as an exhibit to First Financial Northwest’s Current Report on Form 8-K dated March 25, 2020.~~

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	FIRST FINANCIAL NORTHWEST, INC.

Date: ~~May 8,~~November 9, 2020	By:	/s/ Joseph W. Kiley III
		Joseph W. Kiley III
		President and Chief Executive Officer (Principal Executive Officer)



Date: ~~May 8,~~November 9, 2020	By:	/s/ Richard P. Jacobson
		Richard P. Jacobson
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: ~~May 8,~~November 9, 2020	By:	/s/ Christine A. Huestis
		Christine A. Huestis
		First Vice President and Controller (Principal Accounting Officer)



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



	Balance Sheet Location	Fair Value at March 31, 2020			Fair Value at December 31, 2019
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	(Other liabilities) Other assets	$	(3,287	)	$	426

Total derivatives		$	(3,287	)	$	426



	Balance at March 31, 2020		Change from December 31, 2019			Percent Change
	(Dollars in thousands)
Cash on hand and in banks	$	6,453	$	(3,641	)	(36.1	)%
Interest-earning deposits with banks	22,063		9,167			71.1
Investments available-for-sale, at fair value	132,159		(4,442		)	(3.3	)
Investment held-to-maturity	2,371		2,371			n/a
Loans receivable, net	1,092,128		(16,334		)	(1.5	)
FHLB stock, at cost	8,010		1,001			14.3
Accrued interest receivable	4,302		164			4.0
Deferred tax assets, net	2,227		726			48.4
OREO	454		—			—
Premises and equipment, net	22,591		125			0.6
BOLI	32,290		308			1.0
Prepaid expenses and other assets	1,898		(318		)	(14.4	)
ROU	2,446		237			10.7
Goodwill	889		—			—
Core deposit intangible	932		(36		)	(3.7	)
Total assets	$	1,331,213	$	(10,672	)	(0.8	)%



	March 31, 2020			December 31, 2019			Three Month Change
	(Dollars in thousands)
Performing TDRs:
One-to-four family residential	$	3,768		$	3,979		$	(211	)
Commercial real estate	1,257			1,267			(10		)
Total TDRs	$	5,025		$	5,246		$	(221	)
% TDRs classified as performing	100.0		%	100.0		%



	Three Months Ended March 31, 2020		Change from Three Months Ended March 31, 2019			Percent Change
	(Dollars in thousands)
Net gain on sale of investments	$	—	$	8		(100.0	)%
BOLI change in cash surrender value	254		(15		)	(5.6	)
Wealth management revenue	165		(31		)	(15.8	)
Deposit related fees	176		5			2.9
Loan related fees	392		329			522.2
Other	3		(6		)	(66.7	)
Total noninterest income	$	990	$	290		41.4	%