

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, ~~2020~~2021

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~~ Yes X NO 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~~ Yes X NO 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_~~_

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 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, 2020, 10,177,511~~7, 2021, 9,692,339 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	33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5253
	Item 4.	Controls and Procedures	5556
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	5557
	Item 1A.	Risk Factors	5557
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57 57
	Item 3.	Defaults upon Senior Securities	57
	Item 4.	Mine Safety Disclosures	57
	Item 5.	Other Information	57
	Item 6.	Exhibits	58
SIGNATURES			59

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except share data)

Part 1. Financial Information

Item 1. Financial Statements


	March 31, 2020			December 31, 2019				March 31, 2021		December 31, 2020
Assets							Assets
	(Unaudited)							(Unaudited)
Cash on hand and in banks	$	6,453		$	10,094		Cash on hand and in banks	$	7,211	$	7,995
Interest-earning deposits	22,063			12,896			Interest-earning deposits	75,023		72,494
Investments available-for-sale, at fair value	132,159			136,601			Investments available-for-sale, at fair value	168,042		127,551
Investment held-to-maturity	2,371			—
Loans receivable, net of allowance of $13,530 and $13,218	1,092,128			1,108,462
Investments held-to-maturity, at amortized cost							Investments held-to-maturity, at amortized cost	2,413		2,418
Loans receivable, net of allowance of $15,502 and $15,174							Loans receivable, net of allowance of $15,502 and $15,174	1,098,832		1,100,582
Federal Home Loan Bank ("FHLB") stock, at cost	8,010			7,009			Federal Home Loan Bank ("FHLB") stock, at cost	6,465		6,410
Accrued interest receivable	4,302			4,138			Accrued interest receivable	5,702		5,508
Deferred tax assets, net	2,227			1,501			Deferred tax assets, net	1,163		1,641
Other real estate owned ("OREO")	454			454			Other real estate owned ("OREO")	454		454
Premises and equipment, net	22,591			22,466			Premises and equipment, net	22,512		22,579
Bank owned life insurance ("BOLI"), net	32,290			31,982			Bank owned life insurance ("BOLI"), net	33,357		33,034
Prepaid expenses and other assets	1,898			2,216			Prepaid expenses and other assets	3,398		1,643
Right of use asset (“ROU”)	2,446			2,209
Right of use asset (“ROU”), net							Right of use asset (“ROU”), net	3,976		3,647
Goodwill	889			889			Goodwill	889		889
Core deposit intangible	932			968
Core deposit intangible, net							Core deposit intangible, net	789		824
Total assets	$	1,331,213		$	1,341,885		Total assets	$	1,430,226	$	1,387,669

Liabilities and Stockholders' Equity							Liabilities and Stockholders' Equity
Deposits:							Deposits:
Noninterest-bearing deposits	$	53,519		$	52,849		Noninterest-bearing deposits	$	114,437	$	91,285
Interest-bearing deposits	946,465			980,685			Interest-bearing deposits	1,019,218		1,002,348
Total deposits	999,984			1,033,534			Total deposits	1,133,655		1,093,633
FHLB advances	160,000			137,700			FHLB advances	120,000		120,000
Advance payments from borrowers for taxes and insurance	4,960			2,921			Advance payments from borrowers for taxes and insurance	4,813		2,498
Lease liability	2,538			2,279
Lease liability, net							Lease liability, net	4,123		3,783
Accrued interest payable	236			285			Accrued interest payable	197		211

Other liabilities	10,403			8,847			Other liabilities	8,995		11,242
Total liabilities	1,178,121			1,185,566			Total liabilities	1,271,783		1,231,367

Commitments and contingencies							Commitments and contingencies	0		0
Stockholders' Equity							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
Preferred stock, $0.01 par value; authorized 10,000,000 shares; 0 shares issued or outstanding							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 9,692,610 shares at March 31, 2021, and 9,736,875 shares at December 31, 2020							Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,692,610 shares at March 31, 2021, and 9,736,875 shares at December 31, 2020	97		97
Additional paid-in capital	86,357			87,370			Additional paid-in capital	81,099		82,095
Retained earnings	74,017			73,321			Retained earnings	79,455		78,003
Accumulated other comprehensive loss, net of tax	(4,563		)	(1,371		)	Accumulated other comprehensive loss, net of tax	(515)		(1,918)
Unearned Employee Stock Ownership Plan ("ESOP") shares	(2,821		)	(3,104		)	Unearned Employee Stock Ownership Plan ("ESOP") shares	(1,693)		(1,975)
Total stockholders' equity	153,092			156,319			Total stockholders' equity	158,443		156,302
Total liabilities and stockholders' equity	$	1,331,213		$	1,341,885		Total liabilities and stockholders' equity	$	1,430,226	$	1,387,669

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 March 31,
		2021		2020
Interest income
Loans, including fees		$	12,624	$	13,474
Investments available-for-sale		735		919
Investments held-to-maturity		13		0
Interest-earning deposits		12		31
Dividends on FHLB stock		79		76
Total interest income		13,463		14,500
Interest expense
Deposits		2,299		4,366
Borrowings		418		470
Total interest expense		2,717		4,836
Net interest income		10,746		9,664
Provision for loan losses		300		300
Net interest income after provision for loan losses		10,446		9,364
Noninterest income

BOLI income		269		254
Wealth management revenue		160		165
Deposit related fees		200		176
Loan related fees		132		392
Other		3		3
Total noninterest income		764		990
Noninterest expense
Salaries and employee benefits		4,945		5,212
Occupancy and equipment		1,100		1,071
Professional fees		532		430
Data processing		697		694
OREO related expenses, net		1		1
Regulatory assessments		121		144
Insurance and bond premiums		124		120
Marketing		29		64
Other general and administrative		580		532
Total noninterest expense		8,129		8,268
Income before federal income tax provision		3,081		2,086
Federal income tax provision		584		402
Net income		$	2,497	$	1,684
Basic earnings per common share		$	0.26	$	0.17
Diluted earnings per common share		$	0.26	$	0.17
Basic weighted average number of common shares outstanding		9,490,058		9,896,234
Diluted weighted average number of common shares outstanding		9,566,671		9,978,060

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 March 31,
		2021		2020
Net income		$	2,497	$	1,684
Other comprehensive income (loss), before tax:
Unrealized holding losses on investments available-for-sale		(1,952)		(327)
Tax effect		410		68


Gains (losses) on cash flow hedges		3,728		(3,713)
Tax effect		(783)		780
Other comprehensive income (loss), net of tax		1,403		(3,192)
Total comprehensive income (loss)		$	3,900	$	(1,508)

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 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)	—		—		—		—		—		0
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


	Three Months Ended March 31, 2021
	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, 2020	9,736,875	$	97	$	82,095	$	78,003	$	(1,918)	$	(1,975)	$	156,302
Net income	—	—		—		2,497		—		—		2,497
Other comprehensive income, net of tax	—	—		—		—		1,403		—		1,403
Exercise of stock options	2,000	—		21								21
Issuance of common stock - restricted stock awards, net	45,593	1		(39)		—		—		—		(38)
Compensation related to stock options and restricted stock awards	—	—		96		—		—		—		96
Allocation of 28,213 ESOP shares	—	—		89		—		—		282		371
Repurchase and retirement of common stock	(89,019)	(1)		(1,163)		—		—		—		(1,164)
Canceled common stock - restricted stock awards	(2,839)	—		—		—		—		—		0
Cash dividend declared and paid ($0.11 per share)	—	—		—		(1,045)		—		—		(1,045)
Balances at March 31, 2021	9,692,610	$	97	$	81,099	$	79,455	$	(515)	$	(1,693)	$	158,443

Accumulated Other Comprehensive Loss,

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)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities:
Net income	$	2,497	$	1,684
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	300		300


Net amortization of premiums and discounts on investments	257		235

Depreciation of premises and equipment	531		538

Deferred federal income taxes	105		122
Allocation of ESOP shares	371		382
Stock compensation expense	96		80
BOLI income	(269)		(254)
Annuity income	(13)		0
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets	(817)		(72)
Decrease (increase) in ROU	190		(237)
Increase in advance payments from borrowers for taxes and insurance	2,315		2,039
Increase in accrued interest receivable	(194)		(164)
(Decrease) increase in lease liability	(179)		259
Decrease in accrued interest payable	(14)		(49)
Increase (decrease) in other liabilities	596		(1,731)
Net cash provided by operating activities	5,772		3,132
Cash flows from investing activities:


Proceeds from calls of investments available-for-sale	2,000		0

Principal repayments on investments available-for-sale	4,722		3,880
Purchases of investments available-for-sale	(49,422)		(2,371)


Net decrease in loans receivable	1,450		16,034
Purchase of FHLB stock	(55)		(1,001)
Purchase of premises and equipment	(464)		(663)



Purchase of BOLI	(54)		(54)

Net cash (used) provided by investing activities	(41,823)		15,825
Cash flows from financing activities:
Net increase (decrease) in deposits	$	40,022	$	(33,550)
Advances from the FHLB	0		199,000
Repayments of advances from the FHLB	0		(176,700)
Proceeds from stock options exercises	21		0
Net share settlement of stock awards	(38)		(73)
Repurchase and retirement of common stock	(1,164)		(1,120)
Dividends paid	(1,045)		(988)
Net cash provided (used) by financing activities	37,796		(13,431)

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)


	Three Months Ended March 31,
	2021		2020
Net increase in cash and cash equivalents	1,745		5,526
Cash and cash equivalents at beginning of period	80,489		22,990
Cash and cash equivalents at end of period	$	82,234	$	28,516

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid	$	2,731	$	4,884





Noncash items:

Change in unrealized loss on investments available-for-sale	$	(1,952)	$	(327)
Change in unrealized gain (loss) on cash flow hedge	3,728		(3,713)

Initial recognition of ROU	519		403
Initial recognition of lease liability	519		403

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, ~~2020,~~2021, First Financial Northwest Bank operated in ~~thirteen~~fifteen locations in Washington with the headquarters and ~~six~~seven retail branch locations in King County, five retail branch locations in Snohomish County and ~~one~~two retail ~~branch~~branches in Pierce County. ~~The Bank has received regulatory approval to open a retail branch in Gig Harbor, in Pierce County, Washington.~~ 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,~~2020, as filed with the SEC (“~~2019~~2020 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 months ended March 31, ~~2020,~~2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. 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~~2021

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

In October 2020, the FASB issued ASU 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 paragraph 310-20-35-33 for each reporting period. The Company adopted this ASU in January 2021 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.

Note 4 - Investments

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

~~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 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)


	March 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	15,556	$	325	$	(133)	$	15,748
Freddie Mac	13,173		166		(488)		12,851
Ginnie Mae	24,896		278		(84)		25,090
Other	10,388		137		(21)		10,504
Municipal bonds	31,399		546		(507)		31,438
U.S. Government agencies	50,715		90		(449)		50,356
Corporate bonds	22,002		280		(227)		22,055
Total	$	168,129	$	1,822	$	(1,909)	$	168,042

~~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 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 ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is party to cash flow hedge arrangements where the hedge effectiveness is based on LIBOR. 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:~~

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

~~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:


	March 31, 2021
	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	$	3,884	$	(133)	$	0	$	0	$	3,884	$	(133)
Freddie Mac	7,838		(488)		0		0		7,838		(488)
Ginnie Mae	10,649		(84)		0		0		10,649		(84)
Other	0		0		5,981		(21)		5,981		(21)
Municipal bonds	18,074		(507)		0		0		18,074		(507)
U.S. Government agencies	9,490		(16)		28,191		(433)		37,681		(449)
Corporate bonds	2,468		(32)		5,811		(195)		8,279		(227)
Total	$	52,403	$	(1,260)	$	39,983	$	(649)	$	92,386	$	(1,909)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 3444 securities and 3720 securities in an unrealized loss position, respectively, with 1615 and 18 of these securities in an unrealized loss position for 12 months or more, at both March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, respectively. Management does not believe that any individual unrealized loss as of March 31, ~~2020,~~2021, or December 31, ~~2019,~~2020, 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)~~

Management also reviewed the financial condition of the entities issuing municipal or corporate bonds at March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, and determined that an OTTI charge was not warranted.

The amortized cost and estimated fair value of investments available-for-sale at March 31, ~~2020,~~2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments not due at a single maturity date, primarily mortgage-backed investments, are shown separately.


	March 31, 2021
	Amortized Cost		Fair Value
	(In thousands)

Due after one year through five years	$	8,908	$	8,946
Due after five years through ten years	16,134		16,232
Due after ten years	79,074		78,671
	104,116		103,849
Mortgage-backed investments	64,013		64,193
Total	$	168,129	$	168,042

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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~~$24.2 million and ~~$19.0~~$23.4 million were pledged as collateral for public deposits at March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, respectively, both of which exceeded the collateral requirements established by the Washington Public Deposit Protection Commission.

For the three months ended March 31, 2021, there was a $2.0 million call on one investment security that did 0t generate a gain or loss. For the three months ended March 31, 2020, there were no0 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 of $8,000.~~

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~~At March 31, 2021, the annuities ~~are~~were reported as investments held-to-maturity at an amortized cost ~~as investments held-to-maturity~~of $2.4 million 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:


	March 31, 2021		December 31, 2020
	(In thousands)
One-to-four family residential:
Permanent owner occupied	$	199,845	$	206,323
Permanent non-owner occupied	179,401		175,637
	379,246		381,960

Multifamily	140,068		136,694

Commercial real estate	385,470		385,265

Construction/land:
One-to-four family residential	27,817		33,396
Multifamily	58,718		51,215
Commercial	5,837		5,783
Land	2,173		1,813
	94,545		92,207

Business	78,294		80,663
Consumer	38,768		40,621
Total loans	1,116,391		1,117,410

Less:
Deferred loan fees, net	2,057		1,654
ALLL	15,502		15,174
Loans receivable, net	$	1,098,832	$	1,100,582

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, ~~2020,~~2021, loans totaling ~~$501.7~~$496.2 million were pledged to secure borrowings from the FHLB ~~of Des Moines~~ compared to ~~$506.7~~$523.8 million at December 31, ~~2019.~~2020. In addition, loans totaling ~~$122.8~~$127.4 million and ~~$130.3~~$127.1 million were pledged to the Federal Reserve Bank of San Francisco to secure a line of credit at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, 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~~virtually no credit risk, such as cash secured loans with funds on deposit with the Bank. Pass credits also include credits that are on the Company’s watch list (grade 5), where the borrower exhibits potential weaknesses, which may, if not checked or corrected, negatively affect the borrower’s financial capacity and threaten their ability to fulfill debt obligations in the future.

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

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.

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.

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


	March 31, 2021
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass, grade 1-4	$	374,330	$	135,685	$	317,968	$	92,294	$	77,851	$	38,731	$	1,036,859
Pass, grade 5 (watch)	3,969		2,347		41,193		2,251		443		37		50,240
Special mention	422		0		26,309		0		0		0		26,731
Substandard	525		2,036		0		0		0		0		2,561
Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391


	December 31, 2020
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Risk Rating:
Pass, grade 1-4	$	376,918	$	132,243	$	316,955	$	89,957	$	80,208	$	40,477	$	1,036,758
Pass, grade 5 (watch)	3,914		2,347		52,375		2,250		455		144		61,485
Special mention	601		0		15,935		0		0		0		16,536
Substandard	527		2,104		0		0		0		0		2,631
Total loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410

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

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional allowances for loan losses.

~~Loan grades are used~~ In February 2021, the Company received notification that $5.4 million in commercial real estate participation loans had been downgraded by the lead bank to special mention. To date, the Company has not received sufficient information to ~~identify~~make a final determination, and ~~track potential problem~~accordingly, the risk rating on these loans ~~which do~~have not ~~rise~~been further downgraded. At March 31, 2021, these loans that are secured by nursing home/rehabilitation facilities were current on their payments.

At March 31, 2021, total loans receivable included $45.2 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 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.SBA.

~~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, 2021
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
ALLL:
Beginning balance	$	3,181	$	1,366	$	6,127	$	2,189	$	1,242	$	1,069	$	15,174

Recoveries	28		0		0		0		0		0		28
(Recapture) provision	(158)		(34)		765		4		(216)		(61)		300
Ending balance	$	3,051	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,502

ALLL by category:
General reserve	$	3,046	$	1,332	$	6,892	$	2,193	$	1,026	$	1,008	$	15,497
Specific reserve	5		0		0		0		0		0		5

Loans:
Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391
Loans collectively evaluated for impairment	376,722		138,032		368,911		94,545		78,294		38,768		1,095,272
Loans individually evaluated for impairment	2,524		2,036		16,559		0		0		0		21,119

At or For the Three Months Ended March 31, 2020
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 3,034
$ 1,607
$ 4,559
$ 2,222
$ 1,140
$ 656
$ 13,218
Recoveries 12
—
—
—
—
—
12
Provision (recapture) 9
51
134
(79 ) (66 ) 251
300
Ending balance $ 3,055
$ 1,658
$ 4,693
$ 2,143
$ 1,074
$ 907
$ 13,530

ALLL by category:
General reserve $ 3,026
$ 1,658
$ 4,693
$ 2,143
$ 1,074
$ 907
$ 13,501
Specific reserve 29
—
—
—
—
—
29

Loans:
Total loans $ 371,253
$ 169,468
$ 385,910
$ 107,401
$ 34,702
$ 37,225
$ 1,105,959
Loans collectively evaluated for impairment ⁽¹⁾
367,395
167,364
384,653
91,751
34,702
37,225
1,083,090
Loans individually evaluated for impairment ⁽²⁾
3,858
2,104
1,257
15,650
—
—
22,869

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

Recoveries	12		0		0		0		0		0		12
Provision (recapture)	9		51		134		(79)		(66)		251		300
Ending balance	$	3,055	$	1,658	$	4,693	$	2,143	$	1,074	$	907	$	13,530

ALLL by category:
General reserve	$	3,026	$	1,658	$	4,693	$	2,143	$	1,074	$	907	$	13,501
Specific reserve	29		0		0		0		0		0		29

Loans:
Total loans	$	371,253	$	169,468	$	385,910	$	107,401	$	34,702	$	37,225	$	1,105,959
Loans collectively evaluated for impairment	367,395		167,364		384,653		91,751		34,702		37,225		1,083,090
Loans individually evaluated for impairment	3,858		2,104		1,257		15,650		0		0		22,869

At or For the Three Months Ended March 31, 2019
One-to-Four
Family
Residential Multifamily Commercial
Real Estate Construction/
Land Business Consumer Total
(In thousands)
ALLL:
Beginning balance $ 3,387
$ 1,680
$ 4,777
$ 2,331
$ 936
$ 236
$ 13,347
Recoveries 24
—
—
—
—
37
61
(Recapture) provision (379 ) (101 ) 32
801
94
(47 ) 400
Ending balance $ 3,032
$ 1,579
$ 4,809
$ 3,132
$ 1,030
$ 226
$ 13,808

ALLL by category:
General reserve $ 2,982
$ 1,579
$ 4,809
$ 3,132
$ 1,030
$ 226
$ 13,758
Specific reserve 50
—
—
—
—
—
50

Loans:
Total loans $ 351,332
$ 167,843
$ 384,686
$ 114,510
$ 33,513
$ 14,336
$ 1,066,220
Loans collectively evaluated for impairment ⁽¹⁾
345,569
167,843
382,530
114,510
33,513
14,292
1,058,257
Loans individually evaluated for impairment ⁽²⁾
5,763
—
2,156
—
—
44
7,963

⁽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 31, ~~2020,~~2021, past due loans were ~~0.20% of total loans receivable. In comparison, past due loans were 0.19%~~0.21% of total loans receivable, as compared to 0.24% at December 31, ~~2019.~~2020. The following tables represent a summary of the aging of loans by type at the dates indicated:

⁽¹⁾ There were no0 loans 90 days and greater past due and still accruing interest at March 31, ~~2020~~.2021.

⁽¹⁾ There were no0 loans 90 days and greater past due and still accruing interest at December 31, ~~2019.~~2020.

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)


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

Multifamily	$	2,036	$	2,104



Total nonaccrual loans	$	2,036	$	2,104

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 months ended~~Nonaccrual loans at both March 31, 2021, and December 31, 2020, ~~interest~~consisted of one multifamily loan that was in the foreclosure process at those dates. Interest income that would have been recognized had ~~these~~the nonaccrual ~~loans~~loan been performing in accordance with ~~their~~its original terms was ~~$14,000. For~~$24,000 and $14,000 for the three months ended March 31, ~~2019, foregone interest on nonaccrual loans was $6,000.~~2021, and 2020, respectively.

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

⁽¹⁾ There were ~~$203.0~~$199.8 million of owner-occupied one-to-four family residential loans and ~~$168.2~~$179.4 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.~~

⁽¹⁾There were ~~$210.8~~$206.3 million of owner-occupied one-to-four family residential loans and ~~$161.6~~$175.6 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 classified as nonperforming are all owner-occupied.~~

Impaired Loans. A loan is considered impaired when we have determined that we may be unable to collect payments of principal or interest when due under the terms of the original loan document or the borrower failing to comply with contractual terms of the loan. At March 31, 2021, and December 31, 2020, there were no0 commitments to advance funds related to impaired loans. ~~At December 31, 2019, there was~~ ~~$3.1~~ million committed to be advanced on an impaired $12.5 million construction loan. During the three months ended March 31, 2020, the $15.7 million impaired construction/land loan became fully funded. 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, 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:

Recorded Investment ⁽¹⁾

Unpaid Principal Balance ⁽²⁾

⁽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)

Recorded Investment ⁽¹⁾

Unpaid Principal Balance⁽²⁾

⁽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 months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


	Three Months Ended March 31, 2021				Three Months Ended March 31, 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	$	273	$	5	$	433	$	9
Non-owner occupied	984		16		1,388		21
Multifamily	2,070		46		2,105		46
Commercial real estate	16,614		161		1,262		22
Construction/land	0		0		14,087		150

Total	19,941		228		19,275		248

Loans with an allowance:
One-to-four family residential:
Owner occupied	501		8		504		9
Non-owner occupied	819		13		1,642		23




Total	1,320		21		2,146		32

Total impaired loans:
One-to-four family residential:
Owner occupied	774		13		937		18
Non-owner occupied	1,803		29		3,030		44
Multifamily	2,070		46		2,105		46
Commercial real estate	16,614		161		1,262		22
Construction/land	0		0		14,087		150

Total	$	21,261	$	249	$	21,421	$	280

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

Troubled Debt Restructurings. Certain loan modifications are accounted for as troubled debt restructured loans (“TDRs”). At March 31, 2021, the TDR portfolio totaled $3.8 million. At December 31, 2020, the TDR portfolio totaled ~~$5.0 million. At December 31, 2019, the TDR portfolio totaled $5.2~~$3.9 million. At both dates, all TDRs were performing according to their modified repayment terms.

At March 31, ~~2020~~,2021, 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 months ended March 31, 2021 and 2020.

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 ~~2019.~~the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) January 1, 2022. At March 31, 2021, total loans receivable included $56.7 million of loans that were on active short-term deferrals under the CARES Act and related regulatory guidance. 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)~~

~~There were no~~The following table presents TDR modifications during the three months ended March 31, ~~2020. The following table presents~~2021, and the recorded investment prior to and after the modification. There were no TDR modifications for the three months ended March 31, ~~2019, and their recorded investment prior to and after the modification:~~2020.


	Three Months Ended March 31, 2021
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)



Commercial real estate
Advancement of maturity date	1		$	1,241	$	1,241
Total	$	1	$	1,241	$	1,241

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 months ended March 31, ~~2020,~~2021, and March 31, ~~2019, no~~2020, 0 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:

For the three months ended March 31, 2021, and 2020, there were no0 OREO properties sold and no0 market value adjustments taken on the properties in OREO. ~~For the three months ended~~At March 31, ~~2019, there were no~~2021, OREO ~~properties sold and $29,000 in market value adjustments on OREO properties. OREO at March 31, 2020,~~ consisted of $454,000 in commercial real estate properties. At March 31, ~~2020,~~2021, there was ~~a $2.1~~the $2.0 million multifamily loan discussed above 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)

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

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

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability using one of the three valuation techniques. Inputs can be observable or unobservable. Observable inputs are those assumptions that market participants would use in pricing the particular asset or liability. These inputs are based on market data and are obtained 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 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, ~~2020~~2021 and December 31, ~~2019:~~2020:


	Fair Value Measurements at March 31, 2021
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae	$	15,748	$	0	$	15,748	$	0
Freddie Mac	12,851		0		12,851		0
Ginnie Mae	25,090		0		25,090		0
Other	10,504		0		10,504		0
Municipal bonds	31,438		0		31,438		0
U.S. Government agencies	50,356		0		50,356		0
Corporate bonds	22,055		0		22,055		0
Total available-for-sale investments	168,042		0		168,042		0
Derivative fair value asset	903		0		903		0
	$	168,945	$	0	$	168,945	$	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, 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	$	13,288	$	0	$	13,288	$	0
Freddie Mac	4,316		0		4,316		0
Ginnie Mae	17,127		0		17,127		0
Other	10,729		0		10,729		0
Municipal bonds	17,446		0		17,446		0
U.S. Government agencies	40,635		0		40,635		0
Corporate bonds	24,010		0		24,010		0
Total available-for-sale investments	127,551		0		127,551		0

Liabilities:
Derivative fair value liability	$	2,825	$	0	$	2,825	$	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, ~~2020,~~2021, and December 31, ~~2019:~~2020:

Impaired loans (included in loans
receivable, net) ⁽¹⁾

Impaired loans (included in loans receivable, net) (1)

⁽¹⁾Total fair value of impaired loans is net of ~~$29,000~~$5,000 of specific reserves on performing TDRs.

Impaired loans (included in loans receivable, net) (1)

⁽¹⁾Total fair value of impaired loans is net of ~~$31,000~~$8,000 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, ~~2020~~2021 and December 31, ~~2019:~~2020:

March 31, 2021

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

21,114

Market approach

Expected values of future cash flows

0.0%

(0.0%)

OREO

454

Market approach

Estimated selling price less selling costs

0.0%

(0.0%)

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2020

Fair Value

Valuation Technique

Unobservable Input(s)

Range (Weighted Average)

(Dollars in thousands)

Impaired Loans

21,392

Market approach

Expected values of future cash flows

0.0%

(0.0%)

OREO

454

Market approach

Estimated selling price 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:

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	December 31, 2020
			Estimated		Fair Value Measurements Using:
	Carrying Value		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	7,995	$	7,995	$	7,995	$	0	$	0
Interest-earning deposits with banks	72,494		72,494		72,494		0		0
Investments available-for-sale	127,551		127,551		0		127,551		0
Investments held-to-maturity	2,418		2,418		0		2,418		0
Loans receivable, net	1,100,582		1,101,559		0		0		1,101,559
FHLB stock	6,410		6,410		0		6,410		0
Accrued interest receivable	5,508		5,508		0		5,508		0


Financial Liabilities:
Deposits	684,057		684,057		684,057		0		0
Certificates of deposit, retail	409,576		418,118		0		418,118		0

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

The Company ~~adopted ASU 2016-02~~follows ASC Topic 842, Leases, recognizing a ROU and ~~ASU 2018-11 using the modified retrospective approach with an effective date of January 1, 2019, and recognized~~related lease liabilities on the Company’s consolidated balance ~~sheets a ROU included in prepaid expenses and other assets and lease liabilities included in other liabilities.~~sheets. At March 31, ~~2020,~~2021, the Company had ~~eleven~~13 operating leases for retail branch locations. The remaining lease terms range from 5three months to ~~5.3~~9.8 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 the time of the lease inception, or at January 1, 2019, or for leases ~~added after~~in place at that ~~date, at the time of lease inception.~~date.

The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At March 31, ~~2020,~~2021, the Company was committed to paying ~~$57,000~~$68,000 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 months ended March 31, 2020 and 2019, was $225,000 and $175,000, respectively. Lease expense~~ includes the amortized lease expense under ~~ASU 2016-02~~ASC Topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the individual lease agreements. AtThe following table includes details on these items at and for the three months ended March 31, ~~2020, the ROU had a balance of $2.4 million~~2021, and the lease liability had a balance of $2.5 million on the Company’s consolidated balance sheet and is amortizing over a weighted-average remaining term of 6.6 years. The weighted-average discount rate used to calculate the present value of future minimum lease payments was 2.84% at March 31, 2020.


	March 31, 2021			March 31, 2020
	(dollars in thousands)
Lease expense	$	256		$	225
Right-of-use asset	3,976			2,446
Lease liability	4,123			2,538

Weighted average remaining term (in years)	6.84			6.64
Weighted average discount rate	1.97		%	2.84		%

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, ~~2020~~2021 and the discounted lease liability at that date:


	March 31, 2021
	(in thousands)
Due through one year	$	791
Due after one year through two years	782
Due after two years through three years	645
Due after three years through four years	565
Due after four years through five years	420
Due after five years	1,216
Total minimum lease payments	4,419
Less: present value discount	(296)
Lease liability	$	4,123

The Company extended the existing lease in March 2021 at the branch located in Edmonds,Washington. The extended lease term is ~~finalizing~~60 months and the minimum rent due is $8,000, with a ~~lease for a new retail branch in Gig Harbor, Washington, which is expected to commence later in 2020.~~3% annual increase.

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, ~~2020,~~2021, 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~~one-month or ~~3-month~~three-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~~three-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~~one-month or ~~3-month~~three-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~~debt utilized to fund the interest rate swap as compared to the one-month or three-month LIBOR interest received from the counterparty. At March 31, ~~2020, the~~2021, a $903,000 net fair value ~~loss~~asset of the cash flow hedges ~~of $3.3 million~~ was reported with other ~~liabilities.~~assets. The tax effected amount of ~~$2.6 million~~$713,000 was included in ~~Accumulated Other Comprehensive Income.~~accumulated other comprehensive income. There were no0 amounts recorded in the Consolidated Income Statements for the quarters ended March 31, ~~2020~~2021 or ~~2019,~~2020, 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 March 31, 2021 and December 31, 2020:


	Balance Sheet Location	Fair Value at March 31, 2021		Fair Value at December 31, 2020
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	Other Assets (Other liabilities)	$	903	$	(2,825)

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


	Amount Recognized in OCI for the three months ended March 31, 2021		Amount Recognized in OCI for the three months ended March 31, 2020
	(In thousands)
Interest rate swaps on FHLB debt designated as a cash flow hedge	$	2,945	$	(2,933)

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, ~~2020,~~2021, there were no 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 305,000311,000 stock options from the 2008 Plan ~~were~~vested and available for exercise at March 31, ~~2020,~~2021, subject to the 2008 Plan provisions. At March 31, ~~2020,~~2021, there were ~~1,207,658~~1,081,082 total shares available for grant under the 2016 Plan, including ~~303,829~~240,541 shares available to be granted as restricted stock.

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, total compensation expense for both the 2008 Plan and 2016 ~~Plans~~Plan was ~~$80,000~~$96,000 and ~~$124,000,~~$80,000, respectively, and the related income tax benefit was ~~$17,000~~$20,000 and ~~$26,000,~~$17,000, 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.

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.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 months ended March 31, ~~2020,~~2021, follows:


	For the Three Months Ended March 31, 2021
	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, 2021	313,000	$	10.34		$	397,890	$	3.69

Exercised	(2,000)	10.77			5,920		4.16


Outstanding at March 31, 2021	311,000	10.34		2.73	1,217,380		3.69
Expected to vest assuming a 3% forfeiture rate over the vesting term	311,000	10.34		2.73	1,217,380		3.69
Exercisable at March 31, 2021	311,000	10.34		2.73	1,217,380		3.69

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, ~~2020,~~2021, there was ~~$23,000 of total~~0 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 weighted-average vesting period.~~options. There were no0 stock options granted during the three months ended March 31, ~~2020.~~2021.

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 months ended March 31, ~~2020,~~2021, follows:


	For the Three Months Ended March 31, 2021
	Shares	Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2021	16,228	$	13.61
Granted	45,593	13.78
Vested	(17,395)	13.62


Nonvested at March 31, 2021	44,426	13.78
Expected to vest assuming a 3% forfeiture rate over the vesting term	43,093	13.78

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, ~~2020,~~2021, there was ~~$198,000~~$556,000 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 ~~weighted-average~~ vesting period.

FIRST FINANCIAL NORTHWEST, INC. AND SUBSIDIARIES

SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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


	Three Months Ended March 31,
	2021		2020
	(Dollars in thousands, except share data)
Net income	$	2,497	$	1,684
Less: Earnings allocated to participating securities	(11)		(3)
Earnings allocated to common shareholders	$	2,486	$	1,681

Basic weighted average common shares outstanding	9,490,058		9,896,234
Dilutive stock options	67,068		72,120
Dilutive restricted stock grants	9,545		9,706
Diluted weighted average common shares outstanding	9,566,671		9,978,060

Basic earnings per share	$	0.26	$	0.17
Diluted earnings per share	$	0.26	$	0.17

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, ~~2020 and 2019,~~2021, there were ~~40,000 and 50,000~~0 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 three months ended March 31, 2020, there were 40,000 anti-dilutive shares of common stock omitted from the computation.

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.

Disaggregation of Revenue

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 months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


							Three Months Ended
	Three Months Ended						March 31, 2021		March 31, 2020
	March 31, 2020		March 31, 2019				(In thousands)
	(In thousands)
Loss on sale of investments ⁽¹⁾	$	—	$	(8	)
BOLI change in cash surrender value ⁽¹⁾	254		269			BOLI change in cash surrender value (1)	$	269	$	254
Wealth management revenue	165		196			Wealth management revenue	160		165
Deposit related fees	68		69			Deposit related fees	66		68
Debit card and ATM fees	108		102			Debit card and ATM fees	134		108
Loan related fees	392		47			Loan related fees	132		392
Loan interest swap fees	—		16

Other	3		9			Other	3		3
Total noninterest income	$	990	$	700		Total noninterest income	$	764	$	990

_______________

⁽¹⁾ Not within scope of Topic 606

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, 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~~ Fees are also earned on the prepayment of certain loans, ~~participating in an interest rate swap agreement, fees~~and are ~~earned~~recognized at the ~~onset of the agreement and are not contingent on any future performance or term length of~~time the loan ~~itself. The performance obligation~~ is ~~satisfied by entering into the contract and receipt of the fees from the counterparty.~~paid off.

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

Contract Balances

At March 31, ~~2020 and December 31, 2019,~~2021, 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.

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,~~

“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 the London Interbank Offered Rate ("LIBOR"), and the potential transition away from LIBOR toward new interest rate benchmarks;

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

•results of examinations of us by the Federal Reserve Bank of San Francisco (“FRB”) and our bank subsidiary by the Federal Deposit Insurance Corporation (“FDIC”), the Washington State Department of Financial Institutions, Division of Banks (“DFI”) or other regulatory authorities, including the possibility that any such regulatory authority may initiate an enforcement action against the Company or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

•our ability to pay dividends on our common stock;

•our ability to attract and retain deposits; increases in premiums for deposit insurance;

•our ability to control operating costs and expenses;

•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•difficulties in reducing risk associated with the loans on our balance sheet;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;

•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;

•our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments;

•our ability to implement a branch expansion strategy;

•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

•our ability to manage loan delinquency rates;

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

•increased competitive pressures among financial services companies;

•changes in consumer spending, borrowing and savings habits;

•legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules, including as a result of Basel III;

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

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

•adverse changes in the securities markets;

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

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

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

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations; pricing, products and services, including ~~the potential effects~~as a result of the CARES Act, the CAA, 2021 and recent COVID-19 ~~pandemic,~~vaccination efforts, and other risks detailed in our Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) and our other 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~~seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and ~~one~~two retail ~~branch~~branches in Pierce County, Washington. The Bank ~~has received FDIC approval to open a new~~opened its newest branch in ~~Gig Harbor, Washington. This additional Pierce~~Issaquah, Washington, located in King County, ~~location is expected to open~~ in ~~the second half of 2020.~~March 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 4142 other states and the District of Columbia, including concentrations in California, Utah, Oregon, Georgia and ~~Georgia~~Florida of ~~$44.1~~$33.0 million, ~~$16.2~~$11.9 million, ~~$11.7~~$11.4 million, $8.4 million and ~~$8.2~~$7.9 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 aan SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small ~~business loan (“SBA”) department, with~~businesses until our volumes are high enough to support the ~~goal of achieving~~necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status ~~in 2020,~~ 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,~~asset-sensitive, meaning our ~~interest-bearing liabilities~~interest-earning assets reprice at a faster rate than our ~~interest-earning assets.~~interest-bearing liabilities. Despite the significant 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, and the low interest rate environment, the Bank had a modest improvement in the net interest margin over the last year. The cost of funds has declined substantially due to the higher levels of noninterest-bearing deposits, the repricing of retail certificates of deposit at much lower rates, and the payoff of all brokered certificates of deposit. Our net interest margin has been adversely impacted by decreasing loan yields, partially mitigated during the quarter ended March 31, 2021, by recognition of unamortized deferred fee income on forgiven Paycheck Protection Program (“PPP”) loans. The Company expects the ongoing low interest rate environment will continue to put downward pressure on loan yields and the yields on other floating rate interest earning assets as well. Further, 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, until the pandemic subsides, the Company expects its net interest income and net interest margin may be adversely affected in the near term, if not longer.

An offset to net interest income is the provision for loan losses which is required to establish the ~~allowance for loan and lease losses (“ALLL”)~~ALLL at a level that adequately provides for ~~probable~~potential 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.~~income after the provision. Improvements in loan risk ratings, increases in property values, or receipt of recoveries of amounts previously charged off may partially or fully offset any 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”)~~PPP as a lender. Some of the PPP loans we originated were for our existing customers, however we also provided PPP loans to those in our community who have not had a banking relationship with us in the past. The initial deadline for PPP loan applications to the SBA was August 8, 2020. Under this program, we funded 462 applications totaling $52.1 million of loans in our market areas and began processing applications for loan forgiveness in the fourth quarter of 2020. As of ~~April 30, 2020,~~March 31, 2021, 374 PPP loans totaling $29.4 million had received loan forgiveness and were repaid under the PPP loan program. The CAA, 2021 renewed and extended the PPP until March 31, 2021, by authorizing an additional $284.5 billion for the program. The deadline for this second round of PPP was recently extended to May 31, 2021. During the current quarter, the Bank ~~had obtained~~originated 236 PPP loans with an aggregate balance of $23.5 million. As of March 31, 2021, there were 324 PPP loans outstanding totaling $45.2 million as compared to 372 PPP loans totaling $41.3 million at December 31, 2020. The SBA ~~Loan Authorizations~~has recently released a simplified forgiveness process for ~~$48.9~~PPP loans of $150,000 or less. At March 31, 2021, 234 PPP loans have an outstanding balance of $150,000 or less, totaling $11.4 million, or 25.2% of PPP ~~loans.~~loans outstanding. Of these PPP loans, 145 loans totaling $3.3 million have an outstanding balance of $50,000 or less.

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~~as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2)

executed on a loan that was not more than 30 days past due ~~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) January 1, 2022. 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 30, 2020,~~March 31, 2021, total loans with modifications granted under the ~~Bank~~CARES Act were $56.7 million, or 5.1% of total loans outstanding, an increase from $45.2 million, or 4.0% of total loans outstanding at December 31, 2020. At March 31, 2021, $71.9 million of total loans receivable that previously received a loan modification had ~~received 168 requests~~resumed making normal scheduled loan payments. The increase in the quarter ended March 31, 2021, was primarily due to new modifications granted on loans related to an office building and a private tennis club. As of March 31, 2021, $49.1 million in loans had been granted modifications of greater than six months, of which $30.9 million were for ~~loan modifications by borrowers adversely impacted by~~loans in the ~~COVID-19 pandemic.~~ hotel/motel category. The 14 loans with deferrals greater than six months had been granted a second, third, or fourth payment deferral period.

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,~~ in accordance with the CARES ~~Act and regulatory guidance:~~Act:


	As of April 30, 2020											As of March 31, 2021
	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 deferred 4 - 6 months		Balance of loans deferred more than 6 months		Total deferrals		Total loans March 31, 2021		% of loans on deferral as of March 31, 2021
	(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	$	462	$	1,589	$	2,051	$	379,246	0.5	%
Multifamily	1,726		2,877		4,603		169,468		2.7		Multifamily	—		2,347		2,347		140,068		1.7
Commercial real estate:											Commercial real estate:
Office	2,408		—		2,408		95,911		2.5		Office	7,153		—		7,153		83,176		8.6
Retail	14,405		4,128		18,533		122,460		15.1		Retail	—		7,811		7,811		110,843		7.0
Mobile home park	—		—		—		25,370		—		Mobile home park	—		—		—		29,708		—
Hotel/motel	996		5,566		6,562		52,515		12.5		Hotel/motel	—		30,869		30,869		65,475		47.1
Nursing home	5,400		6,368		11,768		11,783		99.9		Nursing home	—		6,368		6,368		12,852		49.5
Warehouse	—		5,635		5,635		17,489		32.2		Warehouse	—		—		—		17,435		—
Storage	—		—		—		34,551		—		Storage	—		—		—		33,498		—
Other non-residential	828		—		828		25,831		3.2		Other non-residential	—		—		—		32,483		—
Total Commercial real estate	24,037		21,697		45,734		385,910		12.1		Total Commercial real estate	7,153		45,048		52,201		385,470		13.5
Construction/land	1,100		—		1,100		107,401		1.0		Construction/land	—		—		—		94,545		—
Business
Business:											Business:
Aircraft	1,074		—		1,074		13,741		7.8		Aircraft	—		—		—		9,512		—
SBA	—		—		—		753		—		SBA	—		—		—		906		—
PPP											PPP	—		—		—		45,220		—
Other business	2,065		657		2,722		20,208		13.5		Other business	—		—		—		22,656		—
Total other business	3,139		657		3,796		34,702		10.9
Total business											Total business	—		—		—		78,294		—
Consumer:											Consumer:
Classic/collectible auto	1,202		—		1,202		22,029		5.5		Classic/collectible auto	—		85		85		26,488		0.3
Other consumer	760		—		760		15,196		5.0		Other consumer	—		—		—		12,280		—
Total consumer	1,962		—		1,962		37,225		5.3		Total consumer	—		85		85		38,768		0.2
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	$	7,615	$	49,069	$	56,684	$	1,116,391	5.1	%

~~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~~2020 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~~2020 Form 10-K.

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

Total assets were ~~$1.33~~$1.43 billion at March 31, ~~2020, a decrease~~2021, an increase of ~~0.8%~~3.1%, from ~~$1.34~~$1.39 billion at December 31, ~~2019.~~2020. The following table details the ~~$10.7~~$42.6 million net change in the composition of our assets at March 31, ~~2020~~2021 from December 31, ~~2019.~~2020.


	Balance at March 31, 2021		Change from December 31, 2020		Percent Change
	(Dollars in thousands)
Cash on hand and in banks	$	7,211	$	(784)	(9.8)	%
Interest-earning deposits with banks	75,023		2,529		3.5
Investments available-for-sale, at fair value	168,042		40,491		31.7
Investment held-to-maturity	2,413		(5)		(0.2)
Loans receivable, net	1,098,832		(1,750)		(0.2)
FHLB stock, at cost	6,465		55		0.9
Accrued interest receivable	5,702		194		3.5
Deferred tax assets, net	1,163		(478)		(29.1)
OREO	454		—		—
Premises and equipment, net	22,512		(67)		(0.3)
BOLI	33,357		323		1.0
Prepaid expenses and other assets	3,398		1,755		106.8
ROU	3,976		329		9.0
Goodwill	889		—		—
Core deposit intangible	789		(35)		(4.2)
Total assets	$	1,430,226	$	42,557	3.1	%

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~~$2.5 million during the three months ended March 31, ~~2020. These~~2021. Deposit growth of $40.0 million outpaced the growth in loans receivable providing excess funds ~~fluctuate based on our funding needs.~~invested in these deposits.

Investments available-for-sale. Our investments available-for-sale portfolio ~~decreased~~increased by ~~$4.4~~$40.5 million during the three months ended March 31, ~~2020.~~2021. During this period, ~~we had no sales or maturities~~the Bank invested excess cash into higher yielding assets by purchasing 25 available-for sale investment securities that included $22.2 million of fixed rate securities and $24.1 million of variable rate securities. AtThe purchases included $21.7 million in mortgage-backed securities, $13.0 million of municipal bonds and $11.7 million of U.S. Government agency securities. These purchases have an expected weighted average yield of 0.99%. During the three months ended March 31, ~~2020, corporate bonds issued by financial institutions represented $25.1 million, or 19.0% of our~~2021, the Bank did not sell any investments available-for-sale, ~~and municipal bonds represented $11.0~~however, $2.0 million of securities were called or ~~8.3% of our investments available-for-sale.~~paid-off early.

The effective duration of the investments available-for-sale at March 31, ~~2020,~~2021, was ~~2.64%~~3.09% as compared to ~~2.54%~~2.55% at December 31, ~~2019.~~2020. 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 by $16.3 million during the three months ended March 31, 2020, to~~at $1.1 billion at both March 31, 2021, and December 31, 2020. ~~Loan originations of $38.7 million were supplemented with $5.3 million of loan purchases to help offset loan repayments.~~ During the three months ended March 31, ~~2020, one‑to‑four~~2021, one-to-four family ~~residential~~loans, business loans, and consumer loans decreased by ~~$1.3~~$2.7 million, $2.4 million and $1.9 million, respectively. Partially offsetting these decreases, multifamily

loans, construction/land development loans and commercial real estate loans ~~decreased by $9.2 million, multifamily loans decreased~~increased by $3.4 million, ~~construction/land loans decreased by $6.3~~$2.3 million 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~~$205,000, respectively. During the three months ended March 31, ~~2020 as compared to~~2021, the Bank originated $60.6 million of loans, which included $23.5 million of PPP loans.

At March 31, 2021 and December 31, ~~2019. At these dates,~~2020, the Bank’s construction loans totaled ~~77.6%~~64.0% and ~~81.9%~~61.6% of total capital, respectively, and total non-owner occupied commercial real estate was ~~437.7%~~391.8% and ~~449.7%~~390.1% 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, ~~2020~~2021 and December 31, ~~2019.~~2020. Total construction/land loans are net of ~~$72.0~~$47.6 million and ~~$89.6~~$59.8 million of LIP at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.


	March 31, 2021		December 31, 2020
	(In thousands)
Multifamily residential:
Micro-unit apartments	$	11,708	$	11,366
Other multifamily	128,360		125,328
Total multifamily residential	140,068		136,694

Non-residential:
Office	83,176		84,311
Retail	110,843		114,117
Mobile home park	29,708		28,094
Hotel / motel	65,475		69,304
Nursing home	12,852		12,868
Warehouse	17,435		17,484
Storage	33,498		33,671
Other non-residential	32,483		25,416
Total non-residential	385,470		385,265

Construction/land:
One-to-four family residential	27,817		33,396
Multifamily	58,718		51,215
Commercial	5,837		5,783
Land	2,173		1,813
Total construction/land	94,545		92,207
Total multifamily residential, non-residential and construction/land loans	$	620,083	$	614,166

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, ~~2020,~~2021, are ~~$32.6~~$58.7 million of multifamily loans ~~$22.9~~and $5.8 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,~~2020, construction/land loans included ~~$38.6~~$51.2 million of

multifamily loans ~~$18.3~~and $5.8 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.

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 months ended March 31, ~~2020,~~2021, the Bank purchased ~~$5.3~~$9.9 million of loans and loan participations to borrowers located in Washington and other states, including $2.4 million of consumer loans secured by classic/collectible ~~automobiles to borrowers located in Washington and other states.~~automobiles.

The majority of our loan portfolio continues to be secured by properties located in our primary market area, however a significant amount is secured by properties in other areas of Washington, in California, and in other states. At March 31, ~~2020,~~2021, total loans secured by collateral located in California represented ~~4.0%~~3.0% of our total loans and total loans secured by collateral located outside the states of California and Washington represented ~~9.8%~~8.9% of our total loans. The following table details geographic concentrations in our loan portfolio:


	At March 31, 2020															At March 31, 2021
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total			One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total
	(In thousands)															(In thousands)
King County	$	291,219	$	99,832	$	199,050	$	97,224	$	17,142	$	13,172	$	717,639	King County	$	292,631	$	78,201	$	224,925	$	85,216	$	48,241	$	10,204	$	739,418
Pierce County	33,897		5,052		26,702		6,069		362		606		72,688		Pierce County	35,300		6,998		25,770		6,106		2,135		396		76,705
Snohomish County	26,004		3,539		34,280		33		3,708		1,436		69,000		Snohomish County	29,776		8,599		14,217		972		16,558		1,127		71,249
Kitsap County	7,571		5		299		2,249		—		—		10,124		Kitsap County	7,220		5		294		2,251		717		—		10,487
Other Washington Counties	9,310		24,330		47,183		1,826		1,236		437		84,322		Other Washington Counties	11,275		23,269		50,582		—		1,062		118		86,306
California	2,664		20,335		15,482		—		972		4,634		44,087		California	2,608		9,825		13,634		—		818		6,094		32,979
Outside Washington and California ⁽¹⁾	588		16,375		62,914		—		11,282		16,940		108,099		Outside Washington and California (1)	436		13,171		56,048		—		8,763		20,829		99,247
Total loans	$	371,253	$	169,468	$	385,910	$	107,401	$	34,702	$	37,225	$	1,105,959	Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391

_______________

⁽¹⁾Includes loans in Utah, Oregon, Georgia and ~~Georgia~~Florida of ~~$16.2~~$11.9 million, ~~$11.7~~$11.4 million, $8.4 million and ~~$8.2~~$7.9 million, respectively, and loans in 37 other ~~states.~~states and the District of Columbia.

Our five largest borrowing relationships, which represent ~~8.0%~~8.6% of our net loans, ~~increased~~decreased by ~~$1.9 million~~$557,000 to ~~$88.8~~$95.7 million at March 31, ~~2020,~~2021, from ~~$86.9~~$96.3 million at December 31, ~~2019.~~2020. The total number of loans represented by this group of borrowers ~~decreased slightly to 14~~remained steady at 13 loans at both March 31, ~~2020, from 16 loans at~~2021, and December 31, ~~2019.~~2020. At March 31, ~~2020,~~2021, 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, ~~2020:~~2021:


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	2	$	—	$	12,185	$	14,424	$	26,609
Real estate investor	5	430		—		18,827		—		19,257		Real estate investor	6	418		—		20,611		21,029
Real estate investor	2	—		—		18,622		—		18,622		Real estate investor	2	—		—		18,274		18,274
Real estate investor	1	—		—		—		15,650		15,650		Real estate investor	1	—		—		15,326		15,326
Real estate investor	1	—		—		13,888		—		13,888		Real estate investor	2	—		—		14,468		14,468
Total	14	$	430	$	8,399	$	64,294	$	15,650	$	88,773	Total	13	$	418	$	12,185	$	83,103	$	95,706

The ALLL increased to ~~$13.5~~$15.5 million at March 31, ~~2020,~~2021, from ~~$13.2~~$15.2 million at December 31, ~~2019,~~2020, and represented ~~1.22%~~1.39% and ~~1.18%~~1.36% of total loans receivable at March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, 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 ~~increases~~the downgrade of $10.5 million of commercial real estate loans partially offset by improvements in the forecasted ~~credit deterioration~~risk factors for all loan categories ~~in response~~due to the improving economy. With the improved economic ~~disruption caused~~outlook as of March 31, 2021, and the expanding availability of the COVID-19 vaccine, the expected economic impact of the pandemic to the credit quality of our loan portfolio has diminished. The $45.2 million balance of PPP loans was omitted from the ALLL calculation at March 31, 2021, as these loans are fully guaranteed by the ~~COVID-19 pandemic. The increase was partially offset by~~SBA. Management expects that the ~~$16.3 million decline~~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 million~~decreased $281,000 during the three months ended March 31, ~~2020, however, the loans are generally well collateralized and did not require additional reserves to be set aside.~~2021. The specific reserves decreased by ~~$2,000~~$3,000 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, ~~2020~~2021, and ~~2019~~2020 - Provision for Loan Losses” discussed below.

We believe that the ALLL at March 31, ~~2020,~~2021, 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,~~1, Item ~~1A.~~1A of our 2020 Form 10-K.

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:


	March 31, 2021			December 31, 2020			Three Month Change
	(Dollars in thousands)








Performing TDRs:
One-to-four family residential	$	2,525		$	2,627		$	(102)

Commercial real estate	1,232			1,242			(10)



Total TDRs	$	3,757		$	3,869		$	(112)
% 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~~$112,000 at March 31, ~~2020,~~2021, compared to December 31, ~~2019,~~2020, as a result of principal ~~repayments and loan payoffs. At~~repayments. In addition, at March 31, ~~2020, all TDRs were performing and on accrual status. In addition,~~2021, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at March 31, ~~2020,~~2021, 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, ~~2020, and December 31, 2019,~~2021, total past due loans were ~~$2.2~~$2.3 million, representing ~~0.20% and 0.19%~~0.21% of total loans ~~receivable, respectively.~~receivable. At December 31, 2020, total past due loans were $2.7 million, representing 0.24% of total loans receivable.



	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



	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
Balances at December 31, 2018	10,710,656		$	107		$	93,773		$	66,343		$	(2,253	)	$	(4,232	)	$	153,738
Net income	—		—			—			1,945			—			—			1,945
Other comprehensive income, net of tax	—		—			—			—			415			—			415
Issuance of common stock - restricted stock awards, net	16,698		—			(93		)	—			—			—			(93		)
Compensation related to stock options and restricted stock awards	—		—			124			—			—			—			124
Allocation of 28,213 ESOP shares	—		—			163			—			—			282			445
Repurchase and retirement of common stock	(263,800	)	(3		)	(4,167		)	—			—			—			(4,170		)
Canceled common stock - restricted stock awards	(5,929	)	—			—			—			—			—			—
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


	Loans Past Due as of March 31, 2020													Loans Past Due as of March 31, 2021
	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	$	199,845	$	199,845
Non-owner occupied	—		—		—		—		168,208		168,208		Non-owner occupied	0		0		0		0		179,401		179,401
Multifamily	—		—		2,104		2,104		167,364		169,468		Multifamily	0		0		2,036		2,036		138,032		140,068
Commercial real estate	—		—		—		—		385,910		385,910		Commercial real estate	0		0		0		0		385,470		385,470
Construction/land	—		—		—		—		107,401		107,401		Construction/land	0		0		0		0		94,545		94,545
Total real estate	79		—		2,104		2,183		1,031,849		1,034,032		Total real estate	0		0		2,036		2,036		997,293		999,329
Business	—		—		—		—		34,702		34,702		Business	264		0		0		264		78,030		78,294
Consumer	—		—		—		—		37,225		37,225		Consumer	37		0		0		37		38,731		38,768
Total loans	$	79	$	—	$	2,104	$	2,183	$	1,103,776	$	1,105,959	Total loans	$	301	$	0	$	2,036	$	2,337	$	1,114,054	$	1,116,391


	Loans Past Due as of December 31, 2019													Loans Past Due as of December 31, 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	$	210,819	$	210,898	Owner occupied	$	77	$	0	$	0	$	77	$	206,246	$	206,323
Non-owner occupied	—		—		—		—		161,630		161,630		Non-owner occupied	159		0		0		159		175,478		175,637
Multifamily	2,105		—		—		2,105		170,810		172,915		Multifamily	0		0		2,104		2,104		134,590		136,694
Commercial real estate	—		—		—		—		395,152		395,152		Commercial real estate	0		0		0		0		385,265		385,265
Construction/land	—		—		—		—		113,665		113,665		Construction/land	0		0		0		0		92,207		92,207
Total real estate	2,184		—		—		2,184		1,052,076		1,054,260		Total real estate	236		0		2,104		2,340		993,786		996,126
Business	—		—		—		—		37,779		37,779		Business	275		0		0		275		80,388		80,663
Consumer	—		—		—		—		30,199		30,199		Consumer	38		0		0		38		40,583		40,621
Total loans	$	2,184	$	—	$	—	$	2,184	$	1,120,054	$	1,122,238	Total loans	$	549	$	0	$	2,104	$	2,653	$	1,114,757	$	1,117,410


	Fair Value Measurements at March 31, 2020									Fair Value Measurements at March 31, 2021
	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)									(In thousands)
Impaired loans (included in loans receivable, net) ⁽¹⁾	$	22,840	$	—	$	—	$	22,840	Impaired loans (included in loans receivable, net) (1)	$	21,114	$	0	$	0	$	21,114
OREO	454		—		—		454		OREO	454		0		0		454
Total	$	23,294	$	—	$	—	$	23,294	Total	$	21,568	$	0	$	0	$	21,568



	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	)%


⁽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.~~


	Three Months Ended March 31, 2021 Compared to March 31, 2020 Net Change in Interest
	Rate		Volume		Total
	(In thousands)
Interest-earning assets:
Loans receivable, net	$	(890)	$	40	$	(850)
Investments available-for-sale	(320)		136		(184)
Investments held-to-maturity	13		—		13
Interest-earning deposits with banks	(142)		123		(19)
FHLB stock	5		(2)		3
Total net change in income on interest-earning assets	(1,334)		297		(1,037)

Interest-bearing liabilities:
Interest-bearing demand	(64)		35		(29)
Statement savings	(4)		1		(3)
Money market	(1,362)		322		(1,040)
Certificates of deposit, retail	(426)		(195)		(621)
Certificates of deposit, brokered	—		(374)		(374)
Borrowings	(24)		(28)		(52)
Total net change in expense on interest-bearing liabilities	(1,880)		(239)		(2,119)
Total net change in net interest income	$	546	$	536	$	1,082



	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	)


	Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2020		Percent Change
	(Dollars in thousands)

BOLI change in cash surrender value	$	269	$	15	5.9	%
Wealth management revenue	160		(5)		(3.0)
Deposit related fees	200		24		13.6
Loan related fees	132		(260)		(66.3)
Other	3		—		—
Total noninterest income	$	764	$	(226)	(22.8)


			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	$	3,308	$	3,308	$	—	$	—	$	—
Unused portion of lines of credit	37,760		15,813		3,441		1,746		16,760
Undisbursed portion of construction and commercial loans	47,621		31,617		16,004		—		—
Total commitments	$	88,689	$	50,738	$	19,445	$	1,746	$	16,760


	At March 31, 2021
	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)	$	141,282	10.15	%	$	55,661	4.00	%	$	69,576	5.00	%
Common equity tier I ("CET1") (to risk- weighted assets)	141,282		14.36		44,270		4.50		63,946		6.50
Tier I risk-based capital (to risk-weighted assets)	141,282		14.36		59,027		6.00		78,703		8.00
Total risk-based capital (to risk-weighted assets)	153,623		15.62		78,703		8.00		98,379		10.00


	March 31, 2021
Increase in prime rate:	(Dollars in thousands)
0 - 25 bps	$	5,287
26 - 50 bps	3,394
51 - 75 bps	8,682
76 - 100 bps	33,282
101 - 150 bps	26,244
151 - 200 bps	8,011
> 200 bps	7,245
	$	92,145


Net Interest Income Change at March 31, 2020
Net Interest Income Change at March 31, 2021						Net Interest Income Change at March 31, 2021
Basis Point Change in Rates		Net Interest Income		% Change		Basis Point Change in Rates	Net Interest Income	% Change
(Dollars in thousands)	(Dollars in thousands)					(Dollars in thousands)
+300		$	38,891	2.78	%	+300	$45,158	6.33%
+200		38,214		0.99		+200	44,018	3.65
+100		37,934		0.25		+100	43,013	1.28
Base		37,839		—		Base	42,468	—
(100)		38,381		1.43		(100)	41,953	(1.21)


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	$	186,999	$	(15,850)	(7.81)	%	13.84	%	(1.10)	%	$	1,350,707
+200	122,711		(8,035		)	(6.15	)	9.61		(0.60	)	1,277,043		+200	191,937		(10,912)		(5.38)		13.93		(0.76)		1,378,145
+100	128,994		(1,752		)	(1.34	)	9.86		(0.13	)	1,307,711		+100	199,013		(3,836)		(1.89)		14.12		(0.27)		1,409,169
Base	130,746		—			—		9.79		—		1,335,424		Base	202,849		—		—		14.10		—		1,438,533
(100)	113,800		(16,946		)	(12.96	)	8.48		(1.27	)	1,341,254		(100)	194,352		(8,497)		(4.19)		13.34		(0.59)		1,456,826


~~(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.



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



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~~10.16			~~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⁾(12)
10.17			Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson⁽¹⁵⁾(13)
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, ~~2020,~~2021, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets; (2) Consolidated Income Statements; (3) Consolidated Statements of Comprehensive Income; (4) Consolidated Statements of Stockholders’ Equity; (5) Consolidated Statements of Cash Flows; and (6) 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)~~



	FIRST FINANCIAL NORTHWEST, INC.

Date: May ~~8, 2020~~12, 2021	By:	/s/ Joseph W. Kiley III
		Joseph W. Kiley III
		President and Chief Executive Officer (Principal Executive Officer)



Date: May ~~8, 2020~~12, 2021	By:	/s/ Richard P. Jacobson
		Richard P. Jacobson
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: May ~~8, 2020~~12, 2021	By:	/s/ Christine A. Huestis
		Christine A. Huestis
		First Vice President and Controller (Principal Accounting Officer)