First Financial Northwest, Inc. - Quarter Report: 2021 March (Form 10-Q)


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

FORM 10-Q

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

	For the quarterly period ended March 31, 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 X No

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

Yes X No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of May 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	53
	Item 4.	Controls and Procedures	56
PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	57
	Item 1A.	Risk Factors	57
	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, 2021		December 31, 2020
Assets
	(Unaudited)
Cash on hand and in banks	$	7,211	$	7,995
Interest-earning deposits	75,023		72,494
Investments available-for-sale, at fair value	168,042		127,551
Investments held-to-maturity, at amortized cost	2,413		2,418
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	6,465		6,410
Accrued interest receivable	5,702		5,508
Deferred tax assets, net	1,163		1,641
Other real estate owned ("OREO")	454		454
Premises and equipment, net	22,512		22,579
Bank owned life insurance ("BOLI"), net	33,357		33,034
Prepaid expenses and other assets	3,398		1,643
Right of use asset (“ROU”), net	3,976		3,647
Goodwill	889		889
Core deposit intangible, net	789		824
Total assets	$	1,430,226	$	1,387,669

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits	$	114,437	$	91,285
Interest-bearing deposits	1,019,218		1,002,348
Total deposits	1,133,655		1,093,633
FHLB advances	120,000		120,000
Advance payments from borrowers for taxes and insurance	4,813		2,498
Lease liability, net	4,123		3,783
Accrued interest payable	197		211

Other liabilities	8,995		11,242
Total liabilities	1,271,783		1,231,367

Commitments and contingencies
Stockholders' Equity
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares issued or outstanding	—		—
Common stock, $0.01 par value; authorized 90,000,000 shares; issued and outstanding 9,692,610 shares at March 31, 2021, and 9,736,875 shares at December 31, 2020	97		97
Additional paid-in capital	81,099		82,095
Retained earnings	79,455		78,003
Accumulated other comprehensive loss, net of tax	(515)		(1,918)
Unearned Employee Stock Ownership Plan ("ESOP") shares	(1,693)		(1,975)
Total stockholders' equity	158,443		156,302
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		—
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

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)

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)	—		—		—		—		—		—
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)	—		—		—		—		—		—
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

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)		—
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		—

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	—		199,000
Repayments of advances from the FHLB	—		(176,700)
Proceeds from stock options exercises	21		—
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)

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

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, 2021, First Financial Northwest Bank operated in fifteen locations in Washington with the headquarters and seven retail branch locations in King County, five retail branch locations in Snohomish County and two retail branches in Pierce County. The Bank’s primary market area consists of King, Snohomish, Pierce and Kitsap counties, Washington.

The Bank is a portfolio lender, originating and purchasing one-to-four family residential, multifamily, commercial real estate, construction/land development, business, and consumer loans. Loans are primarily funded by deposits from the general public, supplemented by borrowings from the 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, 2020, as filed with the SEC (“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, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 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 2021

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. The Company adopted this ASU in January 2021 with no material impact on 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:

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


	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	12,797	$	491	$	—	$	13,288
Freddie Mac	4,116		200		—		4,316
Ginnie Mae	16,513		617		(3)		17,127
Other	10,691		100		(62)		10,729
Municipal bonds	16,483		963		—		17,446
U.S. Government agencies	41,084		88		(537)		40,635
Corporate bonds	24,001		221		(212)		24,010
Total	$	125,685	$	2,680	$	(814)	$	127,551

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)	$	—	$	—	$	3,884	$	(133)
Freddie Mac	7,838		(488)		—		—		7,838		(488)
Ginnie Mae	10,649		(84)		—		—		10,649		(84)
Other	—		—		5,981		(21)		5,981		(21)
Municipal bonds	18,074		(507)		—		—		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, 2020
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(In thousands)
Mortgage-backed investments:
Fannie Mae	$	—	$	—	$	—	$	—	$	—	$	—
Freddie Mac	—		—		—		—		—		—
Ginnie Mae	—		—		1,311		(3)		1,311		(3)
Other	—		—		5,942		(62)		5,942		(62)
Municipal bonds	—		—		—		—		—		—
U.S. Government agencies	1,716		(11)		30,991		(526)		32,707		(537)
Corporate bonds	—		—		5,794		(212)		5,794		(212)
Total	$	1,716	$	(11)	$	44,038	$	(803)	$	45,754	$	(814)

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 44 securities and 20 securities in an unrealized loss position, respectively, with 15 and 18 of these securities in an unrealized loss position for 12 months or more, at both March 31, 2021, and December 31, 2020, respectively. Management does not believe that any individual unrealized loss as of March 31, 2021, or December 31, 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. Management also reviewed the financial condition of the entities issuing municipal or corporate bonds at March 31, 2021, and December 31, 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, 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

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(Unaudited)

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 $24.2 million and $23.4 million were pledged as collateral for public deposits at March 31, 2021, and December 31, 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 not generate a gain or loss. For the three months ended March 31, 2020, there were no calls, sales, or maturities on investment securities.

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 supplemental executive retirement plan agreements. At March 31, 2021, the annuities were reported as investments held-to-maturity at an amortized cost of $2.4 million on the Company’s Consolidated Balance Sheet. The amortized cost is considered the fair value of the investment.

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(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

At March 31, 2021, loans totaling $496.2 million were pledged to secure borrowings from the FHLB compared to $523.8 million at December 31, 2020. In addition, loans totaling $127.4 million and $127.1 million were pledged to the Federal Reserve Bank of San Francisco to secure a line of credit at March 31, 2021 and December 31, 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 point risk rating system. A description of the general characteristics of the risk grades is as follows:

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

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

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(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 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, 2021, and December 31, 2020, the Company had no loans rated as doubtful or loss. The following tables represent a summary of loans at March 31, 2021, and December 31, 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		—		26,309		—		—		—		26,731
Substandard	525		2,036		—		—		—		—		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		—		15,935		—		—		—		16,536
Substandard	527		2,104		—		—		—		—		2,631
Total loans	$	381,960	$	136,694	$	385,265	$	92,207	$	80,663	$	40,621	$	1,117,410

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

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(Unaudited)

amount of valuation allowances is subject to review by bank regulators, who can require the establishment of additional allowances for loan losses. 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 make a final determination, and accordingly, the risk rating on these loans have not 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 SBA.

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		—		—		—		—		—		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		—		—		—		—		—		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		—		—		—		21,119

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(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		—		—		—		—		—		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	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		—		—		22,869

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


	Loans Past Due as of March 31, 2021
	30-59 Days		60-89 Days		90 Days and Greater		Total Past Due		Current		Total (1)
	(In thousands)
Real estate:
One-to-four family residential:
Owner occupied	$	—	$	—	$	—	$	—	$	199,845	$	199,845
Non-owner occupied	—		—		—		—		179,401		179,401
Multifamily	—		—		2,036		2,036		138,032		140,068
Commercial real estate	—		—		—		—		385,470		385,470
Construction/land	—		—		—		—		94,545		94,545
Total real estate	—		—		2,036		2,036		997,293		999,329
Business	264		—		—		264		78,030		78,294
Consumer	37		—		—		37		38,731		38,768
Total loans	$	301	$	—	$	2,036	$	2,337	$	1,114,054	$	1,116,391

________________

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


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

_________________

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

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(Unaudited)


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

Multifamily	$	2,036	$	2,104



Total nonaccrual loans	$	2,036	$	2,104

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

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


	March 31, 2021
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/ Land		Business		Consumer		Total
	(In thousands)
Performing (1)	$	379,246	$	138,032	$	385,470	$	94,545	$	78,294	$	38,768	$	1,114,355
Nonperforming	—		2,036		—		—		—		—		2,036
Total loans	$	379,246	$	140,068	$	385,470	$	94,545	$	78,294	$	38,768	$	1,116,391

_____________

(1) There were $199.8 million of owner-occupied one-to-four family residential loans and $179.4 million of non-owner occupied one-to-four family residential loans classified as performing.


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

_____________

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

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 no commitments to advance funds related to impaired loans.

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(Unaudited)

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


	March 31, 2021
	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	271	$	359	$	—
Non-owner occupied	936		936		—
Multifamily	2,036		2,098		—
Commercial real estate	16,559		16,559		—


Total	19,802		19,952		—

Loans with an allowance:
One-to-four family residential:
Owner occupied	500		547		4
Non-owner occupied	817		817		1




Total	1,317		1,364		5

Total impaired loans:
One-to-four family residential:
Owner occupied	771		906		4
Non-owner occupied	1,753		1,753		1
Multifamily	2,036		2,098		—
Commercial real estate	16,559		16,559		—


Total	$	21,119	$	21,316	$	5

_________________

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

(2) Contractual loan principal balance.

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(Unaudited)


	December 31, 2020
	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
	(In thousands)
Loans with no related allowance:
One-to-four family residential:
Owner occupied	$	274	$	365	$	—
Non-owner occupied	1,031		1,031		—
Multifamily	2,104		2,104		—
Commercial real estate	16,669		16,669		—


Total	20,078		20,169		—

Loans with an allowance:
One-to-four family residential:
Owner occupied	502		549		6
Non-owner occupied	820		820		2




Total	1,322		1,369		8

Total impaired loans:
One-to-four family residential:
Owner occupied	776		914		6
Non-owner occupied	1,851		1,851		2
Multifamily	2,104		2,104		—
Commercial real estate	16,669		16,669		—


Total	$	21,400	$	21,538	$	8

_________________

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

(2) Contractual loan principal balance.

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(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, 2021 and 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	—		—		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	—		—		14,087		150

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

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(Unaudited)

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 $3.9 million. At both dates, all TDRs were performing according to their modified repayment terms.

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

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

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, 2021, and March 31, 2020, no loans that had been modified in the previous 12 months defaulted.

Note 6 - Other Real Estate Owned

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


	Three Months Ended March 31,
	2021		2020
	(In thousands)
Balance at beginning of period	$	454	$	454




Market value adjustments	—		—
Balance at end of period	$	454	$	454

For the three months ended March 31, 2021, and 2020, there were no OREO properties sold and no market value adjustments taken on the properties in OREO. At March 31, 2021, OREO consisted of $454,000 in commercial real estate properties. At March 31, 2021, there was the $2.0 million multifamily loan discussed above and no one-to-four family residential loans for which formal foreclosure proceedings were in process.

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(Unaudited)

Note 7 - Fair Value

The Company measures the fair value of financial instruments for reporting in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value 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.

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

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

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

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

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

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

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

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, 2021 and December 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)
	(In thousands)
Investments available-for-sale:
Mortgage-backed investments:
Fannie Mae	$	15,748	$	—	$	15,748	$	—
Freddie Mac	12,851		—		12,851		—
Ginnie Mae	25,090		—		25,090		—
Other	10,504		—		10,504		—
Municipal bonds	31,438		—		31,438		—
U.S. Government agencies	50,356		—		50,356		—
Corporate bonds	22,055		—		22,055		—
Total available-for-sale investments	168,042		—		168,042		—
Derivative fair value asset	903		—		903		—
	$	168,945	$	—	$	168,945	$	—


	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	$	—	$	13,288	$	—
Freddie Mac	4,316		—		4,316		—
Ginnie Mae	17,127		—		17,127		—
Other	10,729		—		10,729		—
Municipal bonds	17,446		—		17,446		—
U.S. Government agencies	40,635		—		40,635		—
Corporate bonds	24,010		—		24,010		—
Total available-for-sale investments	127,551		—		127,551		—

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

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

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, 2021, and December 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)
	(In thousands)
Impaired loans (included in loans receivable, net) (1)	$	21,114	$	—	$	—	$	21,114
OREO	454		—		—		454
Total	$	21,568	$	—	$	—	$	21,568

_____________

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


	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)
Impaired loans (included in loans receivable, net) (1)	$	21,392	$	—	$	—	$	21,392
OREO	454		—		—		454
Total	$	21,846	$	—	$	—	$	21,846

_____________

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

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

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, 2021 and December 31, 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%)

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


	March 31, 2021
			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	$	7,211	$	7,211	$	7,211	$	—	$	—
Interest-earning deposits with banks	75,023		75,023		75,023		—		—
Investments available-for-sale	168,042		168,042		—		168,042		—
Investments held-to-maturity	2,413		2,413		—		2,413		—
Loans receivable, net	1,098,832		1,100,621		—		—		1,100,621
FHLB stock	6,465		6,465		—		6,465		—
Accrued interest receivable	5,702		5,702		—		5,702		—
Derivative fair value asset	903		903		—		903		—

Financial Liabilities:
Deposits	749,624		749,624		749,624		—		—
Certificates of deposit, retail	384,031		389,971		—		389,971		—

Advances from the FHLB	120,000		120,006		—		120,006		—
Accrued interest payable	197		197		—		197		—

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


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

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

Note 8 - Leases

The Company follows ASC Topic 842, Leases, recognizing a ROU and related lease liabilities on the Company’s consolidated balance sheets. At March 31, 2021, the Company had 13 operating leases for retail branch locations. The remaining lease terms range from three months to 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 at the time of the lease inception, or at January 1, 2019, for leases in place at that date.

The minimum monthly lease payments are generally based on square footage of the leased premises, with escalating minimum rent over the lease term. At March 31, 2021, the Company was committed to paying $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 includes the amortized lease expense under ASC Topic 842, Leases, combined with variable lease expenses for maintenance or other expenses as defined in the individual lease agreements. The following table includes details on these items at and for the three months ended March 31, 2021, and 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, 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 60 months and the minimum rent due is $8,000, with a 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, 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 one-month or 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 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 one-month or 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 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, 2021, a $903,000 net fair value asset of the cash flow hedges was reported with other assets. The tax effected amount of $713,000 was included in accumulated other comprehensive income. There were no amounts recorded in the Consolidated Income Statements for the quarters ended March 31, 2021 or 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.

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)

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, 2021, there were 311,000 stock options from the 2008 Plan vested and available for exercise at March 31, 2021, subject to the 2008 Plan provisions. At March 31, 2021, there were 1,081,082 total shares available for grant under the 2016 Plan, including 240,541 shares available to be granted as restricted stock.

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

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, 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

As of March 31, 2021, there was no unrecognized compensation cost related to nonvested stock options. There were no stock options granted during the three months ended March 31, 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, 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

As of March 31, 2021, there was $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 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.

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

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, 2021, there were no options to purchase shares of common stock that were omitted from the computation of diluted earnings per share because their effect would be anti-dilutive. For the 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)

The following table includes the Company’s noninterest income disaggregated by type of service for the three months ended March 31, 2021 and 2020:


	Three Months Ended
	March 31, 2021		March 31, 2020
	(In thousands)

BOLI change in cash surrender value (1)	$	269	$	254
Wealth management revenue	160		165
Deposit related fees	66		68
Debit card and ATM fees	134		108
Loan related fees	132		392

Other	3		3
Total noninterest income	$	764	$	990

_______________

(1) Not within scope of Topic 606

For the three months ended March 31, 2021 and 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. Fees are also earned on the prepayment of certain loans, and are recognized at the time the loan is paid off.

Other: Fees earned on other services, such as 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, 2021, the Company had no contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had no material performance obligations as of this date.

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

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words “believes,” “expects,” “anticipates,” “estimates,”

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

•the effect of the COVID-19 pandemic, including on our credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity;

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

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

•uncertainty regarding the future of 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 as a result of the CARES Act, the CAA, 2021 and recent COVID-19 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”).

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 seven retail branches in King County, Washington, five retail branches in Snohomish County, Washington, and two retail branches in Pierce County, Washington. The Bank opened its newest branch in Issaquah, Washington, located in King County, in March 2021.

The Bank’s business consists predominantly of attracting deposits from the general public, combined with borrowing from the 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 diversify our loan portfolio with direct loan originations, loan participations, or loan purchases, our portfolio includes loans in 42 other states and the District of Columbia, including concentrations in California, Utah, Oregon, Georgia and Florida of $33.0 million, $11.9 million, $11.4 million, $8.4 million and $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 an SBA department, and has affiliated with an SBA partner to process our SBA loans while the Bank retains the credit decisions. This enables us to be active in lending to small businesses until our volumes are high enough to support the necessary infrastructure. When volumes support our becoming an SBA preferred lender, we will apply for that status which would provide the Bank with delegated loan approval as well as closing and most servicing and liquidation authority, enabling the Bank to make loan decisions more rapidly. In addition, the Bank plans to increase originations of the business loan portfolio, which may include business lines of credit, business term loans, equipment financing, and a focus on industry specific loans, such as green energy financing. In conjunction with the growth of business loans, the Bank seeks to service these customers with their business deposits as well.

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 asset-sensitive, meaning our interest-earning assets reprice at a faster rate than our 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 ALLL at a level that adequately provides for 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 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 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 CARES Act, the Bank is providing certain short-term loan modifications. In addition, the Bank is participating in the 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 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 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 has recently released a simplified forgiveness process for 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 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 short-term modifications of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications (e.g. generally up to 6 months) such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, as amended by the CAA, 2021, a loan modification must be (1) related to the COVID-19 pandemic; (2)

executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency by the President or (B) January 1, 2022. The primary method of relief granted by the Company is to allow the borrower to defer their loan payments for three to six months. Certain borrowers are allowed to pay interest only or have payment deferrals for periods longer than six months depending upon their specific circumstances. Deferred principal and interest amounts are added as a balloon payment due at the original maturity date or payoff of the loan.

As of March 31, 2021, total loans with modifications granted under the 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 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 loans in the 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 current balance of loans in a COVID-19 pandemic relief modification in accordance with the CARES Act:


	As of March 31, 2021
	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)
One-to-four family residential	$	462	$	1,589	$	2,051	$	379,246	0.5	%
Multifamily	—		2,347		2,347		140,068		1.7
Commercial real estate:
Office	7,153		—		7,153		83,176		8.6
Retail	—		7,811		7,811		110,843		7.0
Mobile home park	—		—		—		29,708		—
Hotel/motel	—		30,869		30,869		65,475		47.1
Nursing home	—		6,368		6,368		12,852		49.5
Warehouse	—		—		—		17,435		—
Storage	—		—		—		33,498		—
Other non-residential	—		—		—		32,483		—
Total Commercial real estate	7,153		45,048		52,201		385,470		13.5
Construction/land	—		—		—		94,545		—
Business:
Aircraft	—		—		—		9,512		—
SBA	—		—		—		906		—
PPP	—		—		—		45,220		—
Other business	—		—		—		22,656		—
Total business	—		—		—		78,294		—
Consumer:
Classic/collectible auto	—		85		85		26,488		0.3
Other consumer	—		—		—		12,280		—
Total consumer	—		85		85		38,768		0.2
Total loans with COVID-19 pandemic modifications	$	7,615	$	49,069	$	56,684	$	1,116,391	5.1	%

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.

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 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 2020 Form 10-K.

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

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

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 $2.5 million during the three months ended March 31, 2021. Deposit growth of $40.0 million outpaced the growth in loans receivable providing excess funds invested in these deposits.

Investments available-for-sale. Our investments available-for-sale portfolio increased by $40.5 million during the three months ended March 31, 2021. During this period, 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. The 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, 2021, the Bank did not sell any investments available-for-sale, however, $2.0 million of securities were called or paid-off early.

The effective duration of the investments available-for-sale at March 31, 2021, was 3.09% as compared to 2.55% at December 31, 2020. Effective duration measures the anticipated percentage change in the value of an investment security (or portfolio) in the event of a 100 basis point change in market yields. Since the Bank’s portfolio includes securities with embedded options (including call options on bonds and prepayment options on mortgage-backed securities), management believes that effective duration is an appropriate metric to use as a tool when analyzing the Bank’s investment securities portfolio, as effective duration incorporates assumptions relating to such embedded options, including changes in cash flow assumptions as interest rates change.

Loans receivable. Total loans receivable remained virtually unchanged at $1.1 billion at both March 31, 2021, and December 31, 2020. During the three months ended March 31, 2021, one-to-four family loans, business loans, and consumer loans decreased by $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 increased by $3.4 million, $2.3 million and $205,000, respectively. During the three months ended March 31, 2021, the Bank originated $60.6 million of loans, which included $23.5 million of PPP loans.

At March 31, 2021 and December 31, 2020, the Bank’s construction loans totaled 64.0% and 61.6% of total capital, respectively, and total non-owner occupied commercial real estate was 391.8% and 390.1% of total capital, respectively. The Bank has set aggregate concentration guidelines that total commercial real estate, including 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, 2021 and December 31, 2020. Total construction/land loans are net of $47.6 million and $59.8 million of LIP at March 31, 2021 and December 31, 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

Included in total construction/land loans at March 31, 2021, are $58.7 million of multifamily loans and $5.8 million of commercial real estate 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, 2020, construction/land loans included $51.2 million of

multifamily loans and $5.8 million of commercial real estate 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, 2021, the Bank purchased $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.

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, 2021, total loans secured by collateral located in California represented 3.0% of our total loans and total loans secured by collateral located outside the states of California and Washington represented 8.9% of our total loans. The following table details geographic concentrations in our loan portfolio:


	At March 31, 2021
	One-to-Four Family Residential		Multifamily		Commercial Real Estate		Construction/Land		Business		Consumer		Total
	(In thousands)
King County	$	292,631	$	78,201	$	224,925	$	85,216	$	48,241	$	10,204	$	739,418
Pierce County	35,300		6,998		25,770		6,106		2,135		396		76,705
Snohomish County	29,776		8,599		14,217		972		16,558		1,127		71,249
Kitsap County	7,220		5		294		2,251		717		—		10,487
Other Washington Counties	11,275		23,269		50,582		—		1,062		118		86,306
California	2,608		9,825		13,634		—		818		6,094		32,979
Outside Washington and California (1)	436		13,171		56,048		—		8,763		20,829		99,247
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 Florida of $11.9 million, $11.4 million, $8.4 million and $7.9 million, respectively, and loans in 37 other states and the District of Columbia.

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


Borrower (1)	Number of Loans	One-to-Four Family Residential (2)		Multifamily		Commercial Real Estate		Aggregate Balance of Loans
	(Dollars in thousands)
Real estate investor	2	$	—	$	12,185	$	14,424	$	26,609
Real estate investor	6	418		—		20,611		21,029
Real estate investor	2	—		—		18,274		18,274
Real estate investor	1	—		—		15,326		15,326
Real estate investor	2	—		—		14,468		14,468
Total	13	$	418	$	12,185	$	83,103	$	95,706

________

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

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

The ALLL increased to $15.5 million at March 31, 2021, from $15.2 million at December 31, 2020, and represented 1.39% and 1.36% of total loans receivable at March 31, 2021, and December 31, 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 the downgrade of $10.5 million of commercial real estate loans partially offset by improvements in the forecasted risk factors for all loan categories due to the improving economy. With the improved economic 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 SBA. Management expects that the great majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven. Impaired loans decreased $281,000 during the three months ended March 31, 2021. The specific reserves decreased by $3,000 as a result of amortization of the additional allowance set aside on loans with modifications and loan payoffs. For additional information, see “Comparison of Operating Results for the Three Months Ended March 31, 2021, and 2020 - Provision for Loan Losses” discussed below.

We believe that the ALLL at March 31, 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 1, Item 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 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 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		%

Our TDRs decreased $112,000 at March 31, 2021, compared to December 31, 2020, as a result of principal repayments. In addition, at March 31, 2021, there were no committed but undisbursed funds in connection with our TDRs. The largest TDR relationship at March 31, 2021, totaled $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 March 31, 2021, total past due loans were $2.3 million, representing 0.21% of total loans receivable. At December 31, 2020, total past due loans were $2.7 million, representing 0.24% of total loans receivable.

Nonperforming assets decreased by $68,000 during the first three months of 2021. The following table presents detailed information on our nonperforming assets at the dates indicated:


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

Multifamily	$	2,036		$	2,104		$	(68)



Total nonaccrual loans	2,036			2,104			(68)

OREO	454			454			—
Total nonperforming assets (1)	$	2,490		$	2,558		$	(68)
Nonperforming assets as a percent of total assets	0.17		%	0.18		%

____________

(1) The difference between nonperforming assets reported above, and the totals reported by other industry sources, is due to their inclusion of all TDRs as nonperforming loans, although 100.0% of our TDRs were performing in accordance with their restructured terms at March 31, 2021.

Nonaccrual loans are loans that are 90 days or more delinquent or other loans which, in management's opinion, the borrower is unable to meet scheduled payment obligations. Our only nonaccrual loan at both March 31, 2021, and December 31, 2020, was a $2.0 million multifamily loan secured by a non-owner occupied multifamily residence located in King County, which is currently in foreclosure. During the three months ended March 31, 2021, $74,000 in rents previously held in receivership were released to the Company and applied towards outstanding payments and late fees owed on the loan. The receiver on the underlying collateral on this loan has multiple offers on the property and the Company expects the matter to be resolved in the second quarter of 2021 without incurring a loss.

We continue to focus our efforts on working with borrowers to bring their loans current or converting nonaccrual loans to OREO and subsequently selling the properties. By taking ownership of these properties, we can generally convert non-earning assets into earning assets on a more timely basis than which may otherwise be the case. Our success in this area is reflected by the low ratio of our nonperforming assets as a percent of total assets of 0.17% at March 31, 2021, and 0.18% at December 31, 2020, as well as the minimal amount of OREO held at March 31, 2021.

OREO. OREO includes properties acquired by the Bank through foreclosure or acceptance of a deed in lieu of foreclosure. At both March 31, 2021, and December 31, 2020, OREO was $454,000, and consisted of two undeveloped commercial lots located in Pierce County, Washington.

Intangible assets. The balance of goodwill was $889,000 at both March 31, 2021 and December 31, 2020. Goodwill was calculated as the excess purchase price of the branches acquired in August 2017 (the “Branch Acquisition”) over the fair value of the assets acquired and liabilities assumed.

The core deposit intangible (“CDI”) recorded as part of the Branch Acquisition represents the fair value of the customer relationships on the acquired noninterest-bearing demand, interest-bearing demand, savings, and money market accounts. The CDI balance was $789,000 at March 31, 2021 and $824,000 at December 31, 2020. The initial ratio of CDI to the acquired balances of core deposits was 2.23%. This amount amortizes into noninterest expense on an accelerated basis over ten years.

Deposits. During the first three months of 2021, deposits increased $40.0 million to $1.13 billion at March 31, 2021, compared to $1.09 billion at December 31, 2020. Deposit accounts consisted of the following:


	March 31, 2021		Change from December 31, 2020		Percent Change
	(Dollars in thousands)
Noninterest-bearing demand	$	114,437	$	23,152	25.4	%
Interest-bearing demand	114,098		5,916		5.5
Statement savings	20,470		1,249		6.5
Money market	500,619		35,250		7.6
Certificates of deposit, retail	384,031		(25,545)		(6.2)

	$	1,133,655	$	40,022	3.7

Our retail deposits increased by $40.0 million during the three months ended March 31, 2021. Money market accounts increased by $35.3 million as the Bank continued to competitively price these products to increase these funding sources. In addition, noninterest-bearing demand and interest-bearing demand accounts increased by $23.2 million and $5.9 million, respectively. Partially offsetting these increases, retail certificates of deposit decreased $25.5 million as management elected to utilize liquidity gained from lower cost deposits to reduce its balances of higher cost certificates of deposit in a managed runoff of these funds.

At March 31, 2021 and December 31, 2020, we held $60.9 million and $59.2 million in public funds, respectively, primarily in retail certificates of deposit and money market accounts.

Advances. We use advances from the FHLB as an alternative funding source to manage interest rate risk, to leverage our balance sheet and to supplement our deposits. Total FHLB advances were $120.0 million at March 31, 2021, and December 31, 2020. At March 31, 2021, the Bank’s advances included $60.0 million of fixed-rate three-month advances that renew quarterly, and $60.0 million of fixed-rate one-month advances that renew monthly, all of which are utilized in cash flow hedge agreements, as described below. At March 31, 2021, all of our FHLB advances were due to reprice in less than two months. At that date, there were no FHLB Fed Funds short-term borrowings.

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

The following table presents details of the Bank’s interest rate swap agreements as of March 31, 2021. For each interest rate swap agreement listed, the Bank has secured a fixed-rate FHLB advance for the notional amount that reprices at the same frequency as the corresponding interest-rate swap. The Bank pays a fixed interest rate to the counterparty and in return, receives a floating interest rate based on the index noted in the below table. The original term of these interest rate swap agreements range from four to eight years.

Notional amount

Start Date

Maturity Date

Fixed rate paid to counterparty

Index rate received from counterparty

Repricing Frequency

(Dollars in thousands)

50,000

10/25/2016

10/25/2021

1.340

3-month LIBOR

quarterly

15,000

9/27/2019

9/27/2024

1.440

1-month LIBOR

monthly

10,000

11/19/2019

11/20/2023

1.585

3-month LIBOR

quarterly

15,000

3/2/2020

3/2/2026

0.911

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2027

0.937

1-month LIBOR

monthly

15,000

3/2/2020

3/2/2028

0.984

1-month LIBOR

monthly

15,000

10/25/2021

10/25/2028

0.793

3-month LIBOR

quarterly

10,000

10/25/2021

10/25/2029

0.800

3-month LIBOR

quarterly

Interest rate swap agreements in the above table with start dates in 2021 are forward-starting contracts. The Bank intends to secure two three-month fixed-rate FHLB advances on October 25, 2021 for $15.0 million and $10.0 million, which will reprice quarterly. These forward-starting contracts are intended to partially replace the $50.0 million notional interest rate swap that will mature on October 25, 2021.

A change in the net fair value of these cash flow hedges is recognized as an other asset or other liability on the balance sheet with the tax-effected portion of the change included in other comprehensive income. At March 31, 2021, we recognized a $903,000 net fair value asset as a result of the increase in the market value of these interest rate swap agreements. In comparison, at December 31, 2020, our cash flow hedges were in a fair value loss position and a $2.8 million net fair value liability was recognized.

Stockholders’ Equity. Total stockholders’ equity increased $2.1 million during the first three months of 2021, to $158.4 million at March 31, 2021, from $156.3 million at December 31, 2020. Increases to stockholders’ equity included $2.5 million net income, $467,000 from stock-based compensation and $1.4 million in other comprehensive income, net of tax, as a result of improved in the market values of our derivatives partially offset by a decline in the fair value of our investments available-for-sale. Partially offsetting these increases, stockholders’ equity decreased by $1.2 million from the repurchase of 89,019 shares of common stock and $1.0 million in cash dividends paid. As part of the strategy to increase shareholder value, the Company’s Board of Directors authorized a stock repurchase plan that began on February 1, 2021, and expires on August 13, 2021. The plan authorizes the repurchase of up to 486,000 shares of the Company’s stock. At March 31, 2021, the Company had repurchased 89,019 shares under this repurchase plan at an average price of $13.03 per share.

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


	Three Months Ended March 31,
	2021			2020

Dividend declared per common share	$	0.11		$	0.10
Dividend payout ratio (1)	42.3		%	58.8		%

______________

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

Comparison of Operating Results for the Three Months Ended March 31, 2021 and 2020

General. Net income for the three months ended March 31, 2021, was $2.5 million, or $0.26 per diluted share compared to $1.7 million, or $0.17 per diluted share for the three months ended March 31, 2020. The $813,000 increase in net income during the three months ended March 31, 2021, was primarily a result of the $2.1 million decrease in interest expense that more than offset a $1.0 million decrease in interest income, partially offset by a $226,000 decrease in noninterest income.

Net Interest Income. Net interest income for the three months ended March 31, 2021, increased $1.1 million to $10.7 million from $9.7 million for the three months ended March 31, 2020, as a result of a decrease in interest expense outpacing the decrease in interest income.

Interest income decreased by $1.0 million for the three months ended March 31, 2021, as compared to the same period in 2020, primarily as a result of the ongoing low interest rate environment following the March 2020 150 basis point decrease in the targeted federal funds rate putting downward pressure on resetting adjustable rate instruments combined with the impact of repayments on loans and securities being replaced by lower yielding assets in the lower rate environment. Loan interest income decreased $850,000 for the three months ended March 31, 2021, as compared to the same period in 2020, primarily due to a decrease in yield to 4.66% for the three months ended March 31, 2021, from 4.94% for the three months ended March 31, 2020. The average balance of loans receivable increased slightly by $3.3 million for the three months ended March 31, 2021, as compared to the same period in 2020. During the past twelve months, a total of $75.6 million PPP loans were originated. We began receiving forgiveness payoffs from the SBA in the fourth quarter of 2020, resulting in a $45.2 million balance of PPP loans at March 31, 2021. While these loans carry a low 1% interest rate, recognition of the remaining net deferred fee income on PPP loans at the time of payoff resulted in $718,000 of fee income included in interest income for the three months ended March 31, 2021. This favorable impact to our loan yields is expected to continue during periods where PPP loans are forgiven and/or paid down at levels that result in material recognition of the remaining deferred loan fees.

Interest income from investments available-for-sale decreased $184,000, primarily due to a decrease in yield to 1.91% for the three months ended March 31, 2021, from 2.72% for the three months ended March 31, 2020. Partially offsetting this decrease, the average balance of our investments available-for-sale increased by $20.0 million during the three months ended March 31, 2021, as compared to the same period in 2020, as the Company invested excess liquidity into higher yielding assets.

Interest income from interest-earning deposits decreased $19,000 for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, as a result of a decrease in yield to 0.09% from 1.18% for these comparative periods, partially offset by a $41.8 million increase in the average balance of these funds.

The decrease in interest income was more than offset by a $2.1 million decrease in interest expense for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020. Interest expense on interest-bearing deposits decreased 87 basis points for the comparative periods, as a combined result of the declining interest rate environment and an increase in lower-cost deposits. Growth in our branch network allowed us to redeem our higher cost brokered deposits last year, resulting in a $374,000 decrease in interest expense for brokered certificates of deposit to none for the three months ended March 31, 2021. Our cost of funds was also impacted favorably by a decrease in the cost of money market accounts to 0.33% for the three months ended March 31, 2021, from 1.48% for the three months ended March 31, 2020, partially offset by a $87.8 million increase in the average balance of these deposits for the comparative periods. As we continue to grow our lower cost deposits, maturing retail certificates of deposit were allowed to runoff, resulting in a $621,000 reduction in interest expense for these deposits for the three months ended March 31, 2021, as compared to the same period in 2020, reflecting both a 42 basis point decrease in the cost of these deposits and a $33.4 million decrease in their average balance.

Further contributing to the decrease in interest expense, our cost of borrowings decreased by $52,000 for the three months ended March 31, 2021, as compared to the same period in 2020. The increase in our deposits met our funding needs, allowing us to eliminate our need for short-term borrowings from the FHLB. For the three months ended March 31, 2021, the Company maintained $120.0 million in FHLB advances tied to interest rate swap agreements. In comparison, for the three months ended March 31, 2020, the Company had an average balance of $127.7 million in FHLB advances that included the FHLB advances tied to interest rate swap agreements and FHLB Fed Funds short-term borrowings. Our cost of these borrowings decreased to 1.41% for the three months ended March 31, 2021, from 1.48% for the three months ended March 31, 2020.

The Company’s net interest margin increased to 3.31% for the three months ended March 31, 2021, from 3.11% for the three months ended March 31, 2020. This was due to the reduction in our cost of interest bearing liabilities outpacing the reduction in our yield on interest earning assets between periods. For more information on this, see “How We Measure the Risk of Interest Rate Changes” in Item 3 of this report.

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


	Three Months Ended 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

The following table compares detailed average balances, related interest income or interest expense, associated yields and rates, and the resulting net interest margin for the three months ended March 31, 2021 and 2020. Nonaccrual loans are included in the average balance of net loans receivable and are considered to carry a zero yield.


	Three Months Ended March 31,
	2021						2020
	Average Balance		Interest Earned / Paid		Yield / Cost		Average Balance		Interest Earned / Paid		Yield / Cost
	(Dollars in thousands)
Assets
Loans receivable, net	$	1,099,364	$	12,624	4.66	%	$	1,096,091	$	13,474	4.94	%
Investments available-for-sale	155,795		735		1.91		135,765		919		2.72
Investments held-to-maturity	2,413		13		2.18		2,061		—		—
Interest-earning deposits with banks	52,336		12		0.09		10,555		31		1.18
FHLB stock	6,412		79		5.00		6,615		76		4.62
Total interest-earning assets	1,316,320		13,463		4.15		1,251,087		14,500		4.66
Noninterest earning assets	77,893						73,758
Total average assets	$	1,394,213					$	1,324,845

Liabilities and Stockholders' Equity
Interest-bearing demand	$	103,540	$	27	0.11	%	$	63,413	$	56	0.36	%
Statement savings	19,754		2		0.04		17,089		5		0.12
Money market	477,710		391		0.33		389,886		1,431		1.48
Certificates of deposit, retail	395,291		1,879		1.93		428,695		2,500		2.35
Certificates of deposit, brokered	—		—		—		70,979		374		2.12
Total interest-bearing deposits	996,295		2,299		0.94		970,062		4,366		1.81
Borrowings	120,000		418		1.41		127,707		470		1.48
Total interest-bearing liabilities	1,116,295		2,717		0.99		1,097,769		4,836		1.77
Noninterest bearing liabilities	120,062						69,584
Average equity	157,856						157,492
Total average liabilities and equity	$	1,394,213					$	1,324,845
Net interest income			$	10,746					$	9,664
Net interest margin					3.31	%					3.11	%

Provision for Loan Losses. Management recognizes that loan losses may occur over the life of a loan and that the ALLL must be maintained at a level necessary to absorb specific losses on impaired loans and probable losses inherent in the loan portfolio. Our methodology for analyzing the ALLL consists of two components: general and specific reserves. The general reserve is determined by applying factors to our various groups of loans. Management considers factors such as charge-off history, the prevailing economy, the regulatory environment, competition, geographic and loan type concentrations, policy and underwriting standards, nature and volume of the loan portfolio, managements’ experience level, our loan review and grading systems, the value of underlying collateral and the level of problem loans in assessing the ALLL. The specific reserve component is created when management believes that the collectability of a specific loan has been impaired and a loss is probable or a concession is granted that reduces the value of the loan. The specific reserves are computed using discounted cash flows, current appraisals, listed sales prices, and other available information, less costs to complete, if any, and costs to sell the property. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or if future events differ from current estimates.

During the three months ended March 31, 2021, management evaluated the adequacy of the ALLL and concluded that a $300,000 provision for loan losses was appropriate. This provision was primarily attributed to the downgrades on $10.5 million of $12.2 million in total loans made to a single lending relationship, secured by a bowling alley, roller skating and restaurant location, and a separate hostel business that continue to be adversely impacted by the COVID-19 pandemic. The impact of these downgrades was partially offset by improvements to qualitative economic factors utilized to calculate our general reserves for the ALLL related to the COVID-19 pandemic based upon the improving financial conditions and economic outlook that existed as of March 31, 2021. In comparison, a $300,000 provision for loan losses was recognized for the three months ended March 31, 2020, primarily due to COVID-19 related deterioration to the qualitative economic factors considered in calculating the general reserves for the ALLL. As previously disclosed, the Bank is evaluating the possible downgrade of $5.4 million in commercial real estate participation loans that were downgraded by the lead bank. If the Bank determines a downgrade is appropriate, it may increase our ALLL and provision related to the general allowance by $400,000 to $500,000 in subsequent quarters. For more information, see Note 5 - Loans Receivable--ALLL.

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


	At or For the Three Months Ended March 31,
	2021			2020
	(Dollars in thousands)
Total loans receivable, end of period	$	1,116,391		$	1,105,959
Average loans receivable during period	1,099,364			1,096,091
ALLL balance at beginning of period	15,174			13,218
Provision for loan losses	300			300
Charge-offs:



Total charge-offs	—			—
Recoveries:
One-to-four family	28			12





Total recoveries	28			12
Net recovery	28			12
ALLL balance at end of period	$	15,502		$	13,530
ALLL as a percent of total loans	1.39		%	1.22		%
Ratio of net recoveries to average net loans receivable, annualized	0.01			—

Noninterest Income. Noninterest income decreased $226,000 to $764,000 for the quarter ended March 31, 2021, as compared to the quarter ended March 31, 2020.

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


	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)

During the three months ended March 31, 2021, as compared to the three months ended March 31, 2020, loan related fees decreased $260,000, primarily as a result of a reduction in prepayment fees collected on certain loans paid off prior to

maturity. Partially offsetting this decrease, deposit related fees increased $24,000 for the three months ended March 31, 2021, as compared to the same period in 2020, primarily as a result of increased debit card activity. In addition, BOLI noninterest income increased $15,000 for the comparative periods as a result of annual premiums and dividends on certain BOLI policies.

Noninterest Expense. Noninterest expense decreased $139,000 to $8.1 million for the three months ended March 31, 2021, from $8.3 million for the comparable period in 2020.

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


	Three Months Ended March 31, 2021		Change from Three Months Ended March 31, 2020		Percent Change
	(Dollars in thousands)
Salaries and employee benefits	$	4,945	$	(267)	(5.1)	%
Occupancy and equipment	1,100		29		2.7
Professional fees	532		102		23.7
Data processing	697		3		0.4
OREO related expenses, net	1		—		—
Regulatory assessments	121		(23)		(16.0)
Insurance and bond premiums	124		4		3.3
Marketing	29		(35)		(54.7)
Other general and administrative	580		48		9.0
Total noninterest expense	$	8,129	$	(139)	(1.7)

Salary and employee benefits expense decreased $267,000 for the three months ended March 31, 2021, as a combined result of decrease in the cost of certain retirement benefit plans and a reduction in the use of temporary labor. In addition, the impact of annual salary increases to the Company was mitigated by a reduction of eight staff positions during the three months ended March 31, 2021. Marketing expense decreased by $35,000 for the three months ended March 31, 2021, as compared to the same period in 2020, primarily due to a reduction in sponsored events due to continued COVID-19 restrictions. Partially offsetting these decreases, professional fees increased $102,000 as a combined result of outsourced information technology services and employee recruiting services.

Federal Income Tax Expense. The federal income tax provision increased by $182,000 to $584,000 for the three months ended March 31, 2021, as compared to $402,000 for the same period in 2020, primarily due to a $995,000 increase in income before federal income taxes. The effective tax rate for the three months ended March 31, 2021, and 2020, was 19.0% and 19.3%, respectively.

Liquidity

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

Our primary sources of funds are customer deposits, cash flow from the loan and investment portfolios, advances from the FHLB, and brokered certificates of deposit. These funds, together with equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. At March 31, 2021, retail certificates of deposit of $219.9 million were scheduled to mature in one year or less. Management’s practice is to maintain deposit rates at levels that are competitive with other local financial institutions. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by the level of interest rates, economic conditions and competition. We measure our liquidity based on our ability to fund our assets and to meet liability obligations when they come due. Liquidity (and funding) risk occurs when funds cannot be raised at reasonable prices or in a reasonable time frame to meet our normal or unanticipated obligations. We regularly monitor the mix between our assets and our liabilities to manage effectively our liquidity and funding requirements.

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

When deposits are not readily available and/or cost effective to provide the funds for our assets, we use alternative funding sources. These sources include but are not limited to: advances from the FHLB or the FRB, which are collateral dependent, wholesale funding, national certificates of deposit listing services, brokered deposits, federal funds purchased and dealer repurchase agreements, as well as other short-term alternatives. We may also liquidate assets to meet our funding needs. The balance of our investments available-for-sale increased $40.4 million to $168.0 million at March 31, 2021, from $127.6 million at December 31, 2020, and represents a ready source of cash if needed. The balance of our interest-earning deposits with banks increased by $2.5 million to $75.0 million at March 31, 2021, from $72.5 million at December 31, 2020, as a result of increased retail deposits. At March 31, 2021, the Bank maintained credit facilities with the FHLB totaling $624.5 million, subject to qualifying collateral limits that reduced our pledged collateral capacity to $496.2 million, with an outstanding balance of $120.0 million. As further funding sources, we also had the ability to borrow $79.6 million from the FRB from loan programs other than the PPPLF, and $75.0 million from lines of credit with other financial institutions, with no balance outstanding from these sources at March 31, 2021. For additional information, see the Consolidated Statements of Cash Flows in Item 1 of this Form 10-Q.

To assist in our funds acquisition and interest rate risk management efforts, management utilizes from time to time the national brokered deposit market. Due to adequate funding from other sources, at March 31, 2021, the Bank did not hold any brokered certificates of deposit. In contrast to most retail certificate of deposit offerings which provide the depositor with an option to withdraw their funds prior to maturity, subject to an early withdrawal penalty, certificates of deposit acquired in the brokered market limits the depositor ability to withdraw the funds before the end of the term (except in the case of death or adjudication of incompetence of a depositor) which greatly reduces early redemption risk compared to retail deposits. This callable option available on certain brokered certificates of deposit to redeem the deposit after six months is a favorable distinction compared to retail certificate of deposit terms that are offered in our local market. With these redemption limitations and call features, the cost of these brokered deposits is generally higher than our retail certificate of deposit offerings. Consequently, if we increase our brokered deposits, our cost of funds may increase.

First Financial Northwest is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating expenses and cash dividends. First Financial Northwest's primary sources of funds consist of dividends from the Bank, although there are regulatory requirements related to the ability of the Bank to pay dividends. At March 31, 2021, the Company (on an unconsolidated basis) had liquid assets of $13.7 million and short-term liabilities of $219,000.

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

Commitments and Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit and lines of credit are not recorded as an asset or liability by us until the instrument is exercised. At March 31, 2021 and December 31, 2020, we had no commitments to originate loans for sale.

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

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

The following table summarizes our outstanding commitments to originate loans, advance additional amounts pursuant to outstanding lines of credit and to disburse funds related to our construction loans or certain commercial loans at March 31, 2021:


			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

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

As of March 31, 2021, the Bank had thirteen operating leases with remaining terms of three months to 9.8 years which carry minimum lease payments of $68,000 per month. All of the lease agreements offer extension periods.

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

Capital

At March 31, 2021, stockholders’ equity totaled $158.4 million, or 11.1% of total assets. Our book value per share of common stock was $16.35 at March 31, 2021, compared to $16.05 at December 31, 2020. Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well-capitalized” status in accordance with regulatory standards.

As of March 31, 2021, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory capital guidelines of the FDIC. The following table provides the Bank’s capital requirements and actual results.


	At March 31, 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

In addition to the minimum CET1, Tier I total capital and leverage ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At March 31, 2021, the Bank’s capital conservation buffer was 7.62%.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

•economic conditions;

•interest rate outlook;

•asset/liability mix;

•interest rate risk sensitivity;

•current market opportunities to promote specific products;

•historical financial results;

•projected financial results; and

•capital position.

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

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

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

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

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

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

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

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

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

We have evaluated the use of derivative instruments to limit the impact of interest rate changes on earnings and cash flows and to lower our cost of borrowing while taking into account various elements of interest rate risk. We are using interest rate swaps which qualify as a cash flow hedge as a tool to lower the cost of certain FHLB advances as compared to the fixed rates offered by the FHLB for its longer term advances. At March 31, 2021, the Bank held six interest rate swap agreements with a total notional amount of $120.0 million and a weighted-average fixed interest rate of 1.22%. Under the interest rate agreements, the Bank pays a fixed interest rate, and receives a floating rate based on 1-month or 3-month LIBOR rates to coincide with each agreement’s reset frequency for an original term of four to eight years. Concurrently at the onset of each interest rate agreement, the Bank secured a fixed rate FHLB advance that resets to market rate on the same cycle as the corresponding interest rate swap agreement. In addition, the Bank has entered into two, forward starting interest rate swap

agreements with a start date of October 25, 2021, a total notional amount of $25.0 million, and a weighted-average interest rate of 0.80%. These interest rate agreements are intended to partially replace the $50.0 million notional amount interest rate swap that matures on that date. Entering into these agreements has allowed the Bank to secure fixed rate funding at a lower cost than a traditional five-year fixed rate FHLB advance. We will continue to review similar instruments and may continue to utilize them for interest rate risk management in the future.

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

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

How We Measure the Risk of Interest Rate Changes. We monitor our interest rate sensitivity on a quarterly basis by measuring the impact of changes to net interest income in multiple rate environments. Management retains the services of a third party consultant with nearly 40 years of experience in asset-liability management to assist in its interest rate risk and asset-liability management. Management uses various assumptions to evaluate the sensitivity of the market value of our assets and liabilities to changes in interest rates. Although management believes these assumptions are reasonable, the interest rate sensitivity of our assets and liabilities on net interest income and the market value of portfolio equity could vary substantially if different assumptions were used or actual results differ from these assumptions. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react differently to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities lag behind changes in market interest rates. Non-uniform changes and fluctuations in market interest rates across various maturities will also affect the results presented. In addition, certain assets, such as adjustable-rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, a portion of our adjustable-rate loans have interest rate floors below which the loan’s contractual interest rate may not adjust in conjunction with market rates. Approximately 52.3% of our total loans were adjustable-rate loans at March 31, 2021. At that date, $371.1 million, or 63.6% of these loans were at their floor, with a weighted-average interest rate of 4.47%. A portion of these loans are set to reprice at defined time intervals. Adjustable rate loans that are based on prime rate plus a specified margin recalculate each time the prime rate changes. When the floor rate is above a prime rate based loan’s fully indexed rate, the Bank will not receive the benefit of an increasing market rates until prime rate increases enough where the fully indexed rate exceeds the loans floor rate. At March 31, 2021, the Bank’s net loans receivable included $105.5 million of prime based loans, of which $92.1 million were at a floor rate that exceeded their fully indexed rate. The following table shows the rate increase that would need to occur on these loans before the Bank receives the benefit of a floating rate:


	March 31, 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

The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risk that borrowers may refinance these loans during periods of declining interest rates. However, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of

funds during periods of increasing interest rates. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. We consider all these factors in monitoring our interest rate exposure.

The assumptions we use to monitor interest rate risk are based upon a combination of proprietary and market data that reflect historical results and current market conditions. These assumptions relate to interest rates, loan prepayments, deposit decay rates and the market value of certain assets under the various interest rate scenarios. We use market data to determine prepayments and maturities of loans, investments and borrowings and use our own assumptions on deposit decay rates except for time deposits. Time deposits are modeled to reprice to market rates upon their stated maturities. We also assume that non-maturity deposit rates can be maintained with rate adjustments proportionate to the change in market interest rates, based upon our historical deposit decay rates, which are substantially lower than market decay rates. We have observed in the past that our deposit accounts during changing rate environments have relatively lower volatility and less than market rate changes. When interest rates rise, we do not have to raise interest rates proportionately on less rate sensitive accounts to retain these deposits. These assumptions are based upon our analysis of our customer base, competitive factors and historical experience. In the event of a significant change in interest rates, however, prepayment and early withdrawal levels would likely deviate from those assumed.

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

The following table illustrates the estimated change in our net interest income over the next 12 months from March 31, 2021, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that the Bank might take to counter the effect of that interest rate movement.


Net Interest Income Change at March 31, 2021
Basis Point Change in Rates	Net Interest Income	% Change
(Dollars in thousands)
+300	$45,158	6.33%
+200	44,018	3.65
+100	43,013	1.28
Base	42,468	—
(100)	41,953	(1.21)

The following table illustrates the change in our net portfolio value (“NPV”) at March 31, 2021, that would occur in the event of an immediate change in interest rates equally across all maturities, with no effect given to any steps that we might take to counter the effect of that interest rate movement.


Basis Point							Net Portfolio as % of				Market
Change in	Net Portfolio Value (1)						Portfolio Value of Assets				Value of
Rates	Amount		$ Change (2)		% Change		NPV Ratio (3)		% Change (4)		Assets (5)
	(Dollars in thousands)
+300	$	186,999	$	(15,850)	(7.81)	%	13.84	%	(1.10)	%	$	1,350,707
+200	191,937		(10,912)		(5.38)		13.93		(0.76)		1,378,145
+100	199,013		(3,836)		(1.89)		14.12		(0.27)		1,409,169
Base	202,849		—		—		14.10		—		1,438,533
(100)	194,352		(8,497)		(4.19)		13.34		(0.59)		1,456,826

_____________

(1) The net portfolio value is the difference between the present value of the discounted cash flows of assets and liabilities and represents the market value of the Company’s equity for any given interest rate scenario. Net portfolio value is useful for

determining, on a market value basis, how the market value of equity changes in response to various interest rate scenarios. Large changes in net portfolio value reflect increased interest rate sensitivity and generally more volatile earnings streams.

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

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

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

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

The net interest income and net portfolio value tables presented above are predicated upon a stable balance sheet with no growth or change in asset or liability mix. In addition, the net portfolio value is based upon the present value of discounted cash flows using our estimates of current replacement rates to discount the cash flows. The effects of changes in interest rates in the net interest income table are based upon a cash flow simulation of our existing assets and liabilities and assuming that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. Delinquency rates may change when interest rates change as a result of changes in the loan portfolio mix, underwriting conditions, loan terms or changes in economic conditions that have a delayed effect on the portfolio. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as set forth above. Also, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause changes to the net portfolio value and net interest income other than those indicated above.

At March 31, 2021, other than the interest rate swap agreements we have entered into, we did not have any derivative financial instruments or trading accounts for any class of financial instruments, nor have we engaged in any other hedging activities or purchased off-balance sheet derivative instruments. However, we continue to review such instruments and may utilize them for interest rate risk management in the future. Interest rate risk continues to be one of our primary risks, as other types of risks, such as foreign currency exchange risk and commodity pricing risk do not arise in the normal course of our business activities and operations.

Item 4. Controls and Procedures

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

(a)Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and several other members of our senior management as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b)Changes in Internal Controls: In the quarter ended March 31, 2021, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in Part 1, Item 1A of our 2020 Form 10-K.

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

(a) Not applicable

(b) Not applicable

(c) The following table summarizes First Financial Northwest’s common stock repurchases during the three months ended March 31, 2021:


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 1 - January 31, 2021	—	$	—	—	486,000
February 1 - February 28, 2021	73,920	12.92		73,920	412,080
March 1 - March 31, 2021	15,099	13.55		15,099	396,981
	89,019	13.03		89,019	396,981

On February 1, 2021, the Company began repurchasing shares of common stock under the repurchase plan approved by the Company’s Board of Directors on December 21, 2020. The plan authorized the repurchase of up to 486,000 shares of the Company’s common stock, or approximately 5% of the Company’s outstanding shares on the open market or in privately negotiated transactions, in accordance with Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. At March 31, 2021, the Company had repurchased 89,019 shares authorized for repurchase at an average price of $13.03 per share. The plan will expire no later than August 13, 2021.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Financial Statement Schedules

(a) Exhibits


3.1						Articles of Incorporation of First Financial Northwest (1)
3.2						Amended and Restated Bylaws of First Financial Northwest (2)
4.1						Form of stock certificate of First Financial Northwest (1)
10.1						Amended Employment Agreement between First Financial Northwest Bank and Joseph W. Kiley III (3)
10.2						Form of Change in Control Severance Agreement for Executive Officers (4)
10.3						Amended Executive Supplemental Retirement Plan Participation Agreement with Joseph W. Kiley III (5)
10.4						2008 Equity Incentive Plan (6)
10.5						2016 Equity Incentive Plan (7)
10.6						Forms of incentive and non-qualified stock option award agreements under the 2008 Equity Incentive Plan (8)
10.7						Form of restricted stock award agreement under the 2008 Equity Incentive Plan (8)
10.8						Employment Agreement between First Financial Northwest Bank and Richard P. Jacobson (2)
10.9						Form of restricted stock award agreement under the 2016 Equity Incentive Plan (9)
10.10						Form of incentive stock option award agreement under the 2016 Equity Incentive Plan (10)
10.11						Form of non-qualified stock option award agreement under the 2016 Equity Incentive Plan (10)
10.12						Form of restricted stock award agreement under the 2016 Equity Incentive Plan (11)
10.16						Supplemental Executive Retirement Plan Agreement for Joseph W. Kiley III (12)
10.17						Supplemental Executive Retirement Plan Agreement for Richard P. Jacobson (13)
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, 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)

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

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

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

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

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

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

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

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

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

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

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

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

SIGNATURES

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


	FIRST FINANCIAL NORTHWEST, INC.

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


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

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